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  1. #1
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    Default YumChina (NYSE:YUMC)

    YumChina is a company that possesses exclusive rights to operate the KFC, Pizza Hut and Taco Bell concepts in in the People's Republic of China (excluding Hong Kong, Taiwan and Macau.) Balance date is 31st December. At that date on 31st December 2018 YumChina operated 7,983 restaurants. This makes it by far the largest operator of chain restaurants in China, with the majority of those outlets being KFC. As I write there are only three Taco Bell restaurants in the whole of China, all in Shanghai. Taco Bell is currently a concept in development in China. Decisions on when or whether to roll it out further are yet to be made.

    Some may be surprised to learn that the largest restaurant chain 'brand' in China is KFC, and not a Chinese home grown brand. Chinese home grown fast food brands have been relatively unsuccessful because Chinese food by its nature is already fast and convenient. The exotic nature of the American brands has made them more desirable. Reversing the situation in the United States, McDonalds is very much in second place in China with 2500 outlets open by August 2017. Possibly helping KFC is that they have adapted their menus to Chinese tastes. The chain boasts a full Chinese breakfast menu alongside fish and shrimp burgers, vegetable soups and full-plate meals with vegetable sides. Contrast this to McDonalds who have stringently stuck to their American food concepts. Dominos Pizza has only a very small presence in China for possibly the same reason. A further advantage card the American concepts can play is that their standards of restaurant and toilet cleanliness is generally higher than the Chinese competition.

    YUMC is listed on the NYSE. Yet the annual meetings so far have been held in Hong Kong. Although the reporting currency for the company is USD, the functional currency in which business is transacted in China is the Chinese Renminbi ("RMB"). Unusually for an Asian corporate, the company Chief Executive is a relatively young woman, Joey Wat, aged 46 at last balance date. The goal of the company is to triple the number of restaurants they operate in China over the next 20-30 years. They are currently opening on average more than two new restaurants for every day of the year.

    YUMC was spun off from the parent YUM Corporation in October 2016. So it doesn't have a long history as a listed entity, even though they opened their first restaurant (a KFC) in China as long ago as 1987.

    Why should an investor in NZ be interested in YUMC? It is an example of a comparable company to the likes of Restaurant Brands, who also license most of their restaurant developments from the concept owning YUM parent. With a partial takeover offer in the market for RBD as I write, a look at YUMC gives us an independent reference point for valuing this kind of business.

    Some analysis of YUMC will be forthcoming.

    SNOOPY

    discl: hold YUMC
    Last edited by Snoopy; 11-01-2019 at 08:29 PM.
    To be free or not to be free. That is the cash-flow question....

  2. #2
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    Default BT1/ Top Three Position in Chosen Market (2017 perspective)

    YumChina is the largest restaurant company in China, employing over 400,000 people (including part timers). YumChina has entered into a master license agreement with a subsidiary of YUM (the owner of the intellectual brand property) providing the exclusive right to use and sublicense the use of intellectual property owned by YUM and its affiliates for the development and operation of KFC, Pizza Hut Casual Dining, Pizza Hut Home Service, and Taco Bell restaurants in China, and for the conduct of all related development, promotional and support activities. The license term for all YUM concepts is 50 years, with a further successive 50 year renewal options in perpituity.

    YumChina lists their competitive advantages as:

    • A company culture based on global systems and local spirit.
    • Category-leading brands in one of the world's fastest growing economies.
    • High-quality, great-tasting food, including local favourites with compelling value and a Western experience.
    • Strong unit economics. (Cash on cash payback period of 3-4 years for new PH and KFC restaurants)
    • Extensive experience in developing new restaurants.
    • Knowledge and understanding of Chinese consumers and versatile approach to marketing.
    • Supply chain management with a focus on food safety and quality. (Eighteen distribution centres are strategically placed around China.)
    • Internal people development culture and training systems. (own internally developed management training system called 'Whampoa Academy')
    • World class operations led by certified restaurant managers. (Every restaurant manager has an assistant manager, providing an ideal training ground for future managers of new restaurants).
    • Digital and technology capability, especially in mobile and social media.
    • Experienced senior management team (many still employed from the early days in China).

    In terms of actual store numbers verses competitors in the Chinese market, these are the latest figures that I can find:

    1/ YUM China: 7983 stores (Dec 2017) with principal brands: KFC (5,400+stores ) and Pizza Hut (2,100+stores)
    2/ McDonalds: 2625 stores (CY2017 end)
    3/ Dicos: 2600 stores (CY2017 end). Dicos' feature “Crispy Fried Chicken”, and serve other local flavours like rice burgers and teriyaki chicken rice sets. Dicos aim at a slightly lower price point than KFC and McDonalds. Dicos is owned by Ting Hsin International Group, a Taiwanese based corporate.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 11-01-2019 at 08:26 PM.
    To be free or not to be free. That is the cash-flow question....

  3. #3
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    Default BT2/ Increasing 'eps' trend (2017 perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017
    Operating Profit (excluding Impairments (1)) $384m $354m $488m $640m $785m
    subtract Insurance Payouts ($25m) ($5m) ($3m)
    adjust Corp Jet Disposal $15m ($2m)
    adjust Foreign Currency Adjustments $5m $4m $3m $0m
    add Interest Earned $5m $14m $8m $11m $25m
    Equals Adjusted Normalised EBT $389m $348m $510m $649m $810m
    subtract Tax at 27% (2) $105m $94m $137m $175m $219m
    Equals Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m
    eps {A}/{B} {C} 78.1c 69.8c $1.02 $1.27 $1.52
    Share Price 31 March (following) {D} NA NA NA $27.20 $41.50
    PE Ratio (D)/(C) NA NA NA 21.4 27.3

    Notes

    1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' is less than 1.5% of the turnover of YUMC.

    2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 22-01-2019 at 08:36 PM. Reason: Added PE ratios
    To be free or not to be free. That is the cash-flow question....

  4. #4
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    Default BT3/ ROE > 15% for five years (2017 perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m
    Shareholder Equity EOFY {B} $2,344m $1,945m $1.979m $2,443m $2,859m
    ROE {A}/{B} 12.1% 13.1% 18.8% 19.4% 20.7%

    The trend is encouraging, but we have to stick to our rules.

    Conclusion: Fail Test

    SNOOPY
    Last edited by Snoopy; 09-01-2019 at 03:23 PM.
    To be free or not to be free. That is the cash-flow question....

  5. #5
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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2017 perspective)

    FY2013 FY2014 FY2015 FY2016 FY2017
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27%

    Inflation in China is around 2%. The smallest gain in margin has been from FY2016 to FY2017. 2% of 7.02% (margin for FY2016) is 0.14 percentage points. That means as long as the FY2017 margin is greater than 7.02% + 0.14% = 7.16%, then our requirement is satisfied. They actual margin is 8.27%, so our requirement is met, and has been met over each of the last three 'year on year' comparisons.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 09-01-2019 at 03:43 PM.
    To be free or not to be free. That is the cash-flow question....

  6. #6
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    Default Buffett Test Summary (2017 Perspective)

    When I first heard about the KFC drive into China, I thought of a vast receptive open audience just ripe for the picking. It would simply be a mechanical process to roll the US model for KFC success onto a blank Chinese canvas.

    However, here is a detailed history of what has happened with the roll out over the last 30 years:

    https://macropolo.org/how-kfc-change...a-changed-kfc/

    This article clearly shows that even with a prescriptive management plan tightly overseeing the business development, there have been many hiccups along the way. 'First mover advantage' saw KFC off to a flying start. But the novelty lustre was lost by the early 2000s. So KFC changed focus by becoming more attuned to Chinese customs. Breakfast is very important in China. So KFC began introducing a wide variety of breakfast products tailored specifically to Chinese customers: soymilk drinks, savoury fried dough (youtiao), and congee. Later the company also introduced rice-based meals to its lunch and dinner menus.

    Greater competition from 2010 to 2014 has seen KFC target 'small' fourth tier cities (still with populations greater than 2.5m) and gear their offerings to the upcoming 'digital generation'.

    What went wrong in the early part of our five year analysis? Specifically failure of certain upstream poultry suppliers to meet YumChina standards in late 2012 as well as adverse publicity relating to improper food handling practices by a separate, small upstream supplier in mid-2014 badly affected the same store growth picture. The poultry supply issue from 2012 emerged when the Chinese Central Television (CCTV) broadcast an investigative report about some poultry farmers ignoring regulations by using excessive levels of antibiotics in chicken. Some of the product was purchased by two of KFC China's suppliers. The story led to an investigation by the Shanghai FDA and snowballed into a negative media and social media firestorm lasting six weeks. To underscore its effect, same-store sales declined 41 percent at KFC in January 2013. Returning to 2014 , specifically, on July 20, an undercover report was televised in China depicting improper food handling practices by supplier Shanghai Husi,a division of OSI, which is a large, global supplier to many in the restaurant industry. This triggered extensive news coverage in China that shook consumer confidence and impacted brand usage. Immediately following the incident, YUM experienced a significant, negative impact to sales and profits at both KFC and Pizza Hut Casual Dining.

    There are clearly issues with operating a food business in China that mean that investment success is not a foregone conclusion. Nevertheless YumChina fought off a private equity takeover valuing the company at $18billion (around $40 per share) in 2017. So clearly there are enough shareholders out there who believe YumChina is doing something right, even if Buffett would not be investing at this point.

    SNOOPY
    Last edited by Snoopy; 23-01-2019 at 09:11 AM.
    To be free or not to be free. That is the cash-flow question....

  7. #7
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    Default The Revenue Dilemma

    The most striking thing I found from looking at the YUMC results is how well profits are growing with respect to revenues. This is great for shareholders. But ultimately a company will run into the 'squeeze the orange' argument. Put simply, you can squeeze an orange harder and harder, but ultimately there will be no more juice that you can get out of it. 'Squeezing the orange' that is the fast food restaurant market and eventually your 'profit growth' dries up unless revenues grow. Over the last five years reported, revenues have grown:

    US$6,905m x (1+g)^5= US$7,144m => g= 0.683% (compounding)

    But profit growth has been

    US$284 x (1+g)^5= US$591 => g=15.8% (compounding)

    It is hard to imagine that profit growth could outstrip revenue growth like that going forwards. However, there is another angle that needs investigating. The functional currency of YUMC is the RMB, not the USD. So what happens if the revenue is converted to RMB?

    FY2013 FY2014 FY2015 FY2016 FY2017
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m
    RMB/USD Exchange Rate 6.1932 6.1428 6.2284 6.6423 6.7518
    Revenue RMB42.764 RMB42.594 RMB43.032 RMB44.849 RMB48.235
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27%

    The revenue growth rate in local currency was

    RMB42.764 x (1+g)^5 = RMB48.235 => g=2.44% (compounding)

    This is not great when you consider:

    1/ local inflation is around 2%
    2/ there has been a substantial number of new outlets created over the study period.

    But it does show that the revenue is growing above inflation, albeit modestly. This was not apparent when the results were presented in USD.

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 09:36 PM.
    To be free or not to be free. That is the cash-flow question....

  8. #8
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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2018e perspective)

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m $7,774m
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27% 8.10%

    Inflation in China is around 2%. The smallest gain in margin has been from FY2016 to FY2017. 2% of 7.02% (margin for FY2016) is 0.14 percentage points. That means as long as the FY2017 margin is greater than 7.02% + 0.14% = 7.16%, then our requirement is satisfied. The actual margin is 8.27%, so our requirement is met, and has been met over the FY2017/FY2016, FY2016/FY2015 and FY2015/FY2014 'year on year' comparisons. The decrease in margin over the latest year does not invalidate this company's ability to increase margins for an extended period over the last five years.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 04:07 PM.
    To be free or not to be free. That is the cash-flow question....

  9. #9
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    Default BT3/ ROE > 15% for five years (2018e perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shareholder Equity EOFY {B} $2,344m $1,945m $1.979m $2,443m $2,859m $2,873m
    ROE {A}/{B} 12.1% 13.1% 18.8% 19.4% 20.7% 21.9%



    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 09:27 PM.
    To be free or not to be free. That is the cash-flow question....

  10. #10
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    Default BT3/ ROE > 15% for five years (2018 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shareholder Equity EOFY {B} $2,344m $1,945m $1.979m $2,443m $2,859m $2,873m
    ROE {A}/{B} 12.1% 13.1% 18.8% 19.4% 20.7% 21.9%

    Conclusion: Pass Test
    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Adjusted Normalised NPAT {A} $284m $250m $369m $472m $589m $634m
    Shareholder Equity EOFY {B} $2,344m $1,945m $1.979m $2,443m $2,859m $2,976m
    ROE {A}/{B} 12.1% 12.9% 18.6% 19.3% 20.6% 21.3%

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 23-07-2019 at 09:41 PM.
    To be free or not to be free. That is the cash-flow question....

  11. #11
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    Default BT2/ Increasing 'eps' trend (2018 estimate perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Operating Profit (excluding Impairments (1)) $384m $354m $488m $640m $785m $941m
    subtract Insurance Payouts ($25m) ($5m) ($3m)
    adjust Corp Jet Disposal $15m ($2m)
    adjust Foreign Currency Adjustments $5m $4m $3m $0m $?m
    subtract Wuxi KFC equity revaluation ($98m)
    add Duojia Intangible Write Off $12m
    add Interest Earned $5m $14m $8m $11m $25m $36m
    Equals Adjusted Normalised EBT $389m $348m $510m $649m $810m $891m
    subtract Tax at 27% (2) $105m $94m $137m $175m $219m ($241m)
    subtract Foreign unrepatriated earnings Tax (3) ($20m)
    Equals Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m 392m
    eps {A}/{B} {C} 78.1c 69.8c $1.02 $1.27 $1.52 $1.61
    Share Price 31 March (following) {D} NA NA NA $27.20 $41.50 $40.52 (4)
    PE Ratio (D)/(C) NA NA NA 21.4 27.3 25.2

    Notes

    1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' is less than 1.5% of the turnover of YUMC.

    2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference.

    3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. But this tax bill is to be spread out over eight years. Because it is in integral part of the Trump tax reforms, I do not feel that it should be recorded as a one off. Therefore I am recording a $20m charge every year from 2018 to 2025 inclusive.

    4/ Share price at 5th February 2019. 31st March date still in the future when table was compiled.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 04-03-2019 at 06:37 PM.
    To be free or not to be free. That is the cash-flow question....

  12. #12
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    Default BT2/ Increasing 'eps' trend (2018 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post
    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Operating Profit (excluding Impairments (1)) $384m $354m $488m $640m $785m $941m
    subtract Insurance Payouts ($25m) ($5m) ($3m)
    adjust Corp Jet Disposal $15m ($2m)
    adjust Foreign Currency Adjustments $5m $4m $3m $0m $?m
    subtract Wuxi KFC equity revaluation ($98m)
    add Duojia Intangible Write Off $12m
    add Interest Earned $5m $14m $8m $11m $25m $36m
    Equals Adjusted Normalised EBT $389m $348m $510m $649m $810m $891m
    subtract Tax at 27% (2) $105m $94m $137m $175m $219m ($241m)
    subtract Foreign unrepatriated earnings Tax (3) ($20m)
    Equals Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m 392m
    eps {A}/{B} {C} 78.1c 69.8c $1.02 $1.27 $1.52 $1.61
    Share Price 31 March (following) {D} NA NA NA $27.20 $41.50 $40.52 (4)
    PE Ratio (D)/(C) NA NA NA 21.4 27.3 25.2

    Notes

    1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' is less than 1.5% of the turnover of YUMC.

    2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference.

    3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. But this tax bill is to be spread out over eight years. Because it is in integral part of the Trump tax reforms, I do not feel that it should be recorded as a one off. Therefore I am recording a $20m charge every year from 2018 to 2025 inclusive.

    4/ Share price at 5th February 2019. 31st March date still in the future when table was compiled.

    Conclusion: Pass Test
    I had to do a rush job of the 2018 results before the FY2018 Annual Report was released. That was to facilitate a comparison with 'Restaurant Brands' immediately post the 75% takeover offer from 'Finaccess'. Now that I have the actual YUMC report in my 'hot little paws', I can produce the 'definitive audited version' of these accounts.

    Re-reading the accounts I notice something odd. 'Other Income' appears to have been subtracted from 'Operating Expenses' (AR2018 Form 10-k, p56). The 'Operating Expenses' that are used to calculate 'Operating Profit' ...

    To use the terminology in the Annual Report

    "Total Revenues" (p62) - "Total Cost & Expenses net" (p56) = "Operating Profit" (p62)

    ...have already been adjusted for! 'Minority Owned Equity Accounted Profit', 'the Wuxi KFC equity revaluation', 'Insurance payouts', 'Provision reversal for Aircraft Sales losses' and 'Foreign Currency Adjustments' etc. etc. have all been dealt with. Yet 'Decreasing Expenses' has the same effect as 'Increasing Profits'. So I still need to subtract 'Other Income' from 'Operating Income' to produce a 'Normalised Operating Income' with three exceptions.

    1/'Other Income' does include equity accounted income, and I feel that should be included in the Normalised result. These equity accounted but unconsolidated affiliates are largely minority owned KFC restaurants. So I think it is appropriate not to 'subtract again' the equity accounted income component of 'Other Income', when I finally create my 'Normalised Operating Profit'. To give some idea of the scale of these profits, I have listed them below.

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Equity Income from Unconsolidated Affiliates $26m $30m $41m $54m $65m $65m

    2/ 'Other Income' also includes 'Foreign Exchange Net Loss or Gains'. These losses or gains are generally on contractual arrangements not taken out as a form of money speculation. They are the result of money market events not foreseeable when the underlying contract was taken out. Consequently they should remain removed when considering normalised profits. To give some idea of the scale of these foreign exchange gains or losses , I have listed them below.

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Foreign Exchange Gains or (Losses) ($1m) ($4m) ($5m) ($3m) $0m ($11m)

    3/ The FY2016 result has been corrected to account for the fact that had the separation occurred prior to the actual October 2016 separation date, then there would have been an extra franchise fee due to the parent YUM Brands. However, since we are now interested in 'Yum China' as a separate entity this correction is realistic and the extra charge should not be removed.

    FY2016
    Incremental adjustment to YUM licence fee expense $17m

    My 'Normalised Profit' calculation table appears below:

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Operating Profit (excluding Impairments (1)) $384m $354m $488m $640m $785m $941m
    less Poultry Supply Lost: Insurance Recovery ($25m) ($5m) ($3m)
    add Provision for Losses on Aircraft sales $15m
    less Reversal of Aircraft Sale Provision ($2m)
    less Business Combination Contingency Reversal ($3m)
    less Equity Gain Consolidating Wuxi ($98m)
    add Duojia Intangible Write Off $12m
    add Interest Earned $5m $14m $8m $11m $25m $36m
    Equals Adjusted Normalised EBT $389m $343m $506m $646m $807m $891m
    subtract Tax at 27% (2) ($105m) ($93m) ($137m) ($174m) ($218m) ($241m)
    subtract Foreign unrepatriated earnings Tax (3) ($16m)
    Equals Adjusted Normalised NPAT {A} $284m $250m $369m $472m $589m $634m
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m 392m
    eps {A}/{B} equals {C} 78.1c 68.7c $1.01 $1.23 $1.51 $1.62
    Share Price 31 March (following) {D} NA NA NA $27.20 $41.50 $44.91
    PE Ratio (D)/(C) NA NA NA 22.1 27.5 27.7

    Notes

    1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' was less than 1.5% of the turnover of YUMC.

    2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference. Over FY2018, The US corporate tax rate reduced to 21%, Now that is 4 percentage points below the Chinese corporate tax rate. However if we look at the 'Consolidated and Combined Results of Operations' (p62 AR2019), after adjusting for 'Special Items', the actual corporate tax rate comes out at 27%.

    3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. After further consideration in FY2018, this provision was adjusted down by $36m to a total of $128m. But this tax bill is to be spread out over eight years (AR2017, p76). Because it is in integral part of the Trump tax reforms, I do not feel that it should be recorded as a one off. Therefore I am recording a $16m charge every year from 2018 to 2025 inclusive.


    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 01:13 PM.
    To be free or not to be free. That is the cash-flow question....

  13. #13
    Legend
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    Jun 2004
    Location
    , , New Zealand.
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    Default EBIT & EBITDA Multiples

    FY2013 FY2014 FY2015 FY2016 FY2017
    Normalised EBT $389m $348m $510m $649m $810m
    add Net Interest Paid (or Earned) ($5m) ($14m) ($8m) ($11m) ($25m)
    Normalised EBIT {A} $384m $334m $502m $638m $785m
    Share Price 31st March {C} NM NM NM $27.20 $41.50
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m
    EBIT /share {A}/{B} [D] $1.06 91.8c $1.38 $1.66 $2.02
    EBIT Multiple {C}/{D} NM NM NM 16.4 20.5
    Depreciation & Amortisation {E} $394m $411m $425m $402m $409m
    Normalised EBITDA {A}+{E} [F] $778m $759m $927m $1,040m $1,194m
    EBITDA /share {F}/{B} [G] $2.14 $2.09 $2.55 $2.71 $3.07
    EBITDA Multiple {C}/{G} NM NM NM 10.0 13.5

    So now we have got down to the nitty gritty of determining EBIT/EBITDA ratios. This allows us to prepare the market value of this company with the RBD partial takeoffer price (based on EBIT/EBITDA ratios)..

    Notes

    1/ YUMC is bank debt free. So all interest is 'interest earned'.
    2/ YUMC was first listed in October 2016. So to demand a 'market share price' prior to that date is not a meaningful request.
    3/ The RBD.NZX partial takeover offer has used the 'Enterprise Value' (EV) to underlying EBITDA as a valuation statistic. Enterprise value is calculated by taking the market value of the company's shares and adding on bank debt. In the case of YUMC, there is no bank debt. So the EV for YUMC is simply the market value of the shares.

    For the $9.45 per share RBD partial offer, Enterprise Value for RBD is calculated as equity value of NZ$1,175.4 million plus net debt of NZ$157.7 million as at
    26 February 2018. This gives an Enterprise Value of NZ$1,333.1m. FY18 RBD EBITDA was NZ$94.4m. So the EV/EBITDA statistic comes out at:

    NZ$1,333.1m/NZ$94.4m = 14.3

    If we calculate a comparable statistic for YUMC as at 31st March 2018, I get:

    ($41.50 x 388.860m) / $1,194m = 13.5

    From the Grant Samuel Report on the RBD takeover, Section 6.3.1, the comparative historical multiples are:

    1/ EBIT for RBD are 18.5 to 20, while (c.f. 20.5 for YUMC)
    2/ EBITDA multiples for RBD are 12.2 to 13.2. (c.f. 13.5 for YUMC)

    So the RBD historical figures correlate closely with the YUMC EBIT and EBITDA historical multiples (the FY2017 figures for YUMC reflect the now withdrawn takeover offer) . By these figures, it looks like the market premium offered for RBD shares is fair (to those who only want to sell 75% of their RBD stake).

    SNOOPY
    Last edited by Snoopy; 11-01-2019 at 08:23 PM.
    To be free or not to be free. That is the cash-flow question....

  14. #14

  15. #15
    Legend
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    Default Adjusting for 'Constant Currency' Aspect 1

    The press release for the FY2018 results is out. Rather annoyingly, YUMC have chosen to release their results -only- in constant exchange rate terms. That means I will have to wait until the annual report before the actual results are put on paper. Yet with the RBD takeover offer closing in a month or so, and my need for a measuring stick for that, this means I can't afford to wait that long.

    The issue here is that YUMC results are ultimately reported in US dollar terms. But the functional currency for the business is the Chinese Renminbi. The revenue is coming in all through the year. So it is appropriate to look at averaged exchange rates throughout the year. Using wiki, I got:

    CY/FY2017 CY/FY2018
    Average Exchange Rate USD1- = 6.7518Rmb. USD1- = 6.6174Rmb

    This means that, on average, comparing FY2017 and FY2018, that we shareholders shared in less "Rmb revenue per US dollar reported" in FY2018 compared to FY2017.

    It also means that:

    1/ IF we use a constant currency based on the averaged FY2017 exchange rate as a base rate, THEN
    2/ The 'constant currency' FY2018 earnings results, based on this representative FY2017 exchange rate (but reported in USD), means the USD earnings reported in this way are less than actually occurred. AND
    3/ To return these earnings to actual USD levels, we must multiply the earnings given in 'constant currency terms' by a factor of: 6.7518/6.6174 =1.020

    Note: The above assumes that YUMC earnings translated back to a US reference currency were actually cross currency valued at that average exchange rate.

    SNOOPY

    PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
    Last edited by Snoopy; 06-02-2019 at 08:53 AM.
    To be free or not to be free. That is the cash-flow question....

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