Summary
An analysis of the SEC filings of Yongye International, Inc (YONG) shows that the company and its joint-venture partner could not have produced, and therefore sold, the reported plant product tonnages given the company's stated manufacturing capacity and shipments. The analysis is organized in five sections - a brief overview of Yongye's business, an assessment of Yongye's disclosed production capacity, proof that shipments exceed production, and two sections detailing flows of product in 2008 and in the second quarter of 2010.
Section 1. Brief overview of Yongye's sales and manufacturing
Yongye International manufactures and sells two principal products - a plant product and an animal product (page 3, 10K filed 2011/03/14). Table 1 details Yongye's reported sales by product line in dollars and (metric) tonnage in the past three years.
Table 1. Sales by Product Line
Plant | Animal | Total Sales | ||||
Year | USD Sales | Tons | USD Sales | Tons | USD Total | Tons Total |
2008 | $44,842,062 | 5,100 | $3,250,209 | 6 | $48,092,271 | 5,106 |
2009 | $91,172,988 | 8,502 | $6,919,854 | 1,175 | $98,092,842 | 9,677 |
2010 | $207,514,478 | 18,800 | $6,577,238 | 1,115 | $214,091,716 | 19,915 |
Sources: pages 14, 19, 10K/A filed 2009/10/20; pages 33, 36, 10K filed 2010/03/15; page 61, 10K filed 2011/03/14
The company's predecessor, Inner Mongolia Yongye, began recording sales of its first plant product in 2005 (page 15, Prospectus filed 2009/06/11). Yongye International 's operating entity, Yongye Nongfeng, was established on January 4, 2008 as a joint venture with Inner Mongolia Yongye (page 21, 10K filed 2011/03/14). From January 2008 until June 1, 2009, the company's operating entity did not manufacture its products - it purchased the finished goods exclusively from Inner Mongolia Yongye through an outsourcing contract (page 12, 10K filed 2011/03/15). Since July 2009, the company's operating entity has been manufacturing its own products (page F-26, 10K filed 2011/03/15).
Section 2. Plant product manufacturing capacity
From January 2008 until September 2008, manufacturing was running at 2,000 TPA (tons-per-annum) capacity (page 12, 10K filed 2011/03/15). In October 2008 the company opened a new production facility which added 8,000 tons-per-annum capacity. This capacity was not available immediately - it was initially put into testing, was below 60% utilization as of mid November 2008, and did not reach full production until late in the first quarter of 2009 (page F-8, 10K filed 3/24/2009). In early July 2010, the company announced that by "streamlining the production process" it had increased the annual production capacity of its existing plant product line from 10,000 tons to 15,000 tons. In the same month, the company set up a subsidiary to add 20,000 tons of plant product annual capacity - the construction of the new factory was only completed later in the December 2010 quarter (page 52, 10K filed 2011/03/14). As as of the end of September 2010, "official operation" had not started (page 18, 10Q filed 2010/11/15). According to the company's strategic plan, the company's production facilities are highly automated and cost effective, implying linearity in quarterly production at full utilization.
The above disclosures translate into the following quarterly manufacturing schedule for the plant product, assuming full utilization:
Table 2. Manufacturing capacity for plant product at full utilization
Period TPA Tons Period TPA Tons Period TPA Tons Q1 2008 2,000 500 Q1 2009 8,400 2,100 Q1 2010 10,000 2,500 Q2 2008 2,000 500 Q2 2009 10,000 2,500 Q2 2010 10,000 2,500 Q3 2008 2,000 500 Q3 2009 10,000 2,500 Q3 2010 15,000 3,750 Q4 2008 6,800 1,700 Q4 2009 10,000 2,500 Q4 2010 35,000 8,750 Year 2008 3,200 Year 2009 9,600 Year 2010 17,500
Note: Q4 2008 and Q1 2009 numbers assume 60% and 80% average utilization of the 8,000 TPA facility in the quarter, respectively. Actual manufacturing till Q2 of 2009 was performed by Inner Mongolia Yongye (see Section 1).
Section 3. Plant product shipments and production
Table 3 shows the schedule of plant product tonnage shipments and production at full capacity in years 2008, 2009, and the first three quarters of 2010, according to Yongye's disclosures. Even if Yongye's factories were running at full utilization at all times, stated shipments of plant product would have exceeded stated production in 2008 by about 2,000 tons and in the first three quarters of 2010 by about 8,000 tons. Cumulatively, plant product shipments exceeded production by 8,887 tons over the entire period from the beginning of 2008 to the end of Q3 2010.
The cumulative excess shipments are physically possible only if Inner Mongolia Yongye's finished-goods inventories at 2007 year end contained at least 8,887 tons of plant product. However, per Section 1, Inner Mongolia Yongye's actual operations only started in 2005, and plant product manufacturing capacity at 2007 year end was still just 2,000 tons-per-annum, so plant product inventory could not have exceeded 6,000 {3 x 2,000} tons at 2007 year end.
As a result, there is a "deficit," or missing plant product, of at least 2,887 tons as of the end of Q3 2010, and that's even assuming no plant product shipments in years prior to 2008 and no finished inventory at Q3 2010 end. Therefore, the company's stated plant product shipment and capacity schedules cannot be reconciled.
Table 3. Full-utilization manufacturing capacity and shipments for plant product (in tons)
Period | Shipments | Capacity | Over/Under | Cumulative |
Year 2008 | 5,100 | 3,200 | (1,900) | (1,900) |
Year 2009 | 8,502 | 9,600 | 1,098 | (802) |
Q1 2010 | 2,141 | 2,500 | 359 | (443) |
Q2 2010 | 8,342 | 2,500 | (5,842) | (6,285) |
Q3 2010 | 6,352 | 3,750 | (2,602) | (8,887) |
Total | 30,437 | 21,550 | (8,887) |
Sources: Table 1, Table 2, Shipments for Q1-Q3 2010 from page 23, 10Q filed 2010/05/12; page 19, 10Q filed 2010/08/11; page 21, 10Q filed 2010/11/15;
Sections 4 and 5 cover two specific periods of excessive plant product shipments relative to capacity by addressing, in more detail, the required changes between beginning and ending inventories.
Section 4. 2008 flow of plant product
Inner Mongolia Yongye produced no more than 3,200 tons of plant product in year 2008 per Table 2, yet Yongye Nongfeng shipped 5,100 tons of plant product in the year per Table 1. This is possible only if the beginning finished-goods inventory at Inner Mongolia Yongye exceeded the ending finished-goods inventory at Yongye Nongfeng by 1,900 tons of plant product.
However, as Table 4 shows, beginning finished-goods inventory was not higher, but rather about $16 million lower, than ending finished-goods inventory. The precise split of plant and animal product in inventories at 2008 year end has not been disclosed, but even if the ending inventory contained two years worth of animal product sales at zero gross margin, Table 1 shows that the animal product would have accounted for just $14 million {$6,919,854 + $6,577,238} of the finished-goods inventory, leaving over $6 million for the plant product, which is still higher, rather than lower, than the total beginning finished-goods inventory of about $4 million. Therefore, 2008 reported plant product capacity, shipments, and inventories cannot be reconciled.
Table 4. Product (plant and animal) inventory at year end
2008 | 2007 | |
Inner Mongolia Yongye | ||
Work in progress | $5,579,569 | $4,969,350 |
Finished goods | $0 | $4,302,950 |
Yongye Nongfeng | ||
Work in progress | $0 | $0 |
Finished goods | $20,664,930 | $0 |
Consolidated | ||
Work in progress | $5,579,569 | $4,969,350 |
Finished goods | $20,664,930 | $4,302,950 |
Sources: page 15, 8K/A filed 2010/01/04; page F-15, 10K/A filed 2009/10/20
Section 5. Q2 2010 flow of plant product
Yongye produced no more than 2,500 tons of plant product in Q2 2010 per Table 2, yet it shipped 8,342 tons of plant product per Table 5. This is possible only if the beginning finished-goods inventory exceeded the ending finished-goods inventory by 5,842 tons of plant product.
Since the overall gross margin has been 50%-60% (per Table 6) and the animal product has only slightly lower gross margin than the plant product (page 10, 8K/A filed 2010/01/04), cost per ton for the plant product in Q2 2010 must have been about $5,000 (45% of about $11,000 from Table 5). Therefore, the change in finished-goods plant inventory should have been about $29 million {5,842 x $5,000}. Yet Table 6 shows that the difference in finished-goods (plant and animal) inventory is only about $3 million {$39,059,951 - $35,792,520}.
The precise split of plant and animal product in inventories has not been disclosed, but even if the Q2 2010 ending inventory contained two years worth of animal product sales at 40% gross margin, table 1 shows that the animal product would have accounted for just $8 million {(1-40%) x ($6,919,854+$6,577,238)} of the finished-goods inventory, leaving about $28 million for the plant product, or, at most $11 million change from the $39 million beginning inventory. A change of less than $11 million is more than $18 million short of the required $29 million change. Therefore, Q2 2010 reported plant product capacity, shipments, and inventories cannot be reconciled.
Table 5. Sales by product line
Plant | Animal | |||||
Period | USD Sales | Tons | USD/mt | USD Sales | Tons | USD/mt |
Q4 2009 | $5,213,360 | 472 | $11,045 | $4,892,690 | 835 | $5,860 |
Q1 2010 | $22,470,151 | 2,141 | $10,495 | $2,464,565 | 421 | $5,854 |
Q2 2010 | $89,344,146 | 8,342 | $10,710 | $70,242 | 12 | $5,854 |
Q3 2010 | $71,647,884 | 6,352 | $11,280 | $104,185 | 18 | $5,788 |
Q4 2010 | $24,052,297 | 1,965 | $12,240 | $3,938,246 | 664 | $5,931 |
Sources: page 33, 10K filed 2010/03/15; page S-2, Prospectus filed 2009/12/17; page 23, 10Q filed 2010/05/12; page 19, 10Q filed 2010/08/11; page 21, 10Q filed 2010/11/15; page 61, 10K filed 2011/03/14; USD/mt is calculated as USD Sales/Tons.
Table 6. Sales, cost of goods sold, gross profit margin, finished-goods inventory, and manufacturing cost
Period | Sales | CGS | GP% | Finish Goods | Manuf. Cost |
Q3 2009 | $29,279,473 | $13,435,326 | 54% | $18,921,648 | |
Q4 2009 | $10,106,050 | $4,714,576 | 53% | $31,734,252 | $17,527,180 |
Q1 2010 | $24,934,716 | $11,077,957 | 56% | $39,059,951 | $18,403,656 |
Q2 2010 | $89,414,388 | $39,378,346 | 56% | $35,792,520 | $36,110,915 |
Q3 2010 | $71,752,069 | $29,639,662 | 59% | $36,989,474 | $30,836,616 |
Sources: 10Q filed 2009/11/16; 10K filed 2010/03/15, 10Q filed 2010/05/12; 10Q filed 2010/08/11; 10Q filed 2010/11/15; GP% is calculated as 1-CGS/Sales; Manuf. Cost is calculated as CGS in the period + finished goods at the end of the period - finished goods at the end of the previous period.
Disclosure: I am short YONG.
