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Summary

An analysis of the SEC filings of Yongye International, Inc (NASDAQ: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.

Source: Yongye International's Reported Production: SEC Filings Raise Red Flags