All this brings me to a China-based company that I believe is worthy of investor consideration, Xinyuan Real Estate Co. (XIN). The company is the first Chinese developer to obtain a listing on the New York Stock Exchange, which should provide a certain comfort level regarding transparency and disclosure for investors. The company is trading at what I see as an unbelievably low P/E of 1.84.
Xinyuan Real Estate will announce its third-quarter results on Nov. 9, but let's take a quick look at some reasons why I believe the company is worthy of investor consideration before the earnings announcement.
Most of Xinyuan Real Estate's activities are China-based. The company is a developer of large-scale real estate projects targeting middle-income Chinese consumers. The company's focus has primarily been on what are referred to as China's Tier I and 2 cities. The company has targeted Chinese markets with a population of over 64.7 million in eight cities: Beijing, Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou, and Chengdu.
In October, Xinyuan Real Estate announced that it had acquired the land use rights for its first project in Beijing. The development site consists of a total area of approximately 621,000 square feet in the city's Daxing District, between the city's fifth and sixth southern ring roads. The company indicated that its target customers will be first time home buyers, young couples, and commuters who work in downtown Beijing. The company indicated that it would build smaller-sized and affordable apartments on the development site.
A subsidiary of Xinyuan Real Estate, XIN Development Group, Inc., is proceeding with three U.S. projects. As a component of this strategy, on Sept. 28 the company announced that it acquired a development site in the Williamsburg section of Brooklyn for $54.2 million. The company indicated that the Brooklyn site will accommodate an approximate 506,000 square foot residential condominium development. It will be interesting to see what impact Hurricane Sandy will have on the company proceeding with this project, due to the project's proximity to the Brooklyn waterfront.
The company also has luxury apartments for resale in Irvine, Calif., and 325 finished lots and 185 acres of raw land in the Reno, Nev., area. It appears that part of the company's strategy will be to market the California apartments, the Brooklyn condominiums, and homes in the Reno area, in China.
Xinyuan Real Estate's Financial Results
While Xinyuan Real Estate's third-quarter results will be out shortly, let's take a quick look at the company's second-quarter results. The company's second-quarter financial results were the company's best ever, with record revenues, contract sales, and net income.
Total second-quarter revenues were $253 million, an almost 39% increase from the $182.7 million reported for the second quarter of 2011. Its contract sales were $258 million, a 14.5% increase from the $225 million reported for the same quarter of 2011. Most importantly, the company's net income was $69.4 million, an increase of 118% from the $31.8 million of income for the second quarter of 2011, and an almost 200% increase from the net income of $23.2 million report for the first quarter of this year.
During its second-quarter earnings call, the company stated that its full-year 2012 net income will be in the $130 to $140 million range. I will have to see if this gets updated during the company's third-quarter earnings call.
Xinyuan Real Estate's earnings per American Depositary Share (ADS) for the second quarter were $0.94, compared to $0.40 for the same quarter of 2011, and $0.31 for the first quarter of this year. As a dividend payer, the Xinyuan Real Estate story is also worthy of attention by investors. On Oct. 16 the company announced its third quarterly dividend payment for this year, of $0.04 per ADS. With the shares currently trading in the $3.77 range this is a minimal dividend, but it does show the company's commitment to pay dividends.
Also of note is that Xinyuan Real Estate has been buying back its shares. In June, the company announced that it had completed a $10 million share buyback. The company also announced that it was beginning a new $20 million buyback.
I will definitely take a look at Xinyuan Real Estate's third-quarter results, which will be out shortly, and see if the company is maintaining its growth in revenue and net income. Since the company has projected full-year 2012 net income in the $130 million to $140 million range, this will likely be the case.
I'm very comfortable with the company's China strategy, but am unsure as to how successful Xinyuan Real Estate will be with its U.S. business direction. The U.S. is a different business environment than that of China, and I believe that the U.S. will provide ongoing challenges for Xinyuan Real Estate. While I believe that it's likely that the company will announce additional U.S. projects and acquisitions, I believe that its U.S. strategy may end up being a distraction from what I believe the company should be doing -- focusing on real estate development in China's Tier 1 and 2 cities.
I used to be very skeptical about XIN's US strategy, and I am still skeptical about it. However, several land acquisition XIN made in the past couple of months demonstrate XIN's confidence about its liquidity and profitability. Also, XIN is not alone in terms of aggressive land acquisition in the past months. Many other developers did the same thing. I suspect the worst of the industry is over in the short to median term.