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YongYe (YONG), hype or the real deal?

|Includes: Yongye International Inc (YONG)

Yongye International was listed on OTCBB since April 2009. On Aug 31, it was approved to list on NASDAQ. The stock posted modest gain since moving to NASDAQ. 

What do they do actually? Yongye is located in inner Mongolia. Originally, It was a drug company. It was said that in 2001, an old professor told the company's CEO that there's a technology that can increase plant production up to 10%. It was still in experiment stage at that time. Since then, the company invested significant resource, invited scientists both from China and oversea to research this technology. After 8 years' of hard work, the company successfully launched the "Life essence" line of products.  

Yongye makes two lines of "Life essence" nutrients, one for plant, the other for animal. It is pulvic acid based, combined with Chinese herbal medicine and Mongolia herbal medicine. It is priced at less than $2 a bottle. For each mu or about 1/6 acre, you need to apply 3-4 bottles every one or two weeks depending on plant type. It is applied in addition to fertilizer or as feed additive.

Now if you know the Chinese market, you will know that it is extremely competitive. One day you start a new product, the next day, there will be 10, 20 other people selling the same products. There are hundreds of companies also selling humic acid based products. How did Yongye succeed? 

There are three reasons: first, the product is effective. It works! Farmers who have used the product have reported satisfying results. Second, it's cheap. As the company advertises, invest 400, make 4000 more profit. It is this kind of return that will make farmers buy it. In China what sells the best and the fastest is the products that are cheap and good. Third, the company recruited a marketing genius which is said to be the top 10 in China as their marketing exec and hired the famous "Lizard Team", a marketing company formulated the marketing strategies. They bombarded the local TV networks, newspapers with continuous ads, sent flyers to every family in villages, gave lectures to farmers, set up many branded stores, collected feedback and stats via telephone. The result is amazing. Often farmers would empty the entire stock when a new store just opened.  

There are many people who are suspicious of such marketing tactics. They wonder whether this is scam. Especially when you look at the ads, you see pictures of before/after comparison just like how people are selling the weight loss pills. Yongye has won many product innovation awards. No doubt it is a good product. It many not be some miracle drug. But obviously, farmers like it. It's healthy and environmental friendly. It's "Green". Chinese government has very supportive agriculture policy. Don't forget, the Chinese revolution started from the rural area. When the financial crisis hits, one of the stimulus policy was to push to sell electronics and cars in the villages. 

Yongye is in a niche market. It is rapidly expanding it's distribution network and branded stores. It had already opened more than 9000 stores by the end of 2009 comparing with the 1125 stores in 2008. Yongye started the experiment in the desert area, now they are expanding to the central and southern market. There's huge growth potential for YongYe. On the risk side, as the company expands, it may need to place more common stock offerings to raise capital, which could cause share dilution.


Disclosure: No Position