YumChina (NYSE:YUMC)

[Snoopy]

It is the earnings per share equity bridge that forms the basis for the Buffett growth model

The dollar figures in the table below are all on a 'per share' basis.

Note: To compile the table below, I have assumed:

1/ an ROE figure of 18.8%
2/ a PE ratio of 23.2.
3/ a constant dollar amount of shares being bought back every year amounting to $128m, The actual number of shares this buys back is determined by the modelled share price.
4/ $59m of new shares being subscribed to via the employee share scheme each year. These shares are assumed to be subscribed to at a redemption price of $16.69 each. This rate of subscription creates 3.542m new shares each year.

	Modelled No. Shares SOFY	Modelled Share Price SOFY {SP}	Equity SOFY	Net Income + Foreign Translation Gain {A}	Dividend Declared {B}	Share Buyback {C}	New Shares Subscribed + New Capital on Business Acquisitions {D}	New Retained Equity {A}+{B}+{C}+{D}	FIF Tax Liability {SP} x 0.015
2017	383.344m	$26.12	$6.37	$1.49	($0.16)	($0.33)	$0.09	$1.09
2018	388.860m	$40.02	$7.35	$1.56	($0.51)	($0.79)	$0.07	$0.33
2019	392m	$33.43	$7.62	$1.43	($0.58)	($0.33)	$0.15	$0.67	$0.50
2020	391.722m	$36.19	$8.29	$1.56	($0.58)	($0.33)	$0.15	$0.80	$0.54
2021	391.725m	$39.67	$9.09	$1.71	($0.64)	($0.33)	$0.15	$0.89	$0.60
2022	392.038m	$43.62	$9.98	$1.88	($0.72)	($0.33)	$0.15	$0.98	$0.65
2023	392.646m	$47.79	$10.96	$2.06	($0.80)	($0.33)	$0.15	$1.08	$0.72
2024	393.510m	$52.43	$12.01	$2.26	($0.88)	($0.33)	$0.15	$1.20	$0.79
2025	394.611m	$57.54	$13.17	$2.48	($0.96)	($0.32)	$0.15	$1.35	$0.86
2026	395.928m	$63.10	$14.47	$2.72	($1.04)	($0.32)	$0.15	$1.51	$0.95
2027	397.411m	$69.37	$15.92	$2.99	($1.12)	($0.32)	$0.15	$1.70	$1.04
2028	399.108m	$76.56	$17.55	$3.30	($1.20)	($0.32)	$0.15	$1.93	$1.15
2029	400.978m	$84.68	$19.39	$3.65
Sum 2019-2028					($8.52)				$7.80

Question/ On 1st March 2019, the YUMC share price closed at $41.40. What is the expected 10 year compounding rate of return for a New Zealand investor if you bought that share today, assuming exchange rates remain constant??

Answer/ 41.40 x (1+r)^10 = [ ($84.68+$8.52 - $7.80) ] => r = 0.075 = 7.5%

Question/ Warren Buffett likes to get a 15% compounding return on any share he invests in, What price would he need to pay for YUMC today to achieve that?

Answer/ P x (1.15)^10 = [ ($84.68+$8.52 - $7.80) ] => P = $21.10

Conclusion:

YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 7.5% after tax compounding return over ten years is OK, this is below the kind of return that Warren is seeking. I don't think Warren would be investing in YUMC, unless that acquisition price comes down.


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