Yongye International (YONG) announced a $50M investment from Morgan Stanley Private Equity Asia on Tuesday which sent shares soaring over $6 in pre-market trade; but, after an initial buying frenzy, shares fell sharply back to the mid $5 range, indicating some investor uncertainty. Meanwhile, bullish options trade is present with over 2000 June $5 calls exchanging hands and nearly 3000 calls at the $6 strike, indicating that there is some underlying bullish investor sentiment.
The case against Yongye has been well documented by SA contributor Richard X Roe. Roe questions Yongye’s SEC filings and presents some concerning Discrepancies and Inconsistencies. I would advise anyone considering an investment in Yongye to examine Roe’s work closely.
Yongye shares have taking a beating this year, including a 22% slide in the week ending May 20th, after Absaroka Capital Management issued a scathing report that valued shares of Yongye at $1. Overall, Yongye was down -55% YTD before yesterday's rally. Is the recent news enough to reverse Yongye’s trend?
From my perspective, the potential of a sustained upside swing in Yongye’s share price does exist, leading up to the June 10 closing of the Morgan Stanley Private Equity investment. The momentum behind such a swing will be a function of how much credibility MSPEA and Managing Director Homer Sun has with investors. Investors must also weigh the possibility of dillution should the share price reach $8.80.
The 8-K filing includes language that grants Morgan Stanley practically unfettered access to financial or other information (including non-public information), as well as Yongye's facilities, plants, employees, accountants, auditors, contractors and subcontractors. Morgan Stanley also garnered rights to preview proposed annual operating and capital budgets (Subdoc 4, Sec 8.7-8.9).
Homer Sun is an attorney educated at the University of Michigan where, in addition to law, Sun studied chemical engineering, a suitable undergraduate major for one conducting due diligence on a fertilizer company. While a law degree from a Big 10 school doesn’t equal instant credibility, when Sun states, “After extensive due diligence, we believe Yongye to be an exceptional company…,” investors are going to pay attention. Factor in a seat on the board of directors for Sun and investor's fears may begin to dwindle.
Morgan Stanley Private Equity Asia has significant experience in the region with investments in the neighborhood of $1.8 billion over 18 years. Their investment team is well educated and their investment strategy includes the goal of,
Maintaining intensive and rigorous due diligence and investment decision making processes.
Disclosure: I am long YONG.