YumChina (NYSE:YUMC)

[Snoopy]

[*]Very respectable ROE (Yum China Holdings has a return on equity of 18% for the last year)

If we take the headline NPAT of $429m and divide that with shareholder equity at last reported balance date (31-12-2017) I get a 'Return on Shareholders Equity' of:

$429m / $2,859m = 15.0%

Alternatively, and more correctly, you could use the averaged shareholder equity over the last two balance dates:

$429m / ($2,859m+$2,443m) = 16.2%

Not sure how you got your 18% ROE ValueGrowth. You may have noticed my quoted ROE figure for the 2017 year was 20.7% based on $591m of NPAT earnings. So there are obviously quite a few differences out there, depending on how you calculate the figures.

Most here will probably be aware of the 'Trump Tax Reforms'. Newsmedia have focussed on the reduction of the US corporate income tax rate from 35% to 21%. Nevertheless I don't expect this to help US domiciled YUMC, because almost all of their operations pay tax in China at the business income tax rate there of 25%. And that won't change post the Trump tax reforms.

However if you look at Note 17 of the YUMC AR2017, you will see that the FY2017 results have been hit by a $164m one off income tax charge. This is a result of a less publicised part of the Trump tax reforms. The 'deemed repatriation of accumulated and distributed foreign earnings'. YUMC have treated this as a one time adjustment of $164m. Nevertheless I disagree with this treatment, because this tax bill will be paid back over eight years (YUMC AR2017 p76). So it seems to me it would be better to consider this as approximately $20m of extra annual income tax to be paid over the next 8 years, and not a one off event. This disadvantage of deviating from the official accounts like this is that I will have to remember to put in $20m of extra income tax every year for the next eight years!

From the YUMC accounts, the tax bill for FY2017 was $381m. OTOH I used normal historical tax rates of 27% and came up with a tax bill of only $219m. This is the biggest difference in how I calculated my own normalised earnings verses the 'official' approach taken by YUMC. I think I am right doing things this way (from an investment perspective) although I accept others out there may disagree with my approach.

SNOOPY