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Earnings are out

http://finance.yahoo.com/news/yongye-international-announces...

I'm still getting my thoughts together and will listed to the conference call this morning.

Like last quarterly, you can't really conclude much of anything by looking at the reported revenue and income dollars compared to last year since there are significant sales where they are not recognizing the revenue or income until the customer pays.

Shipments in terms of quantities are up 20% in Q3 2012 compared to Q3 2011. Management says they still expect shipments to be up 30% for the full year vs 2011. At the same time, gross margins are rising vs last year. They are doing a good job of scaling R&D expenses and G&A expense (which actually went down vs last year despite much higher shipments).

However, selling expenses are way up, about 45% for the quarter. They say it's due to more advertising, promotion, and seminar expenses but I'll be curious to look at this one closer when the 10-Q comes out. The other negative item is their comment that the payment cycle has been even longer in 2012 than in prior years. Surprising given that I was under the impression that the credit environment is much improved in China in 2012 vs 2011.

The strangest item I see is that they took a charge to write off all of their good will (approx $11m) in Q3. I've performed and reviewed many, many goodwill impairment tests and I'm kind of shocked that they didn't pass Step 1 of the test, given that business continues to grow like it has. They would have had to significantly dial back their projections for future years in order to suddenly fail Step 1 of the impairment test. However, once they get to the point where Step 1 is failed, it doesn't surprise me at all that Step 2 would tell them to write down everything given how much their net assets have grown from the time the goodwill was initially recorded. It does make me suspect their motives that they determined that they failed Step 1.

The other thing that jumps out at me as unexpected is that Deposits to Suppliers are WAY up at almost $27m compared to about $5m at this time last year. They did say that part of the reason that gross margin improved is because they are getting better prices on raw materials, so maybe this is a move to lock in those low prices, but this is quite a leap. Perhaps this is an indication that sales of the new products that are sold primarily in Q1 are expected to grow significantly and they are gearing up for a very large Q1 vs prior years? I may try to ask about this on the earnings call if I can get through. If any of you get through before me, please feel free to ask them why it is up so much.

Will have updated comments either after the call or once the 10-Q is released.

mekong
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