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  1. #61
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    Quote Originally Posted by Snoopy View Post
    I can offer the following observations:

    1/ YUMC is very will capitalised (no term debt), so is well placed to ride out any short term downturn. The strength of the underlying business model has not changed.
    2/ YUMC is fundamentally a domestic company with most food ingredients grown and supplied from within China. So there is unlikely to be any shortage of product for sale from international trade restrictions.
    3/ People still have to eat and one of YUMC's very strong points of difference is food hygiene standards. By that I mean they have a standard (not that it is necessarily world class by western standards) whereas most local food restaurant businesses have no quality control standard at all. This means local people may be more inclined to eat at a YUMC restaurant than 'Chin's Diner'.
    So VG, you have posted a link which is a regurgitation of a link I posted nine days earlier? I am not quite sure the point you are thinking readers should deduce from this, since your post did not contain your own take on this matter.

    What I can say is that whether you consider YUMC is a 'consumer staple' or not (I am not clear on this point), it has been a good place to hide from 'market turmoil' over the last month. As I write this, the YUMC share price is still higher than it was a month ago ($42.41 on 10th February to $43.92 today, a gain of 3.6%) and there is an exchange rate gain for NZ based holders as well ($NZ1 = $US64 at start of period vs $NZ1 = $US63, a gain of 1.6%). Over the same period the DOW (note YUMC is NYSE listed) has declined from 29,276 to 23,851, a drop of more than 18%.

    I didn't pick any of this in advance, although my subsequent 'observations', quoted above, may explain what happened 'with the benefit of hindsight'. This is one reason that I prefer to have a few global investments that are not available on the NZX so that I can participate in markets and sectors that are not easily accessible here. One could argue that ATM is an equivalent 'local opportunity' to gain exposure to the consumer food market in China. The ATM share price has risen from $NZ15.75 to $NZ16.10 over the same period, a gain of 2.2%. So ATM has underperformed YUMC over the last month. The historical PE ratio of ATM is now 37 verses only 24 for YUMC. There are other similarities like both companies having no term debt. I like both companies, but the value proposition of YUMC is clearly superior. So YUMC is where my 'China market' money will be staying.

    SNOOPY
    Last edited by Snoopy; 11-03-2020 at 10:11 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  2. #62
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    Sorry I have posted it by mistake instead of other link. I found somewhere Yum China has been recognized as one of the world's most innovative companies for 2020, and is one of only a few restaurant holding companies in the world to be included. Its innovation is the major force behind Yum China's growth strategy. With this coronavirus drama, I believe there will be some great opportunities.
    Last edited by Valuegrowth; 15-03-2020 at 08:58 PM.

  3. #63
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    Default BT2/ Increasing 'eps' trend (2019 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post
    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 Daojia 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 AR2018), 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
    I have the 2019 YUMC report in my 'hot little paws'. So time to update the 'earnings per share' trend. Re-reading the accounts I notice something odd. 'Other Income' has been subtracted from 'Operating Expenses' (AR2019 Form 10-k, p55).

    These are the same 'Operating Expenses' that are used as a key component in the calculation of 'Operating Profit' (AR2019 Form 10-k, p55)....

    ---------------

    To use the terminology in the Annual Report

    "Operating Profit" ($901m, p55,p60) = "Total Revenues" ($8,776m, p55,p60) - "Total Cost & Expenses net (that means Other Income already subtracted from expenses)" ($7,875m, p55)

    ----------------

    'Other Income' has been recorded as a 'negative expense', which includes a series of 'one offs' not reflective of normal trading:

    1/ 'Minority Owned Equity Accounted Profit', (Note 6, AR2019; Note 7 AR2016-AR2018)
    2/ 'the Wuxi KFC equity revaluation', (Note 7, AR2018)
    3/ 'Insurance payouts', (Note 7, AR2016)
    4/ 'Provision reversal for Aircraft Sales losses' (Note 7, AR2016) and
    5/ 'Foreign Currency Adjustments' (Note 6, AR2019; Note 7 AR2016-AR2018) etc. etc.

    These one off and/or non-operational adjustments have all been dealt with. Yet 'Decreasing Expenses' has the same effect as 'Increasing Profits'. This means, in general, I do need to subtract 'Other Income' from 'Operating Income' to produce a 'Normalised Operating Income'.

    But there are 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 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.

    FY2015 FY2016 FY2017 FY2018 FY2019
    Equity Income from Unconsolidated Affiliates $41m $54m $65m $65m $69m
    Unconsolidated Affiliates %ge of Adjusted Normalised EBT 8.1% 8.4% 8.1% 7.3% 7.3%
    Reference AR2016 Note7 AR Note 7 AR Note 7 AR Note 7 AR Note 6

    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.

    FY2015 FY2016 FY2017 FY2018 FY2019
    Foreign Exchange Gains or (Losses) ($5m) ($3m) $0m ($11m) ($9m)
    Reference AR2016 Note7 AR Note 7 AR Note 7 AR Note 7 AR Note 6

    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 franchise fee charge should not be removed.

    FY2016
    Incremental adjustment to YUM licence fee expense $17m

    My 'Normalised Profit' calculation table appears below:

    FY2015 FY2016 FY2017 FY2018 FY2019 Reference
    Operating Profit $488m $640m $785m $941m $901m Consolidated and Combined Statements of Income Data
    less Poultry Supply Lost: Insurance Recovery ($5m) ($3m) AR2016 Note 7 'Other Income'
    add Provision for Losses on Aircraft sales $15m AR2016 Note 7 'Other Income'
    less Reversal of Aircraft Sale Provision ($2m) AR2016 Note 7 'Other Income'
    less Business Combination Contingency Reversal ($3m) AR2017 Note 7 'Other Income'
    less Equity Gain Consolidating Wuxi ($98m) AR2018 Note 7 'Other Income'
    add Daojia Intangible Write Off $12m $11m AR2019 p27, p61
    add Interest Earned (net) $8m $11m $25m $36m $39m Consolidated Statement of Income
    Equals Adjusted Normalised EBT $506m $646m $807m $891m $951m
    subtract Tax at 27% /26% (1) ($137m) ($174m) ($218m) ($241m) ($247m)
    subtract Foreign unrepatriated earnings Tax (2) ($17m) ($17m)
    Equals Adjusted Normalised NPAT {A} $369m $472m $589m $633m $687m
    Shares on Issue EOFY {B} 363.758m 383.344m 388.860m 392m 395m
    eps {A}/{B} equals {C} $1.01 $1.23 $1.51 $1.61 $1.74
    Share Price 31 March (following) {D} NA $27.20 $41.50 $44.91 $42.63
    PE Ratio (D)/(C) NA 22.1 27.5 27.9 24.5

    Notes

    1/ The US corporate tax rate up to 31st December 2017, for the previous few years, had 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. The difference is explained under the 'Income taxes' note (Note 16 AR2019, Note 17 AR2018).

    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' (p62,63 AR2018), after adjusting for 'Special Items', the actual corporate tax rate comes out at 27%.

    For FY2019 I have used the 'Statutory rate differential attributable to foreign operations' of 5.3%, added to the US Federal Statutory rate of 21% to obtain a 'round figure' tax rate of 26%. This figure does not include extra tax from 'Foreign repatriated earnings'.

    2/ 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. The IRS released the final transition tax regulations in Q1 2019. This resulted in an additional $8m in transition tax expense being required (AR2019 p62). The final transition tax bill, now $136m, 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 $136m/8=$17m charge every year from 2018 to 2025 inclusive.

    3/ In September 2018 YUMC made a $74m investment in a Hong Kong Stock Exchange floated e-commerce platform for services in China, 'Meituan' (AR2019 p107). YUMC bought 8 million 'Meituan' shares, or less than 1% of the shares on issue. The fair value of YUMC's stake is determined by the closing market price at the end of each reporting period. Gains or losses each year flow through to YUMC's accounts. These gains and losses are not reflected in 'normalised earnings', because they are recorded as gains or losses under the heading 'Investment Gain (Loss)' which falls outside of this envelope (AR2019 p55).

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 23-01-2021 at 03:19 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Default BT3/ ROE > 15% for five years (2019 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post

    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
    FY2015 FY2016 FY2017 FY2018 FY2019
    Adjusted Normalised NPAT {A} $369m $472m $589m $633m $687m
    Shareholder Equity EOFY {B} $1.979m $2,443m $2,859m $2,976m $3,175m
    ROE {A}/{B} 18.6% 19.3% 20.6% 21.3% 21.6%

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 22-01-2021 at 08:51 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2019 perspective)

    Quote Originally Posted by Snoopy View Post



    There has been a change in the definition of 'Revenue' for FY2018. There are two additional categories being:
    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Adjusted Normalised NPAT {A} $284m $250m $369m $472m $589m $634m
    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% 8.16%

    1/ 'Revenues from transactions with franchisees and unconsolidated affiliates'. YUMC operates a central procurement model. The company purchases centrally from suppliers all food and paper products, then on sells and delivers those to all restaurants, including franchisees and unconsolidated affiliates.
    2/ 'Other Revenues': Primarily includes revenue generated from YUMC's mobile e-commerce platform

    To preserve any statistical comparative worth with previous years, I have not added in these two additional revenue categories.

    Inflation in China is around 2%. The smallest gain in margin (we are leaving out the drop in FY2018) 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
    FY2015 FY2016 FY2017 FY2018 FY2019
    Adjusted Normalised NPAT {A} $369m $472m $589m $633m $687m
    Revenue {B} $7,233m $7,075m $7,769m $8,415m $8,776m
    Net Profit Margin {A}/{B} 5.10% 6.67% 7.58% 7.52% 7.83%
    Inflation rate for China 1.4% 2.0% 1.6% 2.1% 2.9%

    If you compare this table with my previous year's work, you will see that I have altered the definition of 'revenue' for all years to the updated way that YUMC looks at things today. 'Revenue' now includes:

    1/ Normal company sales.
    2/ Franchise fees and income.
    3/ Revenues from transactions with franchisees and unconsolidated affiliates.
    4/ Other revenues.

    I grabbed the CPI inflation rate for China from here:

    https://www.focus-economics.com/coun...hina/inflation

    Inflation in China is generally subdued and profit margins are not being eroded (FY2018 excepted) as inflation rises.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 23-01-2021 at 09:59 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  6. #66
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    Default Buffett Test Summary (2019 Perspective)

    Quote Originally Posted by Snoopy View Post
    No change from my preliminary analysis. Each of the four Buffett screenings tests have been confirmed as passed. Some of the changes made between the 'Estimated 2018 results' and 'Audited 2018 Results' are because figures that I have had to estimate have now been altered. Other changes have been made because I have changed my mind on what I consider to be 'normalized earnings'. But the net result is that all the Buffett targets are still met.

    There is one more hurdle to pass before we get to sit at the Buffett growth model table. ROE can be contrived to be higher than intrinsic, if a company has a very high level of debt.

    It is now time to look at a 'term debt' test. ROE can be manipulated higher by taking on more debt. We need to check that YUMC is not over leveraged.

    Total borrowing facilities are listed to be "Approximately $US418m." (from AR2018 p75), This consists of Chinese credit facilities totaling $218m, which should be added to $200m of outside credit facilities in aggregate. I further note that "As of December 31, 2018, the full amount of borrowings were available under each facility." I took that to mean that, despite these facilities being negotiated, nothing had yet been drawn down. There is no term debt listed on the balance sheet for FY2019. So that is consistent with my interpretation.

    If there is no bank debt, then we can't be worried about the repayment of something that doesn't exist. So it is time to take our seat at the 'Buffett Growth Model' table.
    There hasn't been sufficient change in the Chinese market to revise by 'Buffett Test 1' post, the second on this thread. I have revised the second third and fouth Buffett tests over the last few days. Suffice to say the company passes all of these tests over FY2019, as was the case last year. However, I do note that FY2019 ended on 31st December 2019. So these results do not cover the Covid-19 period. The FY2020 annual report has not been released, although if you judge by the share price, up around 40% for the year, the company has recovered well.

    There is one more hurdle to pass before we get to sit at the Buffett growth model table. High ROE can be contrived to be higher than intrinsic, if a company has a very high level of debt.

    It is now time to look at a 'term debt' test. ROE can be manipulated higher by taking on more debt. We need to check that YUMC is not over leveraged.

    Total borrowing facilities are listed to be "Approximately $US415m." (from AR2019 p72), This consists of Chinese credit facilities totalling $215m, which should be added to $200m of outside credit facilities in aggregate. I further note that "As of December 31, 2019, there were no borrowings outstanding" under each facility." I took that to mean that, despite these facilities being negotiated, nothing had yet been drawn down. There is no term debt listed on the balance sheet for FY2019. So that is consistent with my interpretation.

    If there is no bank debt, then we can't be worried about the repayment of something that doesn't exist. So it is time to, once again, take our seat at the 'Buffett Growth Model' table.

    SNOOPY
    Last edited by Snoopy; 23-01-2021 at 03:49 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Default Covid-19 on the ground in China (FY2020 perspective)

    Quote Originally Posted by Snoopy View Post
    Continuing to quote from the listing prospectus:

    "The development and growth of our business has benefited from China's rapidly growing middle class and increasing urbanization. The size of the middle class is expected to continue to grow significantly. According to a 2012 McKinsey study, between 2002 and 2022, the number of middle class and affluent households is expected to increase by 283 million. A significant portion of this growth will be driven by upper middle class households, which are expected to increase from 2% of total households in 2002 to 54% by 2022, or an increase of 188 million households. The Company will continue to focus on this core consumer segment and on serving China's growing middle class."

    What the McKinsey report says about the distribution of middle class households is equally interesting:

    "According to the McKinsey study referenced above, in 2002 87% of the middle class lived in coastal China and only 13% of the middle class lived in inland provinces. By 2022 it is expected that only 61% of the middle class will live in coastal cities as the middle class expands more rapidly in inland cities. Likewise, according to the same study, by 2022 it is expected that 39% of the middle class will live in cities with a population of more than one million."

    The response from Yum China, is to target new trade zones and build more new restaurants further inland. This includes targeting those 'small' (sic) cities with a population of 'only a million'.

    There are interesting parallels with the development of quick service restaurants in China, and China's milk market.

    https://www.theguardian.com/environm...hirst-for-milk
    The battle that YUMC has had in managing their Covid-19 response in China, provides an interesting insight into what happened with consumer food markets in general over FY2020 in China. The following are quotes from the three quarterly reports form FY2020 issued to date.

    --------------------------

    Q1 2020

    First quarter operations were significantly affected by the outbreak. Working closely with local health authorities to safeguard the public, the Company began temporary store closures in late January where appropriate. Approximately 35% of stores were closed by mid-February at the peak of the outbreak, with significant regional differences. As of the date of this release (28-04-2020), approximately 99% of stores in China are either partially or fully open.

    For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. Our results were strong for the first three weeks of January, but then the outbreak led to subsequent same-store sales declines of 40-50% compared to the comparable Chinese New Year holiday period in 2019. As the first quarter progressed, sales performance recovered gradually, with same-store sales down approximately 20% in late March. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. Same-stores sales were still down by more than 10% month-to-date.

    Yum China pioneered contactless delivery and contactless takeaway in late January to enhance preventative health measures. Those services proved popular with customers and have supported the businesses during this period of reduced dine-in traffic.

    Q2 2020

    Sales improved sequentially in April and May but softened in June. Sales were primarily impacted by significantly reduced traffic at transportation and tourist locations, delayed and shortened school holidays and resurging regional infections. These factors and the lingering effect of COVID-19 continue to impact operations in July.

    The unevenness in recovery was most pronounced in the differences between regions and trade zones. Eastern China recovered faster than other regions. Northern China's recovery was notably slower, primarily due to more stringent public health measures. Transportation and tourist locations, which accounted for high single digits of sales, continue to experience significant year over year traffic declines. The pace of recovery also varies across days of the week. Weekdays recovered the fastest as people returned to work and school, followed by weekends, with holidays lagging behind.

    Q3 FY2020

    Third quarter operations improved, although still impacted by reduced traffic at transportation and tourist locations, the delayed and shortened school holiday and the other lingering effects of the COVID-19 outbreak. Dine-in volume has been recovering, while delivery and takeaway remained popular options. The Company's primary focus continues to be safety, efficiency and driving traffic. We launched attractive digital and membership campaigns with strong value propositions to drive sales recovery.

    Q4 FY2020

    Fourth quarter operations improved sequentially from the third quarter. The Company's primary focus continues to be safety, efficiency and sales recovery. To counter the pandemic impact, we ran strong value and digital campaigns to drive traffic. Delivery and takeaway remained popular, while dine-in recovered sequentially. Proactive cost structure realignment, productivity improvements and one-off cost savings helped us achieve year-over-year expansion of restaurant margins and operating profit. However, the pace of recovery was uneven and non-linear, impacted by regional resurgences of COVID-19 in Qingdao, Xinjiang, Beijing, Dalian and elsewhere. October sales benefited from the National Day long holiday, but November and December sales were pressured by the regional outbreaks. Traffic at transportation hubs remained significantly below the prior year due to reduced travel.

    ------------------

    The latest Chinese Covid-19 outbreak (24th January 2021 report) is in the Hebei province, just outside of Beijing. The provincial capital Shijiazhung and the city of Xingtai, which encompasses Nangong, have been largely sealed off from the rest of the country. Community isolation and large-scale testing have also been enforced.

    Nearby Beijing, where around 2 million residents have been ordered to undergo new testing, and has reported two new confirmed cases. This is potentially serious for consumer confidence in 'Northern China'.

    SNOOPY
    Last edited by Snoopy; 17-02-2021 at 10:58 AM. Reason: added Q4 reported effects
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  8. #68
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    Default Buffett Growth Model (2019 Perspective): Data

    Quote Originally Posted by Snoopy View Post
    The objective of the Buffett growth model is to sum the gains of dividends and capital appreciation over an extended period, and calculate a compounding rate of annual return taking into account all tax liabilities incurred on the way.

    -----------------------

    The Buffett growth model operates by:

    1/ Starting with shareholder equity at the start of Year 1,
    2/ Working out a projected return on this equity using an averaged return on this equity from previous years.
    3/ Apportioning this return between dividends, share buybacks and what remains to be reinvested within the company. Note: New Capital raised outside of normal operations during the year must be taken into account!
    4/ Recycling any retained earnings into subsequent year shareholder equity. Then using this new Shareholder equity total as the earnings base for the subsequent year. The subsequent year becomes the new starting point for this process to repeat. Go back to step 1.

    ---------------------

    YUMC is an 'overseas share', caught by NZ's FIF tax regime. FIF tax is paid on 5% of the opening balance of each share owned. At a tax rate of 30%, this works out at:

    0.3 x 0.05 = 0.015, or 1.5% of the opening balance total, payable each year (actually FIF tax is charged on a whole of portfolio basis. But for the purpose of this exercise, we shall assume the entire FIF portfolio consists of YUMC shares only) For NZers, this FIF tax has to be separately accounted for in this calculation each year, and summed over the study period.

    We are looking at a study period, ten years into the future. The amount that must be paid for this FIF tax can be netted off against any overseas withholding tax paid on dividends. That is because, under the FIF regime, there is no separate tax on dividends. The withholding tax on dividends on NYSE listed YUMC and paid by YUMC on the investor's behalf is currently 15%.

    Return On Shareholder Equity: Working Figure

    Post 35 allows us to calculate an averaged five year ROE figure:

    ( 12.9% + 18.6% + 19.3% + 20.6% + 21.3% ) / 5 = 18.5%

    Price Earnings Ratio: Working Figure

    To value our share each year, we need to calculate an appropriate PE value to use. Despite operating for some thirty years, YUMC has only been separately listed for three. Using just three data points is not a very reliable way to calculate a representative average PE figure. This is particularly so when one of those figures was inflated by a since withdrawn takeover offer (Year 2017). I have taken 15% off the year 2017 PE figure to remove this takeover premium.

    ( 22.1 + 0.85x27.5 + 27.7 ) /3 = 24.4

    The derivation of this PE figure has been calculated using a shallow data set. Nevertheless it is the best figure we can get, based on the possibly not representative three year sharemarket trading period we have to draw information from.

    Dividends

    Over FY2018 there have been four quarterly dividends declared: 10cps, 10cps, 10cps and 12 cps. The first half of FY2019 has seen two dividends of 12cps being declared, an annualized rate of 48cps. Given the growth path of the company, I am forecasting dividends for FY2021 to be 13cps, 13cps, 13cps and 13cps. Following an incremental pattern, I am going to model future dividend payments for the years in which we are studying to be as follows:

    Forecast Dividend
    FY2018 (actual) 42cps
    FY2019 48cps
    FY2020 48cps
    FY2021 52cps
    FY2022 58cps
    FY2023 64cps
    FY2024 70cps
    FY2025 76cps
    FY2026 82cps
    FY2027 88cps
    FY2028 94cps

    Share Buybacks

    On 4th October 2017, the board increased the aggregate quantum of shares to be repurchased to $550m. As of the end of FY2018, the aggregate of share repurchases had reached $455m. That leaves $95m worth of shares still authorized to be bought back. Yet counter intuitively, the number of shares on issue continues to go up year on year. What is the explanation for this?

    As stated in AR2018 p40:

    "The company's executive compensation program consists of three primary pay components: (i) base salary, (ii) annual performance based cash bonuses or short term incentives and (iii) long term equity awards."

    We learn on p121 of AR2018 that:

    "Effective 31st October 2016, the company has reserved for issuance under the "Yum China Holdings Inc. Long Term Incentive Plan" 45 million shares of our common stock. Under this plan, the excise price of stock options and SARs (Stock Appreciation Rights) granted must be equal to or greater than the fair market value of the company's stock on the date of the grant"

    Over the remainder of FY2016, 25.274m of these long term incentive plan rewards were issued as part of the demerger process, 0.5m more were granted and 0.456m were forfeited or expired (AR2016 p115). So by the end of FY2016 the net plan shares issued were:

    25.274m + 0.500m - 0.456m = 25.318m

    We can record the change in rights issued in subsequent years as follows:

    Employee Options Authorised Remaining
    Total (start of period) less Options Granted during year add Options Cancelled during year equals Remaining Options to be Authorised (end of period)
    At 31st October 2016 45m (25.274m) 19.726m
    FY2016 19.726m (0.500m) 0.456m 19,682m
    FY2017 19.682m (2.234m) 1.199m 18.647m
    FY2018 18.647m (1.179m) 0.611m 18.079m

    In 'number of option' terms, this means there are plenty still available to be issued.

    Options and SARs vest after three to five years and expire ten years after they were granted. Share based compensation is recognized in the "Consolidated and Combined Financial Statements" on a straight line basis over the service period based on their fair value on the date of the grant. When the options are redeemed, the company gets a cash injection based on the awarded price of the share options granted. But the employee gets to keep the difference between the price at the time the option was awarded and today's market price.

    Again from p123 of AR2018, at the end of that year, 12.407m shares become exercisable at a weighted average excise price of $18.64. If all of these were exercised, this would represent a capital inflow to shareholders equity of:

    12.407m x $18.64 = $231m

    Actual new equity inflow over the FY2018 period from share based compensation was $24m (AR2018 p91). That is equivalent to 3m new ordinary shares created (AR2018 p91).

    During FY2018 (AR2018 p124), the company repurchased 9.0m shares during FY2018 (total cost $312m) and $960m remains available for purchase under current authorization. This remaining to purchase balance is up from the $422m available for future purchases a year earlier (AR2017 p122). So there doesn't seem to be any problem increasing the buy back authorization if management see fit to do so.

    $960m would buy back 24m shares at $40 each. 24m shares exceeds the employee compensation package new equity that could now be created at any time.

    12.407m shares x $18.64 per share = $231m (Potential employee new equity contribution EOFY2018)

    So now the number of shares that could be bought back outweigh the number of employee earned new shares that could be redeemed.

    Nevertheless warrant agreements with two strategic investors (AR2018 p115) could see 7.309m plus 0.891m = 8.2m new shares issued before October 31st 2021. Since these wanrrants are well 'in the money' I expect this will happen in due course. So I don't see the number of shares in YUMC decreasing over the next few years, despite the on market share buybacks.
    The objective of the Buffett growth model is to sum the gains of dividends and capital appreciation over an extended period, and calculate a compounding rate of annual return taking into account all tax liabilities incurred on the way.

    -----------------------

    The Buffett growth model operates by:

    1/ Starting with shareholder equity at the start of Year 1,
    2/ Working out a projected return on this equity using an averaged return on this equity from previous years.
    3/ Apportioning this return between dividends, share buybacks and what remains to be reinvested within the company. Note: New Capital raised outside of normal operations during the year must be taken into account!
    4/ Recycling any retained earnings into subsequent year shareholder equity. Then using this new Shareholder equity total as the earnings base for the subsequent year. The subsequent year becomes the new starting point for this process to repeat. Go Back to Step 1.

    ---------------------

    Tax

    YUMC is an 'overseas share', caught by NZ's FIF tax regime. FIF tax is paid on 5% of the opening balance of each taxpayer's FIF share portfolio owned at the start of each financial year (Fair Dividend Rate method). At a tax rate of 30%, this works out at:

    0.3 x 0.05 = 0.015, or 1.5% of the opening balance total, payable each year (FIF tax is charged on a whole of portfolio basis. But for the purpose of this exercise, we shall assume the entire FIF portfolio consists of YUMC shares only) For NZ investors in YUMC, this FIF tax has to be separately accounted for in the spreadsheet calculation each year, and summed over the future forecast study period.

    We are looking at a study period, ten years into the future. The amount that must be handed over to the IRD under this FIF tax regime can be netted off against any overseas withholding tax paid on dividends. That is because, under the FIF regime, there is no separate tax on dividends. The withholding tax on dividends on NYSE listed YUMC and paid by YUMC on the investor's behalf is currently 15%. However, as previously explained, this withholding tax is netted off against the FIF tax and does not directly come into the Buffett spreadsheet calculation that follows in the ensuing 'spreadsheet' post.

    Return On Shareholder Equity: Working Figure

    Post 64 allows us to calculate an averaged five year ROE figure:

    ( 18.6% + 19.3% + 20.6% + 21.3% + 21.6% ) / 5 = 20.3%

    Price Earnings Ratio: Working Figure

    To value our share each year, we need to calculate an appropriate PE value to use. Despite operating for some thirty years, YUMC has only been separately listed for four. Using just four data points is not a very reliable way to calculate a representative average PE figure. This is particularly so when one of those figures was inflated by a since withdrawn takeover offer (Year 2017). I have taken 15% off the year 2017 PE figure to remove this takeover premium.

    ( 22.1 + 0.85x27.5 + 27.9 + 24.5 ) /4 = 24.5

    The derivation of this PE figure has been calculated using a shallow data set. Nevertheless it is the best figure we can get, based on the possibly not representative four year sharemarket trading period we have to draw information from.

    Dividends

    Over FY2018 there were four quarterly dividends paid: 10cps, 10cps, 10cps and 10 cps (the first of these was the fourth quarter dividend of FY2017, paid in the FY2018 year). FY2019 saw four quarterly dividends of 12cps being paid, an annualized rate of 48cps. Given the growth path of the company, I am forecasting dividends for FY2021 to be 13cps, 13cps, 13cps and 13cps. Following an incremental pattern, I am going to model future dividend payments for the years in which we are studying to be as follows:

    Forecast Dividend (AR2020 p120)
    FY2018 (actual) 40cps
    FY2019 (actual) 48cps
    FY2020 (estimate) 48cps
    FY2021 52cps
    FY2022 58cps
    FY2023 64cps
    FY2024 70cps
    FY2025 76cps
    FY2026 82cps
    FY2027 88cps
    FY2028 94cps
    FY2029 100cps

    Share Buybacks

    The board has authorised a quantum of shares to be repurchased, topping out at a total value of $1.4billion (AR2019 p53), including the latest approved authorisation on 31st October 2018. As of the end of FY2019, the aggregate of share repurchases for cash had reached $700m (AR2019 Form10k, Cashflow Statement, p87 summing three retrospective years). In numerical terms that adds up to, at least, a documented 9 million shares over three years (AR2017-AR2019 Form10k Item 5). In fact, the dollar amount, purchased as declared in the cashflow statements, would suggest that the actual number of shares bought back for all reasons was nearer 20 million. (This is confirmed on p120 of AR2019 Form 10k to be 6.2m + 9.0m + 3.4m = 18.6m.) There are still $700m worth of shares authorized to be bought back. Yet, counter intuitively, the number of shares on issue continues to go up year on year. What is the explanation for this?

    Why do the number of YUMC shares seemingly keep increasing in spite of the share buyback?

    There are at least a couple of reasons

    1/ Exercise of Warrants As part of the YUMC demerger,

    a/ a subsidiary of Primavera Capital - the Hong Kong based investment group - AND
    b/ an affiliate of 'Zhejiang Ant Small and Micro Financial Services Group' ('Ant Financial')

    were in combination issued warrants to purchase shares representing 4% of the YUMC share capital at the time of the separation agreement (AR2019 p48). This amounted to some:

    0.04 x 364m = 14.5m shares

    As of 31st December 2019 warrants to purchase 1.5 percentage points of the original 4 percentage point warrant offer had been exercised (AR2019 Form 10k p49). This has created.

    0.015 x 364m = 5.5m new YUMC shares


    Furthermore in the last quarter of FY2019, these investors entered into pre-paid forward sale transactions which obliges them to deliver a portion of their remaining warrants to third parties in the future. In the foreseeable future, this should result in yet more - 14.5m-5.5m=9.0m - new YUMC shares coming into existence.

    2/ Exercise of Long Term Equity Awards As stated in the opening pages of AR2019 p41:

    "The company's executive compensation program consists of three primary pay components: (i) base salary, (ii) annual performance based cash bonuses or short term incentives and (iii) long term equity awards."

    We learn on p117 of AR2019 that:

    "Effective 31st October 2016, the company has reserved for issuance under the 2016 "Yum China Holdings Inc. Long Term Incentive Plan" 45 million shares of our common stock. Under this plan, the excise price of stock options and SARs (Stock Appreciation Rights) granted must be equal to or greater than the fair market value of the company's stock on the date of the grant"

    Over the remainder of FY2016, 25.274m of these long term incentive plan rewards were issued as part of the demerger process, 0.5m more were granted and 0.456m were forfeited or expired (AR2016 p115). So by the end of FY2016 the net Long Term Incentive Plan shares issued were:

    25.274m + 0.500m - 0.456m = 25.318m

    We can record the change in rights issued above, and equivalent changes in subsequent years, in a table as follows:

    Employee Options Authorised Remaining
    Total (start of period) less Options Granted during year add Options Cancelled during year equals Remaining Options to be Authorised (end of period)
    At 31st October 2016 45m (25.274m) 19.726m
    FY2016 19.726m (0.500m) 0.456m 19.682m
    FY2017 19.682m (2.234m) 1.199m 18.647m
    FY2018 18.647m (1.179m) 0.611m 18.079m
    FY2019 18.079m (1.469m) 0.532m 17.142m

    In 'number of option' terms, this means there are plenty still available to be issued.

    Options and SARs (Stock Appreciation Rights) vest after three to five years and expire ten years after they were granted. When and if options are redeemed, the company gets a cash injection based on the awarded price of the share options granted. But the employee gets to keep the difference between the price at the time the option was awarded and the market price on the day the options are exercised. The employee settlement payment is made in a dollar equivalent value of shares (AR2019 p61). Other shares based payments to NEOs (Named Executive Officers) are in the form of PSUs (Performance Stock Units) and RSUs (Restricted Stock Units). The latter are time based.

    From the 'Share Based Compensation' Notes (p119 of AR2019) at the end of that year, 10.583m shares remained ultimately exercisable at a weighted average excise price of $20.92. Add that total to the options 17.142m yet to be issued and I get a maximum approved number of options that could possibly be redeemed to be 27.725m. If all of these 10.583m of stock options that exist now were to be exercised in the years FY2020 and beyond, this would represent a capital inflow to shareholders equity of:

    10.583m shares x $20.92 per share = $221m (Potential employee new equity contribution following EOFY2019)

    Actual new equity inflow over the FY2019 period from share based compensation was $26m (AR2019 p89). That is equivalent to $26m/$16.58 per share = 1.57m new ordinary shares created (AR2019 p119).

    Employee Options Exercised
    Number of Options Exercised times Weighted Average Excise Price equals Option Supplied Capital
    FY2016 0.590m $9.90 $5.800m
    FY2017 4.168m $15.50 $64.600m
    FY2018 4.493m $15.12 $67.900m
    FY2019 4.234m $16.58 $70.200m
    Total 13.485m $208.50m


    During FY2019 (AR2019 p120), the company repurchased 6.2m shares (total cost $261m). $699m remains available for purchase under current authorization. This remaining 'to purchase balance' is down from the $960m available for future purchases a year earlier (AR2018 p120).

    $699m would buy back 11.7m shares at $60 each (the market price as I write this). 11.7m shares is now less than the employee compensation package related new equity (14.373m) that is eligible to ultimately be created (AR2019 p119).

    14.373m shares x $24.22 per share = $348m (Potential eventual employee new equity contribution EOFY2019)

    Right now the number of shares that could be bought back (11.7m) are near to balancing the number of employee earned 10.583m of new shares that could be redeemed right now (AR2019 119), and less than the number of employee earned shares that will likely ultimately be redeemed (14.373m).

    Conclusion for a long and rambling discussion on Share Buybacks

    So far I have looked at:

    1/ What has documented to have happened AND
    2/ What could happen in the future

    regarding the changing number of YUMC shares, and the associated dollar amounts changing hands.

    What might happen is speculative, in the sense that:

    1/ the rate of buying back shares can change at any time, (ultimately it is entirely under the control of the board) AS CAN
    2/ the number of shares issued to employees and investors (also under board control).

    Nevertheless looking at what 'might happen' from existing declared positions does provide a window of where management think the number of shares will head. It is a window into current board headspace. However, for the purposes of this discussion, it is more important to look at what 'has happened'. That is why I have put 'in bold' figures relating to the actual change in the number of shares on issue since YUMC float time. The one sentence summary of the documented number of share changes is as follows:

    Since the demerger,

    1/ 18.6 million YUMC shares have been bought back AND
    2/ 13.5 +5.5 = 19.0m new YUMC shares have been created.

    That is a gain of 0.4m shares over the period since YUMC was separately quoted. By contrast, Balance Sheet disclosed information would suggest the number of shares has increased from 364m to 392m over the same period -a rise of 28m shares. There is no doubt that, despite the buybacks, the number of YUMC shares has gone up. But why the documented increase is only 0.4m, while the balance sheet information indicates the increase is 28m, is a discrepancy that I cannot satisfactorily explain. There is much talk in the annual report about 'basic earnings per share' and 'diluted earnings per share'. It is possible that 'diluted earnings' include options issued to employees and investors that have not yet been paid up, while excluding future share buybacks that have been authorised by the board but not yet actioned.

    Whatever the actual reasoning behind the share numbers, there is irrefutable documentation that the number of YUMC shares is not decreasing over time. The total number of new shares issued

    1/ in the form of warrants at float time AND
    2/ employee performance incentives

    exceeds those removed from circulation by the program of on market share buybacks.

    SNOOPY
    Last edited by Snoopy; 01-03-2021 at 12:15 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Default Buffett Growth Model (2019 Perspective): Spreadsheet

    Quote Originally Posted by Snoopy View Post
    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 18.5%
    2/ A PE ratio of 24.4.
    3/ A constant dollar amount of shares being bought back every year amounting to $128m.

    YUMC has currently authorised share total buybacks up to a value of $1,400m (AR2018 p53,p124), of which a balance of $960m now remains for further buybacks. This is less than the $2,340m of buybacks I am modelling over the next ten years. However, the YUMC board has a record of increasing the buyback limit over the years. So I don't believe that my modelling is unrealistic. The actual number of shares the money buys back each year in my model 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 $18.64 each (AR2018 p123). This rate of subscription creates 3.165m 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 $7.31 $1.48 ($0.49) ($0.80) $0.16 $0.35
    2019 392m $33.53 $7.59 $1.40 ($0.48 +$0.08) ($0.33) $0.15 $0.66 $0.50
    2020 391.348m $37.33 $8.26 $1.53 ($0.52+$0.08) ($0.33) $0.15 $0.75 $0.56
    2021 391.085m $40.75 $9.02 $1.67 ($0.56+$0.08) ($0.33) $0.15 $0.85 $0.61
    2022 391.109m $44.65 $9.87 $1.83 ($0.60+$0.08) ($0.33) $0.15 $0.97 $0.67
    2023 391.407m $48.80 $10.83 $2.00 ($0.64+$0.08) ($0.33) $0.15 $1.10 $0.73
    2024 391.959m $53.68 $11.91 $2.20 ($0.68+$0.08) ($0.33) $0.15 $1.26 $0.81
    2025 392.739m $59.29 $13.14 $2.43 ($0.76+$0.08) ($0.33) $0.15 $1.41 $0.89
    2026 393.745m $65.39 $14.51 $2.68 ($0.84+$0.08) ($0.33) $0.15 $1.58 $0.98
    2027 394.913m $72.47 $16.04 $2.97 ($0.92+$0.08) ($0.32) $0.15 $1.80 $1.09
    2028 396.312m $80.28 $17.78 $3.29 ($1.00+$0.08) ($0.32) $0.15 $2.04 $1.20
    2029 397.973m $89.06 $19.74 $3.65
    Sum 2019 to 2028 ($7.00) $8.04

    Question/ On 12th August 2019, the YUMC share price closed at $43.02. 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? (note the dividend figure included in the calculation below is the proportion of the dividend due to ordinary shareholders, which now excludes the dividend paid to the controlling interests of YUMC minority owned businesses).

    Answer/ 43.02 x (1+r)^10 = [ ($89.06+$7.00 - $8.04) ] => r = 0.074 = 7.4%

    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 = [ ($89.06+$7.00 - $8.04) ] => P = $21.76

    Conclusion:

    YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 7.4% 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.
    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 20.3%
    2/ A PE ratio of 24.5.
    3/ A constant dollar amount of shares being bought back every year. Since listing, the dollar value of shares bought back amounted to $128m (FY2017), $312m (FY2018) and $261m (FY2019). For modelling purposes I intend to assume the average amount of these three, $234m worth of shares is bought back every year for ten years. That equates to a total ten year buyback commitment of $2,340m.

    YUMC has currently authorised share total buybacks up to a value of $1,400m, of which a balance of $699m now remains for further buybacks (AR2019 p120). This is less than the $1,280m of buybacks I am modelling over the next ten years. However, the YUMC board has a record of increasing the buyback limit over the years. So I don't believe that my modelling is unrealistic. The actual number of shares the money buys back each year in my model is determined by the modelled share price.

    4/ $86m of new shares being subscribed to, via the employee share scheme each year (Estimate, see my post 70). These shares are assumed to be subscribed to at a redemption price of $20.92 each (AR2019 p119). This rate of subscription creates 4.111m new shares each year. $86m/395m shares = 22cps.

    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} NZ Shareholder 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 $7.31 $1.48 ($0.49) ($0.80) $0.16 $0.35
    2019 (1) 392m $33.53 $7.59 $1.82 ($0.46+$0.09) ($0.67) $0.06 $0.66
    2020 395m $48.01 $8.04 $1.63 ($0.48+$0.09) ($0.59) $0.22 $0.69 $0.72
    2021 394.237m $43.61 $8,75 $1.78 ($0.52+$0.09) ($0.59) $0.22 $0.80 $0.65
    2022 392.983m $47.93 $9.58 $1.94 ($0.58+$0.09) ($0.60) $0.22 $0.89 $0.72
    2023 392.212m $52.68 $10.49 $2.15 ($0.64+$0.09) ($0.60) $0.22 $1.04 $0.79
    2024 391.881m $57.33 $11.54 $2.34 ($0.70+$0.09) ($0.60) $0.22 $1.17 $0.86
    2025 391.911m $63.21 $12.71 $2.58 ($0.76+$0.09) ($0.60) $0.22 $1.35 $0.95
    2026 392.320m $69.83 $14.05 $2.85 ($0.82+$0.09) ($0.60) $0.22 $1.56 $1.05
    2027 393.080m $77.42 $15.58 $3.16 ($0.88+$0.09) ($0.60) $0.22 $1.81 $1.16
    2028 394.169m $86.24 $17.34 $3.52 ($0.94+$0.09) ($0.59) $0.22 $2.12 $1.29
    2029 395,567m $96.53 $19.39 $3.94 ($1.00+$0.09) ($0.59) $0.22 $2.48 $1.45
    2030 397.254m $107.31 $21.78 $4.38
    Sum 2020 to 2029 ($7.32) $9.64

    Notes

    (1) 'Consolidated Statements of Equity' for FY2019 show a ($63m) 'Cumulative Effect of Accounting Change' charge amounting to ($63m)/392m = (16cps). This has not been itemised in FY2019 capital adjustments.

    Question/ On 31st December 2020, the YUMC share price closed at $57.09. What is the expected 10 year compounding rate of return for a New Zealand investor if you bought that share on the day, assuming exchange rates remain constant? (note the dividend figure included in the calculation below is the proportion of the dividend due to ordinary shareholders, which now excludes the dividend paid to the controlling interests of YUMC minority owned businesses).

    Answer/ 57.09 x (1+r)^10 = [ ($107.39+$7.32 - $9.64) ] => r = 0.063 = 6.3%

    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 = [ ($107.39+$7.32 - $9.64) ] => P = $25.97

    Conclusion:

    YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 6.2% 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.
    Last edited by Snoopy; Yesterday at 08:10 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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    Default Exercising Options & Injecting New Capital (2019 perspective)

    Quote Originally Posted by Snoopy View Post

    The next step is to forecast the dollar value of YUMC share options to be redeemed in future years. There were no stock options on the books at the start of FY2016 (AR2016, Note 15 'Share Based Compensation' p115). That is because YUMC only became split off as a separate entity in October of that year. The picture of total options granted and options exercisable on record is as follows

    Total Options on Books Options Exercisable Options Exercised During Year
    EOFY2016 24.728m 14.883m 0.590m
    EOFY2017 21.595m 14.072m 4.168m

    The 'options exercised' figure for FY2016 may have been affected by the 2016 'year' for YUMC being only two months long. Multiply the 0.590m figure by 6 to normalize it and I get: 6 x 0.590m = 3.540m. My hunch is that the since withdrawn 'takeover offer' at the end of FY2017 was - a trigger - to cause an abnormally high number of option holders to cash in. I am therefore taking 3.540m as a more normal number that might be redeemed in any one year. At a redemption price of $16.69 per share, that equates to $59m or 15cps for FY2019.
    Total Options on Books Options Exercisable Options Exercised During Year (Normalised)
    EOFY2016 24.728m 14.883m 6 x 0.590m =3.540m
    EOFY2017 21.595m 14.072m 4.168m
    EOFY2018 17.670m 12.407m 4.493m
    EOFY2019 14.373m 10.583m 4.234m
    Total 16.435m
    Average 4.109m

    My previous 'hunch' that an abnormal number of options were converted as a result of the FY2017 takeover offer looks, with hindsight, to be wrong. To model the number of options converted in the future I am now going to use the average of all four years from which we have full reporting data.

    At a redemption price of $20.92 (AR2019 p119) that equates to:

    $20.92 x 4.109m = $85.960m ($86m), which is my forecast for FY2020. I will also use that figure for the whole ensuing ten years of my modelling.

    SNOOPY
    Last edited by Snoopy; 14-02-2021 at 10:32 AM.
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