The officers and directors of Yongye International (YONG) can't make up their mind - they tell one thing to the United States Securities and Exchange Commission (SEC) and investors and then exactly the opposite to their Chinese audience. The SEC filings show that the company regularly sells on credit to its customers, while the company's Director and Chief Operating Officer writes that Yongye never sells on credit, as matter of policy. If the company sells on credit, then the COO, the CEO and Chairman of the Board, an independent Director, and a non-independent Director all likely failed in their duties. Alternatively, if the company does not sell on credit, the $204 million in receivables reported at September end cannot exist (and neither can the associated revenues).
According to Yongye's latest 10Q filing with the SEC, the company does sell on credit and typically provides up to six-month payment terms to its customers. The generous terms explain the sizable receivables balance - if the company sold on cash basis, then account receivables would have been miniscule at each quarter end. Since the company insists that it has never experienced bad debts (that is, receivables are always collected within the agreed-upon terms), then essentially Yongye's stock trades currently below cash, which is unprecedented for a (reportedly) highly profitable company that is doubling revenues every year.
The SEC filings show that the credit-sales policy has been in effect since Yongye's inception, with only one modification in the September 2009 quarter, when the payment terms were extended from three to six months. The 2008 10K/A filed 2009/10/20 (pages 6, F-13 , and 21) states:
Our Distributor Network channel is comprised [sic] by provincial or regional agents... Our distributors are classified as our customers... As is customary in the industry, we provide payment terms to most of our distributors which typically exceed the terms that we ourselves receive from our finished goods suppliers. We typically provide 90 day terms to our provincial level customers and ask for all others to make cash payments up front or upon delivery.
Then the company informed the SEC that:
... during the three months ended September 30, 2009, we extended the normal credit terms for those customers with well-established trading from three months to six months due to the expansion of our business and significant increase in purchase from customers.
The six-month term for “key distributors” or “customers with well-established trading records” has remained in place since, according to the SEC filings.
However, Yongye's COO, Mr. Nan Xu (徐楠), who is also a Director and formerly a General Manager of Yongye's National Sales Center, presents an entirely different story in his book published last summer in China. The book is about the marketing strategies and tactics developed and implemented at Yongye. In Chapter 4, titled Reverse Marketing Channel Management (逆向营销渠道管理), page 117, he reveals the key tenet of Yongye's sales practice - Yongye never sells on credit - and explains the rationale behind it. Since it started operations, Yongye has demanded that the distributors and the branded retailers pay for the product on delivery and pay in full, a rather atypical arrangement in the agricultural industry which is dominated by sales on consignment. The benefits of the “no sales on credit” (不赊销) rule are threefold - the funds don't go to the competitors, Yongye generates immediate cash flow that can be used for corporate development, and the bad-debt risk is essentially eliminated. But more importantly, cash payment is a powerful motivator - “one's heart is where one's property is” (财产在哪里心就在哪里) - in other words, the distributor will work harder to develop the market and promote sales if he paid for the product with cash rather than getting it on credit or on consignment. The practice creates an internal drive that is more powerful than even the best “external” management or incentive scheme, and aligns the sales channel with the manufacturer's objectives.
The COO's revelation that the company never sells on credit is not some kind of an honest mistake or a fluke. First, his book was mentioned in Yongye's press release announcing his promotion. Second, the book was reviewed and praised by Mr. Zishen Wu (吴子申), the company's Chairman and CEO, Mr. Zhao Qiang (赵强), the then Vice President of Sales and Marketing and Director, and Mr. Homer Sun (孙弘), the Independent Director and Managing Director of Morgan Stanley (MS). In the foreword, Mr. Zishen Wu describes the book as telling the facts of Yongye's philosophy, practices, and procedures. He admits that it may not be perfect (due to the author not being a professional writer) but agrees that Yongye's ideas, practices, methods have been faithfully recorded. In conclusion, he praises the author as a marketing genius and foresees bright future for him. On the next page, Mr..Zhao Qiang also praises the author and the authenticity of the book's wisdom that comes from Yongye's branding and marketing experiences in “the trenches.” Finally, Mr. Homer Sun writes on the back cover that in ten years Yongye's marketing practices will be viewed as the traditional way of building sales channels in the agricultural industry.
Yongye's “no sales on credit” practice is further corroborated in an earlier book about the company written jointly in 2010 by an award-winning business journalist and a political propagandist. Chapter 3, Section 7 quotes Mr. Zhao Qiang as saying that credit is the cancer of product sales - if you can't find a way to avoid it, you are stuck - the larger the sales, the higher the likelihood of instant demise [due to cash crunch from bad debts]. And that is why Yongye had adhered, since the beginning, to cash transactions rather than selling on credit, despite obstacles. Later, Chapter 4, Section 3, titled Brand success, with 'no sales on credit' as the standard (成功的品牌，以“不赊销”为目标), conveys Mr. Zhao Qiang's belief that the mark of a successful brand is a sales process that does not rely on credit.
So Yongye's officers and directors face a dilemma. The company's code of ethics states that officers and directors must act:
in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated.
If the company does sell on credit, then they wrote, reviewed, and recommended a false statement about a key feature of Yongye's sales policy, thereby demonstrating lack of responsibility, care, and competence. Alternatively, if the company does not sell on credit, then they signed materially false and misleading SEC filings, as Yongye's balance sheet should not show accounts receivable balances.
Disclosure: I am short YONG.
Additional disclosure: no position in MS