YumChina (NYSE:YUMC)

[Snoopy]

	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

	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018
Adjusted Normalised NPAT {A}	$284m	$250m	$369m	$472m	$589m	$634m
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%	8.16%

There has been a change in the definition of 'Revenue' for FY2018. There are two additional categories being:

1/ 'Revenues from transactions with franchisees and unconsolidated affiliates'. YUMC operates a central procurement model. The company purchases centrally from suppliers all food and paper products, then on sells and delivers those to all restaurants, including franchisees and unconsolidated affiliates.
2/ 'Other Revenues': Primarily includes revenue generated from YUMC's mobile e-commerce platform

To preserve any statistical comparative worth with previous years, I have not added in these two additional revenue categories.

Inflation in China is around 2%. The smallest gain in margin (we are leaving out the drop in FY2018) 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

[Snoopy]

There has been a change in the definition of 'Revenue' for FY2018. There are two additional categories being:

	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018
Adjusted Normalised NPAT {A}	$284m	$250m	$369m	$472m	$589m	$634m
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%	8.16%

1/ 'Revenues from transactions with franchisees and unconsolidated affiliates'. YUMC operates a central procurement model. The company purchases centrally from suppliers all food and paper products, then on sells and delivers those to all restaurants, including franchisees and unconsolidated affiliates.
2/ 'Other Revenues': Primarily includes revenue generated from YUMC's mobile e-commerce platform

To preserve any statistical comparative worth with previous years, I have not added in these two additional revenue categories.

Inflation in China is around 2%. The smallest gain in margin (we are leaving out the drop in FY2018) 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

	FY2015	FY2016	FY2017	FY2018	FY2019
Adjusted Normalised NPAT {A}	$369m	$472m	$589m	$633m	$687m
Revenue {B}	$7,233m	$7,075m	$7,769m	$8,415m	$8,776m
Net Profit Margin {A}/{B}	5.10%	6.67%	7.58%	7.52%	7.83%
Inflation rate for China	1.4%	2.0%	1.6%	2.1%	2.9%

If you compare this table with my previous year's work, you will see that I have altered the definition of 'revenue' for all years to the updated way that YUMC looks at things today. 'Revenue' now includes:

1/ Normal company sales.
2/ Franchise fees and income.
3/ Revenues from transactions with franchisees and unconsolidated affiliates.
4/ Other revenues.

I grabbed the CPI inflation rate for China from here:

https://www.focus-economics.com/coun...hina/inflation

Inflation in China is generally subdued and profit margins are not being eroded (FY2018 excepted) as inflation rises.

Conclusion: Pass Test

SNOOPY