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  1. #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 01:22 PM.
    To be free or not to be free. That is the cash-flow question....

  2. #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 08:53 AM.
    To be free or not to be free. That is the cash-flow question....

  3. #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 09:28 AM.
    To be free or not to be free. That is the cash-flow question....

  4. #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 06:37 PM.
    To be free or not to be free. That is the cash-flow question....

  5. #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 09:27 PM.
    To be free or not to be free. That is the cash-flow question....

  6. #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 04:07 PM.
    To be free or not to be free. That is the cash-flow question....

  7. #22
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    SNOOPY: I see you're a big fan of fast food, particularly fast food in China.

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

  8. #23
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    Quote Originally Posted by SBQ View Post
    SNOOPY: I see you're a big fan of fast food, particularly fast food in China.

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

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

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

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

    As far as doing business in China goes, there are special risks that the article I quote outlines. If we look at YumChina, which has a longer track record than Alibaba, their success seems due to their ability to be seen as a Chinese company (the senior executive team is Chinese, they sell franchises to local Chinese) that provide tangible benefits for Chinese workers. Raising the standard of living of the Chinese people is something the Chinese government have been very successful at. And I would say any China based business that produce for all stakeholders benefits in line with the Chinese government's vision will continue to do well.

    SNOOPY
    Last edited by Snoopy; 13-02-2019 at 08:16 AM.
    To be free or not to be free. That is the cash-flow question....

  9. #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 06:46 PM.
    To be free or not to be free. That is the cash-flow question....

  10. #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 07:51 PM.
    To be free or not to be free. That is the cash-flow question....

  11. #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 08:04 PM.
    To be free or not to be free. That is the cash-flow question....

  12. #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 08:13 PM.
    To be free or not to be free. That is the cash-flow question....

  13. #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 01:02 PM.
    To be free or not to be free. That is the cash-flow question....

  14. #29
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    Jun 2004
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    , , New Zealand.
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    6,453

    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 09:15 PM.
    To be free or not to be free. That is the cash-flow question....

  15. #30
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    Join Date
    Jun 2012
    Posts
    239

    Default

    Hi Snoopy,

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

    right click, and use translate to english

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