Yuhe Intl (PINK:YUII)

Rodman and Renshaw on YUII                                                 6/17/2011

YUII: Rating Under Review

Rating Under Review: We are taking Yuhe International’s rating under review from Market Outperform based on uncertainties surrounding the company’s apparently false acquisition of 13 chicken breeding farms from Weifang Dajiang Group (“Dajiang”). We are also removing our prior financial projections on the company.

What Happened

During an astonishing conference call held this morning, Yuhe management indicated that the company’s previously announced acquisition of 13 chicken breeding farms from Weifang Dajiang Group did not really take place. According to the company, after the original acquisition agreement with Dajiang was reached and signed and the first 80% of down payment was made by Yuhe to Dajiang, Dajiang’s Chairman, Mr. Zheng, apparently was unhappy with the acquisition price and had a change of heart. Thus, he refunded Yuhe the initial deposit and the acquisition did not proceed. As perhaps a face-saving measure, the Chairman and CEO of Yuhe, Mr. Zhentao Gao, did not disclose this information and instead put the returned funds into a separate private account. He then proceeded to acquire 11 chicken breeding farms from some different counterparties with those funds. During this entire time, Yuhe continued to claim that business was usual and that the acquisition from Dajiang did go forward. The company’s current admission was largely a response to allegations raised by articles published on GeoInvesting.com.

Our Take

We are dumbfounded by the events that have taken place. If true, what the company, and more specifically, the company CEO, has done, could be serious violations of securities regulations. There are a number of questions remain with regard to the situation. We believe Yuhe should form a special committee to investigate the matter, consolidate the company’s cash position, and provide updated financial results. The company clearly needs to improve its internal control, disclosure, securities compliance efforts. In light of the current uncertainties surrounding the company, we believe it is prudent to take the rating under review pending greater clarification.

Risks

Major risks to the company include: 1) outbreak of poultry diseases; 2) industry cyclicality; 3) volatility in broiler prices; 4) operating results may be affected by fluctuations in commodity prices; 5) dependence on a limited number of major distributors; 6) limited operating history; 7) illiquid market for shares; 8) currency exchange risk; 9) management's limited capital market experience that could lead to financial disclosure deficiency, 10) uncertainty regarding if and when the company can satisfy Nasdaq’s continued listing requirements; 11) litigation risk; and 12) country risks related to operating and investing in China.

Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on YUII                      5/17/2011

Reiterating Market Outperform Rating after Strong 1Q11 Results

1Q11 Results

Yuhe International (“Yuhe”, Ticker: YUII, Market Outperform) reported strong 1Q10 results that beat both Street consensus and our estimates. The company sold 51.86 million day-old broilers (DOB) with ASP of RMB3.20 per bird in Q1, compared with our respective estimates of 45 million birds and ASP of RMB3.00. Revenue in the quarter increased 128.5% YoY to a record $26.9 million, easily beating our estimate of $20.6 million and Street consensus of $19.5 million. Gross profit increased 90.4% YoY and reached $7.4 million, above our estimate of $6.9 million. Actual gross margin of 27.7% however, was below our estimate of 33.5%. Company cited the longer off season related to the belated Chinese lunar New Year’s date as a major reason for the gross margin decrease. Non-GAAP net income in Q1 came in at $6.1 million, or $0.30 per diluted share, beating our respective estimates of $5.1 million and $0.25 as well as Street consensus of $4.9 million and $0.23 per diluted share.

As of March 31, Yuhe had $42.1 million in cash and cash equivalents, $32.2 million in working capital, and $115.0 million in shareholders’ equity. Current ratio stood at 2.15. The company also generated $7.61 million of operating cash flow in 1Q11.

Reiterating Market Outperform Rating and $16 Price Target

We have tweaked our model to reflect the recent quarter performance and our updated outlook. For 2011, we now expect revenue will reach $135.5 million and gross profit will reach $44.3 million, implying a 32.7% gross margin. We estimate the company will generate non-GAAP net income of $36.4 million, or $1.77 per diluted share for the year. For 2012, we expect revenue, gross profit, and non-GAAP net income will reach $202.2 million, $68.7 million, and $52.5 million (or $2.53 per diluted share), respectively. The shares of Yuhe are currently trading at 3.6x our expected 2011 EPS estimate, which represents attractive valuation, in our opinion. We continue to view Yuhe as a strong growth story and an attractive investment vehicle targeting the Chinese agriculture and consumer sectors. Thus we are reiterating our Market Outperform rating on the shares of Yuhe as well as our price target of $16. Our $16 price target is based on the shares trading at 9x our expected 2011 EPS of $1.77.

Risks

Major risks to our rating and price target include: 1) outbreak of poultry diseases; 2) industry cyclicality; 3) volatility in broiler prices; 4) operating results may be affected by fluctuations in commodity prices; 5) dependence on a limited number of major distributors; 6) limited operating history; 7) illiquid market for shares; 8) currency exchange risk; 9) management's limited capital market experience that could lead to financial disclosure deficiency, and 10) country risks related to operating and investing in China.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on YUII                                    4/5/2011

4Q10 Earning Review; Maintain Market Outperform and Lower PT to $16

Yuhe International (“Yuhe”, Ticker: YUII, Market Outperform) reported 4Q10 results that beat the company’s non-GAAP net income guidance but were slightly below our expectations. During the quarter, the company sold 45 million day-old broilers (DOB) with ASP of RMB3.18 per bird, compared with our estimates of 48 million birds and ASP of RMB2.75. Revenue in 4Q10 grew 64.1% YoY to $21.8 million, slightly above our $21.0 million estimate. Gross margin contracted to 34.5% from 35.5% a year ago and 40.4% in the last quarter, below our estimate of 38.0%. Excluding non-cash stock compensation expenses, non-GAAP net income was $6.2 million, or $0.32 per diluted share, lower than our respective estimates of $6.8 million and $0.34. For full year 2010, the company generated revenue of $67.5 million, representing YoY growth of 42.8%. Non-GAAP net income increased 28.9% YoY to $19.5 million, translating to non-GAAP EPS of $1.15 after a 34.5% YoY growth.

4Q10 Highlights and Discussions

Inflation weighed on gross margin We are somewhat disappointed with the gross margin decline during the quarter. The company indicated in the press release that rises in average unit cost per bird mainly explained the gross margin contraction. Between 4Q09 and 4Q10, on percentage terms, average unit cost increased 19.2% YoY while ASP only grew 16.4%. We believe some other escalating expenses, such as wages, transportation, feed costs, utility expenses, also contributed to the margin decline, which is understandable amid the current inflationary environment in China. That being said, with the central government’s resolution to tame inflation, we anticipate slight gross margin recovery in 2011.

Acquired breeder farms operation update Nine out of the 13 breeder farms acquired in December 2009 were fully operational and contributed to production in 2010. The company also completed acquisitions in Liaoning and Henan provinces of a total of 15 breeder farms in July and December 2010. Combined with the company’s existing breeder farms, Yuhe now has production capacity of 3.15 million sets of parent breeders, which translates to 8% of China’s broiler market in terms of capacity, according to the company. Furthermore, the company has completed construction of a third hatchery and added 60 sets of hatchers at the end of 2010. Yuhe has also started construction of its fourth hatchery with a designed capacity of 100 sets of hatchers, which we expect will be completed in 2H11. On the acquisition front, armed with ample cash on hand ($34.5 million at the end of 2010), the company continues to look for attractive targets. Management indicated during the conference call that potential M&A are likely to happen in 2H11 if prices are attractive. Considering the continued rising cost of DOB, we believe seller’s price tags are likely to be higher than the level Yuhe paid in late 2010 (please refer to our report “Ten More Breeder Farms Acquired” published on January 5, 2011 for more details).


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer.

 

Rodman & Renshaw on YUII                            1/5/2011

Ten More Breeder Farms Acquired 

Yuhe International (“Yuhe”, Ticker: YUII, Market Outperform) announced that it entered into a series of asset purchase agreements to acquire ten breeder farms in Liaoning and Henan provinces for a total purchase price of RMB108.7 million ($16.4 million) including cash consideration of RMB80.1 million ($12.1 million) and stock consideration of RMB28.6 million ($4.3 millions). As for stock consideration, the company will issue 431,848 restricted shares of the common stock at $10 per share. The restricted shares are subject to a six-month lock-up period. The company held a conference call this morning discussing the acquisitions.

Details of the acquisitions 

The assets Yuhe purchased include buildings and breeding equipment for the breeder farms and land use rights with terms ranging from 20 to 50 years. Total production capacity of the ten breeder farms stands at 950,000 sets of parent breeders. Upon closing, Yuhe will have total production capacity of 3.15 million sets of parent breeders, becoming the largest producer of day-old broiler in China and accounting for 8% of market share. Among the ten breeder farms, eight are located in Liaoning and two are in Henan, covering an area of approximately 91 acres with a building coverage of approximately 1.5 million square feet. With these assets acquired, Yuhe will extend its footprint to Henan province, another large broiler market in China, and will have access to a large quantity of breeding land.

To assure quality, Yuhe will only take ownership of the acquired breeder farms when all existing breeding stocks of the acquired farms retire. Note that the ages of the existing breeding stocks at the acquired farms were between 23 and 52 weeks at the time of purchase, and they are expected to retire at the 67th week. Yuhe plans to spend approximately $1.6 million on facility restoration and employee training program. According to management, the first batch of 550,000 sets of parent breeders are expected to be put into production by the end of 3Q11, and the remaining sets are expected by the end of 4Q11, which will contribute to the company’s broiler output increase of 110-120 million in 2012.

Analysis of the deal 

Assuming an average selling price of RMB2.7 per day-old broiler and a net income margin of 26%, these asset acquisitions can contribute $45-$49 million of revenue and $11.7-$12.8 million of net income in 2012. Based on the aggregated purchase price of $16.4 million, the string of acquisitions appears to be valued at 0.3x- 0.4x its expected FY12 revenue and 1.3x-1.4x its expected FY12 net income. Compared to the two previous acquisitions, we believe the valuation this time is reasonable.

On the financing side, Yuhe had $27.4 million cash as of the end of 3Q10 and raised $25.2 million in aggregate proceeds from an equity offering in October, in which the company issued 3.6 million shares of common stock at $7 per share. We believe Yuhe has sufficient cash for the acquisitions and capital expenditure and working capital needs in 2011.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Global Hunter on YUII (November 1, 2010)

YUII closed a secondary public offering of 3.6MM shares on October 20, 2010, at $7 per share, raising $25.2MM in gross proceeds. We believe that this should remove the overhang created by the shelf filing and subsequent marketing efforts. We expect the company to use the majority of the proceeds to continue its growth strategy through small, strategic acquisitions to capture incremental market share in the broiler space. To account for the share dilution, we are lowering our FY2010 and FY2011 EPS estimates and price target, but continue to believe that YUII’s shares remain undervalued based on the growth prospects and profitability of the company.

Highlights

On October 20, 2010, Yuhe International announced the sale of 3.6MM shares through a registered public offering at $7.00 per share, which translates to $25.2MM in gross proceeds. The shares are being sold under the company's previously filed shelf registration. The company lists future acquisitions, capital expenditures and general corporate and working capital purposes as use of proceeds. Yuhe also granted additional 540K shares to the underwriters to cover any over-allotments, which can be exercised within the next 30 days.

We view this announcement as removal of an overhang, the shelf had created a ceiling in the stock price preventing it from participating in the recent rebound in many of the US listed China companies. With this overhang out of the way, we believe that investors should focus again on the company’s robust growth and strong fundamentals and expect to see multiple expansion in YUII’s shares to trade more in-line with its peers. YUII plans to sell 150MM day-old broilers in 2010 and 250MM birds in 2011, which translates to approximately 60% Y/Y top line growth using an ASP of ~RMB 2.70 per bird, and a post-dilution EPS growth of approximately 35%.

We expect the company to use the proceeds from this offering to continue its growth strategy through small, strategic acquisitions. In January of this year Yuhe acquired 13 new breeder farms from Weifang Dajiang Corporation for $15.2MM and in July the company acquired 5 more breeder farms from Haicheng Songsen for $3.1MM, increasing the number of Yuhe’s existing breeder farms to 33 and positioning YUII as the largest player in the space, in terms of both the parent breeder and the day-old broiler production capacity. The average cost for Yuhe to acquire these breeder farms was about 20% - 25% lower compared to the cost of building such farms from scratch. In addition, acquiring existing farms gives Yuhe the opportunity to obtain skilled management and staff. Going forward, the company plans to complete more of these kinds of strategic accretive acquisitions, since the recent industry trends of oversupply of day-old broilers led many smaller competitors looking to leave the market due to lower efficiency and getting closer to the retirement age. Yuhe’s performance has remained strong during this difficult time, due to the top quality of its products and economies of scale. As a result, the company is well positioned to become the consolidator in this fragmented space. We believe that the company remains focused on capturing incremental market share in the broiler space for the next several years and will look to possibly expand downstream once they have reached 10% to 12% of the total broiler market, of which they currently hold about 6%.

Adjusting estimates and price target to account for share dilution. We are maintaining our revenue and operating income estimates for FY2010 and FY2011, however we are lowering our EPS estimates to account for 4.14MM incremental shares, since we believe there is a strong probability that the over-allotment option will be exercised in full. We now expect the company to report FY2010 and FY2011 EPS of $1.05 and $1.41, compared to our previous estimates of $1.10 and $1.75. As a result of lowering our EPS estimates, we are also lowering our price target from $16 to $14. It is important to note that we are still using the same trading multiples to derive our price target and the only reason for the reduction was to account for share dilution.
 

Rodman & Resnshaw on YUII

3Q10 results above expectations 

Yuhe International (“Yuhe”, Ticker: YUII, Market Outperform) reported above expectation 3Q10 results. Revenue grew 62.4% YoY to $21.4 million, above our estimate of $20.2 million and Street consensus of $20.6 million. Gross profit increased 67.6% YoY to $8.7 million with a gross margin of 40.4%, easily beating our respective estimates of $7.8 million and 38.5%. Non-GAAP net income (excluding stock compensation expenses) increased 72.5% YoY to $7.5 million, above our expectation of $6.3 million and Street consensus of $6.4 million. Non-GAAP diluted EPS came in at $0.46, beating our estimate of $0.39 and consensus of $0.40 by a wide margin. As of the end of September, the company had $27.4 million of cash and cash equivalent, up from $14.0 million at the end of last year. 

3Q10 highlights and discussions 

Increasing selling price of day-old-broilers was undoubtedly a major driving force behind the company’s better than expected quarterly performance. As China has been entering into an inflationary environment, poultry prices in the country have witnessed noticeable jumps. The current average selling price (ASP) of day-old-broilers is about RMB3.4, significantly above the RMB2.38 average price during the previous quarter. Management indicated during the conference call that ASP of day-old-broilers is likely to remain high for the rest of 2010, but could come down a bit early next year. Sales volume continued to be strong with 40.3 million of day-old broilers sold, up from 34.6 million in 2Q10 and 30.0 million in 3Q09. We expect sales volume growth for the next quarter will accelerate, fueled by newly expanded hatchery capacity in September and the coming Chinese New Year holiday season. 

The company had locked in relatively favorable fixed prices from its external egg vendors before the recent market price run-up. The higher product selling prices coupled with relatively stable costs resulted in improved margins. That being said, with the expectation of a slight decline in day-old broiler price and the expiration of external egg supply contracts with favorable prices, we believe gross margin can undergo some compression starting in 2Q11.

Raised outlook 

In 2Q10 earning release, Yuhe reaffirmed its 2010 guidance – 150 million day-old broilers and net income of $17 million. With increased capacity, strong market demand, and higher ASP, the company now expects day-old broiler output and net income will exceed the previous guidance. It continues to expect broiler output in 2011 to be approximately 250 million.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Global Hunter on YUII

Summary:

YUII closed a secondary public offering of 3.6MM shares on October 20, 2010, at $7 per share, raising $25.2MM in gross proceeds. We believe that this should remove the overhang created by the shelf filing and subsequent marketing efforts. We expect the company to use the majority of the proceeds to continue its growth strategy through small, strategic acquisitions to capture incremental market share in the broiler space. To account for the share dilution, we are lowering our FY2010 and FY2011 EPS estimates and price target, but continue to believe that YUII’s shares remain undervalued based on the growth prospects and profitability of the company.

Highlights

On October 20, 2010, Yuhe International announced the sale of 3.6MM shares through a registered public offering at $7.00 per share, which translates to $25.2MM in gross proceeds. The shares are being sold under the company's previously filed shelf registration. The company lists future acquisitions, capital expenditures and general corporate and working capital purposes as use of proceeds. Yuhe also granted additional 540K shares to the underwriters to cover any over-allotments, which can be exercised within the next 30 days.
 
We view this announcement as removal of an overhang, the shelf had created a ceiling in the stock price preventing it from participating in the recent rebound in many of the US listed China companies. With this overhang out of the way, we believe that investors should focus again on the company’s robust growth and strong fundamentals and expect to see multiple expansion in YUII’s shares to trade more in-line with its peers. YUII plans to sell 150MM day-old broilers in 2010 and 250MM birds in 2011, which translates to approximately 60% Y/Y top line growth using an ASP of ~RMB 2.70 per bird, and a post-dilution EPS growth of approximately 35%.

We expect the company to use the proceeds from this offering to continue its growth strategy through small, strategic acquisitions. In January of this year Yuhe acquired 13 new breeder farms from Weifang Dajiang Corporation for $15.2MM and in July the company acquired 5 more breeder farms from Haicheng Songsen for $3.1MM, increasing the number of Yuhe’s existing breeder farms to 33 and positioning YUII as the largest player in the space, in terms of both the parent breeder and the day-old broiler production capacity. The average cost for Yuhe to acquire these breeder farms was about 20% - 25% lower compared to the cost of building such farms from scratch. In addition, acquiring existing farms gives Yuhe the opportunity to obtain skilled management and staff. Going forward, the company plans to complete more of these kinds of strategic accretive acquisitions, since the recent industry trends of oversupply of day-old broilers led many smaller competitors looking to leave the market due to lower efficiency and getting closer to the retirement age. Yuhe’s performance has remained strong during this difficult time, due to the top quality of its products and economies of scale. As a result, the company is well positioned to become the consolidator in this fragmented space. We believe that the company remains focused on capturing incremental market share in the broiler space for the next several years and will look to possibly expand downstream once they have reached 10% to 12% of the total broiler market, of which they currently hold about 6%.

Adjusting estimates and price target to account for share dilution. We are maintaining our revenue and operating income estimates for FY2010 and FY2011, however we are lowering our EPS estimates to account for 4.14MM incremental shares, since we believe there is a strong probability that the over-allotment option will be exercised in full. We now expect the company to report FY2010 and FY2011 EPS of $1.05 and $1.41, compared to our previous estimates of $1.10 and $1.75. As a result of lowering our EPS estimates, we are also lowering our price target from $16 to $14. It is important to note that we are still using the same trading multiples to derive our price target and the only reason for the reduction was to account for share dilut