This morning’s Seeking Alpha article by Ian Bezek outlined various issues contained in YONG’s 2010 10-K. This is one of many articles that have questioned the legitimacy of YONG’s business.
YONG is a company we had been quite cautious of in the past. The company had negative cash flow, raised money at valuations levels we deemed inappropriate, and was not fully disclosing information pertaining to its independently-owned Yongye branded stores (which they now have done). We recently initiated our Stage 1 due diligence process on the company, which involves pulling the SAIC filings. To our surprise, for 2008 and 2009, SAIC matched SAT matched SEC. Currently, we are attempting to verify that these filings are the originals and not amended reports. The company has told us that they are the originals. Interestingly, to our knowledge, YONG hit pieces fail to mention anything about SAIC/SAT filings matching SEC filings–something we take very seriously and use a starting point in our ChinaHybrid analysis. However, we will be open to the existence of contradictory information. Show us your cards who ever you are. We are willing to work with anyone in the quest for the truth.
YONG has a formidable short position. Now that it looks like SAIC/SAT/SEC filings may be in order, the bar for identifying foul play has been raised and increases the risk of a net short position. Without the use of PRC filings, hit pieces will have to focus on other issues such normal business risks that are similarly inherent with any company, as well as topics of lax disclosure practices. Overall, we would like to see an improved disclosure policy in the ChinaHybrid space as well.
For now, we will attempt to verify that our SAIC filings are originals. We will also begin the extensive on-the-ground due diligence that is now required before making definitive conclusions on companies in the Chinese RTO universe. In the meantime, invest at your own caution and stay tuned for updates. We are still long YONG with a partially hedged position using Puts. ( We have reduced our hedge at current prices).
GeoInvesting followers may have noticed that we have recently issued negative pieces on a few stocks; and there will more to come in an effort to purify the space. However, readers need to keep in mind that we are also searching for solid firms that will rise once (if) the ChinaHybrid space regains some of its lost glory.”We are cautiously optimistic that YONG can be one of them if on-the-ground DD concurs with our preliminary SAIC/SAT findings.”
Leo
My biggest concern with YONG is the relationship between Yongye International and Yongye Group. It is not clear to me YONG (vs Yongye Group) actually owns the patent for Shengmingsu. From my research I believe the sales and revenue are there, but I worry YONG is just being used to build Yongye Group. Perhaps I am just getting too paranoid with the wave of bad news across the sector.
EriKarju
Hi Leo,
Yongye International does not own Shengmingshu patent, it own’s the company (well, 95% of it), Yongye NongFeng, that has the patent/license rights. See
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5877473-978762-981172&type=sect&TabIndex=2&companyid=745346&ppu=%252fdefault.aspx%253fsym%253dYONG
If the contract above does not include outright sale of the patent to Yongye NongFeng you will have hard time finding it in China PTO’s databases. Licenses, even exclusive ones, are not necessarily reported to authorities. The Chinese law does not compel the reporting of licenses. It is the same practice as in here (USA) and Great Britain.
About Yongye Group. That puzzled me, also, for a long time. According to Yongye International, Yongye Group is not a legal entity, what ever that is worth. It seems to me that the name Yongye Group is used by Yongye NongFeng (and possibly by Inner Mongolia Yongye) in a manner similar to what we call a franchise. It gets plastered on store displays, stores get painted by Group colors and distributors use it on their marketing etc… A sort of poor man’s franchise.
And, yes Yongye NongFeng is used to fund (or build) Inner Mongolia Yongye – the JCV contract stipulates that the latter gets cut from NongFeng’s profits corresponding to it’s ownership share (5%). And that share seems to be un-dilutable. All legal and on the open, thou.
But, do not take my take on these matters as gospel.
EriKarju
Hi Patric,
Actually Maj is responding to the beginning part of Ian’s article (trustworthiness of reported revenues) in indirect way. If SEC filings equal SAIC(SAT) filings (which require certificates that taxes are paid accordingly, among other things) then YONG is
1. Paying income taxes for income Ian makes suspect – i.e. non-existent
2. If YONG is paying also VAT then they paid that based on their stated revenue in SAIC (=SEC) filing.
Put 1 and 2 together and assume, still, a possibility of sizable fraud. Would be rather peculiar one, because the perpetrators would soon be going to poorhouse by paying taxes on non-existent income/sales especially because the chairman (the minority owner of Yongye NongFeng aka YONG’s operating subsidiary in CHINA) gets his cut mainly via percentage of profits (5%), not via stock value appreciation.
The above, of course, assumes that taxes have been paid – but I really don’t see how they could avoid paying taxes without massive collaborating corruption in Inner Mongolia. And then there is the possibility that I got it all wrong. The latter happens disturbingly often.
Patrick
I’m long YONG and have a significant position, but your post above is a non-sequiter: Ian’s “hit piece” had nothing to do with SAIC/SAT filings, but that is your sole response. Why not use your due diligence process and considerable expertise to address some of the points in Ian’s most recent post? I realize you may plan to get to that later, but starting with a non-response seems like an odd choice.
Thanks.
GeoTeam
Patrick, Erik’s comments echo my thoughts. I am also saying that Ian would need a very strong case against YONG if SAIC=SAT=SEC (which our info currently reveals). How many successful hit pieces have succeeded with this linear relationship? Can YONG still be a fraud if filings match? Well, if they raised enough money to fake filings, pay taxes and come out ahead.. I guess so. Can they still be stealing from the pot.. I guess so (TXIC).
That being said.. we are putting the YONG DD in motion as we speak so we can address Ian’s as well as other investors’ points. But realize that it will take time. Have you considered holding put options against your long position, as I have done?
Thanks
EriKarju
Maj,
does matching SAIC/SAT filings also mean that the company has made it’s VAT payments? That is my understanding of the SAT angle here. SAT is responsible for collecting VAT.
Kari
GeoTeam
Well. First let me say that not all companies pay VAT. However if they do then VAT is based on the revenue that the company has reported to the SAT (and also SAIC for an FIE), whether true or not. The key question for us is has the company reported the correct revenue numbers to the SAT (which will be the same revenue in the SAIC for an FIE). If not, they may be cheating on VAT. Now, matching filings only means that the company performed the joint inspection process, but it does not always mean that the numbers are correct. We can only say that the company VAT payment was based on numbers in filings. We can not say that matching filings means that the company paid the right amount of VAT.
Maj
poeticJ
I think you guys place too much weight on SAIC #s. See Benjamin Wey’s take (and many others). I’ve talked to many people who say they aren’t worthless but often an afterthought & can have many reasons for big differences. IOW, many clean companies are mis-matched, and I wouldn’t be surpsied (but don’t know) if there are frauds that intentionally match their SAIC #s to SEC #s.
GeoTeam
Poet,
Thanks for your comment.
We place our emphasis on SAIC and SAT. Ben Wey will not be my reference for research on this topic. I already addressed the weakness of his argument months ago. If anything, Ben Wey shows that SAIC does view SAT tax payments. I have provided legal evidence as well as plenty of proof (https://geoinvesting.com/?p=1021) that SAIC and SAT relationship holds for FIE. Say what you want.. numbers in SAIC filings for FIE are audited and also same numbers provided to the SAT.. Period. Tomorrow I will show how it holds for a VIE like CBEH. Please let me know the people you have talked to who have given you reason to doubt the validity of SAIC filings. I am always willing to listen.
Now I do agree that as we move forward, companies will find ways to circumvent the SAIC/SAT process. That is why I am pulling as many filings as I can now. Also, in no way am I assuming that SAIC=SEC always means no fraud. But I am saying that SAIC does not equal SEC for FIE equates to high chance of fraud.
How do you know that the companies you own are clean? Thanks..