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Xinyuan Real Estate Co., Ltd. Message Board

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  • caseysxyz caseysxyz Sep 18, 2012 12:33 AM Flag

    If Blue Ridge Is The Excuse, Then You've Got a Worse Problem


    New information has two sequential events. First, the new information has to become generally known, knowledge phase. Second, the market has to bake the new information into the valuation, reaction phase. Once the market goes through phases, there will be no more adjustment for valuation until new information starts the cycle again. At this point, the market has baked the chance of fraud into the valuation.

    One type of new information to start the cycle would be Carson Block or Citron or another person of their irk sharing the information, the knowledge phase. They have not done that to date. We can speculate on why that has not occurred.

    I will express the belief that CB, Citron, and anyone of this type of organization has done everything they can to discover fraud at XIN. Those people become addicted to the adrenaline rush of finding the bad person. If they do not check themselves, they end up being Geraldo Rivera opening up a box in the basement of a place Al Capone slept in once on national TV. The fact they have not done that is telling.

    Further, I will express the belief that the SEC wrecking crew from EY New York has racked up the frequent flyer miles to Beijing this year. You are not on anybody’s wrecking crew by being wrong. At this point, they have XIN nailed.

    Since the knowledge phase has not occurred we cannot have a reaction phase. As I believe the valuation of the company is based on dividend yield, unless the yield is in jeopardy, long-term I do not think the valuation will go below current levels.

    There is no certainty on the dividend payment next year. That is why we are called investors and not bondholders. We have to accept some risk.

    The nail in my decision to buy XIN is when I heard Tom on the 3Q conference call associate indefinite with a .04/share/quarter payment. He said it twice and the second time took his time to make sure everyone understood his meaning. He knows the SEC and Congress will come visit his house, if there is not a real good reason to come off that guidance. He also knows there is a high chance he will get to stay in that house with a shiny new ankle bracelet after their visit.

    The dividend history is no dividend until 2011. In 2011, there was an annual dividend of .10. In 2012, two quarters of .04 with guidance of an on-going quarterly .04 payment.

    5. How to Get to the Target P/E.

    XIN is the only United States listed VIE Chinese real estate developer, I am aware of. The ones listed on Hong Kong all do better than XIN. I would assert the reason is the Hong Kong investor does not have the same regulatory risk as the United States investor. How else would you explain the different valuations?

    The WFOE borrowed 25 million from a third party and paid $14 million in dividends and repurchase in 2011. As I stated before, I do not understand the support for this transaction. I can think of all kind of good reasons to do it but I can also think of some bad ones that would change my assessment of risk and valuation. We will not get any more new information until the 20F hits the newsstands. It is an insignificant dollar value so it really does not need to be explained but I would feel better.

    The bad things supporting borrowing the money again go to the regulatory risk of Chinese US-listed companies. They, the SEC and accounting firms, just need to get the mess cleaned up.
    RM is reverse merger.

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    • I disagree Casey. A CB or Citron isn't going to invest the time and energy that needs to be taken on a $2 to $3 stock. Remember these guys take out short positions when they release any results of their investigations. Not enough profit to be made. I the stock were to get to $7 or $8, then they'd bite, because they can money quickly on the initial drop. So this doesn't prove there is no fraud, just no current interest for them to look deeper. Can you see them trying to take the time just on the 240 bank accounts?

    • 1. I can help somewhat on the short seller boutiques question. Ever since I was part of one of the "CCME's not a fraud" factions through that civil war (a war I painfully and expensively lost), I've maintained cordial relations with one of the MW guys.

      About 6 months ago, when I first learned about the Gurnee/Longtop connection, I asked him about XIN. He sent me back a reply that was sort of a "meh, that's awfully small potatoes to worry much about, but I'll put it on our lists" type reply. Admonished, I never asked him about it again. That's not to say for sure that MW hasn't considered XIN, but I definitely think they view $200 million cap companies as smaller than they'd like to focus on.

      That said, the reason I respect MW and Citron so much is their track records. Sure, they've missed on some (FMCN and SPRD come to mind), but they've been right more often than they've been wrong (Sino Forrest, CCME, RINO, etc.).

      2. Dividend stuff.

      First, I would renew my general complaint about focusing on dividend yields. I've always viewed it as strange when the Cheerleaders keep playing up XIN's ever-increasing dividend yield, which hasn't been caused by rising dividend amounts at all, but rather by a 6 month price slide from $3.95 to today. They don't seem to recognize it, but what they're really celebrating their stock price's collapse.

      Plus, there's still time left where the dividend total they'll be using to calculate yield will remain .16. Can you imagine how ecstatic they'll be about XIN's management team if it can manage to push that yield to 16%, never mind that the cause of the yield's increase would be a share price collapse to $1?

      Second, on the "will the .04 quarterly dividends be extended indefinitely?" question, you've got more confidence in Gurnee's inferences than I do. Even leaving aside the Longtop stuff, he's a slippery little eel. When he was subpoenaed to Washington to give his deposition (as defendant-turned-star witness) in the Longtop criminal case, he described it as a "road show" to promote XIN. In addition, he told us about another bi-coastal road show that was supposed to take place the first two weeks of this month, but it's starting to look like there never was such a thing.

      Last, on the dividend history question, see the reply I made to Shelly's post. Like almost everyone else, you got conned.

      5. Getting to the Target P/E.

      Technically (sorry to be fussy here, but legal analysis is probably my strongest investment skill, accounting definitely my weakest), I think of XIN more as an FIE, not a VIE, but now I half think I only wrote that to try and impress (vanity, I curse thee!). The effective difference between the two is basically nil.

      You mention that XIN's P/E discount problem might be caused by listing here vs. HK or Shanghai. That's an excellent suggestion, certainly one worth exploring, but there's one threshhold problem: XIN's not completely alone here.

      CHLN is another US listed Chinese real estate development company, but it still prices more like those HK companies, at roughly a 4.5 P/E. And that's despite it never having paid a dividend and also despite the fact that it listed without an IPO (it used the scuzzy "RM" -- see, I can be taught -- procedure). So before we start celebrating our victory over the P/E discount mystery, we need to explain why this "US Curse" doesn't seem to apply to CHLN.

      6. Why on Earth?

      Would a company with, at the time, $515 million cash on its books need to borrow any money at all to from a 3rd party to fund a $20 share Re-Purchase program?

      That doesn't make any sense at all, does it?

      • 1 Reply to hmmm26
      • 1.
        I am old school. I do not think short shops add any value to the process. I have a hard time differentiating them from pumps and dumps. They do occasionally, albeit quire rarely, get it wrong and take out some companies down that should not be. In those cases, they hurt not only investor but also the innocent employees. The only benefit is enriching themselves and occasionally hurting innocents. I am the guy at the back of the theater that stands up and cheers at the end of Michael Douglas’ “Greed is Good Speech” but I see only one-way good in a short shop. I think the world could do with less people motivated as such.

        I do not think like a short shop. With that said, it occurs to me, even with a low market cap, XIN would look like low hanging fruit. When I have to choose between working a short time for a guaranteed small profit and working a long time for an iffy big profit, I am inclined to the former. As I said, I do not like thinking about these people at all so my ideas may be way off.

        You can put this one to rest. Shoot the person an e-mail, you get anything other than a straight “No, we did not look at”, I think they are not in play and the risk goes down on XIN.

        2. Dividend stuff.

        We are not going to agree on dividends. Indulge me with one more idea on dividend before I suggest we move on to other subjects.

        Therefore, we understand what we are disagreeing on let us look at some numbers. Consider a position of 100,000 shares at an average cost $ 2.50 with a yield of 6.4 %. Now the stock price doubles and we liquidate half our shares. Ignoring taxes, our cost is now $ 0 and we get $ 8,000 a year as long as the company pays a dividend. Next, to have a money-printing machine in the spare bedroom, can you think of a better deal?

        It is best to make sure the micro and macro issues get analysis separately.

        I have been both a CEO and CFO. I think CFO is infinitely more difficult job. Every move is watched and any misstep will be noted publically. Perhaps, I am inversely inclined to CFOs as opposed to short shops but I do not have the same feelings about Tom. I think he is going a solid job.

        5. Getting to the Target P/E.

        Touché, councilor, just do not accuses me of perjuring myself when I am lying.

        There are Chinese real estate developers on Hong Kong that trade at reasonably comparable valuations. There might be other reasons for it but from my chair, the regulatory environment is more secure than the United State. Wow, think about that statement. I never thought I would read it, let alone type it. We are supposed to be the go-to investor country and financial market. Are you listening SEC?

        Thanks, I missed CHLN. My gut reaction is its valuation is deeply discounted too, just not as much as XIN. Therefore, I believe they are part of the US curse but I have not done enough research on CHLN to argue it ably. I will put them on the list but as they are not paying a dividend, it might be awhile.

        6. Why on Earth?

        There is a very simple reason to do the transaction. The company’s functional currency is RMB and the transactional currency is USD. The company has to bridge that gap. Having the WFOE borrow the money bridges the gap. You could do the deal in the afternoon with the lawyer in the boardroom and the banker on the cell. It is just kind of an untidy way of doing things and looks bad.

        I would have to go back and look at the disclosure history. It is possible the company did not think we would ever see this transaction. It is not clear to everyone that this level of minutiae is required disclosure for a VIE (cough cough) I mean FIE. (I do not recall that conversation, Senator). It is an evolving area. Therefore, the transaction might have been contemplated under a different set of requirements.
        It is still a loose-goosie transaction I would like to understand.

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