I came across Xinyuan Real Estate Corporation(XIN) earlier today while looking for growth stocks set for large returns. At first glance, I thought that Finviz.com had mistyped its price to earnings when I saw that XIN's P/E was 2.64. How could it be that a stock valued at $399 million could have such a low current valuation?
Xinyuan Real Estate Corporation Financials
At a closer look, I learned that XIN was a Chinese real estate company that had not only $850 million in sales, but also vastly profitable future business contracts that were set to begin. Its fourth quarter earnings for 2012, reported on February 27th, showed increases in virtually all aspects beginning with a 19% rise in sales from 2011. It also reported the continuation of a $0.05 dividend quarterly representing 4% a year at their current PPS. In addition, its amount of ADS outstanding decreased by over $1 million giving it an ADS valuation of $10.98 PPS. XIN reported $641 million in cash, and only maintains $314 million in total debt as well as owning $1 billion in assets. Finally, XIN already has over $700 million in future business some of which is with one of the top Chinese construction companies.
Negativity Towards Chinese Real Estate
Many investors believe a housing bubble is forming in the Chinese housing market. The growth in November of 2012 for new floor housing construction in China was 6.8 percent compared to 2011. However instead of an inflation in housing due to market manipulation, this is better attributed to a 43% increase in consumer disposable incomes within Chinese cities since 2009.
According to Bloomberg.com,
"gross margins and EBITDA margins will be under pressure for the majority of rated developers due to sector-wide price-cutting and active promotions since 2011"
However, the increase in consumer spending as well as consumer incomes defeated this prediction which was made September of 2012.
Furthermore Bloomberg.com reports
"property sales may start to ease as pent-up demand is gradually absorbed. Moreover, administrative controls on speculation will continue to put a lid on investment demand and housing prices."
As studies showed however, this too was proved to not only false, but the opposite of what has resulted since then.
Why XIN is a Strong Buy
Whether the real estate bubble that Bloomberg.com reported on in September will happen or not, at current valuation XIN is beyond cheap. If you are bad at math, and did not compute its net cash value already, its cash minus debt equates to $328 million dollars compared to its market cap of $399 million. With a fourth quarter gross earnings of $88 million, up from $56 million the year before, and a net fourth quarter profit of $11.6 million, XIN is on pace to easily overcome its market cap in a little over one year.
The book value of XIN is $11 according to the company and is trading at half of that currently. With such a high book value, the risk in XIN is limited at these current trading levels. The market average P/E for a construction company currently is at 31, and the average construction sector price to book value is at 2.35. By these sector averages, XIN is trading 5 times below average book value and at 13.5 times below average price to earnings.
XIN is a strong buy at these levels, being a historically profitable company and having $700 million in future business contracts. The sector average price target for an American company would be between $25 and $40, but until buyer sentiment changes, I cannot give an accurate price target. Beating earnings predictions in the fourth quarter has put it on the right track for gaining exposure, and continued earnings success could put XIN on more radars as time goes by. This could very well be the most undervalued stock in the market, but it will take a large upgrade for many people to trust it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XIN over the next 72 hours.