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posted on 03 March 2016

Xinyuan Real Estate: Analysis Of 4th Quarter Data

by Elliott Morss, Morss Global Finance

Ever since 2007 when Xinyuan Real Estate (XIN) became the first Chinese real estate developer listed on the New York Stock Exchange, its low price has been something of a mystery. After being launched at $16.50, it fell to a low of $1.67 in 2008, and recently has been trading in the low $2 to high $3 range.

The mystery has to do with the fact that at $3.90, its dividend rate is 5% with plenty of coverage but its price/earnings ratio is only 4. Sure, it is a Chinese company and FocusEconomics projects China to grow at only 6.5% this year. And yes, earlier on, there was a bit of musical chairs in the CFO position leading to concerns about the legitimacy of its financial data.

But much of this would appear to be resolved. George Liu has been the CFO for almost a year, and XIN has made steps to attract more foreign interest. It launched what should be a successful luxury apartment project - Oosten in the Williamsburg section of Brooklyn. And last summer, Liu and May Chen, the head of Investor Relations, attended a conference in New York with other real estate investors. In addition, XIN put out an extremely informative report on its real estate market and current investments last November available on its website.

In time, these public relations issues should help provided their numbers remain promising. And it is to the 4th quarter results that I now turn.

Basic Numbers

The 12-month numbers look good. As Table 1 shows, everything that is supposed to be up is up and costs are down. And there is plenty of earnings coverage for a $0.20 annual ADR dividend. But this is no reason to get carried away. As I said in an earlier piece, "being better than 2014 is testament to just how bad a year 2014 was for Chinese real estate".

Table 1. - XIN Annual Financials

o1

Source: Xinyuan Real Estate

However, the quarter-to-quarter numbers include some worrying signs. Table 2 gives quarterly data and changes therein. Revenues, sales, and floor area are up and costs as a share of revenues are down - all good. But income and earnings per share are down. This could only happen if prices fell. CFO Liu was asked about this at the press conference following the release of the fourth quarter figures. He said "margins fell". He suggested it was good to get rid of the low margin properties, even if it had to be done at lower prices.

Table 2. - Quarter-to- Quarter Financials

o2

Source: Xinyuan Real Estate

Prices

Table 3 gives prices (average square meter selling prices in RMB) by XIN project and how it has changed from same quarter last year and the previous quarter this year. The projects are ranked by the number of thousand square meters remaining to be sold at the end of 2015. Liu indicated that every project has more and less expensive segments and that some price declines simply result from less expensive components selling. That having been said, some of these numbers are troubling, e.g. Beijing Xindo Park, Xingyang Splendid II, and Sanya Yazhou Bay No.1. Of course, there could be quite reasonable explanations for the declines, but the prices XIN gets for its units bears watching. For example, I have been to Sanya, a recreation/resort area. This is not where the rapidly growing middle class of China lives. Perhaps it has been hit because the high income potential buyers are holding off out of concern over the decline in the Chinese growth rate.

Table 3. - XIN's Properties for Sale and Price Changes

o3

Source: Xinyuan Real Estate

Share Repurchases

In light of the low share price, a number of XIN stockholders have urged XIN to repurchase stock, arguing that by doing so, it could generate more per share income than it could via more real estate development. Perhaps in compliance with these stockholders' wishes, XIN authorized a share repurchase program of $40 million in December 2015. And in that same month, the company repurchased 495,759 ADSs at a total cost of approximately US$1.7 million. The purchased ADSs constituted 1.4% of its total diluted ADSs outstanding.

Domestic Loans

Last year, XIN got approval to issue local Chinese bonds. Liu was quite enthusiastic because it would mean the company could swap existing loans with coupons of 13-14% for much lower cost debt. On December 30, 2015, the company issued RMB1 billion million of local bonds with a rate of 7.5% and on February 4, 2016 it issued and additional RMB700 million with a 7.47%. Liu said that in addition, XIN got government approval to issue an additional RMB327 million local bonds. There was talk of how the monies raised would be used. Liu and May said that at least some of it would be used to replace more expensive debt. The jury is still out on this question.

Property Inventory

It is important for real estate companies to keep their inventory up for future sales. In fact, a proper sequencing of buying land, building and sales is critical for their survival. Table 4 provides data on XIN's inventories. It appears XIN has far less property under development than in prior quarters. The company also reports these area numbers in US$. It said the Company's real estate property under development at the end of the fourth quarter of 2015 was US$1,884.3 million, compared to US$2,012.2 million at the end of the third quarter of 2015.

Table 4. - Floor Area for Sale and Under Development

o4

Source: Xinyuan Real Estate

Debt

Data on XIN's debt are presented in Table 5. "Other long-term debt" has jumped by $153.3 million, probably because of the inclusion of the first tranche of its local bond issuance of RMB1 billion (approximately $153 million). An interesting question is how will XIN use the new local borrowings. As indicated above, they have suggested they will use at least some of them to replace more costly loans. But will they? With the declining inventory, there will be a real temptation to use these monies to buy and develop more property.

Table 5. - XIN Debt (mil. US$)

o5Source: Xinyuan Real Estate

Debt

Data on XIN's debt are presented in Table 5. "Other long-term debt" has jumped by $153.3 million, probably because of the inclusion of the first tranche of its local bond issuance of RMB1 billion (approximately $153 million). An interesting question is how will XIN use the new local borrowings. As indicated above, they have suggested they will use at least some of them to replace more costly loans. But will they? With the declining inventory, there will be a real temptation to use these monies to buy and develop more property.

Table 5. - XIN Debt (mil. US$)

o5

Source: Xinyuan Real Estate

Oosten

Some wonder how important the U.S. Oosten project for XIN is relative to its other properties. There was nothing on this in its related release (there will be in its 20-K to be issued shortly). We do know from prior reports that at the end of June 2015, it was valued at $173 million relative XIN's total $2 billion of properties under development and for sale.

Does Anyone Remember TPG?

Back in 2013, TPG Asia agreed to invest $108.7 million in XIN. The investment took the form of US$75.8 in convertible notes due in 2018 and US$32.9 million worth of common shares. Things did not work out. In 2014, XIN agreed to allow TPG Asia to redeem in full its 5% senior secured convertible notes due in 2018 at a cost of $86 million to XIN.

In explanation, XIN said "...the restrictions, the covenants from TPGs convertible notes have put a tremendous pressure on the company in terms of financing for our growth." CFO Liu characterized TPG as "conservative". Last summer, Liu said TPG continues to have a seat on the Board of Directors and also has a vote on the important 4-person Investment Committee.

One wonders what TPG has done or is planning to do with its XIN shares. TPG's shares at the time of purchase constituted 20% of XIN's outstanding shares. That is significant and their sale could limit any stock price growth.

Conclusions

The mystery for the low price/earnings ratio of Xinyuan continues. But XIN is taking steps to increase foreign awareness of its activities. In China, its business focus remains on the provision of housing for the growing middle class. And with central government support for this sector, it remains promising. In the U.S., XIN appears to be completing a successful project for high income earners and is working on the development of a second U.S. project in Manhattan.

The real estate industry has its ups and downs. And there will always be good and bad quarters. This last quarter for XIN? Ok. But nothing special.

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