What Will Keep Yongye Going in 2012

Yongye International's (Nasdaq: YONG  ) stock price performance in 2011 might have been a bummer, but the stock still features in my top three fertilizer picks. Let's see what 2012 could hold for Yongye.

A must-watch move
Yongye has impressed me with its smart strategy of putting in money where it pinches most -- sourcing raw materials. Instead of buying humic acid from intermediaries, the company is now using lignite coal from its own Wuchuan facility to extract nutrients. In fact, Yongye is already enjoying cost advantages since this facility became operational last year.

What Fools need to watch out for is the latest development on this front. During its last quarter, Yongye received government approval for a mineral resource exploration permit for its designated project site in Wuchuan. The company is developing this site, which is very close to its primary production facility, as a primary source of raw material for its nutrients. This approval is a critical step toward the target, as Yongye can now apply for final production development approval for the site. Investors should keep track of these developments.

In Yongye's favor
The other thing that should keep propelling Yongye is the agriculture boom. The fertilizer industry has never had it so good, with farmers across the globe racing to grow more to make the most of high crop prices. This, in turn, has fueled the demand for fertilizers, taking their prices sky-high this year and making it a boom year for most fertilizer companies.

Think of Terra Nitrogen (NYSE: TNH  ) and CVR Partners (NYSE: UAN  ) , who reported outstanding revenue growth of nearly 50% and 66.4% in their respective third quarters. Similarly, PotashCorp's (NYSE: POT  ) third-quarter revenue grew an astounding 47% from the year-ago quarter to $2.3 billion as emerging markets drove demand.

In such a situation, how could Yongye stay behind in the race? Its third-quarter revenue climbed a staggering 95.9% from the year-ago quarter to $140.6 million. What's worth noting is how aggressive marketing efforts (I'll talk about it in detail a little later) played a big role in boosting the top line.

What's more, Yongye has the distinctive advantage of having a base in a nation where agriculture is gaining significance. Here's why this "China factor" should continue to work in Yongye's favor next year.

The big boon
China's burgeoning population and higher spending power has fueled demand for food, lifting agricultural production. And China's recent purchase of 900,000 metric tons of American corn is the best evidence of this. Let's see what China does in 2012!

No wonder China is attracting fertilizer companies from across the board. From chemical king PotashCorp to seed giant Monsanto, most companies are not just bullish on China, but are also trying to get a bigger piece of the Chinese market. Even chemical biggie Dow Chemical is expanding its sales network in China.

Interestingly, the China growth factor also signals bigger challenges for Yongye in terms of intensifying competition as firms venture deeper into the country. The good part is that Yongye is already busy trying to grab a bigger market share through aggressive marketing. And these efforts are likely to play a vital role in boosting Yongye's revenue in 2012.

A wise strategy
Yongye has intensified its focus on tapping new provincial markets in China recently, a strategy that seems to be paying off well. Almost 26% and 21% of Yongye's total sales in its second and third quarter, respectively, came from these new markets.

How Yongye now plays the game will be critical, as rival China Green Agriculture (NYSE: CGA  ) is also busy aggressively promoting its products and entering new markets. Note that Yongye is also in talks with a celebrity to endorse its products. If this materializes, Yongye could hit the jackpot as far as promoting products are concerned. Keep watching, Fools.

The unfortunate challenge
Poor Yongye! In spite of a great business line, growth plans, and performance, it faces tough luck when it comes to investors' confidence. Because funnily, what acts as a boon for it has also become the cause of terrible pain. Yongye's shares were beaten black-and-blue in 2011 by short-sellers who gave Chinese stocks a thumbs-down after all the accounting scandals that rocked the Street.

We cannot really dispel the fear from Mr. Market's mind, but the company's solid performance is telling a different story. The fact that Morgan Stanley is investing in the company -- and that one of the "Big Four" auditors is involved with Yongye's auditing -- tells us that Yongye might not be one of those fraudulent Chinese companies.

I think if Yongye continues to perform well in 2012 and proves allegations (if any) wrong, it could be the best thing to happen to the company. Let's hope Yongye can prove its critics wrong.

The Foolish bottom line
Yongye is growing fast, and I think it deserves a watchful eye. Keep yourself updated on how 2012 unfurls for Yongye by adding it to your stock Watchlist -- the free, personalized stock-tracking service brought to you by The Motley Fool.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Yongye International. Motley Fool newsletter services have recommended buying shares of China Green Agriculture and Yongye International. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (18)

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 January 03, 2012, at 12:13 PM, buffalonate wrote:

    Now I know why the Fool keeps pumping Yongye. You guys own it. I knew there had to be a reason you were pumping a questionable stock every day. If their growth numbers were a little more reasonable I might be tempted to invest in the company myself. Their profit growth and the numbers or stores they are distributed to have gone through the roof. That type of growth in a commodities industry is highly suspect if you ask me. If they were a tech company you could possibly believe that type of growth but these guys sell fertilizer. If it seems too good to be true it probably is.

  • Report this Comment On January 03, 2012, at 12:32 PM, Medicalrecordman wrote:

    It's my understanding that Morgan Stanley's Homer Sun turned YONG upside down in his DD on the company before making a huge investment followed by impressive open market purchases. It's also my understanding that two investment houses are about to initiate coverage on YONG and this doesn't include Morgan Stanley. Personally, I think shorting this name at a P/E of less than the current 2 is pure suicide.

  • Report this Comment On January 03, 2012, at 2:31 PM, buffalonate wrote:

    I never said I was shorting it, but I will never own it. The only thing that would legitimize this stock for me is if the company or the company's ceo would buy shares. The last time I checked no one involved with the company had bought shares even at the ridiculously cheap price it now trades. If an executive wants to provide investors confidence in his company he should not just announce but follow through on buying shares. If they owners won't buy shares at firesale prices I think owning that companies stock is suicide. I wouldn't advise anyone to short the stock or own it. If you are smart you would just stay a mile away.

  • Report this Comment On January 03, 2012, at 2:53 PM, tkell31 wrote:

    Buff, you are 100% right. MF writers have pumped almost all the RTO scams at one time or another. As far as MS investing in this, great, they can afford to get taken for a ride. Hell, Forbes called CCME the best small business of the year or something like that. How did that work out again? I could care less if I'm wrong about Yong because you can always make money, it's a lot harder to recover from a big loss, but MF will keep pumping. Funny we don't hear so much about their great CGA pick anymore.

  • Report this Comment On January 03, 2012, at 3:50 PM, phoebe44 wrote:

    tkell31 - you don't hear about CGA anymore because MF recommended that anyone who owned CGA sell their shares because it was no longer a stock that we should own - and MF sold their shares, too - so that's why you no longer hear about CGA - the thesis didn't hold and when that was evident - the call to sell was made -- what's the problem with that?

  • Report this Comment On January 03, 2012, at 4:37 PM, jbsbf54663 wrote:

    http://finance.yahoo.com/q/it?s=YONG+Insider+Transactions

    CEO Wu Zishen bought 555,000 shares in mid-June @ around $5.41/share ($3 million worth).

    Assuming Mr. Zishen's net worth (outside of Yong stocks) is < $100 M, he doesn't need to invest more money into his company. There's a fair amount of risk putting all of your money into one basket, even if you do run a legitimate company.

  • Report this Comment On January 03, 2012, at 4:41 PM, kbsTMF wrote:

    buffalonate,

    I'm not sure where you looked, but the CEO did infact invest 3 million dollars of his own money, open market, at 5.30+. Morgan Stanley invested $50Million after an extensive DD and books review. They then (MS), invested several more million open market, for their customers.

    Before bashing, you really should dig at least below the surface.

    As for MF, they have written on YONG in the negative and positive. ONly became positive after they, as I recall, visited the factory.

    kbs

  • Report this Comment On January 03, 2012, at 4:49 PM, mitcjam wrote:

    Regardless of what buffalonate has said.....he either has absolutely no life or is definitely shorting it. He writes negatively about YONG in every article, despite having no real argument. Buffalonate, just admit it - you are short and you got killed today with it going up 12%

  • Report this Comment On January 03, 2012, at 4:50 PM, mitcjam wrote:

    CEO bought a significant amount last year - why don't you check your facts before spouting off buffalonate.

  • Report this Comment On January 03, 2012, at 4:57 PM, cattywampus wrote:

    I wonder who the celebrity could be? I've always liked Lucy Liu, geez she kicked butt in 'Kill Bill' although her parents were from Taiwan so most likely not the top pick. Michelle Kwan, Lisa Ling or Connie Chung would be good. Maybe they could get Brandon Lee (son of Bruce Lee) in an advertisment fighting Mock Duck, notorious New York Chinatown mobster leader of the Hip Sing Tong, while Yo-Yo Ma plays the mood music. My favorite is Yao Ming of the Houston Rockets, he got the right micro-nutrients along the way, probably not from foliar spraying. Maybe he fell in a vat of Shengmingsu as a kid. Wow options expiration is a long ways off 13 biz days and a short squeeze to boot. Good Luck in the year of the Dragon.

  • Report this Comment On January 03, 2012, at 5:01 PM, jbsbf54663 wrote:

    Neha, where did you see that a celeb could be sponsoring this?? I haven't seen any news of this before. Could you please provide a link/source?

  • Report this Comment On January 03, 2012, at 5:19 PM, cattywampus wrote:

    In the above article. /second paragraph under a wise strategy. Don't have a link, you can ask Neha the writer.

  • Report this Comment On January 03, 2012, at 5:29 PM, cattywampus wrote:

    I went on the Yongye International Inc. site but saw no references to the celebrity endorsement story, FAQ section is good. Sorry thought you were addressing that question to me.

  • Report this Comment On January 03, 2012, at 5:56 PM, jbsbf54663 wrote:

    @Catty, no problem. With a little more research, I was able to find what Neha was probably talking about:

    http://www.yongyeintl.com/images/Yongye%20Investor%20Present...

    on page 13 under 'National Level Campaign,' it reads:

    "Build premium brand and corporate image to enhance

    distributor and end user trust and confidence

    -- CCTV7 - China’s only national agricultural channel

    -- Farmer’s Daily - China’s largest agriculture newspaper

    -- Celebrity endorsement and industry conferences"

    Whether or not this is 'in the works,' I don't know where Neha found that.

  • Report this Comment On January 03, 2012, at 5:58 PM, buffalonate wrote:

    I was wrong, the CEO did buy shares. As far as I could tell he still only owns about 1.5% of the company. That is not exactly confidence inspiring. If I was the CEO and I knew the company was legit, I would find a way to take it private. I find it amazing that a company that is growing earnings at 100% a year and has a p/e ratio of 3 has not been bought out by now.

  • Report this Comment On January 03, 2012, at 6:11 PM, phoebe44 wrote:

    buffalonate -- have you paid any attention at all to what MS is doing?

  • Report this Comment On January 03, 2012, at 6:12 PM, jbsbf54663 wrote:

    So you're saying because MSPEA only invested $50M and then bought $10M and the CEO only buying $3M instead of taking it private nor being bought out means that YONG must be too good to be true??

    According to their Investor Presentation, they have 803 Country-level distributors and ~28,000 "Branded Retailers". They added 10,000 of these branded retailers from 2Q 2010 to 2Q 2011. That's ~12 stores per distributor. Here is the description of the country level retailer:

    "--Recruit and manage village level retailers

    --Manage county level key accounts

    --Provide training/support to village level retailers"

    Since almost all of these branded stores were already built and now just sell Shengmingsu, 12 stores in 365 days doesn't seem all that ridiculous, considering Yongye is based all across China. If you want to argue that they only had 500 distributors over that year and have only recently hired more, that's still only 20 stores that they need to travel to and convince to sell a product that works... convince 1 store every 3 weeks for an entire year. Assuming the distributors know anything about sales, that shouldn't be hard.

    (I got this info from page 11 & 12 of the Sept. 2011 Investor Presentation -- http://bit.ly/w5nM4c)

  • Report this Comment On January 03, 2012, at 7:14 PM, cattywampus wrote:

    @jbsb Thanks for finding that information. Would be great to see YONG break out away from the negative publicity.

  • Report this Comment On January 03, 2012, at 9:57 PM, buffalonate wrote:

    I read their quarterly report awhile back and their growth in distribution was off the charts. I can't remember the exact numbers but it seemed like the growth in distribution was way too fast to be legitimate. I thought about buying CCME and YONG at the same time but I passed on both because the story seemed too good to be true. Considering that the earnings growth is around 100% you could easily argue that the p/e should at least be 50. That would mean if the company is legit it should be valued at at least 16 times what it is worth right now with a p/e of 3. That would be like hitting the lottery if someone could buy the company out so why hasn't anyone? If you could spend 1 dollar and get at least 16 dollars in value I would think the CEO would find any way possible to take the company private. Seems like common sense to me to do that.

  • Report this Comment On January 04, 2012, at 1:21 PM, phoebe44 wrote:

    buffalonate - you are thinking like an American company and an American way of business - Yong is a Chinese company based in China - they don't think business like Americans do - and the Chinese government is involved - heavily. I'm not at all sure there is any such thing as a "private company" in China or a conceivable way to do so by anyone in the world especially if the company is legit and profitable as Yong appears at present.

  • Report this Comment On January 05, 2012, at 12:15 AM, mitcjam95 wrote:

    FYI - Motley Fool Investors.

    Google Search - Buffalonate and Yongye - you will see him trash Yongye in every Motley Fool article. It's funny that he says that he is not shorting this stock; however, he still takes time out of his day to talk trash on a stock that he has no intenitons to short? Tell me how that makes sense? .Unless of course Buffalonate has nothing else better to do then talk about a stock that he has no positon in.

    I am Long the stock and absolutely love their LONG-TERM PROSPECTS. Here are facts that are undisputable:

    1. Audited by a Big 4 accounting firm - unlike the expose few china frauds.

    2. Morgan Stanley invested $50 Million in preferred shares and then purchased millions in open market transactions.

    3. Ceo invested $3 Million of his own money into YONG.

    4. Morgan Stanley has a member on Yong's Board to oversee all their activities.

    5. Growth is near 100% year over year and PEG makes it one of the cheapest growth stocks you can find in the market.

    6. China has a growing population with limited land and fertilizer allows them to get more production per acre for farmland to feed this growing population.

    7. Warren Buffet quote - "Be fearful when others are greedy and be greedy when others are fearful" Right now everyone is fearful of Chinese ADRs and now is the time to be Greedy!

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