YumChina (NYSE:YUMC)

[Snoopy]

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.

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 18.5%
2/ A PE ratio of 24.4.
3/ A constant dollar amount of shares being bought back every year amounting to $128m.

YUMC has currently authorised share total buybacks up to a value of $1,400m (AR2018 p53), of which a balance of $960m now remains for further buybacks. This is less than the $1,280m of buybacks I am modelling over the next ten years. However, the YUMC board has a record of increasing the buyback limit over the years. So I don't believe that my modelling is unrealistic. The actual number of shares the money buys back each year in my model 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 $18.64 each (AR2018 p123). This rate of subscription creates 3.165m 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	$7.31	$1.48	($0.49)	($0.80)	$0.16	$0.35
2019	392m	$33.53	$7.59	$1.40	($0.48 +$0.08)	($0.33)	$0.15	$0.66	$0.50
2020	391.348m	$37.33	$8.26	$1.53	($0.52+$0.08)	($0.33)	$0.15	$0.75	$0.56
2021	391.085m	$40.75	$9.02	$1.67	($0.56+$0.08)	($0.33)	$0.15	$0.85	$0.61
2022	391.109m	$44.65	$9.87	$1.83	($0.60+$0.08)	($0.33)	$0.15	$0.97	$0.67
2023	391.407m	$48.80	$10.83	$2.00	($0.64+$0.08)	($0.33)	$0.15	$1.10	$0.73
2024	391.959m	$53.68	$11.91	$2.20	($0.68+$0.08)	($0.33)	$0.15	$1.26	$0.81
2025	392.739m	$59.29	$13.14	$2.43	($0.76+$0.08)	($0.33)	$0.15	$1.41	$0.89
2026	393.745m	$65.39	$14.51	$2.68	($0.84+$0.08)	($0.33)	$0.15	$1.58	$0.98
2027	394.913m	$72.47	$16.04	$2.97	($0.92+$0.08)	($0.32)	$0.15	$1.80	$1.09
2028	396.312m	$80.28	$17.78	$3.29	($1.00+$0.08)	($0.32)	$0.15	$2.04	$1.20
2029	397.973m	$89.06	$19.74	$3.65
Sum 2019 to 2028					($7.00)				$8.04

Question/ On 12th August 2019, the YUMC share price closed at $43.02. 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? (note the dividend figure included in the calculation below is the proportion of the dividend due to ordinary shareholders, which now excludes the dividend paid to the controlling interests of YUMC minority owned businesses).

Answer/ 43.02 x (1+r)^10 = [ ($89.06+$7.00 - $8.04) ] => r = 0.074 = 7.4%

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 = [ ($89.06+$7.00 - $8.04) ] => P = $21.76

Conclusion:

YumChina is a great company. But to purchase shares in it today would see you pay a high price. While a 7.4% 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