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XIN: Xinyuan Real Estate - Revenues Rebound as Consumer Spending Recovers in China

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·6 min read
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By Steven Ralston, CFA

NYSE:XIN

READ THE FULL XIN RESEARCH REPORT

Xinyuan Real Estate (NYSE:XIN) reported financial results for the third quarter ending September 30, 2020. Total revenues increased 31.7% to approximately $655.4 million versus $497.6 million in the third quarter of 2019. Sequentially, the company’s sales rebounded strongly (+130.5%) from the depressed level of the second quarter as consumer spending began recovering and demand for residential housing rebounded. In addition, contract sales benefitted from the initiation of pre-sales at several major projects, including Zhengzhou Xinyuan Palace I (Phase 1) and Qingdao Lingshan Bay Dragon Seal (plot C1).

Cost of revenues increased 47.0%, a rate greater than sales causing the gross margin to contract to 875 basis points to 16.1% versus 24.8% in the comparable quarter last year. Part of the gross margin decrease was an adjustment made by management to reduce the expected selling prices at two projects. Without the adjustment, gross margin would have contracted 642 basis points to 18.4%. Operating expenses increased only 0.5% from approximately $57.6 million to $57.9 million.

For the third quarter, Xinyuan reported a net income of $23.368 million (or $0.44 per ADS) versus a gain of approximately $4.144 million (or $0.07 per ADS) in the comparable quarter last year. A property held for lease was sold during the quarter; the associated $82.8 million gain advanced the company to a profitable quarter.

As of September 30, 2020, working capital has significantly increased to approximately $1.68 billion, 44.8% above the $1.16 billion on December 31, 2019.

Coincident with the earning release, the Board of Directors declared a cash dividend of US$0.025 per ADS US$0.25 to ADS-holders of record of December 18, 2020, to be payable before January 8, 2021. Since April 2012, the company has had a consistent record of quarterly dividends, starting at US$0.04 per ADS, then in 2013 being raised to US$0.05 per ADS and again to US$0.10 per ADS in mid-2016. In order to manage the company’s finances prudently, the Board reduced the quarterly dividend to US$0.025 per ADS until the recovery from the economic effects of the pandemic is firmly underway.

Summary of operational achievements during the third quarter 2020

China:

• During the third quarter, 336.4 square meters (m2) of gross floor area (GFA) were sold in China

• Zhengzhou Xinyuan Palace I - initiation of presales (19 m2 were sold)

• Qingdao Lingshan Bay Dragon Seal - initiation of presales (25.5 m2 were sold)

U.S.:

• Oosten Project (Brooklyn)

∙ 179 of 216 units have been sold

∙ 21 of the remaining 37 units have been leased

• Hudson Garden Project (Hell’s Kitchen)

∙ Completed superstructure and concrete facade construction, along with window installation

∙ Opened sales office and 3 fully furnished models (studio, 1-bedroom & 2-bedroom)

• RKO Project (Flushing)

∙ On-going pre-development activities continue (e.g. planning, governmental approval process etc.)

∙ New architectural firm engaged to develop architectural plans & complete schematic design

∙ Management anticipates demolition to be completed in the first quarter of 2021

The U.K.:

• The Madison (London)

∙ Completion delayed from October 2020 to 1Q 2021 due to work restrictions (COVID-19)

∙ 151 of 319 apartments have been sold

∙ All 104 Affordable Housing apartments have been sold

Recent initiation of pre-sales

July 2020 — Qingdao Lingshan Bay Dragon Seal Project – plot C1 (Shandong Province)

August 2020 — Chengdu Xinyuan City – plot 9 (Sichuan Province)

Sept. 2020 — Zhengzhou Xinyuan Palace I (Henan Province)

Qingdao Lingshan Bay Dragon Seal is a 600,000 square-meter project with 183-to-284 square meter villas facing the ocean and 112-to-188 square meter apartments in the high-rise towers that overlook the sea. The community is near to 6 km of pristine coastline and close to Eastern Film and Television Industrial Park, a world-class film and television production center.

Chengdu Xinyuan City covers ​​301 acres with approximately 610,000 square meters of planned residential buildings equipped with smart home systems, which are connected to air floor heating, central air conditioning and water purification system. There will be four large multi-dimensional landscaped atriums. In addition, there will be 87,000 square meters of office space, 49,000 square meters of shops and 180,000 square meters of commercial shopping. The complex is close to the future Hepingjie Station of Metro Line 6 and within 800 meters of the Modi River, a Municipal Park, Knowledge Park, Rhododendron Park and Chuangzhi Park.

Guidance for 2020

On the November 27th earnings conference call, management adjusted guidance of contract sales to RMB18 billion (US$2.76 billion) versus $2.39 billion reported in 2019. Prior contract sales guidance was in RMB20 billion-to-RMB22 billion range (US$2.95-to-US$3.25 billion).

Though the goals are economically challenging, Xinyuan has a solid, high quality land bank and pre-sales have rebounded strongly in the third quarter. Management believes that the lost sales in the first half of 2020 have been postponed to the second half. Residential housing demand is giving encouraging signs for a recovery during the second half of 2020; hence, management believes that much of the sales expected in the first half have been postponed to the second half of 2020.

Operational expectations for the fourth quarter

Management anticipates that pre-sales will commence in the fourth quarter at Xinyuan Chang’an Royal Palace (in Xi’an in Shaanxi Province) and Tongzhou Xinyuan Royal Palace (in Beijing).

Located in Xi’an, a city in Shaanxi Province, Xinyuan Chang’an Royal Palace is situated on a 330,000-square-meter site. Current development plans call for nine high-rise buildings, three bungalows, one office building and a kindergarten, along with commercial facilities. Nearby are three hospitals, four schools and five parks.

Located in Tongzhou District of Beijing, Tongzhou Xinyuan Royal Palace is an 110,000 square-meter urban project designed to be a gathering area for international organizations. The units will provide comfortable living with intelligent technology and excellent service.

Xinyuan Real Estate has an impressive history of developing and selling an increasing amount of residential projects, 60 over the last 20+ years. The company primarily operates in China, a growing country which is experiencing positive demographic trends and functions under a managed economy. Xinyuan has a strong project pipeline.

Valuation

The P/B valuation range for comparable property development companies in China is between 0.18 and 1.23. Utilizing comparable analysis, the target price for Xinyuan Real Estate is $6.93 per ADS, which is based on an expected price-to-book multiple of 0.55.

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