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Saturday, November 12, 2005

Another quick look at YaSheng Group (YHGG)

Let's take a quick look again at YaSheng's Q2 report. I had this nagging feeling while working on other stocks that the $1.5 billion invested in PP&E is not yielding enough. In some ways, you see this effect in whether the company can clear depreciation and make a substantial profit. But I want to look at it again.

Ok, so YaSheng has invested $1.54 billion in PP&E, which totally dominates their balance sheet. Let's go back to the 2004 annual report. At the start of the year, they had $1.34 billion invested. They added another $0.16 billion during the year, but let's assume that the earnings for 2004 are pretty much only based on the PP&E they had at the start of the year (it won't make too much of a difference either way, but let's be fair here). In addition, they had $181 million in current assets and some other non-PP&E long term assets, but these are not large. I want to look at return on the big pile of stuff they have.

Net income for the year was $62.0 million, which is about 4.63% of assets. Not great, but not dismal.

Now let's look at Archer Daniels Midland, which is a fair comparison for YaSheng. They had $13.6 billion in PP&E before depreciation at the start of 2004, with $36 billion in sales and $1 billion in earnings. ADM is getting a 7.3% return on invested PP&E.

It shouldn't be surprising that YaSheng is less effective with assets. U.S. agriculture is brutally efficient.

YaSheng has 19% gross margins. ADM has 6.7% gross margins.
YaSheng's SG&A is 9.8% of revenues. ADM's is 3%.
YaSheng's net margin is about 10%. ADM's is 2.7%.

U.S. agriculture is also brutally competitive.

Depreciation schedules:
Buildings & improvements: 20-40 years
Farming facilities: 10 years
Machinery and equipment: 7 years
Transportation & other facilities: 3 years

ADM (straight line depcreciation):
Buildings: 10-50 years
Machinery and equipment: 3-30 years.
...gee, why not just use 0-infinity years?

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