Is This the End for Yongye?

For any investor who has put a toe in the Chinese market over the past few years, it's been a wild ride. Unfortunately for those same investors, that ride has mainly been in the direction headed south. 

Today, one stock that's well off highs set back in 2009 is bouncing back. Let's take a look why Yongye  (Nasdaq: YONG  ) is up 17% today, and what its jump says about foreign-listed Chinese stocks.

A brief history in Chinese stocks
After briefly cresting past 6,000 in late 2007, the Shanghai Stock Exchange Index Composite (SSE) has come back down to its current level around 2,300. The declines in Chinese equities is even worse for most stocks listed abroad. Using reverse mergers into shell companies, a host of Chinese companies seized upon euphoria over Chinese growth in 2009 and 2010 to list on American exchanges. 

While these companies posted eye-popping growth for a time, the unfortunate reality for many was that their reported financials ended up being -- and this is a kind way of saying this -- less than reputable. A slew of companies such as RinoSino-Forrest, and China Agritech fell as short-sellers issued reports that exposed that their reported financials and reality had a wide gap between them. Thanks to the wide use of variable interest entities (VIEs), foreign investors had little legal recourse against fraudulent companies. 

The continued cases of fraud cratered most small-cap Chinese stocks listed abroad. Simply put, small-cap Chinese companies executing reverse mergers were guilty until proven innocent. Considering the amount of high-profile examples of fraud, that's a reaction that's not surprising. No one wanted to be the next big-name investor getting caught holding a large position in a Chinese company that was proven to be a fraud and made near worthless overnight. 

An exit for investors, or a mirage?
However, one interesting facet of the story is that after the sell-offs, certain Chinese companies are now looking to go private. Focus Media  (Nasdaq: FMCN  ) , a company that has long been a favorite of short-seller research reports, is the poster child of the shift in Chinese companies moving back to being private companies. In August, the company announced a deal between its CEO and several investment firms to take the company private at $27 per share. 

Yongye, a company that has seen its own share of research into the veracity of its financial reporting, is following in Focus Media's footsteps. The company is attempting to go private at $6.60 per share in a deal led by its chairman and CEO along with several investment firms. Such a move would end Yongye's time as a public company.

There was never a problem with growth surrounding Yongye, as the company grew from a reported $48 million in revenue in 2008 to $427 million in the past 12 months. Yet at the same time, the company's accounts receivable swelled from $2.7 million to $188.4 million. The continuing rise in accounts receivable led to questions whether the company could actually collect on its reported earnings. Then further "research reports" -- often from nebulous sources -- questioned such basic questions of whether the company lied about the benefits of its core product, which helped the growth of crops. 

As Yongye continued receiving negative attention along wtih other foreign-listed Chinese stocks, its share price kept sinking. That is, until today, when the going-private offer sent the company soaring to 52-week highs. 

The market's not fully buying it yet
Yongye closed today at $5.61, well below the $6.60 per share that's being offered for the company to go private. The difference between the offers and where Yongye's trading shows some of the continuing skepticism that the company will be able to close out its deal to leave the public markets. Likewise, Focus Media has seen some recent selling and now sits about 11% below its own "go private" offer. 

Battles still rage over companies like Focus Media even as they prepare to go private. The interesting question becomes, what sort of information do private-equity firms like Carlyle -- which is part of the group taking Focus Media private -- learn while conducting their own due diligence? What do these companies know that keeps them involved in the deal while the rest of the financial world avoids buying their shares? 

It's an interesting story-line. In the end, expect far more news and heated debate ahead before this round of Chinese companies successfully goes private. There are simply too many questions still unanswered.

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Eric Bleeker owns shares of Yongye International. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (7) | Recommend This Article (8)

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 October 15, 2012, at 7:27 PM, drfrank1 wrote:

    Erik,

    What are you thoughts on the offer price? As a fellow YONG shareholder I've already received solicitations from certain law firms trying to charge the board with failing in their fiduciary responsibilities to shareholders for entertaining a buyout price that is at least $1 per share below book value per share.

  • Report this Comment On October 16, 2012, at 3:58 PM, wgreystone wrote:

    The law firm is only interested in collecting some settlement fee before YONG goes to private. Unless other offer emerges, I don't see there is any sound argument to prevent YONG going private at 40% over stock trading price before the announcement.

  • Report this Comment On October 16, 2012, at 7:04 PM, drfrank1 wrote:

    I can think of a few, considering how dirty cheap the stock was to begin with. Even at $6.60 per share the buyout price would be at just over 4 times ttm earnings and less than total sales for 2011.

    That seems like a ridiculously good deal for a company that has been growing at the rate Yongye has. The share price has been supressed for some legitimate reasons coupled with frequent short sale attacks, but I think most YONG investors thought that sooner or later the market would believe the company was legit and the share price would soar, likely well beyond $6.60. Either way I'm sort of happy to see the light at the end of the tunnel with this one with at least some certainty to get out above my cost basis.

  • Report this Comment On October 16, 2012, at 10:04 PM, TMFRhino wrote:

    Hey drfrank1,

    My biggest objection to any kind of valuation argument would be... No one's trusting book value in small Chinese stocks right now. Likewise, no one's really giving the company credit for that stated P/E of 4.

    Legal fishing in these kinds of situations is common, I saw a suit go across Business Wire shortly after the close. I agree with your sentiment, in many ways I'm just happy to be out around cost basis considering what happened to the broader small cap Chinese space. That is, assuming I don't sell before any go private event... I haven't quite made up my mind on that. On one hand, a pretty big gap between today's pricing and the proposed go private event. On the other hand, I'm unsure how far the stock could fall if the deal fell through.

    That feeling kind of sums up my feeling on everything Yongye... Unsure. If anything, its been a good investing lesson.

    Best,

    Eric

  • Report this Comment On October 16, 2012, at 10:04 PM, TMFRhino wrote:

    *shortly after the close = shortly after the announcement

  • Report this Comment On October 18, 2012, at 9:10 AM, bewisegan wrote:

    If not because of the offer to privatize the company at $6.60 a share, the stock would still be under $5 per share, I think.

    As a small shareholder of the company, my feeling is that whether the offer is undervalued or not, I welcome it. This is simply because the offer price is some 37.79% better than the price before the offer.

    I wonder how the law firm can help the minority shareholders. If because of them, the offer didn't materialized, are they going to compensate them or find a better buyer to take over their shares?

    Since the announcement of the privatization, the price is nowhere near the offer price. This doesn't appear logical to me. Could Motley Fools please advise whether it is advisable to buy the stock now at around $6 per share.

    Thanks in anticipation.

  • Report this Comment On October 28, 2012, at 8:24 PM, HighestVantage wrote:

    This is very interesting indeed. I really like Yongye and I have been watching it for a few years. What is really interesting about this buyout offer is the fact that Morgan Stanley bought 50 million dollars worth of shares not too long ago. I have a feeling they will go in trying to protect their investment and put and end to a buyout that is below supposed book value. If they don't I would be surprised.

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