YumChina (NYSE:YUMC)

[Snoopy]

All of the Buffett tests have been passed. This is a rare event for any share and some may think that this is an invitation to buy. This would be a wrong conclusion to draw. Passing the Buffett tests means that you get a seat at the table to fire up the Buffett growth model to see what comes out. The price an investor has to pay for YUMC will largely determine an investors return after ten years. A great company bought at a high price will likely end up an average investment proposition at best.

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.

Total borrowing facilities are listed to be "Approximately $US261m." (from AR2017 p76), I further note that "As of December 31, 2017, 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 FY2017. So that is consistent with my interpretation. If we now look at the 31st January preliminary release of the FY2018 results, the balance sheet there once again shows no term debt. The entry under which any current bank debt might be hiding ( 'Other Liabilities and Deferred Credits') is broken down into:

1/ Deferred and escalating minimum rents.
2/ Deferred Credits
2/ The 'Trump Tax' on deemed unrepatriated earnings.

This means there is no current bank debt nor term bank debt - still. 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.

SNOOPY