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  1. #46
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    Default

    Quote Originally Posted by SBQ View Post
    Best of luck on your YUMC ventures. Personally I would rather pick YUM because of the cultural (anti-western) shift we're seeing in China.
    I own shares in YUM as well. No reason why you can't ride more than one horse. In fact that is how I got my shares in YUMC. The shares split from my YUM holding.

    Quote Originally Posted by SBQ View Post
    As for China reporting... I only take it with a grain of salt. No one is blowing the whistle on China's mass corporate debt.
    YUMC has no term debt, which is another appealing factor.

    SNOOPY
    To be free or not to be free. That is the cash-flow question....

  2. #47
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    Default Local Revenue Trend

    Quote Originally Posted by Snoopy View Post
    The most striking thing I found from looking at the YUMC results is how well profits are growing with respect to revenues. This is great for shareholders. But ultimately a company will run into the 'squeeze the orange' argument. Put simply, you can squeeze an orange harder and harder, but ultimately there will be no more juice that you can get out of it. 'Squeezing the orange' that is the fast food restaurant market and eventually your 'profit growth' dries up unless revenues grow. Over the last five years reported, revenues have grown:

    US$6,905m x (1+g)^5= US$7,144m => g= 0.683% (compounding)

    But profit growth has been

    US$284 x (1+g)^5= US$591 => g=15.8% (compounding)

    It is hard to imagine that profit growth could outstrip revenue growth like that going forwards. However, there is another angle that needs investigating. The functional currency of YUMC is the RMB, not the USD. So what happens if the revenue is converted to RMB?

    FY2013 FY2014 FY2015 FY2016 FY2017
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m
    RMB/USD Exchange Rate 6.1932 6.1428 6.2284 6.6423 6.7518
    Revenue RMB42.764 RMB42.594 RMB43.032 RMB44.849 RMB48.235
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27%

    The revenue growth rate in local currency was

    RMB42.764 x (1+g)^5 = RMB48.235 => g=2.44% (compounding)

    This is not great when you consider:

    1/ local inflation is around 2%
    2/ there has been a substantial number of new outlets created over the study period.

    But it does show that the revenue is growing above inflation, albeit modestly. This was not apparent when the results were presented in USD.
    The functional currency of YUMC is the RMB, not the USD. So what happens if the revenue is converted to RMB?

    FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
    Adjusted Normalised NPAT {A} $284m $254m $372m $474m $591m $634m
    Revenue {B} $6,905m $6,934m $6.909m $6,752m $7,144m $7,774m
    RMB/USD Exchange Rate 6.1932 6.1428 6.2284 6.6423 6.7518 6.6174
    Revenue RMB42.764 RMB42.594 RMB43.032 RMB44.849 RMB48.235 RMB51.444
    Net Profit Margin {A}/{B} 4.11% 3.66% 5.38% 7.02% 8.27% 8.16%

    The revenue growth rate in local currency per annum was:

    RMB42.764 x (1+g)^6 = RMB51.444 => g=3.13% (compounding)

    This is not great when you consider:

    1/ local inflation is around 2%
    2/ there has been a substantial number of new outlets created over the study period.

    But it does show that the revenue is growing above inflation, albeit modestly. This was not apparent when the results were presented in USD.

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 09:59 PM.
    To be free or not to be free. That is the cash-flow question....

  3. #48
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    Default ROE Incremental Returns Since Listing (FY2018 perspective)

    Quote Originally Posted by Snoopy View Post

    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% (edit now updated to 18.5%) . 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.
    I have mentioned before that YUMC came into being as a 'stock split' for the parent YUM corporation. This is a slight simplification of the truth. In fact at the time of the split, YUMC received an outside capital injection of $460m (AR2018 p115). This is as the result of two strategic investors being brought on board the share register:

    1/ An affiliate of the 'Primavera Financial Group' called 'Pollis Investment L.P.' invested $410m.
    2/ An affiliate of ''Zhejiang Ant Small and Micro Financial Services Co. Limited" called 'API Hong Kong Investment Limited" invested $50m.

    The net effect of these transactions was to add 19.145m shares (along with the $460m) to the 363.758m shares that came into existence at the time of separation. These shares were added in the very last quarter of 2016 and so already appear on the FY2016 balance sheet information as presented in the table below.

    EOFY2016 Change EOFY2018
    Normalised Earnings {A} $472m $634m
    No. of Shares {B} 383m 392m
    eps {A}/{B} $1.23c +39c {D} $1.62
    Owner Equity {C} $2,443m $2,976m
    Owner Equity per share {C}/{B} $6.38 +$1.21 {E} $7.59
    Return on Incremental Equity / Share {D}/{E} +32%

    It is likely that the net effect of this earlier $460m investment was not felt immediately. So much of the profitability gain apparent from subsequent net capital injection into YUMC (mainly from senior employees cashing in their stock options) is 'piggy backing' on the earlier $460m cash injection not shown above. Thus in my opinion a more meaningful comparison table is this second one:

    31/10/2016 (spin off date) Change EOFY2018
    Normalised Earnings {A} $472m (for all of FY2016) $634m
    No. of Shares {B} 364m 392m
    eps {A}/{B} $1.30c +32c {D} $1.62
    Owner Equity {C} ($2,443m-$460m) $2,976m
    Owner Equity per share {C}/{B} $5.45 +$2.14 {E} $7.59
    Return on Incremental Equity / Share {D}/{E} +15%

    Note that 15% is well below the overall ROE figure of 21.3% achieved over FY2018 and also below the ROE figure of 18.5% over the last five years. 15% return on 'incremental equity' is nevertheless a good figure, the kind of figure that a Warren Buffett would be happy with.

    SNOOPY
    Last edited by Snoopy; 15-08-2019 at 10:12 AM.
    To be free or not to be free. That is the cash-flow question....

  4. #49
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    Default

    Quote Originally Posted by Cricketfan View Post
    So Snoopy, after all this analysis, have you invested? I've opened an account with Hatch, might buy a few YUMC to get started.
    Quote Originally Posted by Snoopy View Post
    I am convinced Yum China is a very good company. I particularly like the fact that they can open a KFC restaurant and have all incremental expenditure needed to do that paid back within a couple of years. But successful investment is not just about sharemarket investors buying good companies. What investors need is to buy good companies at good value prices. I see Yum China last traded at $US45.24. Based on last years (2017) results, this represents an historical PE ratio of:

    $45.24 / $1.52 = 29.8

    This is very high. I would like to wait to see the full results from last year released, to see if such a lofty PE ratio could be justified. Right now, I won't be investing more money into Yum China.

    If I was a new investor, I would be waiting for something negative to happen that caused the YUMC share price to fall a bit (bearing in mind YUMC is very strong at its core and the SP should bounce back), and allow a more favourable investment entry price. YUMC has had a series of mishaps outlined earlier on this thread, that dragged their reputation down, for a while at least. The next mishap could be next week. But it could be five years away.
    Cricketfan, YUMC fell 3.49% on Friday down to $42.57. That is more than any of the underlying US indices fell and all were down. This stoush between Trump and Chinese President Xi is exactly the kind of event that we investors look for to bring share prices down to more reasonable levels.

    Many here will see YUMC as just another US corporation liable to feel the backlash, if not from tariffs, then from an anti-US feeling from the loyal Chinese citizen consumers against the USA. But as you can see below, it isn't.

    Quote Originally Posted by Snoopy View Post
    If we look at YumChina, 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.
    Watch the misguided masses sell this one down. Then be ready to pounce. But will the share price go low enough to make this a deal that new investor's can't turn down? That remains to be seen.

    SNOOPY
    Last edited by Snoopy; 26-08-2019 at 08:22 PM.
    To be free or not to be free. That is the cash-flow question....

  5. #50
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    Default HY2019 Profit Review

    It is interesting to take note of the year to date profitability for HY2019 verses the previous year HY2018. (From 30th July 2019 Yum China Profit Release)

    A significant contributor to the profit in HY2019 was the 'mark to market' gain from YUMC's equity investment in Meituan Dianping (a $27m gain in the half).

    Meituan and Dianping were originally two separate companies that merged in 2015. They made their merged public debut on the Hong Kong stock exchange (HKEX) in September 2018. Meituan Dianping operates two complimentary website businesses in China. Meituan.com is a group-discount website which sells vouchers from merchants for deals. Meituan.com generates most of its revenue from mobile application services. Dianping.com hosts consumer reviews of restaurants, and also offers group buying.

    Adjusted 'Net Profit after Tax' for YUMC attributable to shareholders is as follows:

    HY2019 Revenue: $1,048m
    HY2019 NPAT: $553m - $139m -$27m -$14m = $373m
    HY2019 eps: $373m/ 394m = 94.7c
    Exchange Rate 31-07-2019: USD1 = 6.885yuan

    HY2018 Revenue: $1,092m
    HY2018 NPAT: $606m - $160m - $15m = $431m
    HY2018 eps: $431m/ 377m = $1.14
    Exchange Rate 31-07-2018: USD1 = 6.813yuan

    Against the underlying growth narrative, core earnings are down. That is still the case, even if we add in the Meituan Dianping shareholding gain.

    $27m/ 394m = an incremental 6.9c for HY2019.

    We know that extra $27m of investment capital gain was not planned for, because YUMC management do not go about guessing the short term performance, as reflected by markets, of their long term investments. So this earnings drop is not consistent with the stated plan of growing earnings over FY2019 as referenced below.

    From

    https://www.fool.com/investing/2019/...high-note.aspx

    "Management still thinks it can grow overall sales in high single digits and operating profits by double digits."

    One thing management cannot control is the relationship between the US Dollar (the reporting currency for YUMC) and the Chinese Yuan (the function currency of YUMC). Yet if we translate the revenue figures into yuan:

    HY2019 Revenue: 7,215m yuan
    HY2018 Revenue: 7,340m yuan

    there is still no growth.

    At EOFY2018, YUMC was looking to open 600-650 new restaurants in the FY2019 financial year.
    At EOHY2019 this target has been upped to 800-850 units, with the majority of the incremental new units coming from KFC and the new inclusion of COFFii & JOY.

    Special opening promotions for new stores can affect profits in the short term. In addition, bringing forward store remodelling can have a profound negative effect on operating profit and sales, during the period of refurbishment.

    During FY2018 and into FY2019 the overall Chinese economy slowed. Yet digital ordering and increased delivery options are key areas of focus to cater to the busy Chinese diner. Digital and delivery initiatives have helped keep costs in check over the year.
    Last edited by Snoopy; 11-11-2019 at 06:12 AM.
    To be free or not to be free. That is the cash-flow question....

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