Yongye Gets Tough
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Yongye (NASDAQ: YONG) collected some of its receivables, but they had to be pushed by public opinion to do it. Last quarter, there was a fair amount of negative press regarding the runaway accounts receivables after they reported fourth quarter and annual earnings. Apparently, it was important enough to the company, to compel them to issue a press release April 3, 2012, to reassure investors everything was under control.
During the first quarter of 2012 the Company collected $140 million of $154 million accounts receivable, net of allowance for doubtful accounts at the end of 2011. The Company has taken measures to increase its collection efforts and closely monitor its distributors' financial status, and it expects to collect the remaining accounts receivable balance in the second quarter of 2012.
Yongye cited tight credit markets forcing distributors to make full use of the overly generous six-month credit terms that is company policy. According to the press release:
The delay in payments from the distributors was not due to excessive inventories of unsold product held by such distributors, nor was it due to a decrease in demand for Yongye products among distributors and end customers. The press release was somewhat odd given that these results could be presented along with the rest of the first quarter results May 10.
The quarter was notable for collection of the receivables, the unusual press release and for what appears to be a distinct decrease in demand for Yongye’s flagship plant nutrient product Shengmingsu in spite of the company's reassurance demand was intact. It may be that the big receivables overhang and excessive inventory held by distributors had to be cleared away in Q1—traditionally the start of increased sales and higher inventory levels as spring planting commences.
March Q1 2012
In Q1, Yongye launched two new products that are specifically for seeds and roots and are used early in the season. The revenue from these two products was $47.9 million while total revenue was $64.3 million. March 2011 revenue was $50.2 million and did not include the new product. Year-over-year Shengmingsu sales appear to have declined by roughly $33.8 million. Since revenue is recognized upon shipment, while demand may be constant according to the company, the slippage is likely due to excess inventory being sold by distributors that is left over from the excesses of 2011. Peak season is the second and third quarter and it will be critical to note what products continue to grow and by how much under the newly watchful eye of investors. It takes a village to make them collect receivables.
Growth overall was considerably slower in Q1 2012 and likely accounts for the failure of the stock price to advance much even after its collection efforts. It would appear that the Shengmingsu revenue growth declined, but it will be difficult to get an idea of the new normal until Q2 and Q3.
Margins are somewhat cyclical and the current margins are comparable to past Q1s.
While the receivables number has improved, it’s still high by historical norms. Days sales outstanding (DSO) has been steadily rising since June 2011. The company has been extending six-month credit terms in the most recent quarters. It’s hard to know if this is by necessity with tight credit in China or whether Yongye is finding it harder keeping the distribution channels flowing as quickly as they did in the past. In Q4 2011, it’s clear there was excess and they are paying for it with slow revenue growth in Q1. With such public scrutiny, there was no way to keep receivables at high enough levels to support its usual high growth. Revenue growth in March 2011 was 101% and that was without the new product. Whatever the cause, the DSO is still high, but improved over Q4 2011. Accounts receivable are increasing much faster than revenue
With the collection of $140 million of the accounts receivables in Q1, cash flow is positive at $61 million. The receivables account was a net positive change of $79.4 million compared to a negative $622K last year. That particular account will be less likely to cause such a significant boost to cash flow in Q2. They are most often cash flow negative in Q2 and Q3 as sales accelerate and receivables increase. These traditionally get paid in December and Yongye managed $15 million in CFFO in December 2010. If they keep collecting, they may manage it again in 2012.
Capital expenditures were low in March at $14,723. The coalmine venture appears to be on hold with no investment in equipment yet. If investors are lucky, it may remain that way indefinitely. It will be a tremendous cash sink if they build infrastructure and buy equipment to do surface mining. The price of lignite is cheap and the decision to mine it in an effort to control costs is irrational. The price of lignite coal is around $10 to $15 per ton—it’s cheap and plentiful.
Yongye may be succumbing to the inevitable competition in the plant nutrient space and possible saturation of its addressable market. It now has growth that compares more reasonably to close competitor China Green Agriculture. In the March quarter, CGA saw combined revenue grow 34.2% and its humic acid product grew 37%. CGA has a DSO of 91 -- the same as Q4 2011 and nearly a month better than Yongye. CGA has been aiming its business towards the granular fertilizer market and its sales of humic acid based nutrients have been in decline. It might be reasonable to expect the same for Yongye.
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