YumChina (NYSE:YUMC)

[Snoopy]

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