Yongye Intl (NASDAQ:YONG)

	Recent 52-week high
	30% Earnings Per Share (EPS) growth rate
	10% revenue growth year over year
	Strong balance sheet
	15% minimum return on equity (ROE)
	8% minimum pre-tax margins
	Under 50 million shares outstanding
	High insider ownership
	Limited institutional ownership
	P/E at least 1/2 of EPS growth rate

by Maj Soueidan

The Yongye Intl (NASDAQ:YONG) story has become one of additional uncertainty since the news last Friday stating that Roth has downgraded the stock from Buy to Neutral.

Earlier that day an investor had asked me the following question:

Maj. Have you changed your opinion on YONG? just curious...

My response:

"I still am net long YONG (stock, calls and puts). But there is no way I can say how I feel for sure until on-the-ground DD begins. A key question here is whether or not the YONG filings I have are the originals or amended? Remember, I do not think there is a joint inspection with SAT on amended filings.

If we can not even rely on SAT, we are just screwed. It means there may be some collusion at the SAT level too."

I actually believe that if YONG lowers guidance instead of reiterating it (as they did), there is an increased probability that YONG is basically a real company presented with everyday challenges. Short-term bad, but maybe ok in the long-term. By reiterating guidance, the fraud perception card could increase if investors choose to heed Roth's numbers

While the Roth downgrade was not explicitly a decision based on fraud, we had no choice but to remove YONG shares from the GeoBargain list until further notice and the implementation of on-the-ground DD, something we have said needed to be ultimately accomplished before rendering a final decision on YONG shares. We had also informed readers that we had purchased puts against our long position.

Here were some of my thoughts expressed in some Geoinvesting premium level message board posts in response to the Roth downgrade:

• I do not know how YONG shares will eventually resist the temptation to go down further.
  
• When Roth had a price target of $15, I can see a reason for those that follow analysts recommendations for hanging on to YONG, even with a hit piece looming. But now with a target of $5.80, the risk/reward is not worth it...not even close.
  
• I am not sure Roth is telling us everything. Is it possible that they were tipped off by some shorts, which prompted an emergency channel check trip?
  
• I think if we look at the ChinaHybrids where Roth has made significant negative sentiment shifts in opinions, we will notice that stocks have performed awfully.
  
• Roth cut the 2011 EPS estimate to $1.20 from $1.65. Now we have a situation where the company is expected to see no adjusted EPS growth in 2011. So YONG goes from a growth/value play to maybe just a value play.
  
• Will the other 4 analysts that cover YONG now downgrade? (although I think Roth had the highest estimate)
  
• The “looming hit piece” will just shake out weak hands.
  
• Auditor ranks do not matter anymore (at least for now).

I think either way YONG is in a tough spot. The company has maintained guidance, meaning investors would need to assume that Roth is clueless. If they reduced guidance, it strengthens Roth's findings. Is Roth really going to make this stuff up? I doubt it.

Now here is the interesting observation. YONG issued strong guidance in mid March 2011, so the casual observation would reveal that YONG had a "good read" on first quarter 2011 results. But Roth also reduced the first quarter estimate. Conditions could not have worsened that fast, so is it possible that YONG is not being totally up front.

If Roth is right, I am worried that YONG could face a cash flow problem resulting in a need to tap the equity market. And what are the odds of favorable terms?

I think what we are seeing in many of these ChinaHybrids is a desire to grow too fast, leading to a misuse of capital and inability to manage growth/EPS. I will take EPS growth over less revenue and outstanding share count growth any day. Many of these "legitimate" firms could have better utilized internal cash to grow capacity at a more modest pace and to buy back stock.

The dilemma that investors are now presented with is who to believe: YONG or Roth? Until we perform on-the-ground DD, we will side with Roth's assessment. This may seem like a quick 180, but the circumstances support our decision for the time being.