It's Finally Time to Buy Yongye

I've been a critic of Yongye International (Nasdaq: YONG  ) for the longest time. I've called the stock overpriced. Compared it (unfavorably) to more reasonably priced agriculture alternatives PotashCorp (NYSE: POT  ) , Mosaic (NYSE: MOS  ) , and China Green Agriculture (NYSE: CGA  ) . I've repeatedly criticized its inability to generate positive free cash flow and my opinions have not been popular. So you're probably going to be surprised when I tell you that ... now is the time to buy Yongye. Finally.

When the facts change, I change my opinion
Why do I say this? Two reasons. First, as Yongye fell from grace, its stock price fell with it, becoming cheaper by the day. Second, my main worry about Yongye is no longer in effect. At long, long last, Yongye is generating cash flow.

Last month, Yongye announced its full-year results for fiscal 2010. Not only did it emerge into positive "operating cash flow" territory. It actually generated $4.9 million worth of free cash flow, and about a week ago, management announced it's on track to repeat the feat in 2011. In a preliminary report for the first quarter of 2011, Yongye confirmed its cash flow was positive, and sales on track for near-50% growth this year.

This suggests free cash flow could rise as high as $7.5 million by year's end, leaving us with an enterprise valued at just 27 times the cash it churns out in a year -- and growing at a 50% clip. The news prompted praise from market researcher The Bedford Report, which compared Yongye favorably to the performance at larger ag-market player Monsanto (NYSE: MON  ) , growing at 15%.

Foolish takeaway
With free cash flow now in effect, my major concern regarding Yongye has been put to bed. Combined with a more attractive stock price, I now feel free to heed the advice of Fools who've been expounding on Yongye's attractiveness for years, and buy the shares for my own account. (And I have.)

That said, Chinese micro caps aren't for everyone. Indeed, conservative investors might prefer to wait awhile, and give Yongye time to prove it can both earn and keep earning cash profits before jumping in. If that's your preferred approach, feel free to add the stock to your Watchlist. Read along as we track Yongye's progress, and don't make the commitment until it feels right for you.

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 (25) | Recommend This Article (32)

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 April 19, 2011, at 1:14 PM, idahogeo wrote:

    ...wait for it...

  • Report this Comment On April 19, 2011, at 1:15 PM, buffalonate wrote:

    The numbers would be great if you could trust them. This company is smoke and mirrors and I wouldn't touch their stock. They claim they have expanded distribution from 1000 stores to 23000 stores in 2 years yet their revenue has only gone up 5 times. That doesn't make sense to me at all unless their product just isn't selling in the new markets at all. Their valuation is attractive but you cannot trust them.

  • Report this Comment On April 19, 2011, at 1:16 PM, idahogeo wrote:

    ...and there it is... If only the markets were as predictable!

  • Report this Comment On April 19, 2011, at 1:40 PM, stonejonathan wrote:

    LoL nice one Idahogeo

  • Report this Comment On April 19, 2011, at 1:55 PM, leelinch wrote:

    They probably read your review and then changed their numbers so that you would become positive on the stock and suck people in. Scam or Real? Gonna lay your money on the line to find out? Not me!

  • Report this Comment On April 19, 2011, at 2:13 PM, john795806 wrote:

    Idahogeo--best laugh I have ever gotten off of a financial website! And to think that this to-and-fro took only 3 minutes to transpire!

  • Report this Comment On April 19, 2011, at 2:17 PM, anopenmind wrote:

    "The numbers would be great if "you" could trust them?"....

    Oh, but I do trust them, as seems more of others, rather than "you" do not. I trust them because they have given no indication of not trusting their numbers. Dare I say to "you"....what proof do "you" have that gives reasons not to trust their numbers?

  • Report this Comment On April 19, 2011, at 2:19 PM, buffalonate wrote:

    Why waste your time on questionable investments when there are great companies in the U.S. that you know are legit. If these Chinese companies were legit they would be buying back shares because they are ridiculously cheap. When Ebix was under a short attack awhile back they bought shares back immediately because it is the obviously smart thing to do. I have never heard of any of these smallcap Chinese companies buying back shares. If any of these Chinese smallcap companies ever buy back shares I would personally recommend taking a small position in them but I wouldn't hold my breath waiting for that to happen.

  • Report this Comment On April 19, 2011, at 2:29 PM, MAURIZIO400cc wrote:

    mesay

    the lady protesteth too much...

  • Report this Comment On April 19, 2011, at 2:31 PM, MAURIZIO400cc wrote:

    idahogeo

    spooky man!!!

  • Report this Comment On April 19, 2011, at 2:33 PM, MAURIZIO400cc wrote:

    anopenmind

    is it fun speaking to broken records?

  • Report this Comment On April 19, 2011, at 2:33 PM, MAURIZIO400cc wrote:

    Rick

    way to go man!

  • Report this Comment On April 19, 2011, at 2:42 PM, Medicalrecordman wrote:

    I wouldn't rush into YONG anytime soon, as the put volume has recently exploded, suggesting a significant "hit piece" is on the way.

  • Report this Comment On April 19, 2011, at 3:25 PM, randydutch wrote:

    "It's finally time to buy Yonge"

    Thanks, you advised we buy it 6 months ago!

  • Report this Comment On April 19, 2011, at 4:38 PM, Narby12 wrote:

    Really, I think the time to buy was at 4.50-4.60 when they were shorting it in masses and it was severely undervalued. This article tells me it is getting close to the time to get out, I don't think it will be going over $6 any time soon.

  • Report this Comment On April 19, 2011, at 5:46 PM, TMFDitty wrote:

    @buffalonate: Excellent point. Quoting from the most recent 8-K filing: "Our management team and board of directors are committed to enhancing shareholder value ... Based on current market prices, we believe that our shares are presently undervalued ... Our board of directors is contemplating various alternatives to address this issue and will make an announcement as soon as the board determines the appropriate course of action."

    So you might actually survive holding your breath on this one. It sounds like a buyback really could be in the works.

    TMFDitty

  • Report this Comment On April 19, 2011, at 7:18 PM, MonsterFluff wrote:

    I wouldn't hold my breath on share repurchases

    The company has no free cash flow to burn

    They are finding other ways to burn cash that make no sense and create no value and the results of these substantial capex spends will be impossible to track and hold management accountable for

    We keep hearing about the acquisition of the coal business for vertical integration and lower costs. They did not buy a coal business. The paid $35 million to Wuchuan, their current biggest supplier for the rights to LOOK for coal and produce it if they find some. They probably will find some-- it is abundant. But why bother? They were buying 100 ml bottles for 3.5 yuan per bottle already made into fulvic acid before they went in to production for themselves in 2008. Thats 53¢. And that was for finished product. Before even digging one shovelful of coal out of the ground they have spent $35 million just for the right to explore.

    They spent $25 million to buy a customer list from a distributor. That's like buying information from themselves. If they do not know who the subdistributors are serviced by this distributor and the store base they sell to, they could no doubt have generated the information internally saving them a substantial amount of money for basically nothing. I would expect them to already have that information in-house but you never know.

    They bought the rest of the CEOs initial plant for $2.6 million and paid him $10 million in goodwill in addition for synergies and cost efficiencies and overpaid for the plant to boot

    These are all capex expenditures using shareholder money for questionable returns. The spend on the three items is nearly $80 million and the last year's cash flow was $15 million

    Rather than buying shares, I would expect them to look for a way to issue mores shares or look for private placement if they can coax the share price back to higher levels

  • Report this Comment On April 19, 2011, at 8:18 PM, BMcMurry wrote:

    I knew this was a great opportunity when I noticed so many people who didn't like a stock follow it so closely. If you're short, it's time to bail out. You had a good game, but it's over.

    Case in point: Has anyone heard from goldminingXpert lately? As you may have observed from fool commentary on previous articles, he was regulary negative on this company. I bet that he's now closed his position and moved on. buffalonote would be wise to follow his lead.

    This stock goes much higher.

    Disclosure: I'm long.

    再见! (See 'ya later in Chinese)

  • Report this Comment On April 19, 2011, at 8:21 PM, goldminingXpert wrote:

    TMFDitty, the CFO said the same thing about a potential buyback in February to me when I asked. Until further notice, I think it is purely talk.

    I think Yongye will resume going lower after this decent bounce unless they answer the numerous questions raised about the company including their failure to comply with SEC regulations.

  • Report this Comment On April 19, 2011, at 9:42 PM, BMcMurry wrote:

    @goldminingXpert: You've made negative Fool comments on 6 Chinese small caps today: CHBT, ABAT, DEER, CBEH, CMM and YONG. Do you have short positions to disclose? If so, you sure spend a great deal of time defending them... if not, ... well, who are we kidding?

  • Report this Comment On April 19, 2011, at 11:35 PM, goldminingXpert wrote:

    I've made negative comments on far more than 6 Chinese small caps (only 1 comment today -- however -- the preceding comment on Yongye.) I've commented on known frauds such as CAGC, FUQI, and CCME before they were exposed as frauds.

    The whole Chinese RTO sector is a complete joke. Yongye in particular refuses to comply with SEC regulations that they disclose their major customers. That's a major problem.

  • Report this Comment On April 20, 2011, at 2:35 AM, john795806 wrote:

    goldminingxpert:

    From a Yongye press release, with regards to SEC filings:

    Names of Distributors

    Employing one of the favorite tactics of the short sellers, or those who conspire with them, the Author notes that we do not name our distributors and then suggests that the fact that we seem to be hiding something evidences our bad faith and "might" indicate that there is "a chance" that our distributors are related parties. Our decision not to publicize those names is for competitive reasons, and there is nothing wrong with it. We provide those names to our auditors to be used for their audit procedures on the financial statements. Once again, the facts, not the Author's clever innuendo, are important.

    Previous Hebei Distributor

    The Author says that as a result of a transaction with our largest distributor then, that distributor came to own more than 5% of our stock and should have, but did not, make the proper SEC filing, implying that the distributor was owned by a related party. Our Hebei distributor was not owned by a related party. Also, it is the responsibility of the greater-than-5% owner to make the filing. The Company discloses all of its distributors to its auditors, on a quarterly basis as part of the Company's audit and review procedures. This is a basic audit area covered by our auditors, who has signed off the financial statements. All related party transactions are properly disclosed in the Company's SEC filings and there was no significant related party transaction in 2010.

    Is there something unsatisfying that you find about their response? Just askin'...because maybe there is!

    To LeKitKat: I think that Yongye cited the purchase of that distributor list as a significant reason for increased net income, as they were able to bypass the distributor and sell direct, thus increasing prices and margins. However much you may knock Yongye's expenditures (and I'm not sure you have consulted with them regarding their rationalle), Yongye still managed to increase revenue substantially. Just suggesting that Yongye provides contacts in their responses for those who are truly interested in aspects of their business, to gain further information--that's called "transparency" and has been characteristic of Yongye's approach to date, as far as I can tell.

    Those bent on shorting the stock aren't interested in gathering facts--they are interested in driving the price down for a quick buck. Medicalrecordman accurately states that short positions--puts on May and June options--increased significantly yesterday. It will be interesting to see if a short attack is in the offing.

    I would still suggest placing October calls on Yong to protect one's self from short-term volatility, and investing less in shares--if you truly believe the stock is going up.

  • Report this Comment On April 20, 2011, at 10:30 AM, Swede46 wrote:

    LeKitCat seems to have the ability to uncover every tree and shrub in the forest, without the ability to see the forest.

    For example, the "purchase of the customer list" from a distributor. I'll admit that it was a poor choice of wording by the company, maybe something was lost in translation. The distributor had a long term contract giving it exclusive rights to market YONG's product in the provence. Basically, they bought back the contract. They had no interest in buying the company outright due to work that would have been involved in bringing their internal controls up to audit standards. YONG didn't like the fact that the distributor was gaining too much leverage with the company with 30% of sales. The price could be amortized over 5 years at their existing sales level. Sooner with expected increases in sales. Sounds like a good move on their part. Also by paying a "fair price", they didn't risk upsetting their other provincial distributors.

    The purchase of the coal mine is more difficult to evaluate as until they start sourcing their own coal, we won't know what the savings in COGS will be. KitCat made it sound like they will be exploring for coal. The "mine" or more accurately the property, is comprised of surface lignite coal which only requires digging it up and loading on trucks. They also wanted to have a long term secure supply in the event of unforseen developments. Also, they are currently purchasing, not coal, but humic acid from their supplier which they further refine into fulvic acid. They stated that converting the lignite coal into humic acid was a simple process that their new plant was designed to handle. Most of their competitors sell humic acid based not fulvic acid based products.

    This information/insight can't be found by putting their SEC filings under a microscope. Only by following conference calls, press releases and calls and visits to the company. Which the Global Gains advisors have been doing for close to 3 years. In the year since it has been upgraded from recommended as a part of a "basket of china stocks" to an individual formal recommendation, the GG YONG discussion board has had over 1,700 posts, and probably as many before it received it's own discussion board.

    I find it hard to believe that someone can come to a strong conclusion on the merits, or lack of, an investment in a smll cap in a foreign market on the basis of SEC documents alone.

  • Report this Comment On April 21, 2011, at 5:42 PM, MonsterFluff wrote:

    There is no free cash flow and expenditures are high and of very little value goes to shareholders. That is the forest. I see it

    The humic acid is $100-$300 per ton. This expense for the raw material that makes up the majority of the product is so cheap it makes no sense to buy 1) first just the rights to explore and produce for a substantial amount--$35 million--and 2) and second they will incur the expense of production and transport and processing. If they can do it for less than $100 per ton, then a few years down the road:

    1. If the market for product remains strong [and there is some question about the growth of the fulvic acid market]

    2.If they manage to be able to keep charging 4X as much for their the product as competitors

    then mining coal may pay off

    Right now at their production levels, this is a dubious and incomprehensible use of cash.

    CAGC and CGA sell fulvic acid products and if the revenues reported are accurate, sell it 4-5X cheaper than YONG--same product at comparable concentrations. How long do farmers want to pay that much for similar products?

    The customer list was another incomprehensible use of cash for a company that has little cash flow to spare. Wait for the contract to end.

    The margins were supposed to expand enough to make it a good investment.

    While gross did increase from 53% to 56% 2009-2010, operating margins contracted by 4% from 32% to 28% and that was mostly cost of selling. Buying the list was not helpful.

    Putting the 10Ks under a microscope is useful and with enough looking and asking questions, provide some information.

    Most of the ardent advocates of YONG have not taken the time to see what the company has done since 2008. Don't quote other opinions; the investor needs to go look for himself.

    My biggest objection is the enrichment of insiders at shareholder expense. Expanding to the US as a foreign entity has given them unlimited access to shares and they make free use of shares for cash. Check through all the filing 4s to see how the CEO has done. Shareholders have been diluted by 165% since 2008 through share issues, options, warrants & PIPEs.

    In spite of unbelievable revenue growth, CFFO has been negative until 2010 and capex spending has been high with questionable returns to the business. With the spending, free cash flow is still deeply in the red

    I am not short this company and have no interest in shorting or buying. I am continually amazed by the impassioned defense of all of these types of companies by shareholders even in the face of substantial abuse by the management

    Some of them may be OK but there is still a lot of questionable Chinese RTO product out there and finding the winners could be an expensive investment lesson. There are easier and more predictable ways to make money. So far very few of these RTOs are giving shareholders much to be happy about

  • Report this Comment On April 22, 2011, at 1:47 PM, Swede46 wrote:

    KitCat, you state that CGA and CAGE sell fulvic acid based products. I haven't researched CAGC but just now went back to CGA's web site to verify that throughout their discussion of the products they offer, no mention of fulvic acid is made. Only humic acid.Yongye doesn't advertise their product as a fertilizer, but as a product to enable plants to make better use of the nutrients in the soil, better draught resistance, promote bigger, earlier to market produce with higher yields. They even state it is to be used in conjunction with fertilizers at a lower application as Yongye's products help get maximum utilization of the nutrients in the soil. You state that Yongye sells their product for 4 times as much as "competing products". First, I don't see Yongye's products as competing, but complimenting. Also I don't know, and suspect you don't either, at the recommended usage levels, how the total cost per mu to the farmer using Yongye's products and a moderate level of fertilizer compares to someone only using one product such as CGA's. Of course you would also have to evaluate the cost on the basis of comparitive crop yield.

    Have you visited their web sites to get a better understanding of their operations and products?

    The subject of previous dilution has been beat to death in previous discussions. I'm going to give the company the benifit of doubt on eventually increasing shareholder value in spite of the dilution. It's well known, that for a China small cap company, obtaining financing from banks, altho preferable, is nearly impossible. They finally reached a point late last year that they were large enough-had enough assets-proven performance etc. to obtain a revolving line of credit with the China Ag. Bank. They have stated that they expect that they will not have to resort to going back to the capital markets after finally turning cash flow positive and the availability of the line of credit.

    You continue to condem them for wasteful use of cash in buying the "customer list" for 25 million. The list amounted to 30& of Yongye's sales, leaving the intangible value of eliminating the leverage the distributor had with the company out of consideration, we end up with an additional 18% margin, which was the distributors commission. 18% times 30% of sales is 5.4%. With expected sales this year of 300 million, thats an additional 16.2 million in additional margin. Looks like an efficient use of capitat to me.

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