Some people still assert the ability to read Blue Ridge's mind on whether it's selling its position. While they don't reveal HOW they accomplish that feat -- I'm guessing some combination of tarot cards, crystal balls and psychics -- they all do agree on one thing: Blue Ridge is the perfect excuse for XIN's under-performance this quarter.
I don't think they've thought that through, though (hey, alliteration is a dying art form). True, the Nasdaq is + 8% in 3Q, and XIN is - 9%, resulting in an 17% under-performance. And it's also true that most (non Cheerleader) investors would want an explanation for that kind of under-performance. To some, BR seems like the perfect excuse.
But, BR only SEEMS like a perfect excuse. Sure, if BR truly is selling out its entire position (or even just a large chunk of it), it does provide an excuse for the under-performance issue, but it raises the much harder, much worse question of: "Why is an Insider dumping its entire $40 million position in XIN?" Basically, you've solved an easy question by raising a hard one. That's not progress.
See, the danger in the question "Why is BR dumping all its XIN?" is that BR is in a position to know way more about XIN than you or I. BR has an automatic and permanent seat on XIN's Board of Directors. BR's also been a part of XIN since before the beginning, having come aboard before the IPO. Like other corporate Insiders (CEO, Gurnee, etc.), BR even receives stock options. It's also treated more favorably in some of XIN's debt arrangements than any other corporate officer, except the CEO.
Basically, BR knows this company like the back of its hand. Are you sure you want to read in a situation where they're dumping shares hand over fist in the $2.70's?
Since using the BR Excuse to answer the question "Why did XIN under-perform this quarter?" only raises the much more difficult and dangerous question "Why is an Insider dumping its entire 20% ownership in XIN?", shouldn't you BR Excuse folks withdraw your contention, for fear that it might actually be true?
1. Short Sellers.
I have pondered short shops. First, let me bifurcate the issue. Short sellers are ok people we need them for liquidity in the market. One of the problems with XIN we have many people with short opinions but no short money. The short shop is the group we can do without. A short shop not only takes a short position but, like a pump and dump, promotes and sometimes intentionally misrepresents some undiscovered piece of information. If it is unrecoverable fraud, there is might be as social benefit to the service. However, that is only one of the issues used by short shops. Other issues rob management and the shareholders to deal with an issue less abrasively having a better long-term outcome for shareholders, employees, customers, suppliers, and bondholders and other lenders. Short shops are going to take the position I win and everyone else losses. One of the reasons we have the SEC is to protect the interest of the entire stakeholder. The SEC is a disinterest party while the short shops are not. We have paid for this service. We should demand they perform the service and not outsource it.
Some investors use current dividend yield as a barometer of current market sentiment. Although, it works that way P/E is a much better articulation.
5. Our Increasingly Misnumbered Section.
I can guarantee you I will not buy CHLN but as a prudent investor, I need to study it. By understanding CHLN, I understand XIN and its relation to the market, which is the core issue.
6. Sounds Good.
I am going to wait to see the annual disclosure. If I still have questions, I will backtrack E&Y China’s disclosure practice. After that, I have emptied my gun. I have had zero luck with XIN’s IR department. I do not even get a “TILT THANK YOU FOR PLAYING E-mail”. The must be talking to my ex-wives. It has been a long time since I have encounterred such displaced silence.
I'm glad to hear that our views are so similar on one time events, and also that we align so well with GAAP on that. Given that you see BR as more likely than not to be current sellers, I've decided to move my view back to "open question" (I'm losing my negative tilt). Like you said, BR's next 13F should tell us a lot.
On the negative news thing, I hear what you're saying, but I still think XIN would tank like a bowling ball through water if Carson Block or Citron or someone released a report saying "XIN's a Fraud!" Having personally gotten burned big-time betting against CB and Citron on CCME, I now sell first and ask questions later when they yell fire.
In terms of the "holding ability" of the dividend (because it has an annualized 5% or whatever yield), isn't it sort of a problem that there's no certainty that XIN will renew its dividend next year the way there is for utility companies or other companies with long histories of annual dividends? I mean, for somebody buying XIN tomorrow, there's only .08 left of the .16 2012 dividend, with no guarantee it'll be renewed next year.
XIN's last 3 years of dividend history are: 2012, .04 quarterly dividends; 2011, no dividend; 2010, .10 end of yr dividend. That inconsistency leaves me without any real confidence that I could accurately predict what they'll do for 2013.
Sorry, I looked for the thread with a LINK to that article I mentioned, but I couldn't find it.
5. How to Get to the Target P/E.
Excellent points, at least those of them I understand. What's an RM? Outside of that, I don't disagree with any of your points as potential explanations for XIN's P/E suffering. My question, though, is that don't all the points you mention apply equally to every Chinese real estate development company? If they do, then we still haven't solved the mystery of why XIN prices at a discount to those other Chinese real estate deveolopment companies.
I'll try to bump forward an old XIN vs its peers P/E comparison thread that's at least got a few numbers on it to play around with, both of us being quantifiers when possible. It might give us at least a starting basis for discussion.
6. When you say XIN borrowed the $20 million for the Share Re-Purchase program, do you mean it borrowed the money from an outside creditor, or just from one of its own subs? If it's the former, I'll definitely want to figure out why the heck a company claiming to have $600 million in cash needed to borrow any money at all to fund a $20 million Re-Purchase program.
If it's the latter, well, heck, that ain't nothin' in parent / sub chicanery by China stock standards.
The corporate structure of most China stocks at every level below the holding company generally resembles two trains colliding headlong on a bridge, crashing over the railing, into the ocean, and sinking to the bottom of a trench, WITH a bright, shiny, US or Caribbean incorporated cherry-on-top parent for us all to look at and be impressed with.
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.
I never buy the BR excuse. Look, almost every stock has somewhat top institution investor selling during any given quarter. However, many stocks in this situation will deliver phenomenal performance during that quarter. Simple math is that supply goes up, so does demand. New buys will soon absorb whatever shares dumped by the top investor. Buyers feel excited about the opportunity to buy the stock a little cheaper, so they fight to buy them as quickly as possible. The outcome is the stock price goes up even higher than the sales began.
On the hand, most XIN's investors are only whining about BR's mystery sale without any true passion of absorbing the sold shares. Again, we have to be humble to realize that there are many sophisticated market participants out there. If they don't even fight to get the "steal" of XIN's shares for the last three years, something may be just not a real steal.
@mscrouse, I agree continuing the BR discussion with you is unlikely to produce any enlightening results, but what about my more general question on funds? That's was a legitimate question, and I recognize your knowledge in this area is superior to my own.
You wrote: "Private equity funds can be extended, but suppose investors are tired of waiting and want their money back. You have to give it to them at some point."
That seems to imply that prior to a fund's Death Date, investors aren't allowed to withdraw any of their investment. Is that really how it works? Does that also apply to the profits being realized on the original investment?
Good question. I believe that private equity investors are only allowed to withdraw funds as initial investments are liquidated. Presumably there have been other liquidations that have taken place, so investors would have got some money back, but I could still see someone being tired of having their remaining money locked up.
@ mscrouse, one last thing: I noticed your last post got a thumb's down. That wasn't me; I think the voting system's a waste of time. I never voted on the old stars system and I never plan to vote on the new thumbs system.
I am certain I have not connected all the dots.
This information is reached the point of being baked into the valuation? If so, only new information, i.e. the Q3 13-F, will move the market.
It is a worthy exercise to speculate on the direction of the market and the magnitude of movement with new information, BR is holding, accumulating, or divesting. As such, our analysis is aided by our current valuation. There is not only $ 2.74 PPS of downside and perhaps as much #$%$ 13.76 PPS upside. The chances of a downside exceed an upside.
As I have concluded, the likely movement is upside; my degree of magnitude depends on investors sitting on the sidelines rushing in based on the new information. I believe this is unlikely, although I do believe those investors exists, this is not the information they desire.
My assessment is new information on BR will be not impact valuations.
Hi, Casey. I don't think that news of BR selling has been baked in the cake yet, but in my opinion that's for a very good reason: the body of evidence supporting the thesis that BR is definitely selling its entire stake in XIN is, to my mind at least, extremely weak. Until more persuasive proof is offered that BR's truly selling out, I doubt the market's going to concern itself much about it.
On your price calculations, what made you choose $16.50 as the potential price target XIN could reach? I'm not being in any way critical here; rather, I'm genuinely curious ($16.50 is almost exactly the price of XIN's all time high). FWIW, if that calculation is instead based on an expected future earnings number times an industry P/E, then I agree with its estimate of 6 to 8 P/E as the current "norm" for Chinese real estate development companies.
One thing your prediction lacks that I think every prediction needs to have full value is a time component. In what kind of time window do you see XIN accomplishing the $16 feat? If we scale down the price target to $5.50, or the price representing 100% profit, then what kind of timeframe do you see as being required?
PS: Good to see you here, again. We need every super-bright we can get.
I don't see the low price as a good thing, and I'm not confident that Blue Ridge is selling this far under 3.00, although my gut tells me that they were involved in the large volume sales around 3.00. By the way it is common sense -- if you see large sales from them last quarter plus lots of high volume sales on the recent spike, it seems logical that the top holder and seller was a substantial part of that. The buyback has cleared out many of the other seller and many of the other holders were buyers last quarter. Where else would all the sales volume be coming from?
By the way, I'm not a cheerleader, but I think obsessing over XIN's price vs Nasdaq over the last quarter is in and of itself, irrelevant. The reason the stock's top shareholder is selling in light of positive news is a key concern of mine, however. That being said, I have already raised the possibility that Blue Ridge is liquidating shares for its private equity fund, and that private equity funds have a finite lifetime. In this case, the sale could be more akin to a forced sale and not reflective of a fundamental view by Blue Ridge. Actually, if I get confirmation on that I would be bearish short term, but even more bullish long term.
Unfortunately, I can only speculate on Blue Ridge's selling motivations, since I don't have the details of the terms of their private equity fund. In the meantime, I have pared back my XIN investment somewhat and am waiting for more information to come out.
You asked the questions, but provided few answers. What is your theory?
PS: The original Blue Ridge Director Yue (Justin) Tang is no longer on the board, so they no longer have insider access. Check out the latest 20-F. Justin is off the board and there are no bios with Blue Ridge listed in them.
I. "lots of high volume sales on the recent spike, it seems logical that the top holder and seller was a substantial part of that."
I don't think that's true. When there's a huge ER, especially one that is very far afield from its expectations (on the happy side, this time), then increased volume is to be expected immediately in its aftermath. As for the larger than normal ER + 1 week volume, remember that that Monday, investors received a dividend large enough to purchase 1 million shares.
Obviously, not all of that dividend was reinvested, but between DRIP's and folks just reinvesting, I wouldn't be surprised if half of it were, accounting for 500,000 shares that week. On top of that, wasn't that also the week Share Re-Purchase kicked in? I don't remember the daily total for that week exactly, but Re-Purchase probably represented another 300,000 shares that week.
II. "The buyback has cleared out many of the other seller and many of the other holders were buyers last quarter" -- What do you mean by that?
III. " and that private equity funds have a finite lifetime."
I actually learned that from you, just a couple of weeks ago. If you learn the drop dead date, definitely let me know. It still seems weird to me that if a fund has a stake in a company it still likes, that it would just be forced to sell back on the open market, regardless of any other circumstances. Couldn't the death date be extended? If not, couldn't it just create another fund, BR2, or something, and just sell the shares from BR to BR2?
I just have trouble believing that there's no way for BR retain its ownership position because of a looming Death Date. My legal instincts are screaming to me that there's got to be a way around that ("legal formalism is disapproved of" would say 7th Circuit Judge Posner)
IV. "What is your theory?"
I'm not convinced BR is selling its position at all; even if it is making some adjustment, I'd still need to see much stronger evidence than high volume numbers coupled with assumptions as to who was causing them before I were convinced they're selling 100% of their shares. I make 20% adjustments to my own positions, up and down, all the time and it almost never means I'm dumping that stock entirely.
V. " The original Blue Ridge Director Yue (Justin) Tang is no longer on the board"
I didn't know that, but are you sure no other Blue Ridge personnel have joined? I'm only going from memory here, so it might not be gospel, but I'm pretty sure I've seen somewhere in the originating documents a guarantee that BR would always have one directorship.
What if BR is selling to keep the equity price down while the company buys up shares to "support the shareholder". An alternative view would be that corporate officers, CEO, and the board (including Zell) want to take Xin private. As long as the price is low that can be achieved cheaply by accumulating a majority stake followed by a tender offer. Anyone know the % of shares held by the CEO and board members?
Why would BR want to sell to keep the price down? If you're answer is something like "because then it can go Mega UP right after that," then why would BR want to decrease its position now?
On the going private thing, I think the CEO owns something like 40% of the company. But don't expect every outcome for shareholders in a going private transaction to be a rosy one with regard to China stocks.
For "regular" stocks, going private transactions generally produce about the same premium to share price as any other M&A transaction, but that's not at all true for China stocks. Even leaving aside the FIE / VIE special problems, there's now a brand new going private method being used for the first time on ZSTN and CMEDQ that not only has no premium, but will often produce a NEGATIVE premium.
I think XIN's a perfect candidate for the new transaction, which still needs a name, but involves using public purchases to bypass the book value problem for the buyers.
Take a look a the 1 day chart for today. One can argue all day about who is doing what, but if you look at the chart along with the volume, you will see many peaks and valleys - many trades of about 8,000 shares. The price movement is in a tight range. Shortly after 2 pm you will see some larger blocks. In my opinion, I think XIN is in the market actively buying blocks as they become available. We will know something soon as the quarter will be done in about 2 weeks. I have a large (for me) core position that is profitable and I intend to hold for the foreseeable future. If XIN buys back 6 million shares with the $20 million authorization, I think we will see a nice increase in the quarterly dividend next year. If BR is selling, I view that as a positive development for us the small investor. With BR's large block we have no chance of another firm making a buyout offer. If they reduce that block substantially I think it puts XIN in play with other private equity firms. In my opinion, the management of XIN has exceeded my expectations. At some point the market will adjust to their performance and we will see much higher prices.
Interesting post. Yeah, I can groove on some of what you're saying. I especially agree with you that share Re-Purchase is ongoing and has been for weeks.
There's two points on the BR stuff that I think need specification, though. First, I don't think BR's any kind of impediment to an M&A offer right now; if anyone is, my guess is it's the CEO. He's the guy who owns enough shares to effectively prevent any offer from being made; presumably, BR, with only the profit motive in mind (as opposed to the CEO, who might view the company as his life's work), wouldn't stand in the way of any takeout offer with a premium.
If it's true BR's really selling (which I doubt), then we can be absolutely certain they wouldn't stand in the way of a takeout offer (why would they say no to an offer at, say, $3.50, when they're selling right now in the $2.70's?).
The second point is that I'm not sure about BR's selling being good for the small investor, simply because, as an Insider, BR's better positioned to guess, with better accuracy than you or me, the short term and long term price direction of XIN. If they thought XIN was going to be going up any time soon, then they probably wouldn't be selling now. They'd probably wait for the price increase to bake itself into the cake.
So that might arguably be seen as a bad sign; at any rate, that's the usual concern for a stock -- any stock, not just XIN -- when an Insider sells.