YumChina (NYSE:YUMC)

[Snoopy]

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.

SNOOPY

[Snoopy]

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)^5 = RMB51.444 => g=3.77% (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

[Snoopy]

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)^5 = RMB51.444 => g=3.77% (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?

	FY2015	FY2016	FY2017	FY2018	FY2019
Adjusted Normalised NPAT (USD) {A}	$369m	$472m	$589m	$633m	$687m
Revenue (USD) {B}	$7,233m	$7,075m	$7,769m	$8,415m	$8,776m
RMB/USD Exchange Rate (Yearly Average) (1)	6.2850	6.6452	6.7572	6.6094	6.9050
Revenue (RMB)	RMB45.459	RMB47.015	RMB52.496	RMB55.618	RMB60.598
Chinese Inflation (3)	1.4%	2.0%	1.6%	2.1%	2.9%
Net Profit Margin {A}/{B}	5.10%	6.67%	7.58%	7.52%	7.83%

Notes

(1) Averaged annual exchange rates taken from https://www.netcials.com/forex-yearl...-rate/CNY-USD/
[2) I have revised my definitions of 'normalised profit' and 'revenues' from earlier years (see my posts 63 and 65).
(3) I grabbed the CPI inflation rate for China from here: https://www.focus-economics.com/coun...hina/inflation

Discussion

The revenue growth rate in local currency per annum was:

RMB45.459 x (1+g)^4 = RMB60.598 => g=7.45% (compounding)

The annual revenue growth rate in the reporting currency (USD) was:

$7,233m x (1+g)^4 = $8,776m => g=4.87% (compounding)

For the first time the majority of my study period is a time when YUMC was separately listed. The annual compounding growth rate is significantly higher than in the previously quoted comparative post, and a lot higher than you might think if you just looked at the USD revenue growth rate. The benefits of having YUMC as a separate listed entity (from late 2016) may be showing through here.

SNOOPY