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Xinyuan Real Estate Co., Ltd. Message Board

  • brianchesnutt brianchesnutt May 11, 2013 12:56 PM Flag

    Question: Earnings

    So I've heard this topic brought up before but don't remember the explanation. I know there are a lot of prepayments, and then I guess part of that switches over to 'earnings' as the project is actually physically completed? Someone on here a while ago was saying that earnings are overstated becuase of how they are accounted for, and that really nothing should be earned until the project is actually completed and the units moved into. Does anyone have any insight into this?

    I guess my thing is that it's pretty clear now that XIN is not a fraud as other Co's were years back, and aside from just general 'China' political risk, we are dealing with a normal company here. The PE is super low and I'm not sure if the reason is that it's too small for funds to follow or care about, if people are still wary of China fraud risk, if people are wary of China political risk, if people don't think the current earnings are sustainable on future projects, if people thing a China bubble is about to burst, etc.

    I own shares and thing this is a good buy even aside from the earnings acconting issue (Price to Book Value is low regardless) bt I would like to better understand what goes into this calculation... I know it's not like US Real Estate Co's because of the pre-sale issue, but do the accounting practices differ much other than that?

    Thanks all. Good luck!

    Sentiment: Buy

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    • The recognition, timing, of revenue is different than non-US exchanged Chinese companies, Chinese real estate companies listed on Hong Kong or Shenzen exchanges will use IFRS instead of GAAP, which result in a different timing of revenue figures.

      Believing there is no fraud risk, or more precisely higher than normal fraud risk, in XIN demonstrates a lack of understanding in the company. There a number of significant risks to a mainland Chinese company such as XIN. The most pressing is the risk of de-registration. The Chinese fail to regulate their audit firms. Their utter contempt in meeting this basic requirement of a stock market has been gathering momentum for the last two years. At this point, it is likely the mainland Chinese Big 4, as well as other international mainland Chinese CPA firms, will be de-registered by the United States with other markets likely following suit. This in turn will trigger de-listing, as the mainland Chinese companies will be in violation of listing requirement. The shareholder will own an ADR in an issue not traded on a market. Buy and sell transactions will be subject to the whims of Chinese stockbrokers who will take the opportunity to exploit the "high-nose", unprotected shareholders. You will be selling your share, it at all, at a significant discount to current valuation.

      The other risk is generally considered fraud by western observers however the Chinese believe it just to be clever. The owners in the ADRs do not own the company building, selling, and generating cash from real estate. Rather, an ADR holder owns a Cayman Island company. The Cayman Island company owns contracts and agreements with the cash producing Chinese company. Management asserts and the auditors concur this lawyerly golem makes the ADR holder an owner in the Chinese. The problem is no attorney, either Chinese or Western, agrees with that conclusion and Chinese companies have walked away from this agreements without ramifications.

      • 1 Reply to caseysxyz
      • XIn is a net net stock ie selling for less than current assets less total liabilities
        market cap is $ 331m for net value of $ 740m
        even if you had to cut by 2 !! the value of their property under development on the balance sheet ( $ 722m)
        you end up with $380m !!

        very confident with XIN & mgt
        high visibility for 2013,2014 and 2015
        est bookvalue per share at 14.5$ end of 2014
        share price will recover to 7/8$ mid 2014

        regards to all

        Sentiment: Strong Buy

    • A lot going on with earnings....which is why they say earnings are an opinion while cash flow is a fact. XIN had $66M operating cash flow in Q1....that is a fact.

      XIN uses percentage of completion accounting for China projects and full accrual accounting for US projects. I believe both are required by US GAAP since XIN is on the NYSE.

      In China projects are pre-sold .and earnings happen as the project moves to completion according to a planned time frame, cost estimate and selling the USA earnings happen when the project is finally built and moved into(sold).

      XIN appears to be conservative with their earnings as they habitually have positive adjustments for being under their cost estimates, under their time frame, over their price Q1 they had a $11.8M positive earnings adjustment(final contractor settlements).

      There is also the difference between revenues and contract sales to consider.

      Hope this is as clear as mud! LOL!

      • 2 Replies to star_hominid
      • Can't start new topics here. Anyone gets his/her message deleted here? Thanks.

      • Cool thanks very much... So theoretically they could make a higher profit in Q2 than Q1 even if they don't sell a unit?

        I guess I don't understand why they anticipate making less because profit can be realized a number of ways and project starts are just one piece of that puzzle. I love that they seem to underestimate everything expense-wise. There are just so many situations I've run into where the budget is way over-run that it's nice to to invest where people aren't spending to hit a budget, but want to ( and have the ability to ) come in way below.

        So when you say different between revenue and contract sales... don't people put like 40% down on a purchase? By my thinking, even though the rest is not 'revenue' XIN is just as well off if people abandon because they pocket the down payment and sell to someone else. Do you value one of these metrics over the other? Contract Sales seems to be pretty solid indicator of what revenue will be.

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