Yuhe Intl (PINK:YUII)

Yuhe shares have reacted well to this morning's news regarding a completed public offering of common stock that priced 3.6 million shares at $7.00, or about a whopping four times analyst 2011 EPS estimates of $1.76.

It remains to be seen what the company will do with its new pile of cash. If we are to believe commentary from a recent release and the company's proclamation to maximize shareholder value:

 Where appropriate, we plan to use our stock as an acquisition currency, but only if we have a high level of confidence that any future acquisitions match the return profile of this deal, which we expect to be highly accretive and have a positive impact on our revenues, net income and diluted per share earnings. Our ultimate objective, above and beyond achieving revenue and net income growth, is to grow our earnings per share."

then an acquisition should be just around the corner to achieve EPS accretion. 

If their is a positive from YUII's move, it is that EPS will still grow nicely, even after taking into account the 23.0% dilution. Barring acquisitions, 2011 EPS estimates would be reduced to $1.43 from $1.76. Quarterly EPS growth, based on current estimates, remain strong.

We are curious why the company did not wait to see how the market would have reacted to YUII 2010 third quarter report, assuming it meets estimates.

Now that the elephant is out of the bag, aggressive investors are placing their chips on YUII. Conservative investors may want to await the release of 2010 third quarter financials before making a serious move.

We will attempt to interview management.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

Yuhe Intl shares are making an impressive move today in response to news that it entered into an asset purchase agreement with Liaoning Haicheng Songsen Stock Farming and Feed Company Limited ("Haicheng Songsen") to purchase five breeder farms in Haicheng City, Liaoning Province for RMB 21.3 million (approximately $3.1 million).

Upon completion of this deal, Yuhe will be the largest farmer of parent breeders and the largest producer of day-old broilers in terms of production capacity in China," said Mr. Zhentao Gao, Chairman and Chief Executive Officer. "For the first time, we will also have a production base outside of Shandong Province, an important milestone in our path toward becoming the leading company in the national broiler market in China.

Considering the impact of the five breeder farms the Company plans to acquire and assuming the deal closes, the Company expects the following results:

• Day-old broiler output of 150 million in 2010 and 250 million in 2011
• Based on the anticipated production increase and assuming the average selling price for 2009 of RMB 2.74 and a net income margin of 26%, the newly acquired breeding farms are expected to contribute an incremental $3.1 million in net income in 2011 and $4.5 million in 2012.

Two aspects of this release offered a welcome surprise:

1. The terms of transaction were out of character with most of the deals we have seen:

Concurrently, Weifang Yuhe entered into a service agreement with Mr. Zhaolin Jiang, the controlling shareholder of Haicheng Songsen, who provides Weifang Yuhe with certain services related to completing the asset purchase transaction in exchange for 300,000 restricted shares of Yuhe common stock calculated at a price of $10 per share (or 42.9% above Friday's close) with total consideration equal to approximately RMB 20 million. The restricted shares are subject to a six-month lock-up period.

2. Focus is on EPS growth:

Mr. Gao added, "We believe the terms of this transaction are very beneficial for Yuhe and its shareholders. We are acquiring breeder farms with a skilled management team and staff for significantly less than it would cost us to build such farms from scratch. This deal also represents the first time we are using our stock as a currency for making acquisitions. Mr. Zhaolin Jiang's acceptance of restricted shares of Yuhe for the services he provides as part of the deal is a vote of confidence in our business and its future prospects. Where appropriate, we plan to use our stock as an acquisition currency, but only if we have a high level of confidence that any future acquisitions match the return profile of this deal, which we expect to be highly accretive and have a positive impact on our revenues, net income and diluted per share earnings. Our ultimate objective, above and beyond achieving revenue and net income growth, is to grow our earnings per share."

It is good to see that IR firms and CEOs are beginning to understand the messages we are sending. Another point in YUII's favor is that it appears that its Chinese and SEC filings match.

YUII Reported recently strong 2008 year end financial results.  At first glance, with trailing tax adjusted EPS of $.47,  the stock is selling at a tax adjusted P/E of 5 compared to its implied EPS growth rate of 22.64%, based on the company's 2009 net income guidance of $13 million.  Although, the growth rate is below the GeoTeam's® 30% minimum preference, the current discrepancy between the valuation and EPS growth rate seems initially compelling.  The GeoTeam® is breaking down the numbers and will have more details if warranted.