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Should Investors Go All-In on This Real Estate Stock?

- By Jonathan Poland

Xinyuan Real Estate Co. Ltd. (XIN) is a real estate developer and property manager. The company develops residential properties in Tier 1 and Tier 2 cities in China.

Just this morning, it celebrated the listing of its property management entity on the National Equities Exchange and Quotations (NEEQ) in Beijing. The listing should draw attention to the value of this steadily growing business.

This news is on the back of a recent announcement that its board of directors have approved a $40 million share repurchase plan. If all that money is used, we are looking at more than 11% of the current shares and 27% of the float.

Xinyuan currently manages 50 million square meters in over 20 cities, including Beijing and Shanghai, serving more than 100 thousand families. In the last decade, the company has done a fantastic job of driving growth on both the top and bottom line. In the last 12 months, it turned in $73 million in net earnings on more than $1.5 billion in sales. While these results may be down from 2012 and 2013 figures, it still puts the stock in deep discount territory.

Full-year 2016 highlights

  • Total revenues increased 34.1% to $1.56 billion.
  • Sales increased 14.2% to 1,126,100 square meters from 986,100 square meters in 2015.
  • Contract sales increased 26.7%.
  • Gross profit was $357.6 million, or 22.9% of revenue in 2016.
  • Net income was $79.5 million in 2016 compared with $66.5 million in 2015.
  • Diluted earnings per ADS were $1.06 in 2016 compared with 91 cents per ADS in 2015.
  • Unrestricted cash on hand rose to $578 million on Dec. 31,2016, up from $160 million on June 30, 2015.

The market capitalization at Thursday's $4.72 closing price was $308 million, and the total enterprise value of the company is $1.85 billion, which is the number you have to pay attention to here.

Since Xinyuan takes on debt to build its properties, the interest expense has to be less than the income generated to make it worthwhile. Thankfully, the company was able to refinance some $300 million in debt at lower rates.

The value of Xinyuan's business is rock solid, yet it remains difficult to predict how much will be recognized short term due to China's intensifying housing market restrictions. The government is taking measures to limit real estate speculation and misallocation of national resources, but the money supply continues to grow at 10% a year.

To be fair, the property bubble in China is not the same as what it was here in America circa 2008. Chinese buyers must have at least 30% downpayment, which means more equity in the game from the start. Not everyone is buying in the big metropolis of Beijing and Shanghai either. China is a massive country with plenty of opportunity for real estate developers still to come.

During the third-quarter conference call, Xinyuan CFO Helen Zhang said the company is intentionally delaying sales launches on some projects (Kunshan, Tianjin, Zhengzhou) because the market value was above the maximum selling prices permitted at that time under new rules. Give it time and those launches will yield big results.

Also remember that China, as a country today, is a lot better off economically than America was in 2008, even if housing prices continue to rise. The total GDP growth is still forecasted to be 6.5% for 2017. More and more of the younger generation (19 to 36-year-olds) own homes in China at a greater percentage than anywhere else in the world.

In addition, the company has a forward price-earnings multiple of 2.1 times, a projected dividend yield of 9.03% for 2017 and is thinly traded, meaning there is more volatility.

Bottom line, this may be an all-in moment. A "put all your eggs in one basket and watch that basket" moment. The biggest reason is few other investments look as promising or as safe. Sure, I may have to suffer some short-term pain, but longer term (10 years), this stock could be a teenager and that means 300% ROI, which I do not think anyone will see buying the S&P 500.

Disclosure: I am long XIN.

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This article first appeared on GuruFocus.