Yongye International (YONG) - Truly Good

In a ridiculous attempt to damage Yongye's reputation, blogger Ian Bezek - whose bio says he works in distressed real estate - published an article on Seeking Alpha, where he claims that the company's fertilizer "probably doesn't work." His primary argument for why YONG shouldn't be trusted was the large number of Yongye-branded stores: "How on earth could you open 20,000 stores, more than 40 each day, with only 399 workers? Are you familiar with any other companies that can grow so rapidly without hiring more workers?"

What the author fails to realize - or maybe leaves out intentionally to support his short thesis - is that Yongye neither opens and owns, nor staffs those stores. All 20,000 stores are independently owned, Yongye does not have any employees working in those stores, instead they are Yongye-branded with shelving, window signs and displays to support the sale of Shengmingsu, the fertilizer product. YONG responded to Bezek's article in a press release, and explains that "all of our branded stores are existing agriculture stores in rural villages. As such, no stores need to be "opened." These are existing stores recruited to join our distribution network. In addition to selling Yongye's products, these stores also carry other agriculture products such as seeds, pesticides, and fertilizers. The store recruiting work is primarily driven by thousands of staff from our various levels of distributors."

Now everyone who has ever looked into YONG's business model could have spotted all the mistakes in Ian Bezek's piece instantly. That includes Seeking Alpha editors, who have confirmed the article for publishing and distribution. Could it be that China bashing articles generate the most page views these days? The only authority Ian Bezek got came from getting published on Seeking Alpha, and the editors there should be aware of their potentially market moving influence, and check submissions for basic mistakes that are very easy to spot.

YONG is down 6% for the week. We are in an environment where momentum traders hit any China stock the very moment a negative article is published. Most of them don't even know the company's name, nor do they have any idea about its business model. I can't blame them, this strategy was very profitable in the past, and they get served by short sellers with a new "hit piece" almost on a daily basis. However, when the effect of Bezek's article faded, YONG got hit by a downgrade from Brean Murray. The firm removed their price target, and downgraded the Chinese fertilizer sector to HOLD, citing "severe cold weather and serious droughts" that have hit China since late 2010.

Brean Murray concluded that while they are "impressed by Yongye's fast top-line growth and success in improving operating cash flow," they believe "it's difficult for a fertilizer company to be immune to natural disasters and doubt YONG's ability to maintain a triple-digit revenue growth rate in the face of tough weather conditions." But Brean Murray is alone with this view. Yongye issued a statement saying that their fertilizer is actually helping crops survive Northern China's current drought conditions, and one important benefit of the product is to help plants counteract the effects of water deprivation.

The company announced that Shengmingsu was purchased by some county level governments in northern provinces including Hebei, Shanxi, Shandong and Xinjiang to assist local farmers in combating the conditions. Yongye said "in recent months we have continued to see strong demand from our distributors, who are actively promoting our products as an effective nutrient product for local farmers to counteract the drought."

Yongye's peer China Green (CGA) lists the benefits of this group of coal-based liquid fertilizers as "to stimulate growth, yield, and protect plants from drought, disease and temperature damage while improving soil structure and enhancing soil fertility.