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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
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  • YONGYE Intl. (NASDAQ: YONG): Could Nearly Idled Factories Jeopardize The Proposed Going Private Transaction?

    - Evidence surfaced over the weekend indicates YONG's Factories are recently operating at only 5-10% of last year comparable period disclosed output rate -

    Readers: please do your own DD before acting!

    - In an efficient world, Investors should say goodbye to the proposed Going Private transaction-

    Security Guard at YONG's Jinshan Factory (Source: Link2 / Album Link on Link2).

    Who would be willing to finance the purchase of Factories operating at only 5% of the rate (also used for Valuation purposes) at which they were operating during Q2 2013 (See point 2.)? And, more importantly … WHY?

    The logic answer would be: "NO ONE! No reasons to do it"

    New evidence presented in this Instablog might (or better: should) induce CDB (China Development Bank / 国家开发银行) to reconsider its $214 million loan financing crucial for the successful consumption of the proposed YONG Going Private transaction.

    Will the Going Private deal (expected to close as soon as possible) fall apart or experience another major set-back?

    After having noticed an unusually bearish trading activity in YONG securities on Friday afternoon, I spent my entire Sunday trying to figure out the reasons behind it.

    I therefore started to perform some basic DD by using the Company Chinese local name, namely: "永业集团" / Yongye Group followed by the word "liar", as I had done many times in the past (most recent example being LIWA). Here is what I found:

    1. Key findings of my Sunday night investigation:

    • The two Facilities look to be in an idle state. See picture at the following links: Jinshan and Wuchuan (or APPENDIX I).
    • At the old Jinshan Factory (金山厂) there are only 1-2 truck shipments per week (每周平均有两辆货车) and each truck can carry more than RMB 1m (about $161,000) worth of fertilizer ( 每辆货车能载价值100万元以上的肥料).
      • This adds up to 12-24 truck shipments per Quarter!
    • At the new Wuchuan Factory (武川厂) just 1 truck per month (一个月里没几辆货车(后来门卫补充说每月平均有一辆货)
      • It adds up to 3 truck shipments per Quarter!

    You can do the Math and estimate the revenue, which is completely inconsistent with YONG's historical results and guidance.

    • Per Q2 2013 YONG quarterly Report (page 35), during the three months ended June 30, 2013, YONG sold 24,636 tons of liquid crop nutrients.
      • At a 35 tons load per truck, YONG in Q2 2013 had therefore at least 703 truck shipments.
        • The information disclosed by the Factories Guards, imply that during Q2 2014, shipments are down 97.73%-95.89% from the sales levels YONG reported in Q2 2013
    • Based on this information, I estimate the Q2 2014 revenue generated from sales of liquid crop nutrient products to be approximately USD 12.3m (vs. sales of 298.0m during the same period of 2013)

    Even if we were to double the Activity reported by the Guards of the two YONG factories, revenue for Q2 2014 would still not exceed $25m (a figure still 90% lower than the comparable revenue generated during Q2 2013).

    • In addition:
      • Plenty of Complaints about YONG's Products (see Link1 at Link3).
      • People Referring (Link1) to YONG's business as Pyramid Scheme (传销).
    • Price Action in YONG's securities observed during the last two trading hours of Friday (06/16/2014) is typical of the activity usually preceding a Short Sellers Report.
    • On Thursday and, to a greater extent on Friday, we witnessed heavy short selling activity in YONG's common shares. The price decline was somehow contained (close at -1.55%) by Arbitrage traders (ARBs) unaware of any negative developments and therefore offering unlimited willingness to buy shares based on the assumption of a successful Going Private transaction in the coming weeks. However:
    • This situation represents a text-book-example of Information Asymmetries in action, where some participants are selling based on information the other side of the trade has not yet been able to gather.
    • As soon as ARBs do realize what is really going on, they will back off / Disappear and stop supplying unlimited BIDs into the market. Without ARBs, given the limited upside Potential (less than 2% / GP offer is at $7.10 per share), very few participants will be willing to buy … leaving the Sellers in control of the Market. Logic suggests that such an abrupt shift in the Supply & Demand balance of YONG's securities will result in a substantial & immediate decline in the Price per Share (NYSE:PPS). A -20% (or more) could be in the cards.

    2. Investors have been building huge short positions over the last two trading days. Expecting problems for the Going Private transaction?

    YONG First caught my attention on Thursday afternoon when I started to notice some abnormal activity on the Option Market with an increase of almost 100% (from 10% to 20%) in the June 21 Option's implied Volatility.

    The same activity continued on Friday to even a larger extent. Implied Volatility went ballistic!

    Obviously someone has been placing a huge bet on something going wrong with the Going Private transaction.

    An analysis of the volume traded in YONG's shares, seems to confirm my conclusion.

    A break-down of Friday's trading Activity clearly shows that someone has been selling BIG starting 12:15pm. As reported below, from 9:22am till 12:15pm less than 100k share traded.

    However, during the last 3:45 hours of trading on Friday, more than 7m shares changed hands; more than 5.1m being sold at BID (where the BIDs had obviously been provided by ARBs)

    3. So, what's next?

    As said before, new evidence might (or better: should) induce CDB (China Development Bank / 国家开发银行) to reconsider its $214 million loan financing crucial for the proposed YONG's Going Private transaction to be consumed

    Given the increasing importance of Bank Reputation in today's financial environment, China Development Bank (being a reputable Financial Institution) should probably put on hold the necessary USD 214 million loan financing pending the results of further On-the-Ground Due Diligence. Best practices would suggest that, if preliminary on-site-visits were to verify an abnormally low activity at YONG's facilities, the entire Bank team following the transaction should be replaced.

    August 2012, China Development Bank made the news when the Suntech Fraud first emerged (Link). I am pretty it's in China Development Bank's best interest to avoid the repeating of a similar (embracing?) situation.

    As soon as the previously described information Asymmetry between short sellers and ARBs is eliminated, ARBs will no longer provide the unlimited BIDs that have been supporting YONG's price towards the end of last week. A Sell-off is likely to result.

    Recent Developments & Findings suggest that at $6.97 YONG's shares are everything BUT a buy!

    If the information presented in this Instantblog were to be proven true (as it seems to be), I can assure you such a Going Private transaction would never be consumed in any western Country.

    Being, however, a transaction performed by Chinese Entrepreneurs and financed with the help of a Chinese Bank, I cannot rule out its successful closing. If this were to be the case, it would only highlight the huge inefficiencies still inherent within the Chinese Financial System and its capital allocation process.

    On the other hand, if you are able to locate shares, YONG offers a compelling short selling opportunity with negligible downside risk (spread being less than 2%)

    At this point, I have little doubts about something being wrong at YONG.

    DO YOUR OWN DD

    APPENDIX I: - Material found online -

    Pictures of the Jinshan Factory / 金山厂采访视频 (Link2 and linked Baidu Folder Jinshan)

    Tour at the Jinshan Factory and Chat with the Guard / 金山厂周围的图片 (Link2 and linked 56.com Video Link)

    Pictures of the Wuchuan Factory /武川厂采访视频 (Link2 and linked Baidu Folder Wuchuan)

    Tour at the Wuchuan Factory and Chat with the Guard / 金山厂周围的图片 (Link2 and linked 56.com Video Link)

    Relevant Forum Posts:

    Disclosure: The author is short YONG.

    Jun 16 11:30 AM | Link | 4 Comments
  • Is EBay Becoming A SHORT TRADE? Could Panda 4.0 Put At Danger Future EBAY's Customer Base Growth?

    Here below an extremely good article (by Larry Kim) on how recent roll-out of Panda 4.0 is affecting EBAY. No Good news .. .I would say. Spam strategy used by eBay in the Past ... won't work anymore.

    Thanks to Google's roll-out of Panda 4.0 and the Payday Loan 2.0 update, eBay is suffering a massive loss in organic traffic and rankings.

    Dr. Pete at Moz has already taken an early look into eBay's organic rankings, in light of the confirmation of the two Google updates confirmed/announced yesterday.

    Oh noes! The main eBay subdomain has fallen completely out of the 'Big 10,' Moz's list of the ten domains with the most real estate in the top 10. It's a huge drop, considering the historical data available.

    Moz's data is showing that eBay lost around 75% of their terms from page one. They regularly crawl around 10k "head terms" - higher volume keywords.

    What I'm seeing in my own research is that they're not even ranking competitively on 80% of their "long tail keyword searches" (millions of more specific keyword searches) anymore:

    (click to enlarge)

    The preceding figure illustrates for a random sampling of long tail keywords eBay was previously targeting, 80% of them are no longer on the first page, despite relatively low competition for these highly targeted keywords.

    The Entire Research at the followin Link:

    http://www.wordstream.com/blog/ws/2014/05/21/panda-4

    May 22 11:12 AM | Link | Comment!
  • Recent Chinese Media Report Casts Doubts On Lihua International, Inc.(LIWA). Just Another F-Word China Made ?

    Recent weakens in LIWA might indeed have a valid fundamental reason (go directly to Section XX)

    X - LIWA per SEC Filings

    Lihua International, Inc (NASDAQ: LIWA) is a vertically integrated company in China which develops, designs, manufactures, markets and distributes low cost, high quality refined copper products. The Company also uses recycled scrap copper as a raw material to produce refined copper products including copper anode and copper rod.

    Lihua's corporate and manufacturing headquarters are located in the heart of China's copper industry in Danyang, Jiangsu Province. To serve its diverse base of approximately 300 customers, Lihua has representatives in cities throughout China.

    For an exhaustive description of LIWA's business ... readers are invited to read the Form 10-K for the Fiscal Year ended December 31, 2013 (filed by the Company on March 17, 2014)

    At yesterday Close of $4.35 per share, the total Market Cap of LIWA amounts to approximately $130m

    As of December 31, 2013 (2014 10-K, F-2) the company had $365m in Total Assets, more than $203m in Cash and Cash Equivalents and only $19.5m in total liabilities.

    Moreover, last year (2014) the Company was able to report its highest revenue number ever, namely .... north of $900m. Reported Net Income was $56m (2014 10-K, F-3)

    Do the Financial Statements look familiar to you? ... well ... my first thought went to Longwei Petroleum (LPH): TOO GOOD TO BE TRUE!

    XX - CHINESE MEDIA (Cable NetWork / 电缆网) REPORTS A QUITE DIFFERENT PICTURE ABOUT THE COMPANY!

    A first Report about the police taking coercive measures (March 24, 2014) against Mr. Jianhua Zhu (the CEO/Chairman/President) surfaced on March 28, 2014.

    Original: http://jiangsu.sina.com.cn/news/economy/2014-03-28/064096109.html

    Cached: webcache.googleusercontent.com/search?q=...

    The Article also highlights the following Points:

    - LIWA caught up in a Debt Crisis (* I do wonder how this is possible given a Balance Sheet that's even better than the one of AAPL ... lol)

    - Business Downturn started towards the end of 2012

    - Last Year the factory was running at very low capacity

    - Basically No Activity after the Spring Festival (Jan 31 2014)

    - Local Court sealed the warehouse

    - Danyang police did not respond to reporters' enquiries.

    A Second Report followed on April 10, 2014, when the reported went to the town/location of the Company (NASDAQ:LIWA):

    Original: http://www.cableabc.com/news/20140410045113.html

    Cached: webcache.googleusercontent.com/search?q=...

    Some interesting parts of the article:

    - rumors ... "LIWA boss has been arrested, the Company owed a lot of money ... there are many debt collectors"

    - Some locals also cautioned about doing business with LIWA: "Do not do business with the Company, Lihua International (LIWA) IS A LIAR, fraudulent (骗人的)"

    -Public data show that the Company has more than 300 Employees (see also 2014 10-K p. 13 / 402 employees) ... however, there was basically no activity in front of the "workers/staff house" (的员工之家).

    - Informed sources said that LIWA "Basically discoutinued its activities after the Spring Festival" / "春节过后基本就停产了". //*2014 Spring Festival was on January 31, 2014.

    - Company not taking Cooper Orders (?) "...当即表示暂不考虑接收铜丝订单。"

    - LIWA debt problems have been rumored for quite some time. Total Liabilities should amount to approximately RMB 1.2b (about $191m)... making the Company about RMB 600m (about $96m) insolvent. Currently does have $10m (approx. RMB 62m)

    Look at some pictures of LIWA Buildings. I would not describe it as a busy place ... lol ... again ... it reminds me of ... Longwei Petroleum LPH.

    No Smoke ... No Activity? ... Well ... free to guess! Of course when producing this will also produce smoke.

    Workers house ... Deserted / 利华国际员工之家人去楼空

    It seems to me ... some maintenance work is needed.

    SO ... my advice to you?

    1. DO NOT TRUST ME ...

    2. VERIFY THE SOURCES ...

    3. HIRE A TRANSLATOR ...

    4. DO YOUR OWN DD ... eventually pay a visit to the Company ... ... ... ... and ACT CONSEQUENTLY!

    Here the some SAIC basic details about LIWA's Subsidiaries ... as a starting point for further DD:

    www.jsgsj.gov.cn/baweb/show/sj/details.j...

    www.jsgsj.gov.cn/baweb/show/sj/details.j...

    SAIC Portal:

    www.jsgsj.gov.cn/baweb/show/sj/business_...

    Apr 30 9:31 AM | Link | 23 Comments
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