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Xinyuan Real Estate Co., Ltd. (XIN) Q2 2019 Earnings Call Transcript

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Xinyuan Real Estate Co., Ltd. (NYSE: XIN)
Q2 2019 Earnings Call
Aug 16, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Xinyuan Real Estate Company Limited Second Quarter 2019 Earnings Conference Call. Please note that today's call is being recorded.

I would now like to turn the conference call over to Mr. Bill Zima of ICR. Please go ahead, sir.

William Zima -- Investor Relations

Hello, everyone, and welcome to the Xinyuan's Second Quarter 2019 Earnings Conference Call. The company's second quarter earnings results were released earlier today and are available on the company's IR website as well as on Newswire services.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US Securities Private Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such our results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our form 20-F and other documents filed with the US Securities and Exchange Commission. Xinyuan does not assume any obligation to update any forward-looking statements except as required under applicable law.

Today, you will hear from Mr. Yong Zhang, the company's Chairman and Chief Executive Officer, who'll comment on the company's operating results. He will be followed by Mr. Brian Chen, the company's Chief Financial Officer, who will provide some additional color on Xinyuan's performance, review the company's financial results and discuss the financial outlook. Following management's prepared remarks, we will open up the call to questions.

With that said, I would now like to turn the call over to Xinyuan's CEO, Mr. Zhang. Please go ahead.

Yong Zhang -- Chairman and Chief Executive Officer

Thank you, Bill. Good morning, and thank you all for joining our second quarter 2019 earnings conference call. We are pleased to acknowledge that in the first half of 2019 Xinyuan maintained stable growth and commenced pre-sales of three new projects in China. The total value of contracts signed in the first half was 2,000 -- RMB1,080 million [Phonetic] representing a 5.2% increase compared to RMB1026.7 [Phonetic] million in the first half of 2018. In addition, we achieved top and bottom line growth despite downward pressure on sales across the industry.

In the first half of 2019, total revenue increased 103.5% year-over-year. Moreover, we were able to reduce SG&A expenses as a percentage of total revenue to 11% in the first half from 16.4% in the first half of 2018. As a result, gross profit increased by 96% year-over-year, and net income was $38.0 million, compared to net loss of $22 million in the half -- in the first half of 2018. Furthermore, our overseas projects continued to proceed as planned, and presales of our Manhattan project are expected to launch at the end of the fourth quarter of 2019.

We are pleased -- we are also pleased to be able to continue to deliver value to our shareholders with our dividend payment this quarter. Despite market and policy uncertainties, we remain optimistic about our ability to achieve positive operating performance. We will remain focused on our core business, maintaining our competitive advantages and strengthening our market-leading position.

Now, please allow me to turn the call over to our CFO, Mr. Brian Chen.

Brian Chen -- Chief Financial Officer

Thank you, Mr. Zhang. Hello, everyone and welcome to Xinyuan's second quarter 2019 earnings conference call. Allow me to take you through the financial results for this quarter, further discuss our latest operations and initiatives and conclude by updating you on our financial outlooks for the remainder of the year.

Please note that all figures are in US dollar terms, unless otherwise stated. As mentioned by Mr. Zhang earlier, we had a pretty good sales, first half of this year. The total contract sales in RMB terms for the first half of the year was RMB7.3 billion representing a 12% increase comparing to the RMB6.5 billion in the first half of last year.

In terms of the contract sales, which is only counting those contract sales has over 30% on the down payment. The amount increased by 3.4% to RMB6.8 billion from the RMB6.45 billion in the first half of the 2018. Contract sales were $507.4 million in the second quarter of 2019, comparing to $633.9 million in the second quarter of 2018 and $479.7 million in the first quarter of the year.

Total GFA sales in China were about 233,200 square meters in the second quarter, comparing to 282,900 square meters in the same quarter last year and 211,400 square meters last quarter 2000 and -- last quarter. Total revenue increased by 70.1 -- 71.3% to $609.4 million from $355.8 million in the second quarter of 2018 and increased by 30% from about $468.9 million in the first quarter of the year. The average selling price per square meter sold in China was about RMB14,800 in the second quarter of 2019, comparing to about RMB15,300 in last quarter and about RMB14,200 in the second quarter of 2018.

SG&A expense as a percentage of the total revenue decreased to only 10.3% from the 13.2% in the second quarter of 2018 and 12% in the first quarter of 2019. Interest expense this quarter was about $28.4 million, comparing to about $24.3 million last quarter and $24.7 million in the same quarter last year. Due to FX exchange frustrations, exchange loss in this quarter was about $4.4 million, compared to about $3.5 million exchange gain last year.

On a -- aggregated for the half of this year, the net FX loss is about $0.9 million, which is offset by the hedge we put down this year. So the net FX impact is close to nil for this year to date. Net income for the second quarter increased to $19.8 million, comparing to a net loss of $9.3 million for the second quarter of 2018.

Diluted net earnings per ADS attributable to shareholders were $0.19, comparing to a net loss of $0.10 per ADS in the second quarter of 2018. The company repurchased about $1.4 million ADS in the second quarter of 2019.

On the balance sheet side, as at June 30, 2019 the company maintained a very strong cash and cash equivalent position, including the restricted cash, the position is about $1 billion, comparing to $1.1 billion as at -- as of March 31, 2019. Total debt outstanding was about $3.6 billion, increasing from about $3.5 billion at the end of the first quarter of 2019.

The balance of the company's real estate properties under development at the end of the quarter of 2019 was about $3.8 billion, comparing to $4 billion at the end of the first quarter of 2019. Shareholder equity at the end of the second quarter of 2019 was about $753 million, comparing to about $769 million at the end of the first quarter of 2019. The slight decrease of $16 million in the shareholder equity is mainly impacted by the FX impact, which is about $24 million.

Project update side, at June 30, 2019, our total unsold land bank was about 5.2 million square meters. On US project updates, as at the June 30, 2019, our Oosten project in Brooklyn, New York has recognized total revenue of about $260.1 million from the sales of 173 units out of the total of 216 total units.

The BLOOM ON FORTY FIFTH project, which is our Hudson Garden project in Manhattan, Hell's Kitchen completed the superstructure construction and closed out 90% of its external wall and windows. During the past year, the project's design drawings were optimized and the total number of units subsequently increased from 82 to 92. 29,000 square foot of the projects, 38,000 square feet of total retail space has been leased to the US department store retailer Target for a 20 years term. Presales are expected to begin at the end of the fourth quarter this year. We continue to execute on the pending governmental approval and pre development activities of the RKO project, which is our ground-up development project in Flushing, New York.

After the Landmark Protection Committees approval on our landmark protection plan, we were awarded with a certificate of appropriateness. Transfer work of the site Landmark artifact was completed at the end of the February 2019. The artifacts are now stored in the warehouse for restoration work.

UK Project update, in the second quarter of 2019, the structural frame of the Madison in London was completed and construction remains on track for completion in 2020. By the end of the second quarter of 2019, all of the 104 Affordable Housing apartments or the project have been pre-sold. Of the remaining 319 apartments, 134 apartments have been sold.

In terms of the leasing at our Xinyuan Property Management subsidiary. Our Xinyuan Property Management Company subsidiary has achieved rapid growth in recent years. To further drive its development, we have applied to list the subsidiary in Hong Kong. The listing is expected to be completed around the end of September this year. After the listing, we will continue to be the controlling shareholder and we will fully consolidate the subsidiary or company. We believe that listing on a high quality platform where many of its peers are listed will benefit all of our shareholders.

On the dividend side, we announced a cash dividend for the second quarter of 2019 of $0.10 per ADS, which we will repay before September 17, 2019 to shareholders of record as at September 3, 2019. And finally onto our full year 2019 financial forecast. For the full year of 2019, we expect an increase in the contract sales of about 10% and an increase in consolidated net income of 15% to 20% over 2018.

This concludes my prepared remarks for today's call. Operator, we are now ready to take some questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will take our first question from Alexander Wang [Phonetic] with Citibank. Please go ahead.

Alexander Wang -- Citibank -- Analyst

Hi. I have three questions. The first one will be, what is the actual cash flow in first half 2019, and the cash flow guidance for 2019 full year? My second question would be that, what is the breakdown of total debt as of the first half of 2019? And how much is the onshore non-bank borrowing, and how much do you refinance during the second half? And then my last question would be what is the unbooked revenue and the estimated GPM? Thank you.

Brian Chen -- Chief Financial Officer

I would like to answer the second question first. Maybe you need to repeat the first and third one, the voice is a little bit low. In terms of the outstanding loan as at the end of the Q2, we had overall $3.6 billion debt, out of the $3.6 billion, 61% coming from onshore and 39% coming from offshore. For the 61% onshore, 30% of them coming from the construction loan extended by the mainstream bank and 24% also construction and land loan -- [Indecipherable] related loan from the trusted -- from the trust, and 7% of the onshore is coming from onshore corporate bonds.

In terms of the offshore debt, 31% of them coming from the senior notes and 3% coming from back-to-back loans, and this remaining 5% coming from EB-5 loans and some local construction loans from a local financial institute in New York.

In terms of the first one, I cannot catch the question, can anyone repeat that? Do you mind repeat your first question?

Alexander Wang -- Citibank -- Analyst

Yeah. Sure. Yeah. Sorry if it was a little bit unclear. So what was the actual cash flow in first half 2019? And what is the cash flow guidance for the full year 2019? Thank you.

Brian Chen -- Chief Financial Officer

So in terms of the cash movement for the first half of the year, we are starting by -- we had collect the cash payment from the client of about RMB6.3 billion and had a return, so the land acquisition fund are about $1 million. And the expenditure on the land is about $19 million and construction expenditure is $30.4. And the tax payout is $10.4 million and the other operating expenditure is about $10.4 million. $7.4 million also is used on the repurchase of the share and bonds and dividend payout. At the same time, we draw down another $3.9 billion loan and we are paying back $5.8 billion and we pay interest of $1 billion. So at the beginning we had about $8.2 billion cash and the end is RMB7 billion, this is RMB. What's your third question?

Alexander Wang -- Citibank -- Analyst

Hi. Thank you. Thank you very much. I'll repeat my last question, what is the unbooked and the estimated GPM? Thank you.

Brian Chen -- Chief Financial Officer

Thank you. Would you please repeat that question? We don't actually catch it.

Alexander Wang -- Citibank -- Analyst

Yeah. Sure. What is the unbooked revenue and estimated GPM? Thank you.

Brian Chen -- Chief Financial Officer

GPM, do you mean gross profit margin? Sorry. When you mean unbooked revenue, do you mean the deposits we collect for the customer or do you mean the deferred revenue?

Alexander Wang -- Citibank -- Analyst

Hi. If you have information on both, it will be great if you could provide both, please. Thank you.

Brian Chen -- Chief Financial Officer

You need the number as at the -- for the first half of the year, or do you mean a forecast for the end of the year in terms of the gross profit margin?

Alexander Wang -- Citibank -- Analyst

Again, if you could provide both, it'll be great. Thank you.

Brian Chen -- Chief Financial Officer

Gross profit margin for the first half of the year is 27%. We estimate the whole year is about 26%. So maybe we can move on to the next person.

Operator

Thank you. We'll take our next question from Edward Choi with TT International HK. Please go ahead.

Edward Choi -- TT International HK -- Analyst

Hi, management. I thank you for letting me asking a question. So the first question I have is about your capital structure. As I look at that as I -- we are glad to see that -- like gearing and also your cash to short term debt has been -- at least they stabilized in the second quarter. So -- but at the end of the day, it's like your bonds are trading at like 14%, 15% yield, it's still showing a lot of liquidity [Indecipherable] regarding your capital structure, right? So can you share us with your thoughts about how do you want to tackle your total debt pile, as I think about -- how do you going to reduce your leverage going forward? Are you going to slow down some of the acquisition going forward like other -- like some of your peers or what do you think about it?

And also even from an equity standpoint, right, so a substantial portion of your operating cash -- operating profit actually went to interest payments. So -- and once again with your bonds trading at 14% and 15%. So how do you balance the interest between your equity shareholder and your debt bond holders? Are you considering -- how do balance the two of them? Because your dividend payments definitely is high that we are very glad on it. But if you are not cutting down the debt here, we will never get the net profit, for our equity side of the valuation, right? so how do you balance the interest between the equity side and the debt side between the bond buyback, stock buyback and also your dividend payout and also interest -- your cost of financing? Thank you.

Brian Chen -- Chief Financial Officer

Yeah. Thanks for the question. Good question. We did acknowledge that although the situation is stabilized, but our overall debt is pretty high. But let me specify that, although the overall debt amount is increased, but structurally the current portion of this long term debts is actually improved significantly.

If you look at the current portion of all these long term debt, you'll recall, by the end of the Q1, 61.9% of the overall debt they are like current. Now, through the whole quarter's optimization and operation, the current component already go down to 33.6%, which means that, current portion of this overall debt reduced by 33.8%. It's still high, so from the overall debt point of view, our intention is, had the overall balance bring under control and reduce it like in the next three to six months. We would achieve this through few months.

First of all, we will improve our performance by increase the profitability, improve the turnover, more cash generally coming from the operating activity, we will use this fund to pay down certain outstanding debt. As at this point, facing the current portion of the debt, which mature in the next 12 months, we are either laying down funding prepared for those debt payment or with some of them, as at this point, we already paid down.

So, overall, you will see a decrease of the overall debt, as well as to improve the debt related ratio in a quarter or two. We do need to stray a good balance between our equity shareholder and the debt holder. We want to maintain a check record and pay out consistent dividend to our equity shareholder, but we only do so by doing a careful cash planning and make sure that we have sufficient fund to not only keep the liquidity of our operation, but have all the fund prepared to deal with the maturity of our debt out there.

Overall we will need to stray this balance, as time passing by when we improve our profitability and then we tap into further equity issuance opportunity, we believe that in the third quarter we will have a good balance between -- a better balance between the equity investor and the debt investor. The overall cost of the borrowing or the overall cost of the capital will reduce in two to three quarter.

I hope I answered your question.

Edward Choi -- TT International HK -- Analyst

Thank you. I also have a second question. Right? So like in terms of your FX exposure, because this is why majority of your cash flow is inside China. So do you hedge your US dollar bond? So what is your currency FX policy going forward? Are you planning to hedge or are you planning to reduce your US dollar exposure?

Brian Chen -- Chief Financial Officer

Yeah. Majority of our FX exposure, which is those -- when you talk about those US dollar denominated senior notes, it was listed in our US dollar functional currency entity. So they are not subject to the FX fluctuation. The only exposure is coming from some inter-company loan that the oversea subsidiary extend to the Chinese domestic entity. On weighted averages on last year we had about $400 million, actually Chinese yen denominated loan sitting in the USD functional currency. Right now, the exposure go down to equal to $170 million. Facing those exposure, we actually set up a FX strategy, that's the reason you see that, comparing to last quarter we achieved a pretty good FX hedge effect. The net FX movement after the hedge is only $29,000 for that $170 million exposure.

Edward Choi -- TT International HK -- Analyst

Okay, so like -- can you share with us at what proportion of your debt or your cash flow revenue stream is actually hedge.

Brian Chen -- Chief Financial Officer

The hedge exposure is on the intercompany loan, that extend from our US functional currency to the Chinese domestic, which is Chinese yen functional currency entity. The intercompany loan was denominated in RMB, so on the domestic side there is no FX fluctuation. But on the US dollar functional currency side, we have debt exposure equal to about $170 million.

Edward Choi -- TT International HK -- Analyst

[Speaker Overlap]

Brian Chen -- Chief Financial Officer

And we expect the balance will be reduced when we pay down two-third of those balance from Chinese entity to the US functional entity and prepare for the settlement of these senior notes that's going to be expired on August 31, 2019.

Edward Choi -- TT International HK -- Analyst

Yeah. As far as -- yeah, I will tell you that we understand that the company has US dollar as a functional currency in the balance sheet, but at the end of the day it's like maturity of your revenue and your cash flow is in terms of Chinese Yen. So at the end of the day I just try to get a sense like, how do you resolve this currency mismatch between your RMB CNY cash flow and US dollar debt?

Brian Chen -- Chief Financial Officer

Yeah. As you mentioned our business model, overall, we are reporting in US dollar, but with majority net asset and revenue and cost resides in China, which is RMB functional currency. In essence, we are facing with a kind of FX impact. For this, we are just closely monitoring it, we analyze it, but our FX hedge is only focused on the foreign currency monetary balance. We don't really hedge the revenue and costs, neither hedge on our net asset.

Edward Choi -- TT International HK -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] We'll take our next question from Hermann Tilke, Private Investor. Please go ahead.

Hermann Tilke -- Private Investor -- Analyst

Hi. Thanks for taking my call. So, my first question is that, about six years ago in 2012 and 2013, when Mr. Zhang was the CEO, the company had a much lower leverage, a smaller land bank and a higher inventory turnover. But then for the past few years, the company increased its leveraged dramatically and also have a much larger land bank and a high revenue growth. Now Mr. Zhang is back, I wonder if we are going to the old way of running Xinyuan conservatively or are you going to continue the high leverage, high growth strategy?

Brian Chen -- Chief Financial Officer

Yes, to some extent you are right that, Mr. Zhang is considering debt approach like increase the debt LIBOR and increase those kinds of inventory is not sustainable. We do believe that relying on our operating efficiency, increase the turnover, increase the profitability, it might be a better way to address the uncertainty and the challenging external environment. We are looking at that kind of possibility. So, overall, deleverage it. Yeah. To bring the debt level done, more relying on our own cash in-flow from operating to be more healthy and more sustainable growth could be the direction. Thank you.

Hermann Tilke -- Private Investor -- Analyst

Okay. Thank you. So my other question is that, there was an article published by the author called [Indecipherable] in June. So the article talk about Xinyuan and she said that Xinyuan hire some external CEOs and other high ranking executives from Wanda for the past few years. So Wanda is another real estate giant from China and the -- and she said that, overall, the strategy was a failure, because comparing Xinyuan to other competitors from [Indecipherable] Xinyuan was -- the growth was much lower, even though it tries to internationalize, took a lot of additional capital. I wonder, have the Chairman and CEO read the article and what they feel about it and what kind of mistakes you think Xinyuan have made for the past few years? Thank you.

Brian Chen -- Chief Financial Officer

So, first of all, XIN is the first and only Chinese domestic real estate developer listed in the New York Stock Exchange. We really care about the income plans and stable and had a growth -- healthy growth. Comparing to a lot of peer company, including the listed one and private one, XIN is famous for our compliance and healthy growth, which means that, all of our entity are consolidated or fell under the listed company umbrella. We don't have any off-balance sheet financing, we don't have any not so incomplience and cheeky operation like a lot of our peer company in China.

In the last few year we are not as focused on the short term growth, we are also looking at the strategy, how to upgrade our business model, which including that on part automation estate development business, we invest and trying to build up another XIN subsidiary that are related to the real estate business too as an overall strategy.

So with all these things coming in, you might see that our growth might not be as fast as our peer company, but when we strike the balance between healthy growth and the speed and the scale, we prefer to go by a healthy and steady growth path. We do have lesson in the past, but we pick up lesson from there, we will focus on Xinyuan's way. And we're also open for different kinds of alternative and opportunities.

Hermann Tilke -- Private Investor -- Analyst

Okay. Thank you very much.

Operator

We will take our next question Suvas Patel, who is Private Investor. Please go ahead.

Suvas Patel -- Private Investor -- Analyst

Hello. I had three questions. The first one is, in the second quarter earnings there was a net loss attributable to non controlling interest of $9,171 million. My question is, who is this non-controlling interest and why is this figure so large? And then the second question I had is on the earnings forecast for 2019. You said, it'll be 15% to 20% more than 2018. Is that based on ASC 606 or the percentage of completion method that 2018 had used compared to 2017? And the last question is, there is some talk about Xinyuan delisting from the US, is that really true or is there any chance for that? Thank you.

Brian Chen -- Chief Financial Officer

Okay. We'll answer the first question first and I will leave the third one to the Chairman and CEO. The first one is about the -- in Suzhou, about the net income contributed to the minority interest. They are related to two projects in Suzhou and Kunshan, which are two cities close by Shanghai, in Shanghai suburban. For those two projects we own -- our equity is about 17% and 20%, respectively. And for those two projects they are pretty profitable. So which contribute about $5 million and $4 million, respectively, to these two minority shareholder.

And the second question is about --

Suvas Patel -- Private Investor -- Analyst

Earnings forecast.

Brian Chen -- Chief Financial Officer

Earnings forecasts. Sure. The earnings forecasts. I got you, the earnings forecast is based on our US GAAP reporting standard. So those kinds of revenue and net profit is actually contributed by a combination of the full accrual measure, as well as the POC measure. In terms of the third question, let me -- give me a sec to rewind to our Chairman or CEO.

As at this point, in terms of the privatization, we adjust here that from time to time. At this point the [1:01:25] haven't decided or haven't made any decision on that one. We are open to all kinds of alternative to optimize our capital structure.

Suvas Patel -- Private Investor -- Analyst

Okay. Thank you.

Operator

And it does appear that there are no further questions at this time. I'd like to turn the call back over to management for any additional or closing remarks.

Brian Chen -- Chief Financial Officer

Okay. Thank you, everyone for joining us on today's call. And we appreciate your ongoing support. We look forward to update you on our progress in the weeks and months ahead. Thank you again, everyone. Appreciate your time.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

William Zima -- Investor Relations

Yong Zhang -- Chairman and Chief Executive Officer

Brian Chen -- Chief Financial Officer

Alexander Wang -- Citibank -- Analyst

Edward Choi -- TT International HK -- Analyst

Hermann Tilke -- Private Investor -- Analyst

Suvas Patel -- Private Investor -- Analyst

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