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No. of Recommendations: 14
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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No. of Recommendations: 10
Still not up to the Q&A portion of the call, but it dawned on me why the goodwill was written off. I should have realized it right away.

The goodwill impairment test is essentially a discounted cash flow analysis which goes out 5 to 10 years of forecasts/projections (at least Step 1 is). I also suspect that management had to give the Board's special committee a DCF which goes out several years for their review of the go private offer.

The only way for the DCF to come close to supporting a $6.60 per share value would be to drastically reduce future years' projections. I'm sure they want the DCF given to the Board to support the $6.60 price and I'm sure they want the DCF for goodwill testing given to the Board to be consistent with the one the Special Committee is reviewing. Otherwise the Board members would naturally ask why the forecasts for goodwill testing are much higher than the ones used for the go private. Therefore, they had to reduce projections for goodwill testing which resulted in them failing Step 1 in order to have any shot at supporting the go private valuation.

Call it a conspiracy theory if you will, but that is what I'm thinking.
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No. of Recommendations: 1
There's no question in my mind that they are sandbagging in every possible way to justify the $6.60 offer price. That's why they withdrew their guidance, among other odd acts. This was all entirely predictable - every Chinese company that gets an offer suddenly sees revenue and earnings drop, and they start to play up the volatility and risks of the business (which Yongye is doing by extending credit terms, reducing revenue recognition, and so on).

This was the first quarter in years where I didn't bother to listen to the Q&A. But I am curious, so please fill us in when you can!
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No. of Recommendations: 6
Nothing too exiting to report from the call. The Q&A started with a couple questions about the go-private to which they replied that they could not comment on anything regarding the offer, including possible timing. One shareholder didn't so much ask a question as used the opportunity to comment how unfair the offer price is.

Subsequent questions got pretty generic typical answers. I asked about whether the increased deposits were an indication that they are gearing up for big new product sales in Q1 but Sam replied simply that it was a move to lock in supply of materials. I also asked about the goodwill writeoff and he commented that it had a lot to do with the low stock price through Sept 30th. It is not unusual to factor in the stock price to your Step 1 impairment test, but given how out of whack the stock price has been with any other valuation metric, I would have hoped they would have allocated a very small percentage to it. Apparently not, I would now guess they probably allocated something like 50/50 to the stock price and the DCF. That could be consistent with prior year's analysis, but we'll never know for sure.

I agree that they probably moved forward any expense and non-expense spending they could into Q3 to help support a low value of the company. The inventory, deposits, and selling expenses really jump out at me as areas where they likely did this.

It's safe to say that 2013 numbers and comps should really look amazing given these factors as well as the revenue recognition impact. It would be great to be an owner of YONG at that time.

That sure would be great...
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No. of Recommendations: 1
It's safe to say that 2013 numbers and comps should really look amazing given these factors as well as the revenue recognition impact. It would be great to be an owner of YONG at that time.

mekong22,

If this deal were to take 6+ months to go through (as I've read), wouldn't we be seeing those revised numbers before everything is finalized?

And if so, do they still have plenty of other gimmicks left to make the next quarter's results look bad? And if they don't, does that mean that the deal will likely be finalized within the next 3 months?

as always, i am full of carp
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No. of Recommendations: 3
Because the next quarter is year end, they have until mid March to file their next report. Therefore, there is actually more than 4 months between now and then.

However, today's earnings release does say:

The Company intends to update the market in early January 2013 on collections as of year-end 2012.

I really have no idea if the special committee could accept an offer in the next two months. It's certainly possible. I would hope that they would wait for Q4 to be finalized, but who knows. If they require a shareholder vote, there's no way that would happen prior to the January update.

I suspect that a lot of payments from the slower customers for Q3 shipments will probably not be paid until Q1 2013 so they still wouldn't show up in the January update (although $ for many Q2 shipments to these types of customers would hopefully have been received by then).
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No. of Recommendations: 0
If this deal were to take 6+ months to go through (as I've read), wouldn't we be seeing those revised numbers before everything is finalized?

to be clear, yes, they would continue to file all SEC reporting for year end in March, and for Quarters, in May and potentially August and beyond, depending how long the process takes.

Even if the Sp Committee accepts an offer and if shareholders vote in favor, there is likely to be a short period afterwards (probably just a few days/weeks) where the company's delisting is finalized, where they would still be required to file 10-K's and 10-Q's and any other required docs within SEC deadlines until it's official.
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No. of Recommendations: 4
Hi Mekong,

Thanks for the update on the quarterly call.

Let's assume for a moment that there is no go-private offer, is it correct to say that EPS & EPS growth are two of the metrics used to trigger the extra shares to MS, which in turn dilutes existing shareholders in 2013/2014 ?

So then is it correct that YONG management has 3 to 4 tools to squeeze shareholders to take 6.60.
(1) sandbag the expenses, dragging down EPS & EPS growth to triger a (i)lower P/E multiple on (ii)lower earnings ( double jeporady already it seems)
(2) Ensure future triggering of the MS payout & dilute the shares and so reduce the Net Present Value of existing shares further ?
(3) Continue to accumulate unrecognized earnings to further reduce reported earnings (in effect maximising the payment cycle)

This accounting manipulation cannot pushout the reported profitability of YONG forever but in the next 6 months it looks to me like our tools are very limited and theirs are very strong or have I missed something ?

I don't see how the 'real' earnings power of the comapny would force it's way through the accounting manouevers until Q3/Q4 of 2013 at the earliest, which will be way past a takeover date.

Your thoughs on this appreciated.
James
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No. of Recommendations: 8
Hi whoamifoolin

So then is it correct that YONG management has 3 to 4 tools to squeeze shareholders to take 6.60.

(1) sandbag the expenses, dragging down EPS & EPS growth to trigger a (i)lower P/E multiple on (ii)lower earnings ( double jeopardy already it seems)


They could do some more of this. Given that they want to ultimately own the company, they don't want to do anything to harm the company in the long term, so hopefully that provides a little bit of a check on how far they can go pushing up spending.

(2) Ensure future triggering of the MS payout & dilute the shares and so reduce the Net Present Value of existing shares further ?

I guess they could, but I would put the likelihood of the company intentionally doing this as very low

(3) Continue to accumulate unrecognized earnings to further reduce reported earnings (in effect maximising the payment cycle)

Given that the auditors will complete their audit before Q4 is released, I think they would prevent the company from doing anything too outrageous when it comes to not recording revenue that they should have.


All of this may be a moot point given that I would be surprised if the Special Committee doesn't make a decision on the offer before Q4 is announced in March. I would guess that they want to make a decision before the end of December as I doubt the Special Committee members want to be dealing with this for an extended number of months. They will get their input from Houlihan and either the numbers work in their minds or they don't. I find it hard to believe that they could receive a fairness opinion at $6.60 but who knows.

My gut tells me that the offer will be increased a little (hopefully a few dollars) and then the Special Committee will accept sometime in December. If they require a shareholder vote the proxy would probably go out in January and the votes would come in during February and March. The vote could be interesting given how vocal many minority shareholders have been and how many of us have been accumulating even more shares since the offer was announced. If the shareholders vote against the offer, would Wu and MS increase the offer enough to try again?

If not, one of the risks to shareholders is how pissed will Wu be that he didn't get the significant easy payday here. How will it impact his running of the company going forward? Would he possibly leave the company, which would automatically trigger a default on the MS Preferred deal? Will a class action suit against the company get any shareholders any additional payout?

I'm actually somewhat giddy with curiosity wondering how this will all play out.
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No. of Recommendations: 1
wow, we're down below $5.30 now. That's 25% upside at $6.60 with the possibility of an increased offer. FB didn't get as cheap as I hoped (yet, I'm still hoping for better prices) so I put a little more dry powder to use on YONG.
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No. of Recommendations: 1
I also took a bit of a gamble this morning by buying some Jan 18th $6 calls for 10 cents.

My thinking is if no offer is accepted by late January, I will lose 100% of my investment. If the special committee accepts the $6.60 offer, the stock price will rise, but not all the way to $6.60 initially, maybe to somewhere between $6.20-$6.30 and I could make 100-200% in a few weeks (of course it could only rise to $6 in which case I would lose the investment but I'm betting that I would at least break even.

Lastly, they could accept a higher offer (or even just receive a higher offer) in which case, I'm could make well over 1,000% or 2,000% in just a few weeks if the offer is $8 or so. I'm optimistic that the offer will be increased, but by how much and when, who knows. I'm guessing that the company wants to have this resolved by year end.

Of course the original $6.60 could get flat out rejected and the stock price could drop, in which I would happily celebrate losing the small amount I invested in these calls as I expect that scenario would be best for my large long YONG position.

I did this in my Roth IRA to avoid tax on short term gains (possibly at a new higher 2013 tax rate...eek) if it works out. The downside is I wouldn't get any tax benefit if I lose on the investment.

Just to reiterate, there is a good chance of losing 100% invested in these calls so best to avoid if this is beyond your risk tolerance.
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No. of Recommendations: 1
and just like that $6.60 alone is now 30% upside from current prices
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No. of Recommendations: 0
agree!
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Hi Mekong, thanks for the further good scenario analysis on potential outcomes & dates above. I have been considering increasing my position in Yong but I already have a > 5% portion of my portfolio in small cap China so I am being cautious. I probbaly will buy some further stock shortly if it reamins below 5.00 but I will stay away from options as I don't have a good map of the events & times leading uo to a buyout. Clearly you understand this schedule of events much better with your acounting background. I need to go back and look at WWIN and study where that is now relative to the offer date. James
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