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Xinyuan Real Estate Co., Ltd. Message Board

  • stan.ackman stan.ackman Apr 17, 2012 10:11 AM Flag

    XIN is not as cheap as you thought

    I looked through XIN's 20F yesterday. Several things really bother me.

    1. XIN's earnings have been magnified by so called percentage of completion accounting. "Contract sales totaled US$172.1 million, an 11.3% decrease from US$194.1 million recorded in the fourth quarter of 2010." Meanwhile, its revenue recorded in Q4 2011 was US$199.8. Basically, management could use estimates to make record $199.8 revenue in the quarter while XIN actually only sold $172.1 million properties. Percentage of accounting method also could enlarge or shrink gross profit margin based on management's estimate. Look, XIN's 2011 gross profit margin was 28% versus around 20% back to 2009. If you look at other real estate developers's gross margin, 2011 is not known for high gross margin for developers.

    2. In the latest 20F, XIN said in Q3 2011 it started to offer seller financed contract to buyers. Such practice basically make XIN an effective lender. The potential default risk of borrowers will be transferred to XIN now. If you guys remember correctly, Q3 2011 is when XIN started to kick its high revenue and earning growth in 2011.

    3. XIN increased its legal and audit full-time employees from 8 to 23 in 2011. Why such a big increase? I feel there is a possibility of lack of internal control in XIN. Amid fraud concerns among Chinese ADRs, XIN realized it has to hire more auditors to make it safer from any prosecution.

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    • Hmmmm, even a top business school MBA is not necessary good with Accounting. MBAs may be OK with Finance or Marketing. Most time, Accounting is their short bone. I know so many MBAs, so I know this fact very well.

      The perfect audit committee candidate should have enough audit experience - test of controls, which Tom does not have. SOHU or Elong hired him for the same reason as XIN did. An educated English speaker understands financial statements and does not have the ability to interrupt a company's accounting. By the way, LongTop hired him as a director for the same reason.

    • Stan, I want to reopen the accounting discussion, if you're cool with that. Go easy on me, though; accounting has always been my weakest investing link.

      Can you help me understand any of the following:

      1. Has XIN always used the same accounting method, this 'Percentage of Completion' method?

      2. Is that method generally used by other construction companies, too?

      3. Can you walk me through an example of how this accounting method works. I'm especially wondering about all these estimates or projections it sounds like XIN makes for itself. Doesn't that make it easy for them to manipulate their financial picture, or at least, wouldn't it if the accounting department in question didn't stick to the highest standards of integrity?

      4. What's your opinion of the explanation of the Percentage of Completion method that XIN drops into all its 20F's and 6K's? To a layman it seems almost intentionally confusing. Is it more clear to someone who knows accounting? On the 6K dated 2/23, it's on document pgs 6-7, pdf page 11:

      5. You speak of having to use Normalized Earnings, and that these give a forward P/E of 6 or 7. Are normalized earnings what's leftover after all XIN's forward estimates are matched up with real, actual dollar values? For those of XIN's estimates that we can compare to real dollar values, have the estimates been proving to be too rosy? Is that why our forward P/E estimates might be 2.5, but you think a better number's 6 or 7?

      6. Do you think XIN has too much cash? Do you happen to know if other construction companies keep this much?

      End of 1Q: $348.6 million

      End of 2Q: $406.9 million

      End of 3Q: $525.1 million

      End of 4Q: $487.6 million

      By way of comparison, the upcoming .04 dividend payout totals only $3 million.

      In doing due diligence last night, I uncovered some extremely worrying facts. It seems like with me asking you for so much accounting help, I should at least give you the heads up that I'm definitely selling my position today, and frankly, recommend that everyone else sell, too. I'll show my entire hand later, but probably not until tonight, as I've been up all night, and it's a pretty long story.

      • 2 Replies to hmmm26
      • First, a few other companies use this accounting method. However, remember, the method can be manipulated to inflate or deflate contract sale number.

        Evergrande, a top three real estate developer in China, reported contract sales of RMB 80.39 billion and revenue of RMB 61.92 billion in 2011. Look, revenue was 24% discount of contract sales. On the other hand, XIN's 2011 revenue was much higher than its contract sales.

        Also Evergrande is currently traded with a PE less than 5 in Hang Kong. So, do you still think a 2.6 PE is that low for XIN now? Granted, I believe XIN is still undervalued, but it is definitely not worth $10 a share.

        As far as cash concern, XIN does have more cash as a percentage of total assets than many developers. The reason is XIN does not have enough resources to secure as financing as those bigger companies. In China, bigger developers with more connection wit banks and government have much greater ability to secure financing. XIN has to save enough reserve for the raining days.

      • Here's my favorite part of the Divvy Announcement: PR here, if int:

        "Mr. Yong Zhang, Xinyuan's Chairman and Chief Executive Officer commented, "We are pleased to continue our cash dividend for the second consecutive year and to initiate distribution of our dividend payment on a quarterly basis going forward."

        I love the decision to switch to quarterly dividends:

        1. From now on, 4 times a year there will be Dividend Announcements, good news items in their own right, rather than just one. Er, wait, re-reading that last sentence, it occurs to me that it's not the brightest thing I've ever written, but I suppose it's true: 4 good news announcements per year are better than 1 good news announcement per year.

        2. Four times per year, upon the successful payout of the Divvy (May 15), there will be cold, hard cash evidence that XIN's not a fraud.

        Four cash payouts per year, plus using E&Y, a big 4, US accounting firm is doing the absolute, butt kicking most that any Chinese microcap can possibly do to fight the Fraud suspicion. Over time, I think investors will see that.

    • RIGHT if you say so STAN. I dont think anybody understand the true China real estate market and property prices. The safest bet would be to bet on the middle class and industry growth. I think you think in the American BOX of what you understand here. The market, two year contracts, and payment installments are different there. The safety and down payments provide a lot more safety. I think it is cheap and very undervalued. You seam to agree with the bashers , WHY?

    • I understood what percentage of completion accounting is and know it is an absolute legitimate accounting method to account for real estate industry's revenue and cost of revenue. But the problem is as far as valuation, we have to normalize accounting bias. Obviously, percentage of completion accounting helps XIN's accounting revenue increase 50% in 2011. In the reality, the contract sales in 2011 only increased by 28% than in 2010. According to management's guidance, contract sales in 2012 is very likely to be even less than that in 2011. When apply contract sales and industry wise gross margin, the forward PE for XIN is not as attractive as the GAAP PE.

    • Any comments on contract sales vs. percentage of completion accounting sales?

    • Im thrilled they are hiring and paying to improve internal controls ..the cost doesnt bother me one bit...

    • Do you understand the seller financed contracts and how they are booked??/ Please explain how they work ??

    • I would love you to show any defaults that XIN had to eat because of them being a lender..Actually i consider it a big plus.. Ill tell why in another post..

    • I noticed their tricky accounting long time ago. All big players understand it. XIN is traded pretty closed to its fair value now.

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