YumChina (NYSE:YUMC)

[Snoopy]

	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

SNOOPY

[Snoopy]

	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 AR2018), 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

[Snoopy]

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 Daojia 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 AR2018), 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

I have the 2019 YUMC report in my 'hot little paws'. So time to update the 'earnings per share' trend. Re-reading the accounts I notice something odd. 'Other Income' has been subtracted from 'Operating Expenses' (AR2019 Form 10-k, p55).

These are the same 'Operating Expenses' that are used as a key component in the calculation of 'Operating Profit' (AR2019 Form 10-k, p55)....

---------------

To use the terminology in the Annual Report

"Operating Profit" ($901m, p55,p60) = "Total Revenues" ($8,776m, p55,p60) - "Total Cost & Expenses net (that means Other Income already subtracted from expenses)" ($7,875m, p55)

----------------

'Other Income' has been recorded as a 'negative expense', which includes a series of 'one offs' not reflective of normal trading:

1/ 'Minority Owned Equity Accounted Profit', (Note 6, AR2019; Note 7 AR2016-AR2018)
2/ 'the Wuxi KFC equity revaluation', (Note 7, AR2018)
3/ 'Insurance payouts', (Note 7, AR2016)
4/ 'Provision reversal for Aircraft Sales losses' (Note 7, AR2016) and
5/ 'Foreign Currency Adjustments' (Note 6, AR2019; Note 7 AR2016-AR2018) etc. etc.

These one off and/or non-operational adjustments have all been dealt with. Yet 'Decreasing Expenses' has the same effect as 'Increasing Profits'. This means, in general, I do need to subtract 'Other Income' from 'Operating Income' to produce a 'Normalised Operating Income'.

But there are 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 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.

	FY2015	FY2016	FY2017	FY2018	FY2019
Equity Income from Unconsolidated Affiliates	$41m	$54m	$65m	$65m	$69m
Unconsolidated Affiliates %ge of Adjusted Normalised EBT	8.1%	8.4%	8.1%	7.3%	7.3%
Reference	AR2016 Note7	AR Note 7	AR Note 7	AR Note 7	AR Note 6

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.

	FY2015	FY2016	FY2017	FY2018	FY2019
Foreign Exchange Gains or (Losses)	($5m)	($3m)	$0m	($11m)	($9m)
Reference	AR2016 Note7	AR Note 7	AR Note 7	AR Note 7	AR Note 6

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 franchise fee charge should not be removed.

				FY2016
Incremental adjustment to YUM licence fee expense				$17m

My 'Normalised Profit' calculation table appears below:

	FY2015	FY2016	FY2017	FY2018	FY2019	Reference
Operating Profit	$488m	$640m	$785m	$941m	$901m	Consolidated and Combined Statements of Income Data
less Poultry Supply Lost: Insurance Recovery	($5m)	($3m)				AR2016 Note 7 'Other Income'
add Provision for Losses on Aircraft sales	$15m					AR2016 Note 7 'Other Income'
less Reversal of Aircraft Sale Provision		($2m)				AR2016 Note 7 'Other Income'
less Business Combination Contingency Reversal			($3m)			AR2017 Note 7 'Other Income'
less Equity Gain Consolidating Wuxi				($98m)		AR2018 Note 7 'Other Income'
add Daojia Intangible Write Off				$12m	$11m	AR2019 p27, p61
add Interest Earned (net)	$8m	$11m	$25m	$36m	$39m	Consolidated Statement of Income
Equals Adjusted Normalised EBT	$506m	$646m	$807m	$891m	$951m
subtract Tax at 27% /26% (1)	($137m)	($174m)	($218m)	($241m)	($247m)
subtract Foreign unrepatriated earnings Tax (2)				($17m)	($17m)
Equals Adjusted Normalised NPAT {A}	$369m	$472m	$589m	$633m	$687m
Shares on Issue EOFY {B}	363.758m	383.344m	388.860m	392m	395m
eps {A}/{B} equals {C}	$1.01	$1.23	$1.51	$1.61	$1.74
Share Price 31 March (following) {D}	NA	$27.20	$41.50	$44.91	$42.63
PE Ratio (D)/(C)	NA	22.1	27.5	27.9	24.5

Notes

1/ The US corporate tax rate up to 31st December 2017, for the previous few years, had 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. The difference is explained under the 'Income taxes' note (Note 16 AR2019, Note 17 AR2018).

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' (p62,63 AR2018), after adjusting for 'Special Items', the actual corporate tax rate comes out at 27%.

For FY2019 I have used the 'Statutory rate differential attributable to foreign operations' of 5.3%, added to the US Federal Statutory rate of 21% to obtain a 'round figure' tax rate of 26%. This figure does not include extra tax from 'Foreign repatriated earnings'.

2/ 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. The IRS released the final transition tax regulations in Q1 2019. This resulted in an additional $8m in transition tax expense being required (AR2019 p62). The final transition tax bill, now $136m, 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 $136m/8=$17m charge every year from 2018 to 2025 inclusive.

3/ In September 2018 YUMC made a $74m investment in a Hong Kong Stock Exchange floated e-commerce platform for services in China, 'Meituan' (AR2019 p107). YUMC bought 8 million 'Meituan' shares, or less than 1% of the shares on issue. The fair value of YUMC's stake is determined by the closing market price at the end of each reporting period. Gains or losses each year flow through to YUMC's accounts. These gains and losses are not reflected in 'normalised earnings', because they are recorded as gains or losses under the heading 'Investment Gain (Loss)' which falls outside of this envelope (AR2019 p55).

Conclusion: Pass Test

SNOOPY

[Snoopy]

	FY2013	FY2014	FY2015	FY2016	FY2017
Normalised EBT	$389m	$348m	$510m	$649m	$810m
add Net Interest Paid (or Earned)	($5m)	($14m)	($8m)	($11m)	($25m)
Normalised EBIT {A}	$384m	$334m	$502m	$638m	$785m
Share Price 31st March {C}	NM	NM	NM	$27.20	$41.50
Shares on Issue EOFY {B}	363.758m	363.758m	363.758m	383.344m	388.860m
EBIT /share {A}/{B} [D]	$1.06	91.8c	$1.38	$1.66	$2.02
EBIT Multiple {C}/{D}	NM	NM	NM	16.4	20.5
Depreciation & Amortisation {E}	$394m	$411m	$425m	$402m	$409m
Normalised EBITDA {A}+{E} [F]	$778m	$759m	$927m	$1,040m	$1,194m
EBITDA /share {F}/{B} [G]	$2.14	$2.09	$2.55	$2.71	$3.07
EBITDA Multiple {C}/{G}	NM	NM	NM	10.0	13.5

So now we have got down to the nitty gritty of determining EBIT/EBITDA ratios. This allows us to prepare the market value of this company with the RBD partial takeoffer price (based on EBIT/EBITDA ratios)..

Notes

1/ YUMC is bank debt free. So all interest is 'interest earned'.
2/ YUMC was first listed in October 2016. So to demand a 'market share price' prior to that date is not a meaningful request.
3/ The RBD.NZX partial takeover offer has used the 'Enterprise Value' (EV) to underlying EBITDA as a valuation statistic. Enterprise value is calculated by taking the market value of the company's shares and adding on bank debt. In the case of YUMC, there is no bank debt. So the EV for YUMC is simply the market value of the shares.

For the $9.45 per share RBD partial offer, Enterprise Value for RBD is calculated as equity value of NZ$1,175.4 million plus net debt of NZ$157.7 million as at
26 February 2018. This gives an Enterprise Value of NZ$1,333.1m. FY18 RBD EBITDA was NZ$94.4m. So the EV/EBITDA statistic comes out at:

NZ$1,333.1m/NZ$94.4m = 14.3

If we calculate a comparable statistic for YUMC as at 31st March 2018, I get:

($41.50 x 388.860m) / $1,194m = 13.5

From the Grant Samuel Report on the RBD takeover, Section 6.3.1, the comparative historical multiples are:

1/ EBIT for RBD are 18.5 to 20, while (c.f. 20.5 for YUMC)
2/ EBITDA multiples for RBD are 12.2 to 13.2. (c.f. 13.5 for YUMC)

So the RBD historical figures correlate closely with the YUMC EBIT and EBITDA historical multiples (the FY2017 figures for YUMC reflect the now withdrawn takeover offer) . By these figures, it looks like the market premium offered for RBD shares is fair (to those who only want to sell 75% of their RBD stake).

SNOOPY

[Valuegrowth]

https://money.cnn.com/quote/forecast...html?symb=YUMC

https://newburghpress.com/2019/01/09...-inc-nyseyumc/

[Snoopy]

https://newburghpress.com/2019/01/09...-inc-nyseyumc/

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.

[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.

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

[Valuegrowth]

Following two things suggest this is a business worth watching.

• Very respectable ROE(Yum China Holdings has a return on equity of 18% for the last year)
• Its debt to equity ratio is very low

According to my book the highest quality companies have high return on equity.

[Snoopy]

[*]Very respectable ROE (Yum China Holdings has a return on equity of 18% for the last year)

If we take the headline NPAT of $429m and divide that with shareholder equity at last reported balance date (31-12-2017) I get a 'Return on Shareholders Equity' of:

$429m / $2,859m = 15.0%

Alternatively, and more correctly, you could use the averaged shareholder equity over the last two balance dates:

$429m / ($2,859m+$2,443m) = 16.2%

Not sure how you got your 18% ROE ValueGrowth. You may have noticed my quoted ROE figure for the 2017 year was 20.7% based on $591m of NPAT earnings. So there are obviously quite a few differences out there, depending on how you calculate the figures.

Most here will probably be aware of the 'Trump Tax Reforms'. Newsmedia have focussed on the reduction of the US corporate income tax rate from 35% to 21%. Nevertheless I don't expect this to help US domiciled YUMC, because almost all of their operations pay tax in China at the business income tax rate there of 25%. And that won't change post the Trump tax reforms.

However if you look at Note 17 of the YUMC AR2017, you will see that the FY2017 results have been hit by a $164m one off income tax charge. This is a result of a less publicised part of the Trump tax reforms. The 'deemed repatriation of accumulated and distributed foreign earnings'. YUMC have treated this as a one time adjustment of $164m. Nevertheless I disagree with this treatment, because this tax bill will be paid back over eight years (YUMC AR2017 p76). So it seems to me it would be better to consider this as approximately $20m of extra annual income tax to be paid over the next 8 years, and not a one off event. This disadvantage of deviating from the official accounts like this is that I will have to remember to put in $20m of extra income tax every year for the next eight years!

From the YUMC accounts, the tax bill for FY2017 was $381m. OTOH I used normal historical tax rates of 27% and came up with a tax bill of only $219m. This is the biggest difference in how I calculated my own normalised earnings verses the 'official' approach taken by YUMC. I think I am right doing things this way (from an investment perspective) although I accept others out there may disagree with my approach.

SNOOPY

[Snoopy]

[*]Its debt to equity ratio is very low

I see from AR2017 p76, the total borrowing facilities are listed to be "Approximately $US261m." 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. So that is consistent with my interpretation.

$US261m on an asset base of $4,263m would only represent:

$261m / ($261m+$4,263m) = 6% of total assets, even if all of the facilities were fully drawn down. This isn't much. And it does suggest that the statement on p74 of the 'General Form of Registration of Securities' issued on 3rd May 2016 that:

"Our operating discipline has allowed us to deliver a new restaurant cash-on-cash pre-tax payback period of approximately three to four years for KFC and Pizza Hut Casual Dining."

is all that is needed for funding the business going forwards. Being able to fund the business by upsizing it by 20% just every four years from existing cashflows is more than enough to fund all the YUMC growth plans going forwards.

SNOOPY