Yongye International Responds to Allegations in Purported Analyst Reports

BEIJING, May 19, 2011 /PRNewswire-Asia-FirstCall/ -- Yongye International, Inc. (NASDAQ: YONG) ("Yongye" or the "Company"), a leading agricultural nutrient company in China, today responded to recent analyst reports and web-based articles which inaccurately characterize Yongye's business, make false accusations regarding the Company's financials and related party transactions, and draw unwarranted inferences from documents that were filed by third parties with the Chinese government. The Company believes that these analysts and or the parties that have hired or are affiliated with them have engaged in reckless attempts to negatively influence trading in Yongye's securities for their financial benefit. Given the number of ill-founded assertions in these articles we will confine our comments to those issues that are most egregious.

(Photo: http://photos.prnewswire.com/prnh/20110519/CN05920-a )

(Photo: http://photos.prnewswire.com/prnh/20110519/CN05920-b )

The Absoroka Capital Report – Lack of Credibility or Evidence

On May 18, 2011, Absaroka issued a faux "report" repeating stale and already denied and refuted allegations about Yongye that is, by Absaroka's own admission, being published without any warranty of correctness and for the purpose of enriching Absaroka by benefiting its securities position.  Absaroka has admitted that it has a conflict of interest.  If you can read all the way through a full page of fine print legal disclaimers, you will see that Absaroka has gone out of its way to make it sound like it is publishing only its "opinion" about Yongye.  The admonition by Absaroka and the author Mr. Kevin Barnes, that no one should rely on this misinformation, is accurate.  Whether that weak attempt to avoid legal responsibility for their statements, and the harmful effects they have on Yongye and its shareholders, will work, however, remains to be seen.  In the meanwhile, Yongye has confidence that the investing public will not be fooled by Absaroka's insulting tactics – stringing together innuendo, half truths, and outright misrepresentations apparently believing that it can fool the investing public into a panic sale of Yongye stock so that Absaroka can cover its short position cheaply and make a lot of easy money at the expense of Yongye and its stockholders.

Supplier Relationships

This set of allegations was aired before and entirely refuted, yet Absaroka does not bother to address those prior comments, clearly establishing Absaroka's reckless disregard for the truth.  Absaroka claims that the Company's prior two largest suppliers of humic acid are shams.  Absaroka relies on no specific fact to establish this false claim but rather raises questions and innuendos.  As we previously reported, our information is that our largest supplier, Wuchuan Shuntong Humic Acid Trading Company, was established in 2008 by one of our previous suppliers, Wuchuan Sanda.  Sanda's establishment of Shuntong was meant to coincide with our becoming a US public company, which all anticipated would, and did, bring about a significant increase in the demand for humic acid.  

As for Absaroka's claims that the government recently shut down Sanda, we stopped purchasing from Sanda a couple of years ago.  Shuntong had been our major supplier for 2009 and 2010. Resorting to the all-time favorite short seller ploy, Absaroka points to Shuntong's AIC filings, showing the absence of revenue, as "proof" that it cannot be supplying us anything, much less the volume of supplies we are in fact buying.  As has been widely reported, AIC filings are notoriously inaccurate in China for private companies, and many commentators use those inaccuracies, falsely, to try to make unwarranted broader points.  What we do know is that Shuntong has provided us quality product, our auditors have audited our supplier figures, and that our own filings, in both China and U.S., are accurate.  We cannot comment on the "channel checks," or even the "diligent channel checks" that Absaroka asks its readers to credit as the "proof" for their false allegations that Shuntong and Sanda have not provided us the supplies that they have, in fact, provided.

In an astounding display, Absaroka attacks as entirely fraudulent our lignite coal project with Shuntong.  Look carefully at what Absaroka does.  In discussing the project, it says that the project must be fraudulent because it involves Shuntong, which is a fraud.  In discussing Shuntong, Absaroka says it is a fraud because it was involved in the lignite project.  

The lynchpin of the allegation that Shuntong does not exist is yet another rehash – this time of the fact that contact information for Shuntong filed with the government is actually Yongye's contact information.  As we have explained, our staff assisted Shuntong's business registration, and, earlier this year, we learned that because of that assistance our contact information was mistakenly left on Shuntong's local business registration form. Absaroka deals with this fact in a manner that should shed light on its entire attack on Yongye – it simply calls it a perjury.  Their proof that the explanation is perjury?  Because they say so.

We have documentation in which the Wuchuan county government approved awarding  Wuchuan Shuntong the rights to develop the lignite coal resource project with area size of over 30 square kilometers (see attachment A), which we later acquired. The Wuchuan government would not give its approval without a good understanding of the financial resources of Wuchuan Shuntong. We also have approval from Inner Mongolia Autonomous Regions Develop and Reform Committee to transfer the thirty thousand ton per annum humic acid salt project from Shuntong to us (see attachment B).  This transfer also includes the lignite coal resource project we acquired from Shuntong, pending additional governmental approval.

There simply is no evidence that Shuntong is a fantasy or is in any way a related party to our company.

Prepayment

Absaroka recycled the allegation that our prepayment for humic acid in first quarter of 2011 makes no sense and raises some sort of red flag. It is clear that Absaroka is not – nor should it be – in any sort of consumer business.  Our view is that certainty of supply of key raw materials is a priority. Although humic acid and lignite coal are widely available, qualities of these materials vary greatly, as anybody with basic industry knowledge should know. We do have very high requirement for raw materials quality, which is important to ensure that our product deliver good results for farmers. The amount we prepaid in Q1 was around 10% of our anticipated total cost of goods sold for 2011. We think the prepayments were necessary in order to minimize production risk.  Absaroka disagrees.  We don't tell Absaroka how to attack companies and make money manipulating short sales, and they should not tell us how to run our business.

Our recent borrowings and reported cash balances.

Employing a typical, and entirely disingenuous, short seller tactic, Absaroka points to the fact that a bank required a personal guaranty for a loan as some sort of "evidence" that Yongye could not have the assets that it purports to have.  Absaroka apparently believes that the investing public, the auditors, and the regulators are too stupid to discover what was so obvious to the bank that it "forced" Yongye's Chairman to personally guaranty the borrowing.  Absaroka attributes the bank's greater insight to some unspecified "information" that was not available to investors (what about the auditors?).  Once again, this is a typical short seller tactic – ignore the facts and make as much as you can out of innuendo.

The "information" on which the bank based its personal guaranty requirement was that our physical assets were committed to collateralize our other two standby credit lines with two other commercial banks that we obtained last year, totaling RMB400 million.  Given the Chinese Central Bank's tight credit policy, and the need to maintain the availability of those pre-existing lines, we made the business judgment to support a new RMB100 million loan with a personal guaranty from Chairman Wu, who was kind enough to offer it as a demonstration of his confidence in and commitment to our business. We intend to pay back the China Everbright Bank loan as soon as possible, but, in any event, the existence of the guaranty does not evidence any financial weakness of the Company.

Hebei Distribution Acquisition

In a shameless rehash of old – and refuted – allegations, Absaroka once again trots out the question:  why would Yongye purchase a customer list when buying the list adds nothing to our knowledge base?  As we have previously explained, through our announcement on March 24, 2011 (Yongye International Responds to Post on Seeking Alpha Website) and earnings calls, that acquisition was part of a contractual arrangement with our former Hebei distributor in Hebei province regarding the acquisition of the distribution network.  It had nothing to do with knowing, or not knowing, the names of its customers.  Absaroka has (once again) seized on perfectly lawful behavior falsely to raise a specter of impropriety, apparently believing that it can fool the investing public.

We were obligated to pay the purchase price for the network, and we did.  Perhaps Absaroka thinks it is alright to ignore contractual obligations, but we feel that fair dealing is good business, and we believe in treating business partners fairly. Moreover, the acquisition of the distribution network has more than exceeded our original expectations.   We believe that at least part of the success comes from treating our former distributor fairly, which also enhances goodwill from distributors in other provinces. After the acquisition of the distribution network, our sales from Hebei increased 103% in 2010 over 2009, with substantially improved margin. We also have no problem collecting cash from our sales in Hebei.

Not satisfied to reinvigorate only that old – and entirely refuted – allegation, Absaroka recycles the false claim that we bear some responsibility for the alleged fact that the network sellers failed properly to report their stock holdings after the acquisition.  Once again, as we previously stated, the name of our previous Hebei distributor and our financial transactions with them were provided to our auditor as part of the normal auditing process. Reporting their share ownership is the responsibility of the shareholder. In any event, as far as we know, none of the individuals who received our shares in exchange for the sale of the Hebei distributor ended up owning more than 5% of our stock, which is the reporting threshold.

Relationship with Stanford University

It is simply amazing that Absaroka cannot come up with anything new to complain about and also manages to completely ignore our prior responses to these stale claims.  Absaroka claims that we say that a legion of Stanford scholars assisted in the development of our product.  As we have previously reported, Stanford University is not involved in R&D of Shengmingsu.  We do have a cooperative effort with Stanford, but it focuses on corporate social responsibility. There was a Shengmingsu infomercial, developed in 2006 or 2007 by a third party marketing company, referring to the fact that Shengmingsu R&D has the support of Stanford University. Yongye never used this infomercial in its own marketing activities, although some distributors might have used it locally a long time ago. We don't believe it was ever aired on CCTV7. This video might still be found on the internet. After we became public in 2008, we have requested that our distributors adopt stringent measures when promoting our products.

Efficacy of Shengmingsu and Fulvic Acid Plant Nutrients

Absaroka found someone taking a position contrary to our own as to the effectiveness of other companies' humic acid based products.  The report made no reference to Shengmingsu and was not conducted under Chinese growing and soil conditions.  We have many test reports from various Chinese government agencies and other third party organizations on the efficacy of Shengmingsu in Chinese soil. We encourage our investors to go to http://www.yongyeintl.com/Publications.html where we share some selected reports translated into English. Shengmingsu has won some of China's top agriculture and technology awards and is being used by millions of farmers across China.

Production Capacity

A recent article in Seeking Alpha questioned whether our capacity is able to support the sales we made. Obviously, the author has little understanding of real world manufacturing and capacity issues. The official capacity reported for our factory represents the capacity under normal situations with at most 300 days of operation. During the past several years, our sales consistently exceeded our expectations, as evidenced by our multiple increases in sales guidance. As a result, our factory has consistently been operating at a higher than normal capacity utilization, especially during peak seasons (i.e. second and third quarters).  Moreover, we can expand production capacity even further by eliminating bottlenecks in batch and line processes and by hiring additional temporary workers, as we did, in significant numbers, in the peak season in 2010. We also shared in our earnings call that we conducted our capacity improvement project in early 2010. We also outsourced certain processes during peak seasons to manage our production needs.  The short sellers can raise all sorts of innuendo, but these specious claims are refuted by our detailed production records, which were made available for our auditors.

Financial Reporting

We are committed to reporting accurate financial information. Our reported financials for the Chinese authorities have been consistent with our filings with the Securities and Exchange Commission in the U.S. since our inception. Prior to 2009, we were a much smaller company and it did not make economic sense for us to engage a "Big 4" auditor. We are probably one of the few small-cap Chinese companies to have upgraded to a "Big 4" auditor while still trading on the OTCBB and have received unqualified opinions from our current auditor for both 2009 and 2010 since making that change.

About Yongye International

Yongye International is a leading agricultural nutrient company headquartered in Beijing, with its production facilities located in Hohhot, Inner Mongolia, China. Yongye produces and markets two lines of organic nutrient products: a liquid nutrient product which is sprayed on plants and a powder nutrient product which is added to animal feed. Both products are sold under the brand name "Shengmingsu," which means "life essential" in Chinese. The Company's patented technologies and formulas allow it to create products that increase crop yields and improve the health of livestock. The Company sells its products primarily to provincial or regional level distributors, who then channel those products to a carefully selected network of over 26,000 independently owned, Yongye branded stores or directly to rural farmers and government farms in China. For more information, please visit the Company's website at http://www.yongyeintl.com.

Safe Harbor Statement

This press release contains certain statements that may include "forward-looking statements." All statements other than statements of historical fact included herein are "forward-looking statements." These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involving known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the risk factors discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on the SEC's website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these risk factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

SOURCE Yongye International, Inc.

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