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  1. #41
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    Quote Originally Posted by Snoopy View Post
    The YUMC 'Consolidated and Combined Statement of Cashflows' (AR2018 p89) show

    2/ Dividends paid to non-controlling interests

    YUMC have a non-controlling 47% interest in each of the entities that operate the KFCs in Hangzhou (population 9.018m in 2015, 20 KFC Outlets {Googlemaps 2019}), Suzhou (population 4.330m in 2013, 20 KFC Outlets {Googlemaps 2019}). The now 83% owned Wuxi business (since an additional 36% of shares were added to the 47% percent of shares already held) is the entity that operates KFC in Wuxi (population 6.372m in 2010, 13 KFC outlets {Googlemaps 2019}) is now consolidated, as of the first quarter of FY2018.

    More details on 'Redeemable Noncontrolling Interests' can be found in AR2018 on p6 and p111. 'Unconsolidated affiliates' operated 14% of all YUMC KFC restaurants at the end of 2018 (p6 AR2018).

    I have found US regulated Form 10-K reports have less disclosure and are more difficult to follow than the typical NZX report. But maybe that is just me?

    Today the 'non-consolidated entities' reflect certain minority holdings in:

    1/ some flagship KFC stores AND
    2/ a redeemable non-controlling interest in 'DAOJIA.com.cn' (Daojia)

    Daojia is a specialist online takeaway food delivery company'. Notwithstanding this Daojia lost money over FY2018 (AR2018 p70)
    Time to test my theory that 'Dividends paid to non-controlling interests' are from the aggregated in the YUMC accounts 'majority stakes' - that YUMC doesn't own - in KFCs in Hangzhou (population 9.018m in 2015, 20 KFC Outlets {Googlemaps 2019}) and Suzhou (population 4.330m in 2013, 20 KFC Outlets {Googlemaps 2019}).

    We can estimate these 'majority owned outside of YUMC' earnings from the price paid for the now 83% owned Wuxi business (since an additional 36% of shares were added by YUMC to the 47% percent of shares already held) in the entity that operates KFC in Wuxi (population 6.372m in 2010, 13 KFC outlets {Googlemaps 2019}). (Wuxi was consolidated, during the first quarter of FY2018). The valuation of the Wuxi restaurants is the clue where we can get at least some 'hard data' from which to make our valuation estimates for the Hangzhou and Suzhou KFC businesses.

    AR2018 p92 tells us:

    "The completed acquisition of an additional 36% equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi China for a cash consideration of approximately $US98m increasing the company's equity to 83%."

    This values the whole Wuxi KFC business at: $US98m/0.36 = $US270m

    YUMC has been trading on EBIT multiples of around 20. Taking this measure as a baseline, this would imply an underlying EBIT for Wuxi of $US270m/ 20 = $US13.5m. Those earnings are spread over 13 outlets. But the remaining minority interests in the other two cities comprise 40 outlets. Assuming similar levels of profitability, that means the EBIT for KFCs in Hangzhou and Suzhou would be combined as an 'in the ballpark figure' of:

    $US13.5m x 40/13 = $US42m

    That breaks down to 0.47 x $US42m = $20m for YUMC shareholders, while the remaining $22m of EBIT belongs to the independent majority owners. YUMC has no term debt and would not withhold any tax payments to the majority shareholders. (In fact in the real world it is the other way around: the majority shareholders in KFC Hangzhou and KFC Suzhou would have to withhold Chinese tax before paying their dividend to minority shareholder YUMC). Yet from a YUMC accounts perspective -IMO-, all of the EBIT for KFC Hangzhou and KFC Suzhou in the YUMC accounts is available to pay the majority shareholders in KFC Hangzhou and KFC Suzhou. So how does that figure of $22m compare to the $36m dividend to non-controlling interests (AR2018 p89) that was paid? It is obviously less, although perhaps by co-incidence it does match the equivalent $22m figure from FY2017, (and that one would have included Wuxi as well).

    I have made assumptions in this analysis, for example that the profitability of Wuxi is indicative of the profitability in other centres, that may be untrue. We don't know why the former majority shareholders in Wuxi agreed to sell down to YUMC. Perhaps those Wuxi restaurants were underperforming? While I would have liked to have seen my estimate of earnings at KFC Hangzhou and KFC Suzhou to be closer, it isn't far enough out in the circumstances to disprove my theory. Accordingly I am going to assume that $36m dividend to outside majority shareholders continues into the future. This is likely a high bound guess as it may include up to 1/4 of the Wuxi profits in the first quarter, before those profits were consolidated.

    SNOOPY
    Last edited by Snoopy; 12-08-2019 at 07:16 AM.
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  2. #42
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    You're doing a lot of fancy analysis on YUM, far more than I would ever consider on a stock if I were to buy it. For starters i'm not a fan of using EBITA

    China's economy is on the down. Their currency is weakening to the USD. I would look at these factors because they would have a more relevant hit against their balance sheet than to assess by how much dividends they pay.

  3. #43
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    Quote Originally Posted by SBQ View Post
    You're doing a lot of fancy analysis on YUM,
    Too much speed reading on your behalf SBQ? We are talking about YUMC here, which is an entirely different company from YUM now. YUM is the master franchise holder for KFC, Pizza Hutt and Taco Bell globally. YUMC is the operator of KFC, Pizza Hutt and Taco Bell restaurants within mainland China. YUMC is the Chinese equivalent as 'Restaurant Brands' here in New Zealand.

    far more than I would ever consider on a stock if I were to buy it.
    Possibly, although maybe not more than if you owned the stock already?

    Of course, I am not looking into YUMC just for its own sake. I am interested in it as a 'comparative stick' against which to measure my own holding in 'Restaurant Brands' here in NZ. I am also interested in it as a long term success story on developing a 'western' business in the Chinese market. Because NZ has such a deep trade relationship with China, I think YUMC is a worthwhile case study for those companies in NZ looking to develop their business in China.

    For starters i'm not a fan of using EBITA
    I was using EBIT (not EBITA) for business unit valuation purposes. That is how business units are valued in most takeover circumstances. Nothing radical about doing that I would have thought.

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 08:55 AM.
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  4. #44
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    Quote Originally Posted by SBQ View Post
    China's economy is on the down. Their currency is weakening to the USD. I would look at these factors because they would have a more relevant hit against their balance sheet than to assess by how much dividends they pay.
    I find it an interesting feature of the 'United States Securities and Exchange Commission' FORM 10-K annual reports that they are forced to disclose risks to an almost absurd degree. Nevertheless, not living in the USA, I find these disclosures useful. Here is what the report says on the current USA vs China trade wars (p34 AR2018).

    "The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact costs."

    I am sure that if this was an NZX report, they would go on to supply some quantitative estimate of these costs. But none was forthcoming. Yet almost all the YUMC restaurant inputs are sourced within China anyway, so I am not too worried.

    "In addition changes in trade relations between the United States and China may trigger negative customer sentiment towards western brands in China, potentially resulting in negative impact on our results of operations and financial conditions."

    This has happened before, but after two to three years YUMC recovered.

    From AR2018 p32

    "For example, our results of operations in the third quarter of 2016 ( sales $1,848m) were adversely impacted by an international court ruling in July 2016 regarding claims to sovereignty over the South Chia Sea, which triggered a series of regional protests and boycotts in China, intensified by social media, against a few international companies with well known Western brands."

    As far as the currency is concerned, the RMB has been -largely- depreciating against the USD for a long time. So the more recent depreciation over the last few months is nothing new.

    In my spreadsheet projected profits, I use the term 'Net Income + Foreign Translation Gain'. Over the past five years these adjustments have been as follows:

    2014 2015 2016 2017 2018
    Foreign Currency Translation Adjustment ($51m) ($91m) ($134m) $142m ($160m)

    My base earnings figures on the spreadsheet include these adjustments. Also bear in mind that the number of YUMC outlets grew from 7,983 to 8,484 (+6.3%) over FY2018, and underlying profitability has increased much more than that. That kind of growth is outweighing any currency losses.

    SNOOPY
    Last edited by Snoopy; 16-08-2019 at 09:52 AM.
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  5. #45
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    Best of luck on your YUMC ventures. Personally I would rather pick YUM because of the cultural (anti-western) shift we're seeing in China. Also not touching any NZ listed companies at all. Not when corporate taxes are at 28% + a small market size of 4.5M population in NZ.

    SEC reporting is strict as Elon Musk has continuous battles with their regulations. Is it a good thing? IMO overall yes. While you get the odd case like Enron frauds, I would say they are far fewer than the amount of fraud / unethical actions we've seen on listed NZX companies in the past century. In fact, it's a primary reason why so many NZ people shun at sharemarket investing because they remember the past of so many corrupted NZ corporations that have 'fleeced investors'.

    As for China reporting... I only take it with a grain of salt. No one is blowing the whistle on China's mass corporate debt.

  6. #46
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    Quote Originally Posted by SBQ View Post
    Best of luck on your YUMC ventures. Personally I would rather pick YUM because of the cultural (anti-western) shift we're seeing in China.
    I own shares in YUM as well. No reason why you can't ride more than one horse. In fact that is how I got my shares in YUMC. The shares split from my YUM holding.

    Quote Originally Posted by SBQ View Post
    As for China reporting... I only take it with a grain of salt. No one is blowing the whistle on China's mass corporate debt.
    YUMC has no term debt, which is another appealing factor.

    SNOOPY
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  7. #47
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    Default Local Revenue Trend (FY2018 Perspective)

    Quote Originally Posted by Snoopy View Post
    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.
    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 FY2018
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $634m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m $7,774m
    RMB/USD Exchange Rate 6.1932 6.1428 6.2284 6.6423 6.7518 6.6174
    Revenue RMB42.764 RMB42.594 RMB43.032 RMB44.849 RMB48.235 RMB51.444
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27% 8.16%

    The revenue growth rate in local currency per annum was:

    RMB42.764 x (1+g)^5 = RMB51.444 => g=3.77% (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; 04-03-2021 at 08:09 PM.
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  8. #48
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    Default ROE Incremental Returns Since Listing (FY2018 perspective)

    Quote Originally Posted by Snoopy View Post

    Return on Equity

    In the 'Buffett Growth Model', it is 'Return on Equity' that is the most important factor in determining earnings for the year. I am happy with assuming a return on equity for Yum China of 18.8% (edit now updated to 18.5%) . In absolute terms, this will be a high number to roll over on itself for the next ten years. Yet the actual ROE over the last three years (the time since YUMC has been listed as a separate entity) have been noticeably higher than this. I am not expecting the high ROE figures from the last three years to continue. Profits have been growing a lot faster than sales. And I expect some re-balancing of costs upwards. Indeed, over FY2018, the 'Net Profit Margin' was, apparently, already shrinking.
    I have mentioned before that YUMC came into being as a 'stock split' for the parent YUM corporation. This is a slight simplification of the truth. In fact at the time of the split, YUMC received an outside capital injection of $460m (AR2018 p115). This is as the result of two strategic investors being brought on board the share register:

    1/ An affiliate of the 'Primavera Financial Group' called 'Pollis Investment L.P.' invested $410m.
    2/ An affiliate of ''Zhejiang Ant Small and Micro Financial Services Co. Limited" called 'API Hong Kong Investment Limited" invested $50m.

    The net effect of these transactions was to add 19.145m shares (along with the $460m) to the 363.758m shares that came into existence at the time of separation. These shares were added in the very last quarter of 2016 and so already appear on the FY2016 balance sheet information as presented in the table below.

    EOFY2016 Change EOFY2018
    Normalised Earnings {A} $472m $634m
    No. of Shares {B} 383m 392m
    eps {A}/{B} $1.23c +39c {D} $1.62
    Owner Equity {C} $2,443m $2,976m
    Owner Equity per share {C}/{B} $6.38 +$1.21 {E} $7.59
    Return on Incremental Equity / Share {D}/{E} +32%

    It is likely that the net effect of this earlier $460m investment was not felt immediately. So much of the profitability gain apparent from subsequent net capital injection into YUMC (mainly from senior employees cashing in their stock options) is 'piggy backing' on the earlier $460m cash injection not shown in the above table. Thus in my opinion a more meaningful comparison table is this second one:

    31/10/2016 (spin off date) Change EOFY2018
    Normalised Earnings {A} $472m (for all of FY2016) $634m
    No. of Shares {B} 364m 392m
    eps {A}/{B} $1.30c +32c {D} $1.62
    Owner Equity {C} ($2,443m-$460m) $2,976m
    Owner Equity per share {C}/{B} $5.45 +$2.14 {E} $7.59
    Return on Incremental Equity / Share {D}/{E} +15%

    Note that 15% is well below the overall ROE figure of 21.3% achieved over FY2018 and also below the ROE figure of 18.5% over the last five years. 15% return on 'incremental equity' is nevertheless a good figure, the kind of figure that a Warren Buffett would be happy with.

    SNOOPY
    Last edited by Snoopy; 08-03-2021 at 12:23 PM.
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  9. #49
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    Quote Originally Posted by Cricketfan View Post
    So Snoopy, after all this analysis, have you invested? I've opened an account with Hatch, might buy a few YUMC to get started.
    Quote Originally Posted by Snoopy View Post
    I am convinced Yum China is a very good company. I particularly like the fact that they can open a KFC restaurant and have all incremental expenditure needed to do that paid back within a couple of years. But successful investment is not just about sharemarket investors buying good companies. What investors need is to buy good companies at good value prices. I see Yum China last traded at $US45.24. Based on last years (2017) results, this represents an historical PE ratio of:

    $45.24 / $1.52 = 29.8

    This is very high. I would like to wait to see the full results from last year released, to see if such a lofty PE ratio could be justified. Right now, I won't be investing more money into Yum China.

    If I was a new investor, I would be waiting for something negative to happen that caused the YUMC share price to fall a bit (bearing in mind YUMC is very strong at its core and the SP should bounce back), and allow a more favourable investment entry price. YUMC has had a series of mishaps outlined earlier on this thread, that dragged their reputation down, for a while at least. The next mishap could be next week. But it could be five years away.
    Cricketfan, YUMC fell 3.49% on Friday down to $42.57. That is more than any of the underlying US indices fell and all were down. This stoush between Trump and Chinese President Xi is exactly the kind of event that we investors look for to bring share prices down to more reasonable levels.

    Many here will see YUMC as just another US corporation liable to feel the backlash, if not from tariffs, then from an anti-US feeling from the loyal Chinese citizen consumers against the USA. But as you can see below, it isn't.

    Quote Originally Posted by Snoopy View Post
    If we look at YumChina, their success seems due to their ability to be seen as a Chinese company (the senior executive team is Chinese, they sell franchises to local Chinese) that provide tangible benefits for Chinese workers. Raising the standard of living of the Chinese people is something the Chinese government have been very successful at. And I would say any China based business that produce for all stakeholders benefits in line with the Chinese government's vision will continue to do well.
    Watch the misguided masses sell this one down. Then be ready to pounce. But will the share price go low enough to make this a deal that new investor's can't turn down? That remains to be seen.

    SNOOPY
    Last edited by Snoopy; 26-08-2019 at 08:22 PM.
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  10. #50
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    Default HY2019 Profit Review

    It is interesting to take note of the year to date profitability for HY2019 verses the previous year HY2018. (From 30th July 2019 Yum China Profit Release)

    A significant contributor to the profit in HY2019 was the 'mark to market' gain from YUMC's equity investment in Meituan Dianping (a $27m gain in the half).

    Meituan and Dianping were originally two separate companies that merged in 2015. They made their merged public debut on the Hong Kong stock exchange (HKEX) in September 2018. Meituan Dianping operates two complimentary website businesses in China. Meituan.com is a group-discount website which sells vouchers from merchants for deals. Meituan.com generates most of its revenue from mobile application services. Dianping.com hosts consumer reviews of restaurants, and also offers group buying.

    Adjusted 'Net Profit after Tax' for YUMC attributable to shareholders is as follows:

    HY2019 Revenue: $1,048m
    HY2019 NPAT: $553m - $139m -$27m -$14m = $373m
    HY2019 eps: $373m/ 394m = 94.7c
    Exchange Rate 31-07-2019: USD1 = 6.885yuan

    HY2018 Revenue: $1,092m
    HY2018 NPAT: $606m - $160m - $15m = $431m
    HY2018 eps: $431m/ 377m = $1.14
    Exchange Rate 31-07-2018: USD1 = 6.813yuan

    Against the underlying growth narrative, core earnings are down. That is still the case, even if we add in the Meituan Dianping shareholding gain.

    $27m/ 394m = an incremental 6.9c for HY2019.

    We know that extra $27m of investment capital gain was not planned for, because YUMC management do not go about guessing the short term performance, as reflected by markets, of their long term investments. So this earnings drop is not consistent with the stated plan of growing earnings over FY2019 as referenced below.

    From

    https://www.fool.com/investing/2019/...high-note.aspx

    "Management still thinks it can grow overall sales in high single digits and operating profits by double digits."

    One thing management cannot control is the relationship between the US Dollar (the reporting currency for YUMC) and the Chinese Yuan (the function currency of YUMC). Yet if we translate the revenue figures into yuan:

    HY2019 Revenue: 7,215m yuan
    HY2018 Revenue: 7,340m yuan

    there is still no growth.

    At EOFY2018, YUMC was looking to open 600-650 new restaurants in the FY2019 financial year.
    At EOHY2019 this target has been upped to 800-850 units, with the majority of the incremental new units coming from KFC and the new inclusion of COFFii & JOY.

    Special opening promotions for new stores can affect profits in the short term. In addition, bringing forward store remodelling can have a profound negative effect on operating profit and sales, during the period of refurbishment.

    During FY2018 and into FY2019 the overall Chinese economy slowed. Yet digital ordering and increased delivery options are key areas of focus to cater to the busy Chinese diner. Digital and delivery initiatives have helped keep costs in check over the year.
    Last edited by Snoopy; 11-11-2019 at 06:12 AM.
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