Yuhe International Inc (OTC:YUII)

On July 20, 2012, Mr. Gang Hu resigned from the position of Chief Financial Officer of Yuhe International, Inc. (the “Company”).

Open letter from Gang Hu.  Please see it here.

Although the Company's press release dated July 21 in this regard originally suggested that the Audit Committee and its advisors would be publicly reporting the results of the independent investigation to investors, the Audit Committee today confirmed that the independent investigation would proceed as is customary in such corporate investigations, with the Audit Committee reporting such results to the full Board of Directors of the Company, who will then determine the appropriate remedial steps to be taken in light of the final report. The Audit Committee will rely on the advice of its own legal counsel in this regard and act in cooperation with the Company with a view to full transparency regarding the independent investigation process. As previously reported, Loeb & Loeb LLP, is in the process of engaging a forensic accounting firm in connection with launching the independent investigation, and the Audit Committee expects to be in a position to announce this engagement shortly.

WEIFANG, China, June 17, 2011 /PRNewswire-Asia/ -- Yuhe International, Inc. (NASDAQ: YUII) ("Yuhe" or the "Company"), a leading supplier of day-old chickens raised for meat production, or broilers, in the People's Republic of China ("PRC"), today announced that its management will comment on the volatility of the Company's shares through a special conference call before the market opens on Friday, June 17, 2011.

The Company will host a special conference call at 8:30 a.m. Eastern Time on Friday, June 17, 2011. To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time. Conference ID # 77152026

USA Toll-free:

18662421388

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.

WEIFANG, China, June 16, 2011 /PRNewswire-Asia-FirstCall/ -- Yuhe International, Inc. (NASDAQ: YUII) ("Yuhe" or the "Company"), a leading supplier of day-old chickens raised for meat production, or broilers, in the People's Republic of China ("PRC"), today announced that the Company provides incremental documentation relating to the acquisition conducted in December 2009, when it entered into an agreement to purchase 13 breeder farms from Weifang Dajiang Corporation.

On Tuesday Evening, June 14th, 2011 (US time), we contacted the CEO of Daijiang Enterprise Group, Xuejiang Zheng, to discuss the bizarre claims that Yuhe’s management had made in an investor conference call earlier in the day.  We were baffled and outraged at what Mr. Zheng told us.  The following bullet points summarize Mr. Zheng’s statements (see transcript and audio recording in update link for irrefutable proof that:
 

• YUII lied again in the conference call on Tuesday.  There was no Daijiang acquisition. No money ever moved from YUII to Daijiang.  Not even a single penny.
• YUII’s bizarre claim that Mr. Zheng attempted to hoodwink our Chinese investigators in prior discussions because they were affiliated with American investors was a lie.
• YUII’s management fabricated the acquisition documents that were provided to investors in association with the conference call. (Important note: we have separate, independent evidence that confirms Mr. Zheng’s claim that the documents were fabricated). 
• The CEO of YUII went so far as to personally visit Mr. Zheng prior to the conference call to apologize and make amends for having brought Daijiang into the acquisition scam.
• In an attempt to calm Mr. Zheng, who was understandably irate at the fact that he and his company had been unknowingly drawn into YUII’s acquisition scam, YUII’s CEO attempted to downplay the risks to Mr. Zheng and his company.
• Mr. Zheng’s paraphrasing YUII’s CEO: “This is disclosed in the United States in English.   Domestically, no people and no Chinese disclosure at all.  I did not imagine that it will hurt you.
• ”YUII’s actions damage the reputation of Daijiang Enterprise Group, and Mr. Zheng is planning to take legal action against YUII to seek financial compensation.

The following update elaborates on our findings with respect to YUII and provides additional proof that Daijiang acquisition documents were fabricated.

click here for update

We wish to disclose that we have contacted YUII’s auditor, Child, Van Wagoner, and Bradshaw, requesting that they reassess their opinion on YUII’s 2009 financial statements, given that there is now ~$12.553MM of investor money unaccounted for.  We also wish to disclose that we intend to offer assistance to Mr. Zheng in any lawsuit that he decides to file against YUII in the United States.

1st Call Audio

2nd Call Audio

WEIFANG, Shandong, China, June 14, 2011 /PRNewswire-Asia/ -- Yuhe International, Inc. (NASDAQ: YUII) ("Yuhe" or the "Company"), a leading supplier of day-old chickens raised for meat production, or broilers, in the People's Republic of China ("PRC"), today announced that certain of its executive officers and directors have completed the previously announced executive stock purchase plan, by which they purchased the Company's common stock for their personal accounts on the open market at prevailing market prices. The Company further announced that its management will comment on the recent price volatility of the Company's shares through a special conference call before the market opens on Tuesday, June 14, 2011.

Pursuant to the previously announced executive stock purchase plan, the participating officers and directors collectively invested approximately RMB 2.1 million, or approximately US$330,000, in the shares of the Company. The participating executive officers and directors included the Company's Chief Executive Officer, Mr. Zhentao Gao, Chief Financial Officer, Mr. Gang (Vincent) Hu, and certain members of its Board of Directors. The executive stock purchase plan was funded by cash commitments made by the participating officers and directors and will not have any impact on the Company's financial statements or cash balance. The execution of the executive stock purchase plan was conducted in a manner consistent with the interest of all of the shareholders of the Company, taking into account of market conditions, stock prices, and other factors.

Mr. Zhentao Gao, Chairman and Chief Executive Officer of Yuhe International, commented, "The adoption and execution of the executive stock purchase program is a strong demonstration of our commitment to aligning the interests of our shareholders and our executive officers and Directors. The management and directors believe that the Company's fundamentals and growth prospects are not fairly reflected in its current share price, which represents an attractive opportunity for personal investments. We remain devoted to leveraging our operational expertise in China's day-old broiler industry to deliver superb operational results and long-term returns for our shareholders."

The Company also attach the following Chinese documents as evidence of its acquisitions conducted in December 2009, when it entered into an agreement to purchase 13 breeder farms from Weifang Dajiang Corporation, for a total acquisition consideration of approximately $15.2 million:

1. The formal Purchase Agreement between Weifang Yuhe Poultry Co., Ltd. and Weifang Dajiang Corporation, which was legally signed and stamped by both parties;

2. The pay check stub for the payment remitted to Weifang Dajiang Corporation upon signing the Agreement;

3. The bank statement showing the transaction history;

4. The stamped receipt from Weifang Dajiang Corporation for the payment; and

5. An independent asset evaluation report on the acquired farms issued by a third-party asset evaluation agency.

Conference Call

The Company will host a conference call at 8:30 a.m. Eastern Time on Tuesday, June 14, 2011, to discuss the executive stock purchase and to comment on the recent price volatility of the Company's shares. To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time. Conference ID # 75607117

USA Toll-free:

18662421388

China Toll-Free:

4006988166

International Dial-In:

+ 61288236760

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.

First Quarter 2011 Highlights

• Net revenue increased 128.47% year over year to $26.86 million
• Sales volume grew 102.91% year over year to 51.86 million birds
• Gross profit increased 90.41% year over year to $7.43 million
• Operating income increased 106% year over year to $6.12 million
• Net income increased 107.36% year over year to $6.07 million, or $0.30 per fully diluted share

"We are very pleased to report a strong first quarter of fiscal year 2011," commented Mr. Zhentao Gao, chairman and chief executive officer of Yuhe International, Inc. "While the first quarter is traditionally one of our slowest quarters in terms of sales as a result of the Chinese Lunar New Year, our year-over-year quarterly net revenue increased 128.47%, due to our successful market penetration into a wider customer base to absorb our increased production capacity. The first quarter average selling prices of our day-old broilers increased 9.81% year over year in the midst of the current inflationary marketplace. As more of our previously acquired breeder farms have begun contributing to our capacity since early 2011, we expect to continue leveraging on China's strong broiler market and to deliver superb operational and financial results."

Recent Development 

As of the date of this press release, the Company had officially taken possession of 13 breeder farms from its previous acquisitions conducted in December 2009 and July 2010. Of these, 11 breeder farms were taken over from Weifang Dajiang Corporation, and two breeder farms were taken over from Liaoning Haicheng Songsen Stock Farming and Feed Co., Ltd.

2011 outlook

Given the expected strong day-old broiler market in 2011 and the fact that the capacity ramp-up from the previous acquisitions will continue to contribute to the Company's sales volume of day-old broilers throughout 2011, the management of Yuhe International remains confident in the Company's capability to generate strong operational and financial results in 2011.

The management reiterates its previously issued guidance for 2011 of

• production volume totaling 250 million day-old broilers
• net income of between $33 million and $36 million.

WEIFANG, China, April 14, 2011 /PRNewswire-Asia/ -- Yuhe International, Inc. (NASDAQ: YUII) ("Yuhe" or the "Company"), today announced that its management wishes to comment on the recent price volatility of the Company's shares.  

"The Company's management is not aware of any negative allegations against the Company with respect to its operations that may result in the sudden price plunge of its stock," commented Mr. Zhentao Gao, chairman and chief executive officer of the Company, "we continue to operate our business well and the price of our day-old broilers remains in a favorable range. The Company has been and will continue to comply with the applicable U.S. securities regulations and to disclose any material information publicly in a timely fashion."

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.

 

Fourth Quarter Results:

• Net revenue increased 64.06% to $21.8 million, as compared to $13.3 million for the fourth quarter of 2009.
• Gross profit increased 59.4% year over year to $7.5 million, with gross margin of 34.5%, as compared to $4.7 million, or 35.5% gross margin for the same period in 2009.
• Adjusted net income (non-GAAP) for the three months ended December 31, 2010 was $6.20 million, or $0.32 per fully diluted share, up 71.13% compared with net income of $3.6 million, or $0.23 per fully diluted share for the same period in 2009

"We are very pleased to report a strong fiscal year 2010 with solid financial and operational results." commented Mr. Zhentao Gao, Chairman and chief executive officer of Yuhe International, Inc. "Our 2010 non-GAAP net income of $19.5 million has surpassed our previously raised guidance of $18.5 million in net income. The growth was driven by an increase in both sales volume and average selling prices of our day-old broilers. In fiscal year 2010, we sold approximately 146 million day-old broilers, or an increase of 33% from 110 million in 2009. The full year 2010 average selling price for day-old broilers increased 9% year-over-year to RMB 2.97 per bird from RMB 2.74 per bird in 2009. We are particularly pleased with our gross margin performance in fiscal year 2010, which rose to 35.9% from 35.4% in 2009, due to our successful margin management in locking in favorable fixed-price supply contracts during the market downturn and capitalizing on the market rebounds during the third and fourth quarter of 2010."

Given the expected strong day-old broiler market in 2011 and the increased volume contribution from the Company's previous acquisitions made in December 2009 and July 2010, the management at Yuhe International forecasts its fiscal year 2011 net income to be in the range between $33 million and $36 million.

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.

WEIFANG, Shandong, China, Jan. 4, 2011 /PRNewswire-Asia-FirstCall/ -- Yuhe International, Inc., today announced that the company's wholly owned subsidiary, Weifang Yuhe Poultry Co., Ltd. ("Weifang Yuhe"), entered into a series of asset purchase agreements to purchase ten breeder farms in Liaoning and Henan Provinces, China, for an aggregate purchase price of RMB 108,686,716, or approximately USD 16.4 million. The ten breeder farms are purchased from six individuals engaged in large-scale parent breeder raising businesses in China (collectively "Sellers"), where eight breeder farms are in Liaoning Province, and two are in Henan Province.

Pursuant to the terms of the asset purchase agreements, the acquisition consideration will be paid in combination of cash and Yuhe's stock.

• Total cash consideration amount to RMB 80,098,406, or approximately USD 12,099,457.
• The share consideration is calculated at a price of $10 per share with total share consideration equal to approximately RMB 28.6 million, or approximately $4.3 million, for approximately 431,848 restricted shares of Yuhe's common stock. The restricted shares are subject to a six-month lock-up period.

The ten breeder farms have a total production capacity of 950,000 sets of parent breeders, covering an area of approximately 91 acres (558 Mus) with a building coverage of approximately 1,471,869 square feet (136,740 square meters). The assets purchased include the buildings and breeding equipment for the breeder farms, as well as land lease rights with terms ranging between 20 years and 50 years.  

Upon closing, Yuhe will have an increased production capacity of 3.15 million sets of parent breeders, accounting for 8% of China's broiler market in terms of production capacity. Geographic details for the ten acquired breeder farms are as following: one farm in Anshan City, Liaoning Province; One farm in Wafangdian City, Liaoning Province; Two farms in Haicheng City, Liaoning Province; One farm in Dandong City, Liaoning Province; Three farms in Shenyang City, Liaoning Province; and two farms in Zhoukou City, Henan Province.

Mr. Zhentao Gao, Chairman and CEO of Yuhe International, commented, "We are very pleased to acquire the ten new breeder farms in China as planned. The highlights of this acquisition lie in two aspects, one being that the Company had gained access to a large quantity of breeding land with reasonable terms; and the other being that we were able to retain a large number of experienced and skilled workers. Both factors are current bottlenecks to self-constructing such breeder farms."

The average cost of acquiring a 100,000-set-parent-breeder-farm in this transaction was RMB 11,440,700 (approximately $1.85 million), approximately 25% higher than the average acquisition cost of RMB 9,176,000 (approximately $1.48 million) in June 2010 for a comparable breeder farm. The cost increase was mainly driven by the increased land lease right fees from RMB 1,000 per Mu to RMB 1,400 and RMB 1,700 per Mu in Liaoning and Henan Province, respectively. Cost for acquiring farm buildings increased slightly, as a result of purchasing more steel-structured farms with higher unit cost. The average costs for the Company to acquire these breeder farms remain lower than those to build such farms from scratch.

At the time of signing the contracts, the age of the existing breeding stocks at the acquired farms were between 23 and 52 weeks, and such existing breeding stocks are expected to retire at the 67th week. Due to quality assurance purposes, Yuhe will only take the ownership of the acquired breeder farms when all existing breeding stocks retire. Upon closing, Yuhe plans to spend RMB 10 million (approximately USD 1.6million) on a two to three-month facility restoration and employee training program. The Company plans to put the first batch of 550,000 sets of parent breeders into production by the end of the third quarter of 2011, and the remaining 400,000 sets by the end of the fourth quarter of 2011. The production increase will be reflected in the Company's broiler output in 2012, when the breeding stocks enter their egg-laying peaks. This revenue-contribution timeframe is similar to that in Yuhe's previous acquisitions in December 2009 and June 2010, where the production increase from an accumulated 1.05 million sets of parent breeders is expected to be reflected in the Company's broiler output in 2011.

The Company also announced that the constructions of its hatchery facilities were progressing well. The third hatchery facility equipped with 60 hatchers has completed construction and commenced operation with the first batch of 40 hatchers. The fourth hatchery designed to have 100 hatchers will begin construction in the first quarter of 2011.

Mr. Vincent Hu, CFO of Yuhe International, commented, "The Company's future profitability is expected to be improved as a result of this acquisition. We expect the consequential increase in sales volume in 2012 will translate into a lower unit administrative cost and higher operating margin."

"This acquisition was completed amid a booming broiler market in China," commented Mr. Zhentao Gao, CEO of Yuhe International, "The successful acquisition demonstrates that Yuhe is capable of leveraging on its industry experience and reputation to capture industry consolidation opportunities in both rising and falling markets."

"This is the third acquisition carried out by Yuhe, and is also the second acquisition that used our stock as partial acquisition consideration. Based on our previous experience in acquisition and post-acquisition integrations, we expect that this acquisition, being the largest in the Company's history, to be successfully completed as the previous ones," Mr. Gao added.

"It is a strategic milestone in our history that our production base expands into Henan Province after our expansion into Liaoning Province in 2010," Mr. Gao continued, "We currently focus our hatching and sales network in Shandong Province, and we plan to expand the sales network into wider geographic areas after commanding a meaningful market share in Shandong. Having production bases stationed outside of Shandong Province lays strategic foundation for the Company's future nation-wide market penetration. We will continue to leverage on our core competencies and in-depth knowledge of China's broiler industry to carry out our long-term strategy." Concluded Mr. Gao.

The Company raised its net income guidance for fiscal year 2010 to $18.5 million, up from previously announced $17 million. The raised guidance represents growth in net income of 44.5% as compared with fiscal year 2009. The Company expects the production volume of day-old broilers to be 145 million heads for fiscal year 2010, slightly down for 0.5% from previously expected 150 million day-old broilers. The updated guidance does not take into account of the impact of any potential acquisitions.

"The upward adjustment to our net income guidance was mainly due to an increase in average selling prices of the day-old broilers, which have exceeded our initial expectations," commented Mr. Zhentao Gao, Chairman and CEO of Yuhe. "The day-old broiler prices have stayed in high range from the third quarter of this year, and is still gaining upward momentum going into December. As one of the largest suppliers of day-old broilers in China, we are highly confident that the favorable supply and demand dynamic in the day-old broiler market will continue to support high unit selling prices throughout and beyond 2010, allowing us to reach our updated financial guidance for the fiscal year 2010," concluded Mr. Gao.

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.

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"Our strong third quarter sales growth was driven by an increase in both volume and average selling prices," commented Mr. Zhentao Gao, Chairman and Chief Executive Officer of Yuhe. "We are particularly pleased with our gross margin performance which benefited from higher average selling prices and our ability to optimize our input costs by locking in favorable fixed prices for external eggs when the market was not as strong as it is today. Yuhe's management team, based on its many years of experience and industry expertise, correctly forecast the current supply shortage and took action to capitalize on the opportunity.  As a result, we are benefiting from a situation where average selling prices are rising at a faster rate than our input costs.  The current average selling price of day-old-broilers is approximately RMB 3.4 and we expect this favorable supply/demand imbalance to persist into at least the first half of next year."  

Outlook

Mr. Gao added, "We are pleased to announce that we began to generate revenues from the new parent breeders that we purchased in Shangong Province in 2009 and early 2010.  Of the 13 farms purchased, nine have begun operations and the other four farms are expected to commence operations by the end of the first quarter of 2011.  We also completed the construction of our new hatchery in September 2010.  Given our increased capacity and the higher average selling prices in the market, we believe our full year 2010 broiler output and net income will surpass our previously provided forecast.  For 2011, we continue to expect broiler output of approximately 250 million.  

"Our acquisition of the five breeder farms in Liaoning Province provides us with a production base outside of Shandong Province and is an important milestone in our path toward becoming the leading company in the national broiler market in China.  We are in the process of upgrading the facilities and training the employees at these farms and plan to put the first four farms into production by the end of the first quarter of 2011 and the fifth farm into production by the end of the second quarter of 2011.  Upon full operations of all of our acquired farms, we expect to have in total 430,000 sets of hatchers with a hatching capacity of 43 million broilers per year.

"The capital we raised in our recent financing, combined with our internally generated cash resources, provides us with flexibility to capitalize on potential acquisition opportunities within our industry.  We continue to view this as a very attractive time to make acquisitions and are currently evaluating additional targets that represent a total capacity of between 1.0 million and 1.2 million sets of parent breeders.  We are committed to delivering sustainable growth in shareholder value and keeping this principle foremost in our mind when evaluating any potential future acquisitions."  

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

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.

Yuhe International, Inc. announced today that it intends to offer shares of its common stock in an underwritten public offering. Roth Capital Partners is acting as sole book-running manager for the public offering with Rodman & Renshaw, Brean Murray, Carret & Co., and Global Hunter Securities acting as the co-managers.

"We have not determined the specific amounts we plan to spend on any of the uses of the proceeds from this offering of our common stock as described in “Use of Proceeds” or the timing of these expenditures. Failure by our management to apply these funds effectively may adversely affect our ability to maintain and expand our business. In the event that management does not apply these funds effectively, your investment in our common stock may not result in a favorable return."

The GeoTeam® is suspecting that Yuhe Intl (NASDAQ:YUII) may be contemplating a capital raise:

At the last minute, management cancelled its participation in the Rodman conference last week. We were scheduled for a one on one with the company. Early last week, we emailed the investor relations firm to inquire why YUII canceled, but never received a response.  Although not for certain, we may be able to assume that YUII is in a quiet period or saw no reason to attend the conference, as they may have already secured a capital raise deal. Shares have also been weak, despite the company reporting solid 2010 second quarter financial results and publicized claims that its SAIC files match SEC files. Most of the price decline has happened since September 7, 2010.

This reminds of us a similar situation when Skypeople Fruit Juice (NASDAQ:SPU) did not host a question and answer during its 2010 second quarter conference call. Just days after the call, SPU announced a private placement, contradicting its related 10Q which eluded it would not do so at the time.

YUII does have some debt, which could limit financing options. Still, we would consider it a slap in the face to investors if YUII completes a raise anywhere near its current price, which is about 30.0% off its recent highs.  2011 EPS is expected to grow 58.6% to $1.76.  It would be more prudent to allow this growth to play out before joining the ranks of other ChinaHybrid companies that have showed a lack of consideration to shareholder value. On the bright side, YUII had mentioned that it would only use its stock as currency for accretive acquisitions. Issuing EPS guidance would be beneficial if our speculation is validated.  Hopefully, we are overreacting, but the Chinese RTO sector is becoming increasingly difficult to read.

• Sales revenue amounted to $12.48 million for the three months ended June 30, 2010, increased by $2.64 million, or 27%, from $9.83 million for the three months ended June 30, 2009.
  
  • The revenue increase was driven by the increase in sales volume of the Company’s day-old broilers by 8.9 million birds, or 34%, from 25.7 million birds in 2009 to 34.6 million birds in 2010 for the three-month period ended on June 30.
    
  • The increase in sales volume of the broilers was a result of capacity expansion in the first quarter of fiscal year 2010.
    
  • Nevertheless, the sales revenue increase as a result of the broiler sales volume increase was partially offset from $3.12 million to $2.64 million by the revenue decrease in retired parent broilers and by-products by $0.48 million.
    
  • The unit selling price of the broilers of RMB 2.38 per bird remained unchanged year over year for the three months ended June 30, 2010.
    
• Net profit increased by $0.96 million, or 46%, to $3.06 million for the three months ended June 30, 2010 from $2.09 million for the three months ended June 30, 2009.
  
• EPS was $0.19 vs. $0.13.

Outlook:

The Company's management expects sales volume and net income to rise in the second half of the year, given the seasonality of the business and the fact that the new parent breeders that were purchased in 2009 and 2010 will begin to generate revenue in the fourth quarter of 2010. Therefore, management re-affirms its previously issued guidance for 2010 with production of 150 million broilers in total and net income of approximately $17 million.

Considering the contribution of the five newly acquired breeder farms, management expects the output of broilers in 2011 to reach 250 million. Management also believes their existing sales network is capable of absorbing the increased output in the short run. The Company plans to build sales networks gradually around those production facilities outside Shandong province to provide pre-sales services, marketing, and after-sales support.

The construction of Yuhe's new hatchery was, to some extent, affected by the recent hot weather because the Chinese government enforces shorter working hours for construction workers on high temperature days. Management expects the new hatchery to commence operations in September 2010.

Mr. Gao added, "We believe Yuhe is very well positioned to capitalize on the opportunities in our market. With our recently closed and announced acquisitions and the construction of our new hatchery, we are confident that we are making the right investments today to position our Company for profitable growth. We have a very experienced team that understands our market very well and is adept at optimizing our input costs and maximizing our sales potential to drive both sales and earnings. We are very pleased with our first half performance. As we enter the second half of the year, we are encouraged by the market environment. We previously stated that we believe there will be a supply shortage in our market going forward and we are beginning to see tangible signs of this. Our day-old broilers are currently commanding average selling prices that are up significantly from the prices we were seeing in the second quarter. We believe that demand and prices for high-quality day-old broilers will stay strong through at least the second half of the year. This together with our expanding capacity gives us confidence that we will be able to deliver strong results for our shareholders through the balance of the year and beyond."

As we approach 2011, EPS growth should improve for the ChinaHybrid universe. Now is the time to identify qulaity companies that will benefit from this trend.  Some stocks have already been moving up from recent lows, perhaps a clue from the market on who it believes the quality companies are. 

On July 30, 2010, we placed Yuhe International on the GeoBargain list. YUII is the first ChinaHybrid company we have added to this list since we recoded the Chinese GeoBargains/GeoSpecials to their respective radar lists with intentions to perform further due diligence on the sector.  Previously, YUII was a GeoSpecial.  We hope to have more stocks join YUII as we head towards 2011.

GeoNuggets® - Quick Check List Highlighting Undiscovered Opportunities

Yuhe Intl (NASDAQ:YUII)

Company Description: Founded in 1996, Yuhe is one of the largest day-old broiler poultry breeders in China. The Company's main operations involve breeding, as all broilers are sold within a day of hatching.

Data Ended 7/30/10

• Price = $9.40
• Trailing EPS = $0.80
• Fully-Taxed Trailing EPS^a = $0.60
• 2010 EPS Estimate= $1.06
• 2010 Fully-Taxed EPS Estimate= $0.80
• 2010 EPS Estimate= $1.68
• 2011 Fully-Taxed EPS Estimates= $1.26
• P/E based on Fully-Taxed Trailing EPS = 15.66
• P/E based on Fully-Taxed 2010 EPS = 11.75
• P/E based on Fully-Taxed 2011 EPS = 7.46
• Fiscal Year ends in December

Reasons for Optimism

1. YUII meets 7 out of 10 GeoBargain® Requirements
   
   

   	Requirement	Comments
   	Recent 52-week High(generally within 3 months)	Must Reach $12.43
   	30% EPS Growth Rate	The June 2010 Qtr. through the 2011 December Qtr.are all expected to achieve EPS growth in excess of 30%.
   	10% Revenue Growth	The June 2010 Qtr. through the 2011 December Qtr.are all expected to achieve revenue growth in excess of 30%.
   	Strong Balance Sheet/Operating Cash Flow	As of 1st Qtr 2010
   Yes	Positive Cash Flow	$2.0 Million
   Yes	Debt to Equity Ratio less than 20%	18.50%
   No	Current Ratio is at least 2:1	1.84:1
   	Return on Equity is at least 15%	15.00% on an annualized basis
   	Minimum Pre-tax Operating Margins of 8%	24.91% as of 1st Qtr. 2010
   	Preferably Under 50 Million Shares	16.06 Million shares as of 1st Qtr. 2010.
   	High Insider Ownership (generally greater than 15%)	50.0% (Still need to verify)
   	Limited Institutional Ownership (generally less than 20%)	>20.0% (Still need to verify)
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. (Ideally less than 0.50).	0.35, Using the average EPS growth rate for 2010 and 2011

   
   
2. We are continually seeking leading companies to add to our portfolio. YUII fits this bill, as it is one of top three day-old broiler poultry breeders in China. Soon, upon completion of a recently announced asset purchase agreement of five breeder farms, YUII will hold the number one spot in terms of production capacity. There is a big distinction between being the leader and to being a leader.
   
   
3. The company is expected to experience over 30% EPS growth for the next 7 quarters.
   

   	2011 EPS	% Change	2010 EPS	% Change	2009 EPS
   1st Qtr.	$0.33 Est.	83.3%	$0.18	-5.3%	$0.19
   2nd Qtr.	$0.30 Est.	66.7%	$0.18 Est.	38.5%	$0.13
   3rd Qtr	$0.54 Est.	45.9%	$0.37 Est.	42.3%	$0.26
   4th Qtr.	$0.52 Est.	57.6%	$0.33 Est.	43.5%	$0.23
   Full Year	$1.68 Est.	58.5%	$1.06 Est.	30.9%	$0.81

   Investors should note that estimates likely do not include the impact of the breeder farm asset purchase agreement which is expected to add $3.0 million to 2011 net income.
   
   
4. YUII has expressed a commitment to the maximization of shareholder value, with a particular emphasis on EPS growth. Such a commitment is especially important during a time when the ChinaHybrid sector has lost some credibility.
   
   * Comments detailing aspects of the breeder asset purchase agreement reinforces our assumption:
   

   "This deal represents the first time we are using our stock as a currency for making acquisitions.

   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."

   * 300,000 restricted shares of Yuhe common stock were issued in the deal at a price of $10 per share (or 42.9% above the stock's price at the time of the announcement). The restricted shares are subject to a six-month lock-up period.
   
   * At $3.1 million, YUII paid only about one times the 2011 projected net income contribution.
   

   Hopefully, YUII can help lead the charge to help rebuild investor confidence in the ChinaHybrid space, a plea that we have already directed towards the CEO's of these companies.
   

5. Credibility established:
   
   * As indicated in a Seeking Alpha article, YUII's SAIC files parallel SEC filings. (Wherever you may stand on your belief on the validity of SAIC filings, one can not deny that at the current moment mismatching information can cause perception problems. Until this issue is laid to rest, knowing that filings match will give investors a sense of comfort and a willingness to bid P/E's higher. Long-term investors who do not subscribe to the SAIC filing debate will find the current ChinaHybrid sector ripe for success)
   
   * The company's substandard payment procedures have been reviewed by Ernst & Young, and subsequently rectified.

Investors may feel that the above factors will help YUII experience an above average P/E when compared to the rest of ChinaHybrid space. In fact, YUII sports a tax adjusted trailing P/E of 15.66, which many investors may consider lofty when compared to the ChinaHybrid sector. We, on the other hand, believe the market is telling us that it perceives YUII shares may offer a favorable growth/risk profile, giving us some confidence that a trailing P/E of 25 and a P/E of 15 on future estimates may be in the cards.

Points to Ponder:

• YUII auditor is not in the top 100. This is common for small firms. We believe that YUII will eventually retain a top 100 auditor.
  
• On On June 2, 2010 the company filed a S-1, allowing it to raise capital in the future, which will weigh on the minds of investors. We feel that management will only tap equity for accretive purposes which lightens our dilution concerns.
  
• Debt to equity is knocking on the door of our maximum threshold of 20%. We would also like to see a higher current ratio. As the company's growth gains steam, we are hopeful that these statistics will improve.

Potential Valuation Scenarios if the company can achieve its EPS growth goals

Short-Term Potential value based on fully taxed adjusted trailing EPS

P/E 25 * $0.60 = $15.00

Short-term Potential value based on 2010 & 2011 fully taxed adjusted EPS estimates:

P/E 15 * $0.80 = $12.00
P/E 15 * $1.26 = $18.90

^a YUII is not paying a full tax rate. Therefore, all EPS numbers have been adjusted by the GeoTeam to reflect a Chinese tax rate of 25%.

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.

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.

Added to the GeoSpecial list on August 17, 2009 @ $5.10.
 
Catalyst: see original note 
Peak performance: Reached a high of $12.43 on March 9, 2010
Current Price: $7.60
 
Current road block:  In early March, YUII ran into some accounting obstacles; Debt to equity is around 20% which is right on the edge of where we prefer to see this ratio. (we prefer less than 20% and consider both long and short term debt).  YUII has reported two consecutive of quarters of subpar EPS growth;

• Fourth quarter 2009 vs 2008: $0.23 vs. $0.48
• First Quarter 2010 vs 2009:    $0.18 vs. $0.19

Remains on the GeoSpecial list.  With $15.7 million in cash and annualized cash flow from operations tracking at $8.0 million, YUII appears in good position to satisfy its $14.0 million debt obligations. Also, in April 2010, the company renegotiated approximately $8.2 million of its long-term bank loans at a more favorable fixed interest rate of 7.56%. The terms of these loans were extended to the first quarter of 2013. The lull in EPS growth was preceded by several above average growth periods and appears to be temporary as the company has recently increased capacity. Analyst estimates have the company’s next three quarters of EPS growing over 30%, followed by 44.5% for all of 2011.  Managements outlook is also positive:

"The Company's management expects sales volume and net income to rise throughout the remainder of 2010. Therefore, management re-affirms its previously issued guidance for 2010 of production totaling 150 million day-old broilers and net income of approximately $17 million." 

The company has, with the aid of a top ten accounting firm, addressed its accounting issues:

In May 2010, Ernst & Young (China) Advisory Limited completed its review of the Company's payment procedures at the request of Yuhe's Audit Committee. The review concluded the following: 

• Yuhe International has cleared all the inter-company balances with related parties.
• There were no payments between Yuhe International and its related parties in the period of March 1, 2010 to March 31, 2010.
• No material exceptions were noted during the review of the payment procedures.
• The Board of Directors and Audit Committee have initiated more stringent internal controls over payment procedures. Additional information is available in the Company's Form 10-Q filed with the SEC on May 14, 2010.

Even though YUII remains in the GeoSpecial list, short term is no slam dunk. Despite commentary in its 2010 first quarter 10Q indicating that its liquidity situation is sufficient for ongoing operations... 

"The Company expects that its strong positive working capital of $11.09 million as of March 31, 2010 and positive cash flow provided by operating activities of $1.99 million will meet its foreseeable working capital needs for the next 12 months from the date of this report. In the first quarter of year 2010, the Company renewed 7 bank loans for a total of $8.19 million with local banks, these loans will expire in year 2013."

On June 2, 2010 YUII snuck in an S-3 filing opening the door for more dilution.

This development is somewhat perplexing. As it stands, estimates are bullish and the balance sheet is solid.

Our suggestion:  Let the stock reflect the good news and consider an offering at a later time.  For the time being, we will give the company the benefit of the doubt, as a raise could be used for an accretive acquisition:

"Unless otherwise indicated in a prospectus supplement, we intend to use the net proceeds from the sale of shares of our common stock under this prospectus for capital expenditures, possible future acquisitions, and general corporate and working capital purposes. We have no current plans, commitments or agreements with respect to any acquisitions as of the date of this prospectus."

The most discouraging aspect regarding this ordeal is that we can't even trust what we read in SEC filings. We were just about to praise YUII as a company that appeared in a good position to avoid tapping the equity markets.  YUII joins Universal Travel (NYSE:UTA), Yongye Intl (NASDAQ:YONG), Shengkai Innovations Inc (NASDAQ:VALV)  as firms that we believe are doing shareholders an injustice by still tapping the equity markets when their stock valuations are low and balance sheets seem healthy enough to finance near-term growth.  Investors may want to wait for more clarity in the likelihood of YUII executing an offering before making a serious investing commitment.

"While the first quarter is traditionally one of our slowest in terms of sales due to the cold weather and the Chinese Spring Festival, we saw an uptick in sales volume of our day old broilers," commented Mr. Zhentao Gao, Chairman and Chief Executive Officer of Yuhe International. "At the same time, gross margin was impacted by slightly lower selling prices and higher feed costs. We expect our financial performance to accelerate in the second half of the year when the approximate 176,000 parent breeders we recently purchased mature and begin contributing to production capacity."

The Company's management expects sales volume and net income to rise throughout the remainder of 2010. Yuhe's strongest results will occur in the second half of the year, given the seasonality of the business and the fact that the new parent breeders that were purchased in early 2010 will begin to generate revenue in the fourth quarter of 2010.

Therefore, management re-affirms its previously issued guidance for 2010 of:

• Production totaling 150 million day-old broilers
• Net income of approximately $17 million.

YUII is down sharply this morning on details in an 8K mentioning that its independent registered public accounting firm, that Grant Thornton is resigning as the Company’s independent registered public accounting firm effective immediately.

Details:

• In the Company’s Annual Report on Form 10-K/A filed on June 3, 2009, the Company has concluded that certain related party loans between the Company and Shandong Yuhe Food Group Co., Ltd. have constituted prohibited transactions under Section 402 of the Sarbanes-Oxley Act of 2002.
  
• Although all such related party loans had been repaid as of the end of 2009, because the Company continues to make payments under certain arrangements to Yuhe Food, such payments have resulted in related party loans in January and February 2010.
  
• Grant Thornton noted during its audit procedures that the Company has been unable to eliminate the occurrence of related party loans between the Company and Yuhe Food, and the Company concluded that a material weakness continues to exist with respect to the Company’s compliance with Section 402 of the Sarbanes-Oxley Act of 2002.
  
• Grant Thornton also has communicated to the Company certain audit adjustments related to the Company’s financial statements for the year ended December 31, 2009, which indicated a material weakness of the Company’s internal control over financial reporting. The Company agrees with such assessment.

It's odd that YUII continues to make prohibited loans after acknowledgment of similar violations in June of 2009. But, we are more concerned about the "audit adjustments related to the Company’s financials for the year ended December 31, 2009."  Will this result in a restatement of financials? We are postulating that it will not as the statement likely refers to loan issue.

Normally, such news would prompt a removal of YUII from the GeoSpecial list, but we will let this play out for the moment until we receive more details.  Negative perception will certainly persist as the company seeks a new accounting firm and performs  damage control.  Some investors may assume that where there is smoke there is fire. We are actually making a bold move and initiating a trading position in YUII @ $9.50.  Most investors would likely require more clarity on the situation, but our risk tolerance is a 100 on a scale of one to ten.

Maj

The GeoTeam® is strongly considering coding Yuhe Intl as a GeoBargain. We currently have the stock coded as a GeoSpecial and a GeoBargain on the radar. We had held off on a GeoBargain designation due to 2010 analyst EPS estimates being less than 30%. However, current estimates have YUII EPS growing 32% to $1.07 ($0.81 tax adjusted) . With a forward P/E of 9.88, value investors may also take a liking to the fact that the company has completed capacity expansion plans with further plans to expand capacity in 2010.

Source: PR Newswire (December 22, 2009)

Special situation initiated @ $5.10

On August 14, 2009 Yuhe Intl reported strong second quarter financial results, slightly exceeding analyst estimates.

Highlights:

• Revenue increased 75.5% to $9.8 million
• Fully diluted EPS increased 81.2% to $0.13. 
• Company maintains fiscal 2009 guidance of $50 million in total revenue and $13 million in net income.

Using the current outstanding share count of 15,722,180, Company guidance implies an earnings per share figure of $0.83.

The share count of 15,722,180 seems like a reasonable assumption due to comments from the Company's most current 10Q filing.

"The Company expects that its strong positive working capital of $4.84 million as of June 30, 2009 will meet its foreseeable working capital needs for the next 12 months from the date of this report as management believes the Company would be able to renew the $8.3 million bank loans that are due in the next 12 months."

YUII is currently on the GeoBargains on the Radar list.  In order to upgrade to a GeoBargain, the company would need to attain earnings per share growth of at least 30%.  While analyst estimates indicate that the company will achieve this requirement in some of the upcoming quarters, the EPS growth rate is not forecast to reach 30% on an annual basis.

• 2009 annual EPS growth rate (taking into consideration that the company exceeded analyst estimates by $0.02): 9.6%
• 2010 annual growth rate: 17.5%

The GeoTeam® will code YUII a low tier GeoSpecial as a result of the stock's tax adjusted P/E to 2010 earnings per share growth statistics:

• Price as of August 14, 2009: $5.10
• 2010 tax adjusted analyst estimate: $0.60 ^a
• P/E on 2010 tax adjusted analyst estimate: 8.5
• PEG ratio based on 2010 earnings per share growth rate: 0.48

Why low tier?

Comment from 2009 second quarter press release:

"we expect the third quarter will be our best quarter of 2009 partly due to seasonality.

Analyst estimates do not echo this sentiment as they show the fourth quarter being the strongest quarter for 2009 and 2010.  A clarification is ultimately needed on this item as it could affect growth rate assumptions.

^a For valuation purposes, The GeoTeam® prefers to adjust EPS to reflect a tax rate of 36%.

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.