At the end of 1Q the company had $6.12/share of cash, not including restricted cash + deposits + prepayments totaling another $5.67/share. So the total cash is $11.79 per share. Last year Xinyuan's net earnings were $2.17 per share. The current stock price of $4.16 implies a 1.9x P/E. The company is undervalued compared to its peers. Its Beijing Daxing project, which will be launched in September 2013, is worth twice of the company's current market cap. And Xinyuan has 15 other projects.
The company's sales and profits will get a major boost starting in 3Q 2013. In the second half of 2013 and 1Q 2014, Xinyuan plans to start the presale of 5 new projects, including its 216-unit high-end condo project in Williamsburg, Brooklyn (designed by architects WASA/Studio A; marketed by the same team that handled the Time Warner building) and the company's flagship Beijing Daxing Xinduhui project (estimated $600 million value, to be launched in September). A total of 600K square meters ("SM") of gross floor area ("GFA") are planned to be unleashed. On the surface, those just more than double the existing 400K SM available GFA. Well it's much more - compared to those existing 400K SM GFA in Zhengzhou (selling at RMB 9,100/SM) and Jinan (RMB 8,800/SM), the new additions are in Williamsburg, New York City (around RMB 60,000/SM) and Beijing (may exceed RMB 30,000/SM). The company is entering a new stage of rapid growth and starts to deliver in top-tier locations. Its geographical diversification also deserves higher multiples
It's all nice and dandy with the "starting from Q3" and all, but what about the future. There are no land acquisitions. And what's the deal with these "urban complex" projects in Jinan and Zhengzhou? Xin's peers are getting 35% or more revenue growth in the first half while Xin's revenue will be declining. Are we going to see the same in the future?
Investors need to have confidence in the management. things such as lack of communication, paying large amounts of money to directors (for business purpose, isn't that conflict of interest?), splurging on business jets etc obviously do not help.
At current multiples, Xinyuan investors have priced in multiple apocalypses. This topic alone may deserve a separate article. In short, the Chinese economy is going through slow growth and deleveraging. Investors around the world are fearful. The June liquidity squeeze was caused by the People's Bank of China ("PBOC") tightening credit. The idea is that, credit grows too fast, and it needs to be controlled. The real economy is not growing that fast. Consider the Chinese economy as an overweight man. The Chinese government and PBOC have decided that, let's not wait for the fat man to go obese and get a heart attack. Let's get him on a diet and go through extraneous exercises before it's too late. Diet and exercises are never pleasant. It's painful and causes panic. But it's better early than late, and being healthy is good. The transition means slower growth but it ultimately primes the economy for less volatile and longer-lasting expansions.
China's deleveraging is chronic and not acute. China won't face a "Lehman" moment, but will need to spend many years solving the issues from excess credit and over-investment after stimulus packages including the $652 billion stimulus in 2008. Credit growth will need to be reduced to single-digits for many years, compared to the 23% annual increases since 2008.
One important ratio is the public debt/GDP ratio. According to CIA, the 2012 Japanese public debt/GDP ratio is 214.3%. In United Kingdom it's 88.7%. In United States it's 73.6%. And in China, it's 31.7%.
Theoretically, Xinyuan can lever itself and issue a $300 million bond and use the proceeds just to pay a $4.15 per share dividend, so shareholders can recoup their investment on day one. Alternatively Xinyuan can use the proceeds to buy back all of the outstanding shares. Xinyuan has kept a consistent dividend program and a share repurchase program. Although, issuing dividends and doing share buyback does not make sense from an economic perspective. Done right, with proper leverage, real estate development is one of the most profitable businesses on earth. Some NYC development projects can deliver 30% - 50% levered IRRs. When every dollar of Xinyuan's cash has the potential of earning 30% - 50%, paying them out as dividends and spending them on share buyback is a very expensive way to tell the shareholders "Yes we care about you".
he bond retires the 15.6% Fosum note with an all-in cost (including warrants) of about 20%. In April 2010, Xinyuan issued the $40 million 3-year senior secured note to Forum Asian Realty Income II, L.P. This new cheaper debt will improve Xinyuan's financials and increase the company's profitability.
Although bondholders secured a 13.25% annual return through 2018, equity investors will realize much higher returns through 2018.