Hi. My name is Rich. And I am a Yongye International (Nasdaq: YONG ) skeptic.
It's been nearly a year since I wrote a skeptical column on Yongye, however. The last time I wrote about this Chinese pharaoh of fertilizer -- three weeks ago -- I suggested it might finally be time to buy the stock. And like the proverbial stopped clock, it appears I've been proved right twice.
Yongye reported first-quarter earnings last night, and, as we've come to expect, the numbers were fabulous:
- Sales more than doubled to $50 million.
- Gross and operating profits climbed in tandem, up 97% and 101%, respectively.
- Net profits increased 60%, while "adjusted" net -- the number Wall Street focuses on when making its earnings estimates -- nearly tripled to $0.27 per share (beating consensus expectations of $0.18 with a stick).
Not that I care about any of that.
The trouble with Yongye
The trouble with Yongye, you see -- and the trouble with a lot of Chinese small caps -- is that a lot of people don't trust their numbers. Not even when calculated under GAAP. Not even when audited by a "Big Four" accounting firm. That's one reason companies like Yongye and China Green Agriculture (NYSE: CGA ) languish at single-digit price-to-earnings ratios, while firms like Mosaic (NYSE: MOS ) and PotashCorp (NYSE: POT ) enjoy more robust P/Es of 14 and 24, respectively.
While I don't necessarily agree the discount is warranted, I do acknowledge the concern. That's why I hedge my bets on the "can we trust 'em?" question, and skip right over Yongye's headline numbers to count the cash instead. Once again, I like what I see.
Confirming the impression we got last quarter, Yongye's cash flow statement once again showed strong cash-profit generation. Operating cash flow grew more than 1,200% year over year, to $6.6 million. Subtract $1.1 million in capital spending and Yongye generated $5.5 million in real free cash flow. Thus, in one quarter's time, Yongye has effectively doubled its trailing free cash flow. It's now generating $11.5 million in annual FCF, and growing at a brisk clip.
Ordinarily, that wouldn't be enough to persuade me to buy the stock -- not at Wall Street's projected 15% growth rate. But it seems to me Yongye is growing a whole lot faster than Wall Street gives it credit for. If I'm right, Yongye just might be one of those "wildly mispriced" Chinese small caps we've been looking for.
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