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.
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