Is Xinyuan Real Estate Going for All the Marbles?
Xinyuan Real Estate (XIN) has been getting better press recently. For example, one scribe recently wrote: “
“After reporting 26.6% revenue growth in 2015, with growth accelerating in 2H15, the stage is set for accelerating revenue growth in 2016. Contract sales outpaced revenue growth for yet another year in 2015. The revenue-to-contract sales ratio has been approaching record lows, and will rebound as projects are completed. With contract sales also projected to grow another 10-15%, I expect another strong year of revenue growth.”
The result of positive news has been an increase in its NYSE price from $3 to $5 in less than 12 months. And even at $5, it has a P/E of only 5.54 and a dividend rate of 4%.
XIN just released its financial report for the first quarter of 2016. It sounded good. Sales and profits were up when compared to the first quarter of 2015. But also, it indicated that recent land purchases financed primarily by debt. The more debt/leverage, the greater are the chances for boom or bust. Below, I consider these issues more closely along with other points in the report that got my attention. My information sources include XIN’s quarterly report and earnings call, along with Konecko Research. Konecko is a China-based business news site that does a good job of covering XIN developments.
Revenues and Profits Up
“In the first quarter of 2016, the Company’s total revenue increased 41.2% to US$235.4 million from US$166.7 million in the first quarter of 2015. Net income for the first quarter of 2016 was US$6.9 million ($6.1 million attributable to XIN shareholders) compared to US$4.5 million for the first quarter of 2015.”
This positive news should probably be assessed against a broader frame of quarterly results and this is done in Table 1. Revenues and profits, when looked at against the last three quarters are disappointing. Are we talking about a seasonal problem here? Is the first quarter regularly weaker than other quarters? A comparison with other 2015 quarters suggests that this might be the case. But the seasonality argument does not hold up when the 2014 numbers are viewed: there, the first quarter results were better than the second and third quarters.
The last row in the table looks at the income to revenue ratio. It is a rough measure of the return on property sales. It was lower in the first quarter of 2016 than any other quarter in the two previous years.
Table 1. – XIN’s Revenues and Income (in thous. US$)
Source: XIN Financial Reports
Growing Property Inventory Financed by New Debt
As Table 2 suggests, the growth in XIN’s property inventory in the first quarter of 2016 ($162 million) was closely matched by its debt increase ($165 million). One could read this to suggest the XIN “is going for all the marbles”: its land purchases are only limited by how much it can borrow. This is not surprising: it is the way most real estate development companies operate: borrow money to develop land and hope to make money on its sales.
Table 2. – XIN’s Property Inventory and Debt (in thous. US$)
Source: XIN Financial Reports
Limits on Dividends and Equity Payouts
Konecko Research has pointed out that an XIN indenture with Citicorp limits the total XIN can spend annually on buybacks and dividends. Specifically, the company cannot pay out more that a total of $35 million in the 2015-17 years for buybacks and dividends. XIN is allowed to carry over anything under the $35 million total to $35 million allowed in each of the following years.
Konecko calculates that XIN spent $14.8 million on dividends and $3.3 million repurchases in 2015, leaving a balance $16.9 million meaning total dividends and repurchases in 2016 could be as high as $51.9 million. Konecko estimates further that if dividends are about $14 million (down a bit because of the reduced shares outstanding), repurchases could as high as $38 million. Since $14 million were used in the first quarter, about $24 million could be repurchased in the remainder of the year.
What is Happening to XIN’s Selling Prices?
Selling prices have a direct impact on XIN’s bottom line. Table 3 indicates what has happened to prices since the first quarter of 2015. Overall, they are down 12% since then. Of course, the fall in the overall selling price does not automatically mean weakening prices. It really depends on the sales mix. But it is not a good sign. Of greatest concern are Zhengzhou Thriving family (down 11%), Xingyang Splendid II (down 52%), and Chjengdu Thriving Family (down 6%). In all three of these cases, there is a significant inventory yet to be sold.
Table 3. – XIN’s Average Selling Prices per Square Meter (RMB)
Source: XIN Financial Reports
The Sanya Yazhou Bay No. 1 is highlighted in Table 3 because it made no sales last quarter. This project is important to XIN. It projects total sales of $292 million, with only 8% sold so far. At the press conference, CFO Liu said in response to a question on this:
“…based on the initiative measures that have been imposed on the neighborhood where our Yazhou project is, all the projects in that location has been put on hold due to the initiative measures imposed by local government.”
This sounds quite ominous so I contacted XIN management. Its response:
Question: What is the reason for this freeze?
XIN: There are some administrative measures that have been imposed by local government in the location where our Sanya project is. So basically, not just our project, other projects in that location have been put on hold due to the administrative measures imposed by local government as well.
Question: How long will it last?
XIN: The Company expects that it will be solved shortly.
I hope so. Real estate companies live and die on getting the timing right. Unexpected delays like this tie up capital that normally has already been programmed for other uses.
The XIN Business Outlook
XIN is bullish for 2016. It has raised its previously announced financial forecast, now expecting full year contract sales to grow between 15% and 20% and net income to grow between 20% and 25% compared to 2015.
Real estate is a risky business. As an XIN investor, I hope its business outlook for 2016 is correct. XIN continues to borrow to finance its investments. It is betting on its management expertise to make the right investments and get its timing right so it has the money it needs when needed. It will be good to hear when it is allowed to resume sales in Sanya.