by Elliott Morss, Morss Global Finance
Introduction
Last week, XIN reported on its 3rd quarter performance. Most numbers were up a bit over last quarter and up a lot over the third quarter of 2014. But 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.
Summary Results
Table 1 provides data on recent performance. More floor space was sold in the 3rd quarter but at lower prices than in the 2nd quarter. Net income stayed up and XIN projects an increase of 30% for the entire year. That sounds good and indeed offers plenty of coverage for its $0.05 quarterly ADS dividend. But the growth is only half of what XIN projected at the beginning of 2015. At that time, it projected 2015 income in the $90 – $100 million range.
Table 1. – XIN Quarterly Results
Sales Prices and Projected Income
Table 2 provides more information on lower selling prices. There are two ways to view these reductions. The positive way is to say it is part of a program to reduce leverage: speed up the sale of properties and reduce debt. The negative way to view it is that it is a reflection of weaker real estate markets resulting in lower net income.
The properties highlighted in red recorded exceptionally large price reductions. I queried XIN about these. Apparently in each XIN project there are different types of properties selling at very different average prices. So when sales volumes are low you might happen to sell mostly expensive or inexpensive properties. But the overall average of selling prices is probably a good indicator of what is happening, and it is down 12% from the 2nd quarter.
Table 2. – XIN Selling Prices
It is notable that XIN’s inventory of properties for sale is up slightly from the 2nd quarter. One can project that if this inventory sells of at its current prices, the total proceeds would be $2.7 billion.
In addition to these active projects, XIN has 576,000 square meters in the planning stage with launches on 64% this quarter and the balance in the first quarter of 2016.
Equity, Leverage, and Buybacks
XIN had 153 million shares outstanding at the end of 2014. That is now down to 146 million shares. In 2007, it approved setting aside 10 million shares to be awarded to staff via stock options. And this year, it approved another 20 million shares. Keep in mind an ADS is equivalent to two shares.
The case for buybacks, as shown in the following example, has been presented to XIN management. It shows what the earnings per share would be for $100 million real estate investments at different returns. It also shows what would happen to earnings per share if its outstanding shares were reduced as the result of a $100 million buyback at $1.75 per share ($3.50 per ADS).
Whenever George Liu, the Chief Financial Officer of XIN is asked about buybacks, he says the same thing:
“We will be doing some buying back. We plan to continue to repurchase from time to time.”
My sense is his heart is not in it. There are two reasons for this. First, XIN executives like to believe they can make a 20% return on property investments. Second, XIN is a real estate company. It raises money and invests in real estate. That’s what real estate developers do.
Deleveraging
Some Westerners believe XIN’s relatively low stock price is the result of being too leveraged. The lower average sales price might be an indication that XIN wants to deleverage somewhat. But I doubt it. The company’s debt is up slightly ($71 million) from the second quarter.
Liu has earlier talked quite enthusiastically about lowering finance charges by issuing its own bonds in China. He seems somewhat less enthusiastic about these prospects today. XIN would need central government approval to do this, and my sense is that XIN is encountering unexpected problems with that.
Conclusions
Real estate development has been and will always be risky. The developers never know when to stop. But even though China is only projected to grow by 6.9% in 2015, XIN has found a solid real estate niche – providing housing to the growing middle class of China. So XIN is not really interested in buybacks. And it won’t raise its dividend. But the exiting dividend yielding 6% is safe. And who knows, more people may come to believe XIN is a very legit company and this could lead to a higher stock price.
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