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  1. #11
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    Quote Originally Posted by Valuegrowth View Post
    [*]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
    Last edited by Snoopy; 16-01-2019 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...

  2. #12
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    Thank you for the analysis.

    18% = 532 US$3.1b (Based on the trailing twelve months to September 2018.)

    As per the following link ROE: 27.13 %( As of Sep 2018) for the quarter that ended in Sep. 2018.

    https://www.gurufocus.com/term/ROE/Y...a-Holdings-Inc

  3. #13
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    Quote Originally Posted by Valuegrowth View Post
    Thank you for the analysis.

    18% = 532 US$3.1b (Based on the trailing twelve months to September 2018.)

    As per the following link ROE: 27.13 %( As of Sep 2018) for the quarter that ended in Sep. 2018.

    https://www.gurufocus.com/term/ROE/Y...a-Holdings-Inc
    OK I accept that looking at the latest quarterly result and annualising the most recently declared twelve months of earnings from that base is another acceptable way to work ROE out. I guess the main point to come out from this though is, whatever method you use, ROE still comes up looking good (more than 15%)!

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

  4. #14
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    Quote Originally Posted by Valuegrowth View Post
    [*]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
    Last edited by Snoopy; 05-02-2019 at 03:43 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  5. #15
    Senior Member Valuegrowth's Avatar
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    https://macropolo.org/how-kfc-change...a-changed-kfc/

    How KFC Changed China and How China Changed KFC

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

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

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

  6. #16
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    Quote Originally Posted by Valuegrowth View Post
    https://www.businessinsider.com.au/k...8-12?r=US&IR=T

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

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

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

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

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

    SNOOPY
    Last edited by Snoopy; 16-01-2019 at 02:22 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  7. #17
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    Default Adjusting for 'Constant Currency' Aspect 1

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

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

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

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

    It also means that:

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

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

    SNOOPY

    PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
    Last edited by Snoopy; 06-02-2019 at 09:53 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  8. #18
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    Default Adjusting for 'Constant Currency' Aspect 2

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

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

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

    It also would mean that:

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

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

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

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 10:28 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #19
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    Default BT2/ Increasing 'eps' trend (2018 estimate perspective) [one setback allowed]

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

    Notes

    1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' is less than 1.5% of the turnover of YUMC.

    2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference.

    3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. But this tax bill is to be spread out over eight years. Because it is in integral part of the Trump tax reforms, I do not feel that it should be recorded as a one off. Therefore I am recording a $20m charge every year from 2018 to 2025 inclusive.

    4/ Share price at 5th February 2019. 31st March date still in the future when table was compiled.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 04-03-2019 at 07:37 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  10. #20
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    Default BT3/ ROE > 15% for five years (2018e perspective) [one setback allowed]

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



    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 06-02-2019 at 10:27 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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