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No. of Recommendations: 11
From the CEO of Yongye:

We did have pressure on working capital for the second quarter. Also, given that we have the bank loan and MS investment, our cash position was not tight and could afford to give some extra days to distributors to support sales. However, as we announced before, we do expect further cash flow improvement this year from last year when we reported positive $15m operating cash flow.

We expect to collect significant A/R in Q3 and Q4. We only need to collect from our 25 provincial-level distributors most of whom we have been dealing for a long time. We review the credit of every one of them individually and determine whether bad debt allowance is needed. For the past three years, we never have any bad debt. We feel very confident that we will collect all of our A/R.


A few days credit is an understatement

Accounts receivable is up 161% to $142.5 million this Q. It was $54.6 million last June

AR was $142.5 million on $154 million in revenue. That's a lot of cheddar extended to the mice.


Days sales outstanding is at 85 days this quarter up from 56 days last June. For those keeping score at home, this is an extra month extended to distributors

Another metric I use is receivables as a percentage of revenue. It is 92% this quarter up 50% over last year's 61%. For some reason, Yongye has decided to let receivables run wild to generate outsized revenue growth and move an abundance of inventory this Q. I am not clear why they felt the need to push so much inventory out the door this quarter at the expense of very poor working capital management. The only thing that comes to mind is there is less demand for product under their normal business arrangements.

Does the statement "we extended better terms to increase sales" sound anything like channel stuffing or is it just me ?


The selling expense mainly advertising and promotion increased 78% year-over-year and revenue increased 73%. In spite of better gross margins presumably as they switch to coal as raw material, the sales expense negated most of the gain.

A large portion of sales expense was accounted for as an accrued expense and helped offset the working capital debacle by $26 million. If they had been unable to push this expense into the next Q, CFFO would have been much worse. This account has increased by $16 million since December 2010 and June 2010.

So to recap, they increased DSO by 55% and AR by 161% to get the $154 million in revenue counted in Q2 2011. At the same time they pushed ad expense into next quarter to help the cash flow statement by as much as $10-$15 million. Next quarter's cash flow will be interesting--will a continued increase in this account allow a positive CFFO? Or will they be forced to pay the bill detracting from CFFO?

If YONG can collect most of AR and does not need to keep giving distributors better terms, then CFFO should return to positive numbers. It is going to need close scrutiny next Q. Right now it looks like they are pushing expenses out and recognizing revenue as soon as possible and something will have to happen in the back half. Expenses will have to be paid and bills collected. This quarter is a waiting to exhale moment

They now report production numbers and sales numbers in tons

They produced 4886 tons in Q2
They produced 7044 tons in Q1

Sold 13,278 tons Q2
Sold 17,631 tons Q1

Due to a backup of accumulated inventory from previous quarters, production output in this quarter was sufficient to meet product demand. As such, we improved inventory management and reduced inventory turnover days to 85 days for the three months ended June 30, 2011 compared to 100 days for the same period of 2010. We expect our production output will increase in the third quarter of 2011.


The inventory build in Q1 2010 did not seem to be a problem

Q1 2010 inventory/ revenue was 185% and the draw down in Q2 2010 was 46% inventory/revenue

In Q1 2011 the ratio was 150% but Yongye felt it necessary to decrease production and draw down revenue/inventory to 28%

Combine that with E-Z credit terms and increasing selling expenses and it suggests at least to me that demand may be softer?

The company was selling product to distributors for nearly $12,000 per ton this Q--the competition gets around $3,000-$4,000 as of December 2010. Is what looks like premium pricing making it harder to move product?

Finally more cash disappeared down a black hole called deposits to suppliers. It was $52 million in Q2 2011 and only $10 million in December 2010 as they started to ramp for the increased Q1 production of 7,044 tons. The explanation from the CEO is runaway inflation. The major raw material is lignite coal--virtually a waste product used to make humic acid and charcoal briguets. It is selling for and has sold for as low as $10 per ton. The sudden need to lock in 3 months worth of pricing is puzzling. The distributor of lignite is Wuchuan Shuntong Humic Acid Company whom they helped set up when they were incorporated and who was the recipient of $35 million for exploration rights for coal on 7,000 acres in 2010. I don't understand this relationship. Wuchuan is getting a lot of cash at shareholder expense and YONG does not have a lot to show for it. Unless YONG's creditworthiness is in question, why do they have to pay up front for raw materials especially from a company they have very close ties to?


The Company is required to pay deposits to the suppliers for the full amount of certain raw materials ordered. These raw materials primarily consist of lignite coal, chemical component materials and packing materials, and are expected to be delivered to the Company before the end of September 2011. The lignite coal, and most chemical component materials will be consumed in the production process at Yongye Fumin. As of June 30, 2011 and December 31, 2010, the deposits to suppliers for raw materials amounted to $52,657,243 and $10,845,221, respectively, and deposits to other service providers amounted to $137,119 and $61,074, respectively.


This record amount of prepaid expense comes during a quarter of declining production and an inventory glut. Why now and why so high? September will need to see high production and big sales coupled with better control over receivables to work out after paying $52 million for materials.

It may all work out by year's end after the growing season has concluded and be entirely above board. Even so, if it is legit, the misuse of cash and capital is unbelievable. The growth is incredible and with such horrendous management, it's hard to believe they can grow so fast. In 2007 revenue was $13 million. By the end of 2011, projections are $300-$350 million. That is an increase of 25-fold. Why isn't this company selling at the same premium as LULU or GMCR?
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No. of Recommendations: 3
CFO, not CEO.

Also, thanks for stealing my work and posting it as your own with no mention of your source for either the quote, the observation of AR, or the correct calculation of the ASP.

All that said, this is admittedly, a concern. Let's wait for Q4.

Tim
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No. of Recommendations: 1
Then the other shoe dropped: Account Receivable grew six fold from $26,110,813 to $142,506,734. That, to me, sounds like channel stuffing. To put it in context, the increase in AR was $116,395,921 vs. sales of $154,704,865. That means that 25% of sales was cash and the other 75% was credit. This was precisely what I was addressing in the GE thread. YONG didn't sell the merchandise, they loaned it to their customers.

http://boards.fool.com/china-watch-yong-earnings-29466965.as...

Denny Schlesinger
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No. of Recommendations: 5
Tim

I am sorry--I thought this was from a publicly available conference call and as such was not attributable to you

If it was a private communication you have my deepest apologies

As far as receivables go it was Denny who first mentioned it here and is where I saw it and became interested in the results

What is ASP?

All of the calculations are mine that are done on ongoing spreadsheets I keep updated. They and the commentary are original work

I had thought about putting this at MDP in response to your initial post but as a courtesy to your subscribers I did not. They have requested I keep my research to myself.

i realize I am not completely welcome at MDP because I have often had contrarian opinions of your recommendations. Mostly you have been tolerant. Thanks for that I appreciate it.
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No. of Recommendations: 2
LKK the misunderstanding between you and Tim aside, I am greatly concerned that MDP has asked you not to comment on the MDP boards about an MDP stock pick.

Your contrarian views are most welcome, conformation bias is the enemy of us all.


Did I read that right or is this another misunderstanding ?



James
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No. of Recommendations: 12
MmBop

you have got to be kidding. You are talking about the most neurotically compulsive researcher at the Fool. You need a few more laps before you get to squawk at the Kitty Kat, boy.

RWS
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No. of Recommendations: 1
I'm in agreement with James. Most of the folks I know at MDP would welcome feedback on any of the MDP stocks regardless if it is contrary or in addition to anything else.

And, that goes double for any work you are kind enough to share on Chinese companies! Many thanks.

Bill
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No. of Recommendations: 6
It is not TMF who asked me not to comment. They have been tolerant of my dislike for Chinese RTOs. It was several of the subscribers who objected to what no doubt seems like unfair short-sightnedness regarding RTOs.

After posting about the three ag companies--CGA, CAGC and YONG--I had a couple of people ask me to stop. I have never had an advisor tell me to quit.

In order to avoid stirring up a hornet's nest all over again, I have limited my comments there to very short observations. I knew a lengthy write up would just cause trouble. It was entirely my decision

>^..^<
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No. of Recommendations: 5
After posting about the three ag companies--CGA, CAGC and YONG--I had a couple of people ask me to stop.

I admit it may be a personal shortcoming of mine to see no value in paying TMF or anyone else for investing advise.

That being said, for someone who is willing to pay for one person's opinion to then actually attempt to silence the free opinion of someone else is IMO (expletive delete) behavior.

Is it any wonder they come flocking from behind the walled garden seeking answers every time a MF newsletter pick blows up.

B
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No. of Recommendations: 7
Well I and other MDP’ers welcome your comments long and short. If people are put off by what you are saying maybe they shouldn’t read your comments. Others like myself shouldn’t be deprived of your view contrarian or otherwise. MDP and the Motley Fool should be a place for open-minded investors and not a place where people are afraid to speak their mind. I have seen too many good solid investing minds chased from the MDP boards in the years I have been a member because they dare to speak their minds.

James, Long Free Speech
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No. of Recommendations: 2
On the other hand, those of us who are not part of MDP benefit greatly by seeing such analytical messages on the public boards, so from a purely selfish view I'm quite happy to have them out here! 8-)
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No. of Recommendations: 3
MmBop

you have got to be kidding. You are talking about the most neurotically compulsive researcher at the Fool. You need a few more laps before you get to squawk at the Kitty Kat, boy.

RWS


although I still object to the tone and content of MmBop's post, my response was asinine and out of character for this tremendous board. I apologize to all the readers of this board.

Why isn't there an edit/delete key for your own posts?

Rog
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No. of Recommendations: 4
although I still object to the tone and content of MmBop's post, my response was asinine and out of character for this tremendous board. I apologize to all the readers of this board.


If I had to assign the a-word to the Bop post or to yours, would choose Bop, and it is ironic that your apology comes first.

Regards, DTM
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No. of Recommendations: 1
"Why isn't this company selling at the same premium as LULU or GMCR?"

Well, GMCR is under investigation by the SEC for its accounting practices. Maybe YONG should fake its numbers and make those receivables disappear...

If you can show me a small cap China stock that trades at 40x forward P/E, I'll be impressed. If not, this closing comment is just insipid.
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If I had to assign the a-word to the Bop post or to yours, would choose Bop, and it is ironic that your apology comes first.

Disagree.

Tim
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No. of Recommendations: 36
LeKitKat,

First of all I would like to congratulate you for sharing your research and hard work. There are not many, with exception of few, who share such detailed research and analysis both in paid and non-paid boards. Personally I have not made any buy or sell decisions based on your boards. Yet, I have read most, if not all of your posts, just for the rigor you bring on your effort and in your analysis.

I think there are many who have read your work in awe and enjoyed in silence. We may not have expressed our thanks often enough, though you richly deserve them. Please do not limit yourself because few folks have trouble seeing another view point. If only they can open their eyes, every time they buy a stock someone had dis-agreed with their view point and sold them.
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No. of Recommendations: 1
Thanks CM

I am especially pleased my company posts are not used as a buy or sell. That is the last thing I need is guilt over giving bad advice on what to buy or sell. It is mainly intended to seek pros and cons of a particular name and never intended to urge a stock buy on anyone. What I always hope for is more ideas to look at that the initial post brings about.

Insipid? Not so much

More rhetorical ironic.
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No. of Recommendations: 14
It's strange to me that there are people who wouldn't value an experienced, informed opinion, devil's advocate or otherwise. I find LeKitKat's posts all very valuable and informative, and I read them all. I learn a lot about the mechanics of various businesses working through her posts, and I look forward to seeing more of them.

When I post a company writeup it's because I'm working up a company that I'd either like to invest in or have invested in, and I'm looking for that person to call me an idiot in an informed way, showing me the errors in my reasoning. That's really, really valuable.

I would never shun the guy who called me an idiot and showed me why in a rational way.


Mike
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No. of Recommendations: 1
Maybe it's the kind of person who buys stocks on expert advice but does not want to hear contrary opinion because that causes cognitive dissonance that ruins a good night's sleep. If that person latches on to a successful advisor he can achieve good results. Many years ago I invested based on Louis Navellier's MPT Review and did rather well. When I tried to "improve" on his recommendations, I did less well.

Multiple opinions only works for "self directed" investors.

Denny (Too many cooks spoil the broth) Schlesinger


BTW, you might want to read my latest essay The Market as a Fitness Landscape

http://softwaretimes.com/files/the+market+as+a+fitness+la.ht...
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No. of Recommendations: 9
I would never shun the guy who called me an idiot and showed me why in a rational way.

OOHHH shut it, what are you a grown up?

You need to get in touch with your inner troll.

In all seriousness we are dealing with a very real psychological issue that rears its ugly head among investors and ruins returns. Buyers want what buyers want. They want a Merc C class AMG, they want a McMansion, they want a $5 cup of coffee every day . . . Get in the way of their wants and they get defensive and act as if you are treating them poorly or as some uninformed moron. Just ask them, they have done their research and now they want what they want. Throw in irrational respect of an expert and now you are attacking not only them but those that they hold in high regard.

Seriously, they interpret the criticism as a two fold attack on their adulthood and intelligence; we attacked what they decided they wanted and their ability to make a judgement about what experts to trust. To top it off we attacked THEIR expert.

It does not help that we live in a society where A and B grades are handed out not earned and every participant is a winner and gets a trophy at the end of the season. And that is probably a rant for another day and another board.

jack
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No. of Recommendations: 9
I am especially pleased my company posts are not used as a buy or sell.

minor comment, but Kitkat I've used your posts all the time as a basis for a buy and sell decision, and I've used posts from canucks, cryinglot, CM, X, MDC, BGM, you name it. I use VIC, I use Barrons, I use WSJ, I use blogs, I use Value Line, I use anything that can be of help. I also try to pass along ideas in turn, to some limited degree.
In essence, I don't care who gives me the idea - if it comes to me, and I decide to act on it for whatever reason - it is therefore my sole responsibility. Period.

I'm following the Peter Lynch model, after all, who talked about this very topic.

After posting about the three ag companies--CGA, CAGC and YONG--I had a couple of people ask me to stop.

Honestly? Honestly really? Wow, what amateurs!
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No. of Recommendations: 2
final comment

I don't know who I'm more embarrassed for, your response or the two pitiful losers who rec'd your post.
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No. of Recommendations: 3
I don't know who I'm more embarrassed for, your response or the two pitiful losers who rec'd your post.

Usually authors take on more responsability than reviewers, so that would be one thing. And the charitable interpretation for the two recs is that that 'Recommend this Post' link is quite close to 'Report this Post'.

dtm
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No. of Recommendations: 3
LeKitKat,

I appreciate your writeups. I'm just waiting for one that's within my circle of competence so I can use it and give comments!
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No. of Recommendations: 2
"After posting about the three ag companies--CGA, CAGC and YONG--I had a couple of people ask me to stop."

Love it. Most encouraging quote I've seen on the boards in a while. The prevalence of this kind of dogmatic attitude is just another reason that there will never be an "efficient market." Good news... since it would be awfully hard to make strong returns if the market were efficient.

I'd encourage the folks who sent those emails... or those who think similarly... to pick up some of the classics and do some reading on investor temperament. It would likely serve them well.
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No. of Recommendations: 0
"After posting about the three ag companies--CGA, CAGC and YONG--I had a couple of people ask me to stop."

I closed out my CGA puts today. Nasty loss! Losing is NEVER efficient! ;)

BTW, they say that in theory selling naked puts is the same as selling covered calls. Now I'm finding better deals buying the stock and selling covered calls.

Denny Schlesinger
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