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  • Yongye International (YONG): Is Their Story Too Good To Be True?

         Surfing the internet, you read that the last marathon was run in 56 minutes. What do you think? For anyone who follows the marathon and achievements of human endeavor, the conclusion is obvious – the report is incorrect. If the report is not a typo, it has to be a hoax. The word record currently is over 2 hours and times simply don’t improve that fast. No one is going to run under 1 hour anytime soon. Just like no one is going to lose 100 pounds in one day. 
         A similar experience can be had reading the financial reports of Yongye, filed with the SEC. Yongye International (Yongye) reports increasing their branded stores from 200 to 18,700 in 2 and ½ years, from January 1, 2008 to June 30, 2010. Yongye claims that it didn’t sell its first product until April of 2005. Then Yongye reports going from $3.7 million in sales in 2006 to $95.8 million in 2009 to $114.3 million for just the first half of 2010. The revenue and growth primarily come from one product, fulvic acid, which they sell to farmers. The second product, fulvic acid as a nutrient for cows, has negligible sales that are dwindling. This claimed growth came while only increasing employees from 197 on January 1, 2007 to 399 on January 1, 2010.
         Oddly, Yongye refers to their branded stores while, at the same time, reporting that these stores are independently owned and operated. According to Yongye, they paint these stores owned by others in Yongye’s colors and drape the front of the stores with Yongye’s banners. Yongye claims to provide the stores with a computer to run their promotional material and receive premium staging for their products. Yongye claims that their own sales and support staff manage the relationships with the stores, overseeing 3 to 10 stores per salesperson, walk the fields with the farmers, provide training and education and after sales support to the farmers.
         What do you think? For anyone who follows business and its achievements in expansion and growth, can this story be anything other than a complete hoax, like the story of the marathon being run in 56 minutes? Let’s review some of the general problems that come to mind and then delve into specific problems with Yongye.

    The Fertilizer Business in China is highly Competitive, With Large Competitors and Skeptical Customers 

        The fertilizer industry involves a commodity product that has been studied for many, many years by large companies that have been in business and dominant for a long time.  It is a highly competitive industry.  Regarding the particular fertilizer Yongye makes, fulvic acid, Yongye reported over 164 companies in China making and selling the same product, with five of them adding the exact same nutrients Yongye does. Yongye identifies humic acid as a very similar, competing product and reports over 500 companies in China making and selling humic acid. Yongye reports it is competing with all companies that make fertilizer, of which there are thousands, if not tens of thousands in China, including very large, dominant companies.
                    The customers of Yongye’s products, Chinese farmers, are notoriously difficult to sell to, especially for any new companies claiming to sell new products. Farming has been done for thousands of years in China. The farmers believe they know best how to farm and are very resistant to any change or new products. The farmers are also notoriously thrifty and unwilling to spend money. The farmers are very cautious about changing their methods or trying new or different fertilizer, for fear of unknown effects.
                     Obtaining shelf space in agricultural stores is difficult for a newcomer to the fertilizer business. A large competitor, such as Sinofert, who sells millions of tons of product, compared to a few thousand by Yongye, has a huge advantage. In the event a newcomer could get shelf space, it is likely that any premium positioning will be given to large, well known fertilizer companies like Sinofert. While shelf space will be difficult, it would be well nigh impossible to get many store owners to allow another company to paint the outside of the store in its colors or hang its banners on the front of the store.   

    Problems with Yongye’s Story

         The Current Executives Have No Background in the Fertilizer Industry

         Despite Yongye’s primary product being fertilizer, the officers of the company have virtually no experience in the fertilizer industry. The bios of all the executive officers, including the CEO, Vice Chairman, CFO, VP of Sales and Marketing, and the VP of Corporate Strategy, do not indicate any previous experience in the fertilizer field. The only exposure to even the field of agriculture is only in the bio of the CEO, where there is a vague reference to Mr. Wu being appointed to various managerial positions of state owned conglomerates in textile, diary (diary is the spelling in the filing), and agriculture industries. There is no identification as to when he had any managerial position in any agricultural entity or what he did. The only person that claimed any background in fertilizer was the chief scientist, Professor Goa Jing, who is no longer with the company. 

    The Mysterious Creator of ShengMingsu and His Curious Disappearance

         According to the CEO, Mr. Wu, his good fortune began on the day that Professor Jing share with him the formula for Shengmingsu, which Professor Jing devoted 40 years of his life creating. The two co-founded the company together and the rest, as they say, is history. But this history was not so good for Professor Jing.
    Professor Jing apparently parted with his life’s work, without any reported compensation. Professor Jing did not receive any stock in Yongye, not a single share. Professor Jing also never received any salary for the position of Chief Scientist that he held in 2006 and 2007. By 2008, Professor Jing was replaced at Yongye as Chief Scientist without any explanation. The only detail reported of the incident was that he signed a non-compete agreement for no reported compensation. He was replaced by a Chief Scientist with a background and expertise in . . . .  animal nutrition and husbandry.
         Moreover, the story about Professor Jing and the creation of the formula appears quite doubtful. Professor Jing’s bio reveals very little experience in the fertilizer industry. Prior to co-founding the company in 2003, Professor Jing was the Deputy Director at the Petrochemical Research Institute of Inner Mongolia between 1982 and 2001. The only experience referenced in his bio regarding fertilizer is a stint as Deputy Production Director For Wumeng Fertilizer Company, but the year(s) he spent in the position are revealed. 
         In any event, as Yongye admits, fulvic acid is a commodity product produced by many companies, so it was unnecessary to tell this elaborate story about Professor Jing devoting his life to finding a special formula. Anyone can find how to extract fulvic acid from humic acid from simply searching on the internet and start producing it a short time later.

         Fulvic Acid Fraud? California Bans the Use of the Term Fulvic Acid in Product Advertisements

         Fulvic acid is one of the modern day snake oils. Do a Google search on “fulvic acid” and there is no end to the promises of this “miracle” molecule. Ingest “fulvic acid” and there is no end to the magical effects - you will have increased energy, improved concentration, increased sense of well being, faster healing time, and improved healing. Virtually any positive effect you can think of is claimed. Need a cure for cancer? Fulvic acid is the answer says some of its promoters.
         Want super growth for plants? Fulvic acid again is the answer. Go to and super-grow plant care will explain and sell it to you. Google “fulvic acid plant growth” and you will find no end to the number of companies touting and selling fulvic acid as the new “miracle grow” for plants. 
    Yongye is one of these companies making claims that fulvic acid will result in super growth, except that it sells its product solely in China. Yongye claims crops will grow so much bigger and faster with fulvic acid that customers will make 1000% return from buying their products. That’s right – 1000%.   Yongye claims that internal studies show that for every 1 rmb spent on Yongye’s products, customers will get a return of 10 rmb.   
         There is just one problem. There is no evidence that fulvic acid is a “biostimulant” that causes quicker or increased plant growth. California has banned the use of the term fulvic acid, along with its claims of being a “biostimulant”, as misleading, citing a lack of evidence supporting the claim. Yongye would be prohibited from advertising Shengminsu in California the way it claims it does in China. Oregon also has the same ban.
         How did these unsubstantiated claims for fulvic acid come about? Well, it is commonly accepted that adding organic materials to depleted soils can be very beneficial. No dispute by anyone there. The natural way is composting dead plants, which creates organic material rich in humic acid and fulvic acid. Mixing this organic material with your soil can improve its quality and structure.
         However, in order to short circuit the process, humic substances have been extracted from other substances, such as lignite coal, to be added to the soil for the same effect as composting materials. Some studies have found that humic acid does improve plant growth. However, those studies have not been repeatable. It appears that about half the studies show improvements, half don’t. The studies that appear more rigorous show no improvement. California allows humic acid advertisers to represent only that it may increase plant growth. Even if there is no stimulant effect, adding humic acid may have some benefit to improve the structure and quality of the soil. 
         Fulvic acid is the only active substance in humic acid, so it has been extracted from humic acid, advertised as having greater, more immediate effects, and sold. However, these claims are unsubstantiated.   Many important benefits of humic acid are not present when fulvic acid is extracted. Not only are the benefits of humic acid lost, but the benefits of fulvic acid which exist when still contained in humic acid are lost after it is extracted. Many of the large fertilizer companies either don’t sell fulvic acid, or, if they do, it is a very small fraction of their sales.
         It is unlikely that Yongye is getting experienced, skeptical Chinese farmers to fall for its claims regarding fulvic acid and start purchasing it for their crops. Furthermore, fulvic acid is a commodity product, with many other companies making and selling it for much longer than Yongye, so it would be very unlikely that Yongye would suddenly have extraordinary margins and growth that none of its competitors are sustaining.
         There is No Growth like Yongye Growth
         Yongye claims to have grown from 200 branded stores on January 1, 2007 to 9100 on January 1, 2010 to 18,700 on June 30, 2010. They call them their branded stores but describe them as independently owned and operated. This growth is simply not possible as described by Yongye.
         Let us just focus on the period from January 1, 2010 to June 30, 2010, during which Yongye claimed to have gone from 9100 branded stores to 18,700 branded stores, an increase of 9600 branded stores. For this six month period, this would be an increase of 52 branded stores a day.
         Assuming Yongye lived up to its earlier representations of a computer for each store, along with training, education and after sales support, what would this involve? It would require, on average, painting 52 stores a day, hanging banners on 52 stores a day, and purchasing and installing 52 computers a day. Furthermore, Yongye would need to continue to provide training, education and after sales support at the previously existing 9100 stores, as well as to a new 52 stores each and every day.
         The size of Yongye’s sales and support staff is simply not sufficient to support these functions. As of January 1, 2010, Yongye reported having 100 sales and support staff but to perform all of these functions would conservatively require about 3000 staff. Regarding adding the stores, if it took only 10 people to add a store very three days that would be over 1500 sales and support staff. Even with that number, it would be virtually impossible because you would first need to convince the new stores at an unbelievable pace, solve a logistical nightmare of getting the people and materials to each store, and do all the physical labor of painting, putting up the banners and installing the computers. 
         Meanwhile, you need a large number of sales and support staff to remain to do the training, education, and after sales support, for which you would conservatively need at least another 1500 employees.  Yongye claimed that each sales manager oversaw 3 to 10 stores at a time. Assume the number is 10 and give each manager 1 assistant; you then have 2 sales and support staff for each store. That would require 1870 sales and support staff for these functions. Of course, that number is unrealistically low. Assuming 20 working days in a month, that gives each sales and support staff only 2 days a month for each store to do training, education and after sales support.
         So, very conservatively, Yongye would need over 3000 sales and support staff to perform the functions they claim at the growth they claim. Perhaps they recruited contractors and distributors to assist. However, Yongye provides no indication in their financial reports or SEC filings that they had anywhere near that number of contractors or distributors assisting with these kinds of tasks. 

    Yongye International Claims to Be Selling More Than They Have the Capacity to Produce

         Yongye is its only manufacturer. It does not purchase the product it sells from anyone else. Yongye reported that the capacity of its production line was 10,000 tons per year for its plant product. However, Yongye reported selling more product, over 10,000 tons, in the first half of the year, than it has the capacity to produce in an entire year.
         The excess did not come from a sell of off inventory. Inventory only dropped from $42,033,261 on January 1, 2010 to $41,437,200 on June 30, 2010. This very small drop would not account for selling more than twice the amount that Yongye could make in half of one year. 
         Likewise, Yongye’s report on July 19, 2010 that it recently increased capacity from 10,000 to 15,000 tons per annum would not account for the difference. Putting aside the credibility of this claim for the moment, this increase was evidently not in place as of April 2010, since it the capacity at that time was still listed as 10,000 tons per year in an investor presentation. Thus, any increase in capacity only occurred either at the end of or shortly after June 30, 2010 and had little or no impact. Even if it had occurred earlier, the capacity would still only be 7500 tons for the year, well less than the over 10,000 tons reportedly sold.
         The announcement of the increase in capacity due to streamlined production and updated equipment was quite a surprise, casting some doubt on its credibility. Yongye had, on numerous occasions, indicated that the entire capacity was 10,000 tons per year with that equipment, without every mentioning that it could be increased or was in the process of being increased. No mention of it in the annual report for 2009, in the first quarter report, or in the investor presentations, the latest of which was in April 2010.


         As the CEO, Mr. Wu, puts it when describing his previously failed business career, “dreams are beautiful, reality is harsh”. Yongye International is selling a dream to investors; the intent of this article is to explain the harsh realities. The dream is a miracle product providing returns to customers of 1000%, resulting in sales for the company that is growing at an incredible rate as a result of innovative marketing. The reality is a modern day snake oil product with little chance of anything but ordinary gains in a highly competitive industry with experienced, skeptical customers. The marketing success here is the sales pitch of Yongye to those who buy their story.   


    There are many problems the article didn’t discuss. Here is a brief summary of some of these problems:
         (1)    The complicated company structure making it difficult to hold anyone liable because Yongye only owns Fullmax, a virgin islands’ company, that only owns Asia Holding, a Hong Kong company, that only owns 90% of the operating entity, Yongye International, in a joint venture with Inner Mongolia Yongye;
         (2)    Yongye’s failure to have positive cash flow from operations in any year it has reported;
         (3)    Yongye’s agreement to buy the manufacturing operations from its predecessor owned in part by Yongye’s CEO, then paying $9 million in goodwill on a total purchase price of $16 million;
         (4)    the accounting firm changing every year – 4 different accounting firms in 3 years;
         (5)     A business that pays in advance and timely to its suppliers but provides terms for its customers to pay 3 to 6 months after receiving the product.

    Disclosure: Short YONG.

    Disclosure: Short YONG
    Oct 20 3:11 PM | Link | 45 Comments
  • Should Orient Paper to Restate Its SEC Filings and Disavow Its Press Releases and Websites?
    Orient Paper Inc. is a small paper manufacturer in China that trades on Amex. It has been accused from a number of sources of embezzlement by management and falsification of its financial statements. The newest members of the board of directors, who make up the audit committee, have taken the step of hiring a law firm, Loeb & Loeb, to investigate and have hired the financial advisory services of Deloitte and Touche to assist in dealing with the allegations.
    This article questions whether Orient Paper should immediately announce that it SEC filings should not be relied on, and whether it should state that neither should its press releases or website(s) be relied on. Why? Orient Paper’s SEC filings have numerous internal inconsistencies, and externally inconsistent with its press releases and website(s). In this article I detail some of these inconsistencies. These will be in addition to the problems I detailed in my original article, “Orient Paper, Does It Add Up?”, where I described Orient Paper’s false representations that it had a R&D facility and a 37 member R&D Team and the dubiousness of its claimed growth in light of its reported reduction in employees and  its lack of spending on advertising and promotion.
    In this article, I detail Orient Paper’s misstatements about its leases, its misstatements and failed promises regarding its business plans and operations, and it’s inconsistencies concerning the supplying of its raw materials. Some of the representations support the claim that Orient Paper is contracting, not growing as it claims.       
    Orient Paper’s Mistatements About Its Leases
    Orient Paper “alleged” non-cancellable lease of 133,200 acres simply disappears from its financial statements after it last appears on its 2nd quarterly report in 2008. Orient Paper had claimed that it paid an annual fee of $15,384 for this non-cancellable lease that expired in 2031. The lease just disappears off the financial reports with no explanation given. Further, as the only other lease Orient Paper reports was related to the 42.95 acres, the disappearance of this lease indicates that Orient Paper is contracting, not expanding as it claims. 
    Orient Paper makes inconsistent reports about 42.95 acres, comprised of two districts. Orient Paper originally reported in its 2007 annual report that it leased this property for$15,384 in a 30 year lease expiring in 2031. In its 2008 annual report, Orient Paper contradicts the earlier report, stating that it obtained in 2003 land use rights in the property for 50 years for the price of  $2,189,328. In the same report, Orient Paper also claimed that it leased only the 32.95 acres in the 2nd district, contrary to its previous representation that it leased the entire 42.95 acres.
    Clearly, Orient Paper’s representations regarding the the 2nd district of the 42.95 acres contradict each other. Orient Paper could not have been leasing this property in 2007, as it claimed then, if it had purchased the land use rights in 2003, as it claims now.
    Orient Paper’s Misrepresentations About Its Plans
    In 2008, Orient Paper Inc. reported that they were building a 2 million square metre facility with a production capacity of $1.2 million tons and that by 2010 they expected revenue of $800 million to $1.3 billion and net income of $160,000 million to $230,000 million. The building of this facility never materialized. It appears that Orient Paper never had the funds, resources, or capability to build this facility. This appears to be a clear fabrication.
    A similar claim was recently resurrected in a promotional video done by a promoter of the stock, Doug from, where the CEO of Orient Paper showed Doug a plan to build a 1000 acre facility. Orient Paper does not have the funds, resources, or capability to build this plant. There are no disclosures in its SEC filings on this facility and nothing presented as to what it would cost, what it would produce, or when it would be completed. 
    In 2008, Orient Paper issued another press release claiming that it was converting to an anti-counterfeit paper production line which would produce a minimum of 10,000 annually in its first year and which would generate $40 million in revenues and $6 million in profits.. See link at Again, Orient Paper never delivered on this promise, it is not producing or selling anti-counterfeit paper according to its SEC filings since.
    Orient Paper’s Questionable Representations Regarding Obtaining Raw Materials:
    Orient Paper has made contradictory representations about its raw materials, claiming in press releases that it was attempting to address raw material supply problems due to a shortage of domestic supply while claiming in its SEC filings that it had no problems obtaining raw materials due to long term, stable relationships with local suppliers. One of the difficulties for Chinese paper manufacturers is that they need to import the raw materials, wood pulp and waste paper, needed for the production of paper, as China lacks sufficient domestic resources. Orient Paper recognized this difficult in press releases and claimed various steps to address this problem, none of which materialized.    
    Orient Paper claimed that it obtained a permit to import 170,000 tons of waste paper to alleviate the lack of domestic supply and would be selling the waste paper to other mills, including 34 other local paper mills. However, Orient Paper never imported waste paper or sold it. See link at
    Orient Paper claimed that it signed a letter of intent to merge with a company that supplied raw material and made paper, Lingzian Taihua Pulp & Paper Ltd., Co., to obtain the vertical advantage of having its own raw material supplier and obtain economies of scale. This merger never happened. See line at;col1.
    In 2008, Orient Paper issued another press release claiming it signed a letter of intent to merge with another company that had projects that would enable it to supply raw materials. This merger never happened.   See link at
    Appearing to contradict these press releases, Orient Paper claims in its SEC filings to have the advantage of having all its supply needs met at favorable prices due to a stable, long term relationship with local suppliers. This claim is dubious given Orient Paper’s recognition of and claimed attempts to resolve the lack of supply in China resulting in intense competition for these raw materials and the necessity for importing the majority of them. 
    Inconsistent Representions About the Types of Paper It Produces
    Orient Paper is also repeatedly inconsistent in its SEC filings regarding the types of paper that it makes. For example, Orient Paper claims in 2007 and 2008 that it produces and makes digital photo paper and security paper. However, Orient Paper makes clear in a later filing that it only started producing digital photo paper in 2010 and that it does not make security paper, but intends to develop it.
    Orient Paper’s representations about the types of paper it manufactures is also inconsistent with its claims of increasing the types of papers it produces and raises doubts about the growth it claims. In its 2007 annual report and in its 2008 quarterly reports, Orient Paper stated that it engaged in the production and distribution of copy paper, uncoated and coated paper, digital photo paper, corrugated paper, plastic paper, kraft paper, graphic design paper, antifraud thermal security paper and other paper and packaging related products. In its 2009 annual report, Oirent Paper is done to identifying only 3 types of paper that it manufactures – corrugating medium paper, offset printing paper, and writing paper.
    This list of inconsistencies with Orient Paper’s SEC filings is not intended to be exhaustive. However, it is indicative that Orient Paper’s representations are not accurate and it is evidence that Orient Paper is acting fraudulently. Furthermore, it casts doubt on the competency of management to run anywhere near the kind of operations they claim. Perhaps, Orient Paper should address these problems by stating that its SEC filings should not be relied on and neither should its press releases or websites be relied on.    

    Disclosure: No current position. Was long prior to Muddy Waters report. Then went short. Now have no position.
    Aug 06 6:19 AM | Link | 6 Comments
  • Outlook for the Chinese Paper Industry
    Outlook for the Chinese Paper Industry:  Not That Rosy:
       This article examines the macro state of the Chinese Paper market based on several research reports that have recently studies this issue.    

         The economics of the Chinese paper manufacturing industry are poor. Massive government subsidies to the Chinese paper industry has allowed it to under-cut worldwide competitors and show tremendous growth through exports. However, the Chinese paper industry has shown poor profitability. Inherently, it has no competitive advantages. It has no pricing power as paper is a commodity business and, in the last decade, real paper prices have fallen while input costs have risen. China is experiencing oversupply as its production capacity continues to grow while domestic demand, while growing, is still very weak. Similarly, there is excess supply and capacity in the global market. 
    Growth: The Chinese paper industry has shown tremendous growth. Since 2000, China has tripled its paper production. Since 2002, the number of paper manufacturing companies has steadily increased, recently growing from 8,376 in 2007 to 8,731 in November of 2008.   China became the world’s largest production of paper in 2008. In 2009, China accounted for over 17% of the world’s output. 
    Lack of Competitive Advantages:   China lacks the natural resources for paper and has no labor cost advantage. China’s forest base is among the smallest in the world per capita. Consequently, China is the largest importer in the world of pulp and recycled paper. These raw materials, which make up 3/4ths of the cost of producing Chinese paper, as well as electricity, coal, and transportation, have nearly doubled in price in the last decade. Recycled paper by itself accounts for over half of the costs. Labor costs are only a small part of the costs, 4% but increase to 6% for the larger companies with more professionalized staff, similar to U.S. companies where it is 85. China has no technological advantages. 
    Poor Pricing Power: Paper production is a commodity business. International Paper, the largest paper company in the world, reports that there are low barriers to entry. Many believe paper demand will decrease in an increasingly digital world. Paper prices have performed poorly over the past decade, while prices of component materials have shown double and triple increases. The price of recycled paper has increased 160% between 2000 and 2008. However, real paper prices have fallen in the last decade. Companies that own their own raw material suppliers, referred to as backwardization, have better pricing power and are better positioned to receive government subsidies. 
    Overcapacity and Weak Demand: Capacity growth has not slowed – the two largest companies, Nine Dragons and Lee & Man, have aggressively added to capacity, going from 8 million tons in 2007 to 15 million tons in 2009. The growth has led to the Chinese market is saturated – it cannot absorb the present or planned output of Chinese paper. Exports have led the growth as domestic demand only captures a small part of the Chinese paper industry’s expansion. However, there is also global overcapacity. In 2009, year-on-year fixed-asset investment in China’s paper industry grew 21.5%, despite rapidly falling paper demand. 
    Poor Profitability: The result has been poor profitability for the Chinese paper industry whose rapid growth has not been fueled by positive economic or competitive advantages but by government subsidies of 33 billion dollars from 2002 to 2009. As some of the pressures for the industry have recently eased – raw materials are down from their highs and paper prices are up from their lows – year over year reporting may show some improvement. However, the general characteristics for the Chinese paper industry remain as described.

    Sources for this article:
    No Paper Tiger: Subsidies to the Chinese Paper Industry, link at;
    China's Pulp and Paper Industry: What Low-Cost Labor Advantage, link at


    Tags: China, Paper
    Aug 05 12:37 AM | Link | 1 Comment
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