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  1. #16
    Senior Member Valuegrowth's Avatar
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    https://macropolo.org/how-kfc-change...a-changed-kfc/

    How KFC Changed China and How China Changed KFC

    https://www.businessinsider.com.au/k...8-12?r=US&IR=T

    How KFC became China's most popular fast-food chain and made nearly $5 billion last year

    I don’t think fast food culture will disappear anytime soon.

  2. #17
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    Quote Originally Posted by Valuegrowth View Post
    https://www.businessinsider.com.au/k...8-12?r=US&IR=T

    How KFC became China's most popular fast-food chain and made nearly $5 billion last year

    I don’t think fast food culture will disappear anytime soon.
    I hadn't heard about the "K Pro" way of presenting KFC before. Here is the article published when "K Pro" opened in Shanghai.

    http://www.timeoutshanghai.com/featu...-Shanghai.html

    "The inside looks less KFC, more salad bar with a counter featuring fresh vegetables on display (mostly to show off the staff as they prepare your food)"

    Looks like YUMC are treating healthy eating seriously! Mind you they aren't abandoning the traditional KFC way, with a 'hedging the bet' regular KFC right next door!

    SNOOPY
    Last edited by Snoopy; 16-01-2019 at 01:22 PM.
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  3. #18
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    Default Adjusting for 'Constant Currency' Aspect 1

    The press release for the FY2018 results is out. Rather annoyingly, YUMC have chosen to release their results -only- in constant exchange rate terms. That means I will have to wait until the annual report before the actual results are put on paper. Yet with the RBD takeover offer closing in a month or so, and my need for a measuring stick for that, this means I can't afford to wait that long.

    The issue here is that YUMC results are ultimately reported in US dollar terms. But the functional currency for the business is the Chinese Renminbi. The revenue is coming in all through the year. So it is appropriate to look at averaged exchange rates throughout the year. Using wiki, I got:

    CY/FY2017 CY/FY2018
    Average Exchange Rate USD1- = 6.7518Rmb. USD1- = 6.6174Rmb

    This means that, on average, comparing FY2017 and FY2018, that we shareholders shared in less "Rmb revenue per US dollar reported" in FY2018 compared to FY2017.

    It also means that:

    1/ IF we use a constant currency based on the averaged FY2017 exchange rate as a base rate, THEN
    2/ The 'constant currency' FY2018 earnings results, based on this representative FY2017 exchange rate (but reported in USD), means the USD earnings reported in this way are less than actually occurred. AND
    3/ To return these earnings to actual USD levels, we must multiply the earnings given in 'constant currency terms' by a factor of: 6.7518/6.6174 =1.020

    Note: The above assumes that YUMC earnings translated back to a US reference currency were actually cross currency valued at that average exchange rate.

    SNOOPY

    PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
    Last edited by Snoopy; 06-02-2019 at 08:53 AM.
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  4. #19
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    Default Adjusting for 'Constant Currency' Aspect 2

    Quote Originally Posted by Snoopy View Post
    PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
    There is another way to produce constant currency earnings results. You could start with the exchange rate on the first day of the financial year and assume that remains constant throughout the year.

    SOCY/SOFY2018 CY/FY2018
    Average Exchange Rate USD1- = 6.6174Rmb
    Daily Exchange Rate USD1- = 6.488Rmb

    This would mean that, on average, comparing 'constant exchange rate earnings based on the opening day exchange rate' and 'actual earnings over all of FY2018', that we shareholders would have shared in more "Rmb revenue per US dollar reported" in FY2018 compared to the unadjusted case where earnings were translated at different exchange rates throughout the year.

    It also would mean that:

    1/ IF we use a constant currency based on the first day of FY2018 exchange rate as a base rate, THEN
    2/ The 'constant currency' FY2018 earnings results, based on the representative opening day in FY2018 exchange rate (reported in USD), means the USD earnings reported in this way are more than actually occurred. AND
    3/ To return these earnings to actual USD levels, we must multiply the earnings given in 'constant currency terms' by a factor of: 6.488/6.6174 =0.9804

    Note: The above assumes that YUMC earnings translated back to a US reference currency were actually cross currency valued at that average exchange rate.

    By changing the reference point, our adjustment has gone the other way! I don't know which of 'Aspect1' or 'Aspect 2' is the more correct way of making a constant exchange rate correction. But given we are looking at a 2% change from the quoted figures either way, I might just forget about doing any corrections and stick with the quoted figures that I know are wrong, but not by much.

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 09:28 AM.
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  5. #20
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    Default BT2/ Increasing 'eps' trend (2018 estimate perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Operating Profit (excluding Impairments (1)) $384m $354m $488m $640m $785m $941m
    subtract Insurance Payouts ($25m) ($5m) ($3m)
    adjust Corp Jet Disposal $15m ($2m)
    adjust Foreign Currency Adjustments $5m $4m $3m $0m $?m
    subtract Wuxi KFC equity revaluation ($98m)
    add Duojia Intangible Write Off $12m
    add Interest Earned $5m $14m $8m $11m $25m $36m
    Equals Adjusted Normalised EBT $389m $348m $510m $649m $810m $891m
    subtract Tax at 27% (2) $105m $94m $137m $175m $219m ($241m)
    subtract Foreign unrepatriated earnings Tax (3) ($20m)
    Equals Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shares on Issue EOFY {B} 363.758m 363.758m 363.758m 383.344m 388.860m 392m
    eps {A}/{B} {C} 78.1c 69.8c $1.02 $1.27 $1.52 $1.61
    Share Price 31 March (following) {D} NA NA NA $27.20 $41.50 $40.52 (4)
    PE Ratio (D)/(C) NA NA NA 21.4 27.3 25.2

    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' is 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.

    3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. But this tax bill is to be spread out over eight years. 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 $20m charge every year from 2018 to 2025 inclusive.

    4/ Share price at 5th February 2019.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 12:46 PM.
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  6. #21
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    Default BT3/ ROE > 15% for five years (2018e perspective) [one setback allowed]

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    Shareholder Equity EOFY {B} $2,344m $1,945m $1.979m $2,443m $2,859m $2,873m
    ROE {A}/{B} 12.1% 13.1% 18.8% 19.4% 20.7% 21.9%



    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 09:27 PM.
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  7. #22
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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2018e perspective)

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $630m
    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% 8.10%

    Inflation in China is around 2%. The smallest gain in margin 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. They 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

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 09:36 PM.
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  8. #23
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    SNOOPY: I see you're a big fan of fast food, particularly fast food in China.

    Can I ask your thoughts on BABA and it's future outlook (after Jack Ma no longer the CEO) ?

  9. #24
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    Quote Originally Posted by SBQ View Post
    SNOOPY: I see you're a big fan of fast food, particularly fast food in China.

    Can I ask your thoughts on BABA and it's future outlook (after Jack Ma no longer the CEO) ?
    SBQ, I don't follow Alibaba closely, but these guys obviously do:

    http://knowledge.wharton.upenn.edu/a...thout-jack-ma/

    Operationally, I don't see any problems in the medium term. Jack Ma will have stepped away from that part of Alibaba long ago. But as a charismatic figure head, Jack will be impossible to replace. So investors might not be prepared to pay such a high multiple for the company once the media fronting founder goes. Thus I see the 'investment risk' for shareholders as higher than the 'business operational risk'.

    There are 'investors' (that I would call mathematically challenged gamblers) who are prepared to pay any market price to get on the share register of a globally big name company. At some point they will pay too much. But what point is that? This is a difficult question to answer. So difficult, that I prefer to leave those kinds of investments to others.

    As far as doing business in China goes, there are special risks that the article I quote outlines. If we look at YumChina, which has a longer track record than Alibaba, 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.

    SNOOPY
    Last edited by Snoopy; 13-02-2019 at 08:16 AM.
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