Yippee, Yongye!

Hi. My name is Rich. And I am a Yongye International (Nasdaq: YONG  ) skeptic.

(Hi, Rich!)

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.

Foolish takeaway
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.

Are you looking at Yongye? Make it easy on yourself. Add the stock to your watchlist and keep up to speed on developments at this company.

At long last, Fool contributor Rich Smith owns shares of Yongye. The Motley Fool has a disclosure policy.

China Green Agriculture and Yongye International are Motley Fool Global Gains recommendations. Motley Fool Options has recommended a synthetic long position on Monsanto. The Fool owns shares of China Green Agriculture and Yongye International.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (23) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2011, at 11:01 AM, mrkhan1024 wrote:

    Just to further extrapolate on Mr. Smith's commentary, I plugged in the following numbers into a free cash flow calculator and varied the short-term (5-year) growth rate to show how YONG would be valued by a Buffett-style investor. These are pretty standard assumptions.

    Discount rate: 10%

    Annual growth rate beyond 5 years: 5%

    TTM free cash flow: $11.5m

    Results:

    5-year growth 15%: 367.4m

    5-year growth 25%: 543.4m

    5-year growth 35%: 783.2m

    5-year growth 50%: 1,298.9m

    So at the analyst-estimated but historically conservative near-term growth of 15%, YONG is priced at a 31% discount with its 253.3m market cap. Also, as a company matures and requires less capital expenditure, FCF generally starts to approach net income, thus growing faster than earnings. 15% is therefore highly conservative from a FCF standpoint.

    Also, keep in mind that if KPMG is doing its job as auditor, the very first thing it should be checking is whether the cash is in the bank. Follow the cash seems to be Mr. Smith's main point as well.

    Lastly, while YONG has had its share of past accounting issues and question marks, the last two years of SEC filings have been heavily scrutinzed by long and short players alike and continue to come out extremely clean. A recent Seeking Alpha hit piece supposedly laid out 20 discrepancies in its filings, but most were from prior to 2009 (and YONG fired its accounting firm for its poor work) and essentially nothing stuck from the last two years that suggest fraud or inflating of numbers.

  • Report this Comment On May 10, 2011, at 11:39 AM, russk921 wrote:

    Seeking Alpha should be censured for it's actions related to YONG. If you're lkooking for reliable investment information nix SA off your list. They're nothing but a greedy bunch of lying thieves...no appologies offered...

  • Report this Comment On May 10, 2011, at 11:46 AM, buffalonate wrote:

    The only number you need to be concerned with when it comes to Yongye is how many shares did the insiders buy when the stock was attacked by the shorts. Zero. How many shares did the company buy back when they are extremely cheap. Zero. They have been selling shares in the last year though. If someone associated with the company would buy shares in the company that would relieve my concerns and I would buy the stock. Until that happens I will stay a mile away from this one.

  • Report this Comment On May 10, 2011, at 11:52 AM, buffalonate wrote:

    Here are the insider transactions for Yongye. You will notice that in the last 2 years there has been lots of selling of stock and zero buying of stock when it is selling for a fraction of its worth. http://finance.yahoo.com/q/it?s=YONG+Insider+Transactions It looks to me like they don't have enough confidence in their own stock to buy it for 1/10 of its real worth.

  • Report this Comment On May 10, 2011, at 12:21 PM, ETFsRule wrote:

    Buffalonate:

    The only "insider" selling was when a New York investment company sold their shares in March 2010, when YONG was trading over $8.

    The seller was a "special situations" investment fund, so I don't think they ever intended to hold their shares for the long haul. I'd say it was reasonable for them to sell, since they had originally picked up those shares for less than $2/share.

    The real insiders have never sold any shares, and have increased their holdings via a stock incentive plan.

  • Report this Comment On May 10, 2011, at 1:25 PM, 123spot wrote:

    Thanks Fool, for continuing to follow up on this controversial company.

  • Report this Comment On May 10, 2011, at 2:33 PM, buffalonate wrote:

    It doesn't worry you guys that neither the company nor its insiders will buy its stock when it is ridiculously cheap. It has a growth rate of 100% and a p/e ratio of 5 which makes it valued at 1/20th of its intrinsic value. If I was an insider in that company who could determine if the numbers were legit or not I would mortgage everything I had to buy more shares. The company could easily revalue the stock by buying 10 to 20 million in stock and provide confidence in their company. What else could the company invest their money into that would be worth 20 times its investment? The fact that they won't make such a no brainer investment would worry the hell out of me if I was an investor.

  • Report this Comment On May 11, 2011, at 12:32 AM, ETFsRule wrote:

    Take a deep breath.

    Stocks fall 50% all the time... It's actually pretty rare to see heavy insider purchases when a stock has this sort of drop.

    Starbucks fell from over $40 to under $10 in 2009, but they didn't have a lot of insider purchases. Does that make them a scam?

    And do you really think 100% growth is sustainable? Analysts are predicting 15% growth for YONG over the next 5 years.

  • Report this Comment On May 11, 2011, at 6:55 AM, TruffelPig wrote:

    The nice P/E doesn't help you when they halt the stock at NASDAQ. I am sitting on quite a bunch of CCME shares and while the reverse merger investigations are ongoing I wouldn't touch any such company. Not one. It is a bad idea, there are good companies with reliable numbers based on solid science. Buy those.

  • Report this Comment On May 11, 2011, at 10:46 AM, buffalonate wrote:

    Starbucks underlying profits crashed along with the stock price. Yongye says they are doing great so why wouldn't they buy stock for 1/20th what it is worth. Even if the longterm growth prospects are only 15% the stock is priced 1/3 of that so why won't anyone associated with the company buy their stock on sale if they are doing so great? Find something else to invest in because this company stinks. Ebix was short attacked a while back and they instantly announced a share buyback plan because the shares were cheap and it provides confidence in the company. Yongye will never do that.

  • Report this Comment On May 11, 2011, at 11:18 AM, MAURIZIO400cc wrote:

    gosh! goodness me! I just read the latest report at 'Manifacturing Beta', m soo scared now that i want to sell all my shares.

    isn't anyone going to investigate who is controlling this rotting nest of scumbags and jail all those illigal short sellers? (rethorical question)

  • Report this Comment On May 11, 2011, at 11:24 AM, TopDogPicker wrote:

    If u think its a fraud just short it! Yak yak yak yak..... Same people saying the same thing over and over and over and over!

  • Report this Comment On May 11, 2011, at 2:49 PM, doug007 wrote:

    The money to buy back stock has to come from somewhere.

    Even if the stock is cheap, if they have better uses for the money - like expanding the business - then maybe buying back stock isn't a good idea for the company, even if it is a great value.

  • Report this Comment On May 11, 2011, at 6:14 PM, jimydigriz wrote:

    well, let's see.

    after months of border line libel by bezek, the very day yongye posts fabulous earnings olp global publishes a hit piece (not to mention adding insult to injury by asking payment for the details) and short interest goes up almost half a million shares. oh yeah, no short selling conspiracy here.

    these SOBs are in deep and will say anything to supress the share price of this stock

  • Report this Comment On May 12, 2011, at 1:29 AM, Potbeagle wrote:

    Why are articles on seeking alpha considered news? I really don't understand why people are buying into these small time shortys.

  • Report this Comment On May 12, 2011, at 11:59 AM, network2 wrote:

    Anyone who still thinks Yongye is worthy of a short needs to check out the Yongue International website. Recent months have revealed a growing amount of information becoming available. Unlike some much larger Chinese company websites, the English is generally very good, with a few mistakes here and there, hardly room for those of us who do not speak a single word of Chinese to complain. If this were a scam, the company is certainly going to extreme lengths to create a shell. There are several PDFs with great photos, many smiling farmers, great graphs, and explanations of the product, production facilities, and distribution network. I particularly enjoyed the drawing of a plant, showing delivery of the product to the foliage, and pointing out that fertilizers are in their own way highly inefficient because either the roots must grow out to the nutrients (rather slow) or rain must dissolve and leach the fertilizer through the soil to the roots (what if it does not rain for a while?) at the same time washing the fertilizer deeper into the ground where it is of no use, and resulting in lots of waste as well as polluting underground water tables or running off into rivers, ponds, and other bodies of water. Another method to influence plant growth is hybridization of seeds, which means next year's crop at the earliest. Or you can spray Shengmingsu direct on the foliage, which has immediate effects (8 hours or less) on plant cell membranes and structures, immunities, cellular ability to uptake nutrients from the soil and air, etc. The drawing with captions I am talking about is found on the company's website under Investor Relations, Presentations, then click on the Corporate Presentation PDF (or just put the following in your address bar: http://www.yongyeintl.com/images/3-18-11%20Yongye%20Investor... ) There are so many photos of provincial stores, with the company's colors, products on the shelves, certificates of achievements, descriptions of awards,and pages and pages of information, that if anyone thinks this is a scam, I am afraid they are going to be left in the dust bin of history. Consider the credentials in the management team profiles. Mr Yu, CFO, has an MBA from Stanford. He spoke on the 2011 QI Conference Call the other morning, and his English is impeccable, his command of accounting concepts profound. I have only mentioned one name. The entire list of management is very impressive. I hope Yongye has a strong international patent and some good international patent attorneys. As others have said, I do not think KPMG would want to associate with Yongye if this were just an extensive and elaborate financial scam. Check out the SEC filings. The huge expense and enormous amounts of detail required to file SEC documents is mind boggling and hardly the work of petty thieves. I could go on, but check out the Yongye website for yourselves.

  • Report this Comment On May 12, 2011, at 2:28 PM, buffalonate wrote:

    Their stock is at a firesale price and neither their company nor the insiders will buy Yongye's stock. That was enough to tell me to stay away from this company.

  • Report this Comment On May 17, 2011, at 2:47 PM, BradLK wrote:

    I am wondering if this has somthing to do with Yongye's product:

    http://newsfeed.time.com/2011/05/17/growth-chemical-leads-to...

    I dont know if this is a good or bad thing. Chances are that it has nothing to do with Yongye.

  • Report this Comment On May 17, 2011, at 4:57 PM, jimydigriz wrote:

    chances are indeed good that it has nothing to do with yongye. they are in fact 100%. the article clearly states that the problem is due to a growth accelerator called forchlorfenuron. yongye's shengmingsu product is a fulvic acid based nutrient.

    are there not already enough adverse and spurious rumors circulating about this stock to suit you?

  • Report this Comment On May 18, 2011, at 12:45 PM, goldminingXpert wrote:

    Will the Motley Fool stop its shameful pumping campaign for the YONG scam yet?

    http://www.zerohedge.com/article/another-chinese-fraud-absar...

  • Report this Comment On May 18, 2011, at 12:54 PM, buffalonate wrote:

    Every time somebody pumps this stock I wait for it to go up for a couple days and then give it a thumbs down. Easy points. I checked into a bunch of the Chinese smallcap stocks that have been attacked by the shorts and found that none of them have repurchased shares nor insiders have made purchases. That gives me zero confidence in any of them.

  • Report this Comment On May 25, 2011, at 11:20 AM, decbutt wrote:

    A few year back CGA articles were dime a dozen.

    By the close today it looks like CGA will have shed >20% in two days. That's *on top* of all the other falls.

    Anyone expecting an insightful fool.com article on CGA tomorrow?

    I'm not.

  • Report this Comment On May 25, 2011, at 12:41 PM, jmbring wrote:

    @decbutt,

    if you're not expecting material worth reading at TMF, why do you spend precious time posting here? just curious.

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