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Xinyuan Real Estate Co., Ltd. Message Board

  • stan.ackman stan.ackman Apr 4, 2012 4:59 PM Flag

    Is XIN worth the risks

    Apparently, XIN is significantly undervalued compared to its current earnings. The market discounts the earnings so much because of several risks.

    First, not a big concern for XIN, fraud risk. The chance of a total fraud for XIN is closed to zero. The market did not discount too much for this risk. XIN has been already traded below P/E of 3 before the Chinese fraud scandals emerged.

    Second, industry risk. This is big one. Chinese real estate industry is extremely policy driven. The central government lifted the unloved industry in the beginning of this new century. It also started to contain this industry in the middle of 2009, when XIN started this long-time slump. This year, local government started to relax some local real estate policy. That’s why XIN climbed more than 80% this year. However, the central government is still largely against the policy relaxation. If the real estate price shows any sign of appreciation. More restrictions will come. Currently, the government’s goal is to bring down housing price in China at least 10%. This potential outcome has yet to be reflected into XIN’s current earning. If you look at XIN’s 2011 Q4 earning, several properties XIN sold actually still show higher price than a year ago. So, if housing price is really down 10%, is XIN still going to deliver the same level of earning? Also, currently, quite a few real estate buyers in China are price chasers. They buy because they anticipate future significant appreciation of housing price. If they feel the trend broken, they will stop buying. In turn, Chinese real estate price will drop more.

    Third, solvency and liquidity risk. Small developers (compared with Vanke, Poly, and EverGrande) like XIN have limited ways to get finance. Although, XIN has stronger balance sheet than a few developers in China, it still need to borrow to develop projects. This is just a basic of the real estate industry. No developers finance deal totally by their own money. If real estate volume and price drops in the future, XIN will find its operation cash flow dry up, impairing its ability to develop new projects. No new projects mean no future income.

    Now, let’s look at rewards. According to JB, XIN is worth $6.59 per share, about 100% return from the current price level. The question is how long we will get this 100% return. Based on current loss of confidence about China and China real estate industry, I rough guess is at least two years. So, 100% return for two years means 41% annual return for two years. If it needs three years to the $6.59 level, it is a 26% annual return for three years.

    If any of the risks I mentioned really happen. XIN will not even go closed to $6. So, all the return numbers I just talked about will not mean anything unless the risks eventually will not happen.

    If XIN is still around $2, I will recommend buy it because it mean a potential return of 82% for two years, or 49% for three years. But the current price just makes XIN unattractive.

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    • Undoubtedly your view suggest an interesting insight and reasoning.
      At the same time includes -apologize in advance if you read me aggressive because really isn't the intention- one emphasis that if it has been released with the same criterion/pattern within the U.S., Americans had never been able to accept Fanny and Freddy.

      's only American myopia, some ignorance about the real state costs or a way to find the speck in your neighbor's eye?

      Your view leaves me much more calm because your issue focuses exactly where -'m sure- you never 've worked.
      Writing more clear: you never built a single sqm, nor 've advisors around building costs.
      You don't know how much 's the world average -using USD- per cement or cast iron kilogram.

      Only through such ignorance many banks could convince around the world , for example, thousands of "spanishwethepeople" to accept mortgages above @ 6000 euros/sq2 without any luxury.

      That's the reason why invite you to check your concepts using the Americans real state costs on similar buildings to those developed by this Chinese company and can assure you 'll find an incredible...(take your own view again) ..."distance".

      You must remember one of the most important capitalist principle:
      "The price of anything is what someone is willing to pay".

      The other point ':cement or cast iron are like commodities so their prices are closer everywhere (only remain the great difference on handjobs, salaries...lawyers?)

      After that, and beyond all market manipulations 'm fully agree with you with the lack of certainty about the "intrinsec profile real state everywhere",
      also you may accept that in most of development countries with a terrible social spread (China situation) between rural and cities people,the trend has no choice in coming decades (around 70% "wethepeople" 'll be living in cities before 2030).

      Don't worry if you aren't able to develop sq2 with an inflation above 20% per year like i'm doing (of course we are going to a new disaster) but you must think why the vast majority and most important American real state developers aren't able to restart their business with a lot of free money and a 0% rate according to your FED)


      (hug from Argentina while counting the bricks and reviewing the bill that has come with a 15% increase)

      political query:
      do you believe in the reproduction of capital that "built/made" happy owners without house debts in America or you 'll vote MittObama?

    • Fraud risk is still #1 in my book. Evidently, in China, it is still possible to borrow hundreds of millionds Yuan (amounts to almost a hundred million USD) based on "promises" or other in-tangibles. Much of the money, evidently, is used to buy land or building which were supposedly to double.

      Nobody knows who borrowed how much from whom. Does anybody know where XIN stands? How much of its money is borrowed with shark intererest rates? Did it lend out any of its money this way?

    • That's a really good topic for discussion tomorrow. I'll think about the cash reserves thing tonight and post a thread tomorrow.

      Reminder to myself for then: 1. is there a ratio of some kind we can measure for xin, compared to vanke/chln/etc, maybe a cash to revenues ratio? cash to ??? debts? revenues? liabs? feels like it should be a cash to something ratio. compare xin's to others to see if xin's hoarding too much cash. if y, why?

      2. chairman guy's 40% gains value when fraud worry gone, so why the hoarding? looks bad.

      3. why not declare a 10 cent for this Q div? w/ expect same nextQ. mass price jump shres. as long as each q's earnings = 10 cents or better, div can be sustained w/ virt no decline in outrageous 4 bucks cash holdings

    • What you said is exactly the dilemma XIN's management is facing right now. No dividend equals fraud, and more dividend means less reserve for an industry meltdown.

      Also, there is no minimum cash required on a daily basis. You can easily borrow from a bank to boost a short-term liquidity issue. However, chairman Zhang, who owns 40% of the company, worries more about the survivorship of the company more than the share price. As Tom said in the conference call, the chairman needs a job to do. Retail investors like us, on the other hand, worry more about this stock's short-term to median-term performance rather than the long-term prospect of the company. If the stock really hit $7, most people here will sell their XIN stocks completely if not substantially. Who cares if XIN will survive in the next 5 years if an industry consolidation happens.

    • But if they're hoarding cash beyond what similarly situated companies are doing, then talk of the Fraud risk can gain momentum, with people asking "why -- if they really have all this cash, $4+ per share -- don't they give some back to us? Is it possible all that cash is just an entry on a balance sheet and not really cash in an account somewhere at all?"

      How would we measure whether XIN's cash reserves are greater than other companies like it? What do you figure: we'd need Chinese real estate companies, then compare those companies' cash reserves to, what, their revenues? their building costs?

      What ratio would we want to learn about other Chinese real estate companies and then compare to XIN's ratio (without picking a ratio that clearly stacks the deck for or against XIN)?

      I have no idea what any of those answers are, but I think that's an avenue we'd all benefit from learning more about.

    • If XIN' outlook is stable, it should return the capital back to its shareholders. However, management knows the outlook is not stable at all. Tom Gurnee, the CFO, told me even the chairman does not know what will happen beyond 12 months. Basically, they feel the uncertainty. However, shareholders keep pressure on them. They are in a dilemma. I guess that's why they still didn't announce the actual dividend. They use the wait and see approach. Only if the share price drops below a certain level, they will announce it. Otherwise, they will conserve the cash while the shareholders are relatively happy with the current share price.

    • On the cash point, why does XIN need to keep so much cash on hand? As of Dec 31, it had cash/equivalents of $4.14 per share, see 2nd chart from bottom, here:

      What would the danger be in returning a nice chunk of that money to its owners, the shareholders, via dividends? It doesn't help XIN's argument against fraud to have, but not distribute, all that money.

    • XIN could survive or even thrive from a meltdown if it executes several factors correctly. For example, it needs to conserve the cash right now. Even though its share pricing seems so undervalued. I have seen so many companies tried to lift their declining share prices by announcing more share buybacks and dividends just before their earnings got hit badly. These companies may be even forced to sell their assets or sell shares at even lower price when the industry consolidation got into the last stage. But they would be much better positioned if they chose conserve cash rather than using cash to save their share prices at the beginning of the meltdown.

      My saying is XIN could survive if a consolidation really comes. However, its share price can and will likely go much lower before go much higher. Oil shipping industry is pretty good example of industry consolidation. 99% of the companies in that industry have annual losses in the last 3 years. In 2009, most of the companies have P/E around 4 or lower. Now, they have no profit, and most of their shares have dropped another 50% from their 2009 lows.

      As far as XIN as a target, XIN will surely worth not too much than its book value if it is forced to sell itself. Real estate companies has limited real intangible value, for example brand value. If Vanke wants to buy XIN, it wants to buy only XIN's expertise in some regional market and its team rather than its assets. XIN's tangible assets will only worth as much as its carrying value. Its properties under development will be only worth as much as the market price. If real estate market price drops, XIN's book value drops.

    • Man this guy is a buzz kill. "Not worth the risk". Every stock investment is a risk including this one. But there are very few companies trading at 1/2 book value and a PE of less than 3.

      This is one of those rare situations that I am very confident in taking the risk.

      • 1 Reply to rsadams71
      • Agree with this poster. You made great arguments Stan, except for two things - Even at $3.3, still extremely cheap compared to the rest of the market's valuations. If I was looking for a cheaper stock with close to the same valuations as XIN, I'd be hard pressed.

        The other point is the dividend. To get paid while you wait for the price to grow can be reason alone for some to pick up XIN at 4 & 5 dollars.

        $6-8 I think is a reasonable price range for one to pause and consider the risks you so eloquently stated.

        You're right on the risks, but wrong on the price threshold for XIN to be too risky to buy.

    • Good stuff. I'll divide my comments into sections. Skip whatever sucks.

      Fraud Risk

      You say "close to zero". I agree, but ONLY FROM OUR PERSPECTIVE as investors, having done enough due diligence on XIN that we're comfortable. On the other hand, for potential NEW investors, the Fraud Risk is as big for XIN as it possibly can be, hitting everything that scares them: Micro cap, using an Accounting Firm they've never heard of, in an industry there's a lot of concern about. I think Fraud definitely scares a lot of potential investors away.

      You mention XIN declined before the initial wave of Chinese frauds. True, it might not have been the Fraud Risk that initially caused XIN's decline to sub 3 P/E, but it's certainly one of the factors contributing to the long languish at those numbers.

      Potential Chinese Real Estate Bubble Risk

      I won't pretend to understand the economics surrounding this question, but I know that economists themselves don't agree on it.

      I know the basic outline, though: Proponents of Imminent Bust talk a lot about finished buildings sitting empty. They claim there's an oversupply of housing caused by the govt / Party ordering economic development to be the # 1 task for all subordinate government levels, and that the easiest way for those subordinate governments to prove they've accomplished that goal is to point to a bunch of new skyscrapers in their downtowns, so they order buildings whether they really need them or not.

      I don't know if that criticism's accurate or not. But, I think XIN investors are somewhat insulated from this risk, since it's price has been hammered down so low, it's at levels you might expect AFTER the Bust had already happened. In other words, if the Bust happens, I think XIN's already been priced down for it, and if the Bust doesn't happen, XIN should get a ton of upward pressure when folks start to realize that the threat of the Bust has passed.

      Liquidity / $6.59 Thing Risk

      I'm still thinking through this stuff, but soon we should reopen that discussion.

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