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  1. #21
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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2018e perspective)

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    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. 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

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 05:07 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  2. #22
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    Default

    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) ?

  3. #23
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    Default

    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 09:16 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  4. #24
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    Default Buffett Test Summary (2018e Perspective)

    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
    Last edited by Snoopy; 28-02-2019 at 07:46 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  5. #25
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    Default Buffett Growth Model (2018e Perspective): Data

    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. 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.

    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 21 allows us to calculate an averaged five year ROE figure:

    ( 13.1% + 18.8% + 19.4% + 20.7% + 21.9 %) / 5 = 18.8%

    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.

    ( 21.4 + 0.85x27.2 + 25.2 ) /3 = 23.2

    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

    Only one dividend of 10c per share has been declared over FY2017, the latest year in which an annual report was published. This relates to the period Q4 for FY2017. Over FY2018 there have been four quarterly dividends declared: 10cps, 10cps, 10cps and 12 cps. 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 42cps
    FY2019 42cps
    FY2020 46cps
    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 AR2017 p37:

    "The company's executive compensation program has three primary pay components: base salary, annual performance based cash bonuses and long term equity awards."

    We learn on p119 of AR2017 that:

    "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"

    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 p121 of AR2017, at the end of that year, 14.072m shares become exercisable at a weighted average excise price of $16.69. If all of these were exercised, this would represent a capital inflow to shareholders equity of:

    14.072m x $16.69 = $235m

    Actual new equity inflow over the period was $27m. That is equivalent to about 1.617m new ordinary shares created.

    The current authorized buy back limit of $95m would buy back 2.375m shares at $40 each. 2.375m shares to be redeemed is way short of the new 14.072m -1.617m = 12,455m shares that could be created at any time. it looks like the number of shares bought back will continue to be outweighed by the number of employee earned new shares vesting.

    SNOOPY
    Last edited by Snoopy; 05-04-2019 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...

  6. #26
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    Default Buffett Growth Model (2018e Perspective): Equity YOY Bridge

    The following information is derived from the "Consolidated and Combined Statements of Equity" (p93 AR2017). This reference shows the 'change in shareholder equity' over the previous three years. The FY2018 information, which I have added, has been plucked from the press release issued on the 31st January 2019 titled:

    "Yum China reports fourth quarter and Fiscal Year 2018 Results."

    http://ir.yumchina.com/phoenix.zhtml...cle&ID=2385649

    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}
    2016 ($20m)
    2017 $2,443m $571m ($60m) ($128m) $33m $416m
    2018 $2,859m $606m ($197m) ($307m) $27m $129m
    2019 $2,988m

    Note that:

    1/There were 383.344m shares on issue at the start of FY2017.
    2/There were 388.860m shares on issue at the start of FY2018
    2/There were 392m shares on issue at the start of FY2019.



    We can rewrite the above table on a 'per share' basis as follows:

    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}
    2017 $6.37 $1.49 ($0.16) ($0.33) $0.09 $1.09
    2018 $7.35 $1.56 ($0.51) ($0.79) $0.07 $0.33
    2019 $7.62


    It is the 'earnings per share' equity bridge that forms the basis for the Buffett growth model

    SNOOPY
    Last edited by Snoopy; 29-03-2019 at 09:04 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  7. #27
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    Default Uneven forces meet: Why Share Buybacks disappoint at YUMC

    Quote Originally Posted by Snoopy View Post

    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 AR2017 p37:

    "The company's executive compensation program has three primary pay components: base salary, annual performance based cash bonuses and long term equity awards."

    We learn on p119 of AR2017 that:

    "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"

    Options and SARs vest after three to five years (the actual vesting normally takes place over an extended time frame of four 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 p121 of AR2017, at the end of that year, 14.072m shares become exercisable at a weighted average excise price of $16.69. If all of these were exercised, this would represent a capital inflow to shareholders equity of:

    14.072m x $16.69 = $235m

    Actual new equity inflow over the period was $27m. That is equivalent to about 1.617m new ordinary shares created.

    The current authorized buy back limit of $95m would buy back 2.375m shares at $40 each. 2.375m shares to be redeemed is way short of the new 14.072m -1.617m = 12,455m shares that could be created at any time. it looks like the number of shares bought back will continue to be outweighed by the number of employee earned new shares vesting.
    The playing field seems tilted to me, in favour of 'employees' over 'shareholders', with all these new shares coming and old shares going.

    Employees get their shares that 'vest today' at a price three to five years in the past (at least). They may even choose to hold their share options for ten years in total. Thus at redemption time, they get a 'three to ten' year price discount. I think I am right when I say:

    "the only money the company gets when the employee options are exercised is the value of the option when it was issued."

    The employee pockets the difference between 'today's market price' and the 'option issue price'. I am not complaining about that. This is how long term incentives work. But such a mechanism can carry a cost for the shareholder.

    If YUMC wants to neutralize any 'eps' dilution, by buying back an equivalent number of shares compared to those options that vest, it must do so by buying the shares on market at the market price up to ten years down the track from option issue time. Needless to say, the share price 'today' will have likely grown over ten years. In this example, if the employee share option was purchased at an equivalent price of $16.69, and today's market price for YUMC shares is $40, then we shareholders must spend $40 to neutralize the effect of each $16.69 'paid' by those employees as a long term incentive, all those years ago.

    The vesting of these awards is complicated by the fact that many were issued before YumChina separated from the parent YUM Company, the ultimate US based franchise holder for KFC, Pizza Hut and Taco Bell.

    "Under the employer method, employees holding YUM awards prior to separation had their awards converted into awards of the company they worked for subsequent to the separation."

    This explains why the 'weighted average excise price' for partly paid shares outstanding at the end of FY2017 is only $16.69. Yet YUMC shares have never traded below $24. The 'switch' between YUM Options and YUMC options was done using the 'Black Scholes' model and 'contemporary interest rates' and 'discount rates' to ensure the transition to YUMC options was handled fairly.

    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.

    I shall further assume that the number of shares bought back in future years total $128m at the indicative market price of the year. For FY2019 this is $33.53. And that equates to 3.818m shares, or 33cps for FY2019.

    Note that over FY2019, the number of shares on issue is modelled to change according to the difference between 'new shares subscribed' and 'shares bought back'. Specifically for FY2019, this calculates out at:

    3.540m - 3.818m = -0.278m (the negative sign means the number of shares on issue has reduced over the year)

    All of the options listed on p121 of AR2017 are well in the money. But if an employee entitled to share options leaves before the first vesting date, then they may still be forfeited.

    SNOOPY
    Last edited by Snoopy; 29-03-2019 at 09:13 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  8. #28
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    Default Buffett Growth Model (2018e Perspective): Spreadsheet

    Quote Originally Posted by Snoopy View Post
    It is the earnings per share equity bridge that forms the basis for the Buffett growth model
    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 18.8%
    2/ a PE ratio of 23.2.
    3/ a constant dollar amount of shares being bought back every year amounting to $128m, The actual number of shares this buys back 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 $16.69 each. This rate of subscription creates 3.542m 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 $7.35 $1.56 ($0.51) ($0.79) $0.07 $0.33
    2019 392m $33.43 $7.62 $1.43 ($0.58) ($0.33) $0.15 $0.67 $0.50
    2020 391.722m $36.19 $8.29 $1.56 ($0.58) ($0.33) $0.15 $0.80 $0.54
    2021 391.725m $39.67 $9.09 $1.71 ($0.64) ($0.33) $0.15 $0.89 $0.60
    2022 392.038m $43.62 $9.98 $1.88 ($0.72) ($0.33) $0.15 $0.98 $0.65
    2023 392.646m $47.79 $10.96 $2.06 ($0.80) ($0.33) $0.15 $1.08 $0.72
    2024 393.510m $52.43 $12.01 $2.26 ($0.88) ($0.33) $0.15 $1.20 $0.79
    2025 394.611m $57.54 $13.17 $2.48 ($0.96) ($0.32) $0.15 $1.35 $0.86
    2026 395.928m $63.10 $14.47 $2.72 ($1.04) ($0.32) $0.15 $1.51 $0.95
    2027 397.411m $69.37 $15.92 $2.99 ($1.12) ($0.32) $0.15 $1.70 $1.04
    2028 399.108m $76.56 $17.55 $3.30 ($1.20) ($0.32) $0.15 $1.93 $1.15
    2029 400.978m $84.68 $19.39 $3.65
    Sum 2019-2028 ($8.52) $7.80

    Question/ On 1st March 2019, the YUMC share price closed at $41.40. 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??

    Answer/ 41.40 x (1+r)^10 = [ ($84.68+$8.52 - $7.80) ] => r = 0.075 = 7.5%

    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 = [ ($84.68+$8.52 - $7.80) ] => P = $21.10

    Conclusion:

    YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 7.5% 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.


    SNOOPY
    Last edited by Snoopy; 09-03-2019 at 02:02 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #29
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    Default Spreadsheet Musings: (2018e Perspective)

    There is an old phrase in computation. 'GIGO' which means 'Garbage In, Garbage Out'. The practical translation of this glib phrase is that, no matter how sophisticated your mathematical model, if you put unreliable numbers in a sophisticated front end, then the output will be a sophisticated but unreliable result.

    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%. 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.

    Dividend Payments

    YUMC was demerged without the promise of paying dividends. Yet by the last quarter of FY2017 the first of what have become quarterly dividends (10cps in this case) was declared and paid. Total dividends declared over FY2018 amounted to 42cps. The share price on 31st March 2018 (the tax year boundary in NZ) was $41.50. But this price was inflated as the result of a now withdrawn takeover offer. So I am going to use an indicative normalised price of 0.85 x $41.50 = $35.28. Based on that price, the dividend yield for FY2018 looking forwards was:

    $0.42 / $35.28 = 1.19%

    This is not great. But it is close to covering the FIF tax liability of 1.5%, which is a good thing for shareholders. An overseas shareholding that does not cover the FIF tax liability via dividend yield means a negative cashflow liability for New Zealand holders indefinitely into the future, just to maintain the existing FIF holding you have.

    The ability to pay a dividend for a company which operates in the Chinese market is restricted. I quote from Item 5 (p54 AR2017).

    "The laws rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after tax profits each year, after making up the previous year's accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate of such a fund reaches 50% of its reserve capital." As a result, our Chinese subsidiaries are restricted in their ability to transfer their assets to us in the form of dividends,"

    Since YUMC is now paying dividends, it follows that at least a proportion of these Chinese subsidiary companies have accumulated an aggregate fund reaching 50% of its reserve capital. But did that happen only at the start of Q4 FY2017, when the first YUMC dividend was paid? Or did it happen before that? And what is 'Reserve Capital' anyway?

    From " http://www.businessdictionary.com/de...e-capital.html "

    "Reserve Capital" is the authorized capital of a firm that has not been called up and is, therefore, available for drawing in case of a need.

    So it looks to me as though 'reserve capital' is probably a moving target. This would make sense as the bigger the company gets, the more capital/ retained earnings are needed to keep it running. At EOFY2017/SOFY2018, the capital position of YUMC, just after the first dividend was paid, was like this:

    Total Equity 50% of Total Equity
    SOFY2017 $2,443m $1.222m
    SOFY2018 $2,859m $1,430m
    SOFY2019 $2,976m $1,488m

    Note that for comparative purposes, I have included the one year either side figures as well. Can we then say that $2,443m was insufficient capital to pay dividends, while $2,859m was enough? Or is this whole dividend thing an 'operating free cash flow' question? I pose that last question because it is 'cash flow' that eventually builds 'shareholder equity'.

    FY2017 FY2018
    Net Cashflow from Operating Activities $884m $1,333m
    less Stay in business Capital Expenditure (1) $415m $470m
    add Net Interest Gains $25m $36m
    equals Operating Free Cashflow $444m $899m
    Compare with
    Dividends Paid during Year $60m $197m
    add Repurchase of Shares over Year $128m $307m
    equals Total Discretionary Payments to Shareholders over Year $188m $504m

    (1) I have equated 'Stay in Business Capital Expenditure' with 'All Capital Expenditure'. Capital expenditure each year is substantial in total. But this is directed towards a large number of small sites, in general. Most of these new stores will last for ten years before any lease renegotiations. But payback, in the case of KFC at least, can be as short as two years. Capital expended in constructing new restaurants is expected to continue at current levels or accelerate as part of the YUMC business plan going forwards. So I think it is fair to consider the capital used in developing new additional restaurants as 'stay in business capital.'

    My interpretation of the above two tables goes like this:

    1/ If $2,859m (balance SOFY2018) is a sufficient capital base from which it is legal to consider paying dividends AND
    2/ the operating free cashflow over the FY2018 year generated an additional $899m of discretionary capital AND
    3/ $504m in discretionary payments were made to shareholders over the FY2018 year THEN
    4/ There remains $395m (=$899m-$504m) of new capital that could have been paid out to shareholders on the books at YUMC

    Why is this important? I have shown in the Buffett model an increasing stream of dividend payments over the next ten years. And the above calculation shows that even if earnings per share do not rise in the future, then total discretionary payments to shareholders could rise by $395m/$197m = +78% right now. This shows that my projected dividend increases, at least in the medium term, are doable.

    New Shares Issued

    The Buffett modelling shows a 'net increase' in YUMC shares over ten years, up from 392m to 400.178m. This is an 'net increase' of 8.178m. The 'net increase' is the difference between new shares issued as part of long term employment bonuses ( 10x 3.542m = 35.420m ) and those bought back on market. By simple subtraction the number of shares modelled to be bought back on market is therefore:

    400.178m - (392m + 35.420m) = -27.242m

    (Note: this result is a negative number, because buybacks remove shares from the total).

    Over FY2017, 2.254m new share options were granted an average exercisable price of $26.56. With the current share price now 60% higher than that, it is likely that future share options issued will be lower in number to equate to a similar dollar value of compensation. Even so, if the number of shares issued over the next ten years was comparable in quantity to those issued during FY2017, then that would only equate to:

    2.254m x 10 = 22.540m

    of new shares being issued. This is rather less than the number of shares I have modelled being bought back. Yet we also need to consider that the balance outstanding of previously awarded share options was 21.595m at EOFY2017 (the latest figure available). And I am modelling 2.254m options to be added to the current 21.595m pre-existing total this year, and every future year. If this grand total gradually reduces over time (IOW relatively more options are exercised than are issued), that means my apparently excessive modelling of buybacks may indeed only just balance the options exercised.

    I feel, on balance, it is likely that I have overestimated the number of new shares coming on stream in the next ten years as a result of employee remuneration packages. This is because with new options being listed at a much higher excise price, and the YUMC share price perhaps getting a little ahead of itself, there is a chance more newer options will expire unexercised. Fewer options exercised means less capital available to the company for future expansion. But it also means a lower level of on market buybacks will be required to neutralise the earnings dilutive impact of these new shares. And that it turn means more cashflow available for dividends.

    Starting Share Price

    The modelled share price on 1st January 2019 was $33.43 - the actual opening price on the day. The implied share price, based on, starting shareholder equity, projected earnings using an 18.8% averaged ROE rate, and an averaged 23.2 PE ratio is:

    23.2 x [0.188 x $7.62] = $33.24

    The fact that these two figures are similar is pleasing, but largely a co-incidence. Guessing with precision the PE ratio the market will assign to a share at any one particular time is a game of luck. Besides, the annual estimate of the share price in the calculation table is only there to estimate the FIF regime tax bill for the year. It does not affect the compounding calculation as regards future earnings and dividends as modelled.

    Similarly, my modelled share price for starting the years 2020 and 2021 are lower than today's share price, even though the growth outlook for the company is good. However this is because the model is a mathematical construct based on averaged assumptions. For this model, the averaged assumptions are likely to get better the more years roll by. But to single out any particular year and declare that figure as a 'prediction' is something that is technically beyond the scope of this 'Buffett Growth Model'.

    'ROE normalised' -as derived- applied to unnormalised unadjusted capital

    On the surface, what I have done is derive an ROE figure from my adjusted profit data, then applied this figure to model the growth of 'something else'. This does not sound good. My adjustments are most distorting to the published result figures (or put another way the published result figures are most distorting to realistic operating results) over FY2018. But the way the 'Buffett growth model' is constructed, such a distortion will compound through ten years of future earnings data. So the overall effect may not be trivial!

    The 'Wuxi KFC equity revaluation', which I have ignored for profit purposes, has resulted in a 'realistically realisable capital gain' of $98m coming onto the books. This is incorporated in the company's $2,873m of 'shareholder equity on hand' at the end of the FY2018 financial year. Consequently, when I apply an averaged normalised ROE figure to this 'inflated capital', in order to estimate FY2019 earnings, I am applying that ROE figure to more capital than would otherwise be on the books through normal operating trading. Is this a problem? Particularly when we realise that there is more capital on the books than there would be as a result of normal operating trading. The answer to that question depends on how 'capital constrained' YUMC is. IOW, if YUMC suddenly had a windfall of capital (which they did), could this capital be redeployed to open new restaurants at a faster rate than would otherwise be possible? I believe the answer to that question is 'yes'. So, in this instance, I am convinced that applying normal operating earnings rate to a larger than expected capital pile will not result in an overestimate of YUMC earnings going into the future.

    The $98m of 'bonus capital' that I am talking about here represents:

    $98m/$2,873m = 3.4% of the total company capital.

    So what I am saying here is that an incremental restaurant build rate of 3.4% every year for ten years is sustainable. I am very comfortable in saying this.

    SNOOPY
    Last edited by Snoopy; 07-04-2019 at 10:15 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  10. #30
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    Hi Snoopy,

    if you want to chat with china based investors:
    https://xueqiu.com/S/YUMC

    right click, and use translate to english

  11. #31
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    Default Developing a Business In China

    "Over the past three decades, we have built a significant lead not just in number of outlets, but also in brand awareness and loyalty, proprietary consumer know-how in individual provinces and city tiers, a national supply-chain network, product innovation and quality processes, a motivated and highly-educated workforce and a long-tenured and passionate local management team. We believe that these competitive strengths are difficult to replicate."

    The above is a quote from the 'Yum China' listing prospectus p69. It is referring to the roll out of KFC and Pizza Hut in China. But if you read the paragraph, it is clear that it can apply to any new 'western' product that is rolled out for sale in China. With one exception - the very first sentence. There aren't many western products that have a thirty year history in China and are still on a successful growth path. So what can we learn from 'Yum China' story about the way other consumables might be successfully rolled out across the country with the fastest growing middle class in Asia? A lot I think.

    Over the years Yum China has built:

    1/ An increasing number of distribution outlets.
    2/ Brand Awareness and Loyalty.
    3/ A motivated and highly educated workforce.
    4/ A long tenured and passionate local management team.

    We can regard the above as key 'check points' for any foreign consumables business, making a success of itself in China.

    A local management team is important because it means that a company that follows such a recipe can adapt to local tastes. That doesn't necessarily mean the core product needs changing. But it might mean resizing the quantity of what you sell and adopting the distribution systems to get the product to the end line customer in a more convenient and timely way. By using the above recipe, 'Yum China' have been able to integrate into Chinese popular culture and consumers' daily lives.

    How fast has Yum China managed to grow in terms of outlets? Some day I hope to be able to fill in more gaps in the table below. But here is a flavour of what has happened.

    Year No. Of Outlets
    1987 1
    2005 1,792
    2010 3,906
    2011 4,493
    2012 5,726
    2013 6,243
    2014 6,714
    2015 7,176
    2016 7,562
    2017 7,983
    2018 8,484

    From 1987 to 2017, this gives us a 30 year annual compounding growth rate of:

    1(1+g)^30 = 7983 => g=0.35

    In round figures the business has grown by 35% every year for 30 years! This includes the early stage of the growth cycle where growth was higher. Perhaps more indicative of what we might see from now on is what has happened between 2015 and 2017:

    7176(1+g)^2 = 7983 => g=0.05, or 5% per year.

    That is nevertheless a strong underlying growth rate, as it excludes inflation.

    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

    Dried milk powder first appeared in small shops in China in the early 1980s, about the same time the first KFC in Beijing opened.

    "In a little over 30 years, milk has become the emblem of a modern, affluent society."

    We could say the same about the arrival of KFC in China. (KFC had a somewhat more up market image in China than it has in the west!)

    China has the ambition of tripling its milk production. Yum China has a plan to triple the number of quick service restaurant outlets in China from the 2016 base year.

    "As populations urbanise, they have always moved up the food chain, making the transition from diets largely based on grains and vegetable staples to ones in which meat, dairy, fats and sugars feature more prominently. China has followed the same trajectory."

    One way to interpret that is to say that 'KFC' and 'milk' are driven by the same trend to urbanisation.

    "By the end of the 90s, the eastern cities of China were booming, and people were consuming more dairy foods, but a gap was growing between there and the interior, where people were much poorer and still drank little milk."

    This is exactly the same geographic spread of sales as reported in period by Yum China.

    In response to the melamine milk contamination scandal:

    "Consumers remain deeply suspicious about the safety of local food, fearing adulteration, residues from the overuse of agrochemicals, toxins from the pollution of ground water and air by industrial waste and excessive use of antibiotics. Many affluent parents still only buy foreign brands of milk for their young children."

    Here we have yet another parallel with foreign owned chain restaurants. The food isn't necessarily better than the local offering. But hygiene standards are much more consistent.

    "The Chinese Communist Party is obsessed with feeding this enormous population – it will go on growing until at least 2030. The reason it bangs on about food security and food safety is that it’s a potential source of instability. People come out on the streets about it."

    This indicates that despite the risks of investing in a country with absolute autocratic control, companies that 'feed the masses' with verifiably quality controlled food, will likely remain politically favoured. This is a security blanket, both for imported milk and imported restaurant concepts.

    In summary, I think there are real lessons to be learned here for those NZ listed food businesses selling their product into China. Perhaps the most important being that despite the tailwinds some investors see, the positive progress will probably be interrupted by scandals and setbacks along the way. Rather than panic and pull out, savvy investors can take these as discounted investment entry points to take advantage of what seems to be a relentless longer term upwards trend.

    SNOOPY
    Last edited by Snoopy; 25-07-2019 at 08:20 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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    So Snoopy, after all this analysis, have you invested? I've opened an account with Hatch, might buy a few YUMC to get started.

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    Quote Originally Posted by Cricketfan View Post
    So Snoopy, after all this analysis, have you invested? I've opened an account with Hatch, might buy a few YUMC to get started.
    Hi Cricketfan,

    Yum China was a spin off from the parent franchise holder for KFC, Pizza Hut and Taco Bell, YUM Brands, which I held. So in a sense my 'Yum China' shares 'fell into my lap' at spin off time, and I have held them since. It has been a wild ride, mostly upwards, after that. Yum China was long touted as having big growth potential within YUM Brands. I was a little surprised, although happy enough, when it was carved out as a separate listed entity, two and a half years back. Back in the early 2000s, if you forgive the baseball analogy, Yum China was sold as being in the second innings in a ten inning ball game. To carry the analogy through, I would say we are in about the fourth innings now. So plenty of growth within China is still to come, albeit at a growth rate slower than in those earlier heady days.

    As you have read on this very thread, I have researched Yum China extensively in recent months. I think it is a better company than I had thought it was, before I started my big read up. Like Restaurant Brands in NZ, they are cursed with the task of rolling out 'Taco Bell', the Mexican restaurant brand, in their own territories - a brand that hasn't really resonated outside of the Americas so far. I hope they make a go of it. But in the short term Taco Bell is a loss making distraction, with just a couple of test stores open in Shanghai.

    Another 'distraction' is the new 'COFFii & JOY' café brand, an apparent attempt to head off the likes of Starbucks expansion into China. The 'COFFii & JOY' brand has been developed 'in house' at Yum China. Potentially we have another growth arm to exploit. However the reality is there were only 15 'COFFii & JOY' outlets at EOFY2018 end, When you operate close to 8,000 restaurants in total, this is not material. For now, I am sure that 'COFFii & JOY' is yet another loss making distraction. But in the future? Incidentally, YUM China are not quite the novices in the coffee market that some might think. KFC sold over 90 million cups of freshly ground coffee and generated revenue of over RMB1 billion in 2018.

    I am convinced Yum China is a very good company. I particularly like the fact that they can open a KFC restaurant and have all incremental expenditure needed to do that paid back within a couple of years. But successful investment is not just about sharemarket investors buying good companies. What investors need is to buy good companies at good value prices. I see Yum China last traded at $US45.24. Based on last years (2017) results, this represents an historical PE ratio of:

    $45.24 / $1.52 = 29.8

    This is very high. I would like to wait to see the full results from last year released, to see if such a lofty PE ratio could be justified. Right now, I won't be investing more money into Yum China.
    If I was a new investor, I would be waiting for something negative to happen that caused the YUMC share price to fall a bit (bearing in mind YUMC is very strong at its core and the SP should bounce back), and allow a more favourable investment entry price. YUMC has had a series of mishaps outlined earlier on this thread, that dragged their reputation down, for a while at least. The next mishap could be next week. But it could be five years away. I feel right now that YUMC is a better measuring stick to hold up against 'Restaurant Brands' as a determiner of value, rather than a sure fire investment in its own right.

    SNOOPY

    discl: hold RBD, YUMC, YUM
    Last edited by Snoopy; 22-04-2019 at 04:00 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  14. #34
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    Default BT2/ Increasing 'eps' trend (2018 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post
    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. 31st March date still in the future when table was compiled.

    Conclusion: Pass Test
    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 Duojia 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 AR2019), 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

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 02:13 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 (2018 perspective) [one setback allowed]

    Quote Originally Posted by Snoopy View Post

    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
    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

    SNOOPY
    Last edited by Snoopy; 23-07-2019 at 10:41 PM.
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  16. #36
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    Default BT4/ Ability to raise Net Profit margin above inflation rate (2018 perspective)

    Quote Originally Posted by Snoopy View Post
    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018e
    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. 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
    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%

    There has been a change in the definition of 'Revenue' for FY2018. There are two additional categories being:

    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

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 05:05 PM.
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    Default Buffett Test Summary (2018 Perspective)

    Quote Originally Posted by Snoopy View Post
    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.

    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.
    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. 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 $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.

    SNOOPY
    Last edited by Snoopy; 24-07-2019 at 05:12 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  18. #38
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    Default Buffett Growth Model (2018 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. 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.

    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 21 allows us to calculate an averaged five year ROE figure:

    ( 13.1% + 18.8% + 19.4% + 20.7% + 21.9 %) / 5 = 18.8%

    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.

    ( 21.4 + 0.85x27.2 + 25.2 ) /3 = 23.2

    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

    Only one dividend of 10c per share has been declared over FY2017, the latest year in which an annual report was published. This relates to the period Q4 for FY2017. Over FY2018 there have been four quarterly dividends declared: 10cps, 10cps, 10cps and 12 cps. 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 42cps
    FY2019 42cps
    FY2020 46cps
    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 AR2017 p37:

    "The company's executive compensation program has three primary pay components: base salary, annual performance based cash bonuses and long term equity awards."

    We learn on p119 of AR2017 that:

    "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"

    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 p121 of AR2017, at the end of that year, 14.072m shares become exercisable at a weighted average excise price of $16.69. If all of these were exercised, this would represent a capital inflow to shareholders equity of:

    14.072m x $16.69 = $235m

    Actual new equity inflow over the period was $27m. That is equivalent to about 1.617m new ordinary shares created.

    The current authorized buy back limit of $95m would buy back 2.375m shares at $40 each. 2.375m shares to be redeemed is way short of the new 14.072m -1.617m = 12,455m shares that could be created at any time. it looks like the number of shares bought back will continue to be outweighed by the number of employee earned new shares vesting.
    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. 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.

    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.

    SNOOPY
    Last edited by Snoopy; 25-07-2019 at 11:39 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  19. #39
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    Default Buffett Growth Model (2018 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 18.8%
    2/ a PE ratio of 23.2.
    3/ a constant dollar amount of shares being bought back every year amounting to $128m, The actual number of shares this buys back 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 $16.69 each. This rate of subscription creates 3.542m 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 $7.35 $1.56 ($0.51) ($0.79) $0.07 $0.33
    2019 392m $33.43 $7.62 $1.43 ($0.58) ($0.33) $0.15 $0.67 $0.50
    2020 391.722m $36.19 $8.29 $1.56 ($0.58) ($0.33) $0.15 $0.80 $0.54
    2021 391.725m $39.67 $9.09 $1.71 ($0.64) ($0.33) $0.15 $0.89 $0.60
    2022 392.038m $43.62 $9.98 $1.88 ($0.72) ($0.33) $0.15 $0.98 $0.65
    2023 392.646m $47.79 $10.96 $2.06 ($0.80) ($0.33) $0.15 $1.08 $0.72
    2024 393.510m $52.43 $12.01 $2.26 ($0.88) ($0.33) $0.15 $1.20 $0.79
    2025 394.611m $57.54 $13.17 $2.48 ($0.96) ($0.32) $0.15 $1.35 $0.86
    2026 395.928m $63.10 $14.47 $2.72 ($1.04) ($0.32) $0.15 $1.51 $0.95
    2027 397.411m $69.37 $15.92 $2.99 ($1.12) ($0.32) $0.15 $1.70 $1.04
    2028 399.108m $76.56 $17.55 $3.30 ($1.20) ($0.32) $0.15 $1.93 $1.15
    2029 400.978m $84.68 $19.39 $3.65
    Sum 2019-2028 ($8.52) $7.80

    Question/ On 1st March 2019, the YUMC share price closed at $41.40. 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??

    Answer/ 41.40 x (1+r)^10 = [ ($84.68+$8.52 - $7.80) ] => r = 0.075 = 7.5%

    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 = [ ($84.68+$8.52 - $7.80) ] => P = $21.10

    Conclusion:

    YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 7.5% 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 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), of which a balance of $960m now remains for further buybacks. 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/ $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.


    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 09:30 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  20. #40
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    Default 'Dividend' disambiguation

    Sometimes reading things through a second time can give you a different perspective. I have 'temporarily paused' my previous post 39 while I sort this matter out.

    The YUMC 'Consolidated and Combined Statement of Cashflows' (AR2018 p89) show two kinds of dividends.

    1/ Cash dividends paid on common stock
    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.

    From the annual results over the years, I have compiled a partial 'dividend table' below, based on the 'non-controlling interests' of YUMC, alongside the corresponding income.

    2014 2015 2016 2017 2018
    Net Income (Non-controlling Shareholders) ($30m) $5m $12m $26m $28m
    Dividends paid to Non-controlling Interests ($4m) $0m ($7m) ($22m) ($36m)

    There isn't much clear logic in this table that I can see. In 2014 a 'dividend' was paid out, despite multi-million dollar losses. The proportion of the dividend paid out doesn't seem to bear much relation to the earnings of any particular year. For the previous 'Buffett Growth Model Spreadsheet', I tried to estimate a 'normalised' non-controlling shareholder dividend. However, I now believe this was the wrong approach. These 'Dividends paid to Non-controlling Interests' can even be a reflection of one off earn out agreements. 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).

    Specifically during FY2016, the founders of the 'Little Sheep Hot Pot' concept (a restaurant franchise business now entirely owned by YUMC) were bought out of a minority Little Sheep residual shareholding position.

    "The difference between the purchase price of less than $1m, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable non-controlling interest was recorded as an $8m loss attributable to non-controlling interests during the year December 31 2016." (p111 AR2018)

    Note that in the above table, the 'dividend' paid out for 2016 was the $1m price, less a fair value adjustment of $8m - for a total 'cash loss' to YUMC of $7m. So the fair value of goodwill adjustment was a cash flow item! This means the value of the goodwill attached to the residually owned 'Little Sheep' shares must have been previously agreed with the minority 'Little Sheep' shareholders as fixed. At least, I think that is the way it worked! 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. Owning a majority interest of 90% in Daojia (AR2018 p92) is expected to enhance existing digital and delivery capabilities (AR2018 p26). Delivery contributed to 17% of Company Sales on 2018. (AR2018, p25) From what I can gather from the annual reports, 'revenue' from a takeaway food order is booked up front by either KFC or Pizza Hutt. But there seems to be some liabilities payable to the Daojia founders, and now minority shareholders, that are recorded in the YUMC cashflow statements as 'dividends'. Notwithstanding this Daojia lost money over FY2018 (AR2018 p70)

    I intend to rework my Buffett Growth Model using my new reinterpreted knowledge.

    SNOOPY
    Last edited by Snoopy; 10-08-2019 at 08:16 AM.
    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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