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  1. #46
    Legend
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    Default

    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
    To be free or not to be free. That is the cash-flow question....

  2. #47
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    Default Local Revenue Trend

    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)^6 = RMB51.444 => g=3.13% (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; 13-08-2019 at 10:59 PM.
    To be free or not to be free. That is the cash-flow question....

  3. #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 above. 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; 15-08-2019 at 11:12 AM.
    To be free or not to be free. That is the cash-flow question....

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