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Executives

Jacky Zhang – Deputy General Manager of Investor Relations

Yong Zhang – Chairman and Chief Executive Officer

Thomas Gurnee – Chief Financial Officer

Analysts

Kun Tao – Roth Capital Partners

Xinyuan Real Estate Co., Ltd. (XIN) Q4 2008 Earnings Call March 27, 2009 8:30 AM ET

Operator

Please standby we are about to begin. Good day everyone and welcome to the Xinyuan Real Estate Company Limited Fourth Quarter 2008 and Year-End Conference Call. Today’s conference is being recorded. At this time I would like to turn the call over to Mr. Jacky Zhang with the company for opening remarks and introductions. Please go ahead sir.

Jacky Zhang

Hello everyone. This is Jacky Zhang of Xinyuan and welcome to Xinyuan's fourth quarter 2008 earnings conference call. The company's fourth quarter earnings results were released earlier today and available on the company's Investor Relations website at ir.xyre.com, as well our newswire services. You can also download a short presentation regarding today's earnings results from our website.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties. As such, our results may be materially different from the views expressed today.

Further information regarding these and other risk and uncertainties is included in our registration statement and our Form 20-F, and other documents filed with the U.S. Securities and Exchange Commission. Xinyuan does not assume any obligation to update any forward-looking statements except as required under the applicable law.

Today you will hear from Mr. Yong Zhang, our Chairman and Chief Executive Officer, who will discuss the general business climate, comments on current operations and provide some perspective on the company's long-term strategy and its plans in 2009. He will be followed by Mr. Tom Gurnee, our Chief Financial Officer, who will go over the company's financial results and provide some color on our results and our 2009 outlook.

Following managements' prepared remarks we will open the call to questions. During the Q&A session, Mr. Zhang will speak in Mandarin and I will be translating his comments into English. Please note that unless otherwise stated all figures mentioned during this conference call are in U.S. dollars. Now, I will turn the call over to Xinyuan's Chairman and CEO, Mr. Yong Zhang. Please go ahead Mr. Zhang.

Yong Zhang

Hello everyone and thank you for joining us today. We’ve made meaningful progress in our fourth quarter to position the company to withstand with current market focus impacting the company. Well our financial results for the fourth quarter 2008 reflects the weakened demand for [new] potential real estate across the industry. We have a strong cash flow position of $193 million at the end of December 2008 that provides the company the solid financial flexibility of positive cash flow.

In February, the Chinese government duly expect to stimulate the economy and in October the real estate market, the government is initiatives promoting growth. Reductions in dollar payments on owner-occupied housing, a reduction in official interest rates, a reduction in deed tax and a waiver of stamp duty fees as well as broader monetary stimulus. Our upcoming quarters in addition to maximizing sales, we are taking several specific actions to bolster our financial and competitive positions.

First, in terms of our current project and cash flow generation, we are modifying our development schedules to match demand, converting cash and matching demand. Our volumes of minimal capital expenditures in terms of future development of future opportunities. We intend to focus our efforts and resolving our six straight peak cash flows to market with particular emphasis are generating new development projects you have heard a lot, I will repeat on central [province] sales.

Our ability to enhance our core discipline is very high, in developments of small to medium projects in Tier II cites. We have experienced some management in these markets new projects are generally shorter in duration and they generate little cash flows, all of which stood out better during this challenging economic times.

Four, internally we will continue our efforts to reduce overhead costs. Lastly, we will continue to strengthen our management team. Have almost [18] qualified professionals and the recent addition of Tom Gurnee as CFO in that post. We would welcome Tom to Xinyuan after his great years of his period as Chief Financial Officer across several public companies who will give our financial highlight on all of the regions to give us here the [level]. With that let me again welcome Tom and turn the call over to him for comments.

Thomas Gurnee

Great. Well thanks Chairman, Zhang and I want to thank you for his good presentation. Anyway I want to talk to you about, in-depth about the quarter, a little bit about the year and then give you the best feel I can for the future of Xinyuan in the next year. The results reflect some pretty large adjustments for impairment and Percentage of Completion estimate changes. So, please bare with me, I will try to explain as best I can, but I will be happy to answer questions in the Q&A period.

Again all of these are in U.S. dollars unless noted otherwise as far as currencies. Okay, about Q4 2008, revenue was up 27% from the end of 2007 from $83 million, I mean sequentially from September I am sorry, from $83 million in Q3 to $60 million in Q4, mainly due to lower gross floor area sales rates. The GFA or Gross Floor Area sold in the fourth quarter was 60,300 square meters versus 84,500 square meters in the third quarter. The ASP softened a little bit in Q4 versus Q3 from 62 RMB per square meter to 59.90 RMB per square meter that's down around 4% or so.

Projects in Anhui and Shandong finished up in the last quarter, while our three big I call them Tier 1.5 projects Suzhou, Kunshan, and Chengdu are just turning to come on stream in a big way. There was a small 1.7 million negative impact from re-estimating projects under POC I hope to get to explaining that a little later. The gross loss, we had a gross loss that's the news and the gross loss of $75.8 million compares to a previous quarter profit of $18.4 million and 2007 Q4 of $30.3 million, obviously there is some major adjustments in there.

We as part of Percentage of Completion Accounting, we re-estimated all projects as per U.S. GAAP POC method, which had several impacts. And let's start with Suzhou, Suzhou is the region with one of our projects, Suzhou International City Garden. On Suzhou International City Garden because the total project revenue is expected to total less than the expected total project cost. We had to recognize under the POC method the entire eventual project costs loss of $21.6 million in the current quarter. We were also required to assess the, whether there is an impairment on Suzhou International City Garden project, which led to an additional charge to cost of sales of $72.6 million in the quarter. We performed an impairment analysis that determined the net book value of future cash flows was $72.6 million below the carrying value of the asset.

Finally, in addition to the Suzhou effects, we did make changes to other projects although they were all profitable and expected to be profitable. And that resulted in a cumulative change to cost of sales of $10 million. The Suzhou International City Garden was the only unprofitable project in our portfolio. And this is the first impairment of any kind in the company's history and based on current projections there should be no further impairments on the horizon. The adjustments were also cumulative meaning they need change in the expected fortunes of our project is booked cumulatively in the quarter that the estimate has changed. So, all these adjustments were cumulative catch-ups. These adjustments were all non-cash items and I have included in the press release, a brief tutorial of the Percentage of Completion method and I will be happy to answer questions about it during the Q&A.

Also in the first quarter, SG&A expenses totaled $9.3 million, against $13.5 million in the previous quarter. So, expenses did come down a bit mainly due to compensation expenses dropping on lower headcount down about 900,000 quarter-to-quarter and about a 100 people lower headcount. At the end of February of this year, we are down about 529 people. So, we are down nearly 200 people since in last five months. Promotional expenses dropped $2.8 million versus the previous quarter, the market turned out to be somewhat inelastic and the Chairman paired back the expenditures on promotions during this time.

Stock-based compensation also came down about $500,000 quarter-to-quarter. The net loss for the quarter totaled $77.5 million versus the profit of $7.8 million last quarter and $8.2 million in Q4 2007. All right, just a few comments about the total year. Revenue increased year-on-year 16% from $309.7 million to $356.6 million with year-on-year increase. However, our gross profit recorded a gross loss of just over break-even of $0.2 million gross loss, versus the gross profit of $101.6 million in 2007. Now, SG&A increased year-on-year from $27.6 million, to $46.1 million for the year, 8.9% of revenue to 12.9%, but that's generally due to the fact that we went IPO with stock option compensation for the entire year, there is fees for the entire year, a legal fees, SOX fees et cetera, et cetera.

We did see that to go down quarter-to-quarter, we hope to see that trend continue, we've got many action items underway. The net loss for 2008 was $23.6 million, versus a profit in 2007 of $45.7 million. So, that's all I'm going to say about the year, of course I can comment more of that in the Q&A, but I wanted to concentrate more on where we are and where we are going. The balance sheet as of December 31 included cash of $193.6 million. We have $367.7 million of total debt and we had a gearing ratio of 43.5%. The book value per share at the end of December was $2.65 and that means per ADS the book value was $5.30.

We have $524 million invested in property under development currently being build and a further $102 million on the balance sheet for land acquired but they [could not] being developed at this time. So, that's where we are on the balance sheet and where we are on land. The outlook, I like to comment on the outlook now, briefly and first let me give a backdrop for the outlook. We have available GFA inventory what I mean but that is, the projects currently under construction will eventually have gross floor area available of about 1.158 million square meters, that’s what's available as of the end of December that will be available during that time, from December forward.

Of that 489,000 the largest project by far that we will have, that's available for sale in future periods is Kunshan International City Garden with about 489,000 square meters. And the second largest is Chengdu Splendid, which has 217,000 eventually available. And the third is Suzhou International City Garden at a 179,000. Those three projects are all the Tier 1.5 projects I have referred to earlier. In addition to those we have Henan Colorful Garden with a 145,000 square meters still available and Shandong International City Garden at 89,000.

Despite having these inventories we are staging our construction efforts to match the market as the Chairman mentioned during his introduction. So, we are, both the Kunshan and Suzhou completion dates have been pushed out to 2013 from 2010, end of 2010, which was represented last year some time. And Chengdu has been pushed out till the end of 2011 for a completion date that compares to also 2010 at the last quarter. We do have two parcels of vacant land that would be Zhengzhou, what is called the alcohol project there was an alcohol factory there, 278,000 GFA available. And in Chengdu, we have another parcel of 219,000 square meters. Both of those are fully paid in cash, fully paid up and therefore there could be sources if we so decide to turn into cash flow in the near future.

We do have access to local funds for construction, if we need such. In Kunshan and Suzhou alone we have about 600 million RMB of borrowing capacity to finish those up. But we do not have a firm plan right now as of this phone call, we do not have a firm plan for another project to be commenced in the year 2009, that could change of course, but as of right now we do not plan on that.

So, let me get to the forecast then itself. In Q1, nearly over here the GFA to be sold will total about 38,000 to 40,000 square meters maybe a smidgin higher versus 60,300 that we just recorded for Q4 2008 that's 35% up from Q4 Chinese New Year was the factor, but the market was also a factor. The GFA sales held up better in our traditional markets in Henan and Shandong, but with some discounting involved and ASPs generally are about 10% lower than two quarters ago than in the third quarter.

Revenue, we expect in the first quarter to be between $40 million and $45 million of 25% to 30% from Q4 2008. ASPs again are lower than Q4 2008 approximately 10% down on Q3, but did vary of course by geography. Net income expected for the first quarter, we're cutting G&A expense, but we can't do it fast enough to avoid a loss in the first quarter, we expect a loss of $2 million to $4 million in the first quarter. For total year 2009, we expect to sell gross floor area of about 260,000 to 290,000 square meters. Now there is a faster pace obviously in the first quarter, but we believe the second quarter is strong, a lot stronger than the first, the third quarter is historically the seasonally the strongest period. So, we expect like I say 260,000 to 290,000 square meters.

There is no assumption here of affirming ASPs, while they're affirming, but they're not aggressive, not aggressively increasing. We do expect to continue to hold back the pace of Suzhou, Kunshan, and Chengdu projects as I said earlier finishing up in 2013 and we expect as a result of these sales, we expect our revenue to fall in the range of $225 million to $250 million for the year. And we expect that to result in somewhere near break-even. This is really a tough call because we have long ways to go in this market, but we expect somewhere around break-even. That could potentially change for a few factors we could accelerate the Tier 1.5 projects.

We could do that, but that's a separate decision. We could develop the two break-up owned parcels, fully paid parcels and we could periodically look for project financing to generate cash out of one of our existing projects to start another one. Those are all options open to us. Anyway that's the full force of my presentation and I'd like to throw it open now for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Kun Tao with Roth Capital Partners.

Kun Tao – Roth Capital Partners

Good morning and good evening in China. My first question is, what exactly changed in your projections apparently you postponed your Percentage of Completion of construction for some projects. Do you also lower your price per square meter for future projections?

Thomas Gurnee

Yes, that's exactly the cause. If you take a project, let's take Suzhou and you stretch it out for a couple of years. Okay, you have additional cost for capitalized interest, so that drives cost little higher. But then on the revenue side, yes, we have lower ASPs because the ASP environment we are in now is not the ASP environment envision when that project was commenced.

Kun Tao – Roth Capital Partners

So, can you tell us how much exactly you lower your ASP from what price to what price?

Thomas Gurnee

No, because there is timing differences and all sort of things, but I think we are in the and just, I can send that to, I’m going to send that to you separately, but I believe it's down like 20%. We were in the 12,000 to 13,000 range towards the end of the project in the year 2010, and now we are in the 7,000 range ASP this year, going up to 8,500 – just one moment please let me take Suzhou International City Garden right now is about 7,000 to 7,200 RMB per square meter and it rises to maybe 8,000– 8,500 next year it was far higher than that in the projections, it was like over 10,000.

Kun Tao – Roth Capital Partners

Okay. My second question is so far what's your overall average Percentage of Completion in your construction and what’s your accumulated pre-sale amount in dollar amount? Do you have that figure?

Thomas Gurnee

Let's see not at the top of my hand, but accumulated pre-sales, let me see here, yeah I have got it.

Jacky Zhang

Which project?

Thomas Gurnee

Pardon me. He is asking about pre-sale. So, accumulated pre-sales of these projects listed is 681,000 square meters over 18,023 total project.

Kun Tao – Roth Capital Partners

It’s 600?

Thomas Gurnee

Yeah. Let me give you a couple, I will give you the largest projects. Okay.

Kun Tao – Roth Capital Partners

Okay.

Thomas Gurnee

So, Kunshan we've got, right now we've got 489,000 left that we can sell, the total project was 500.5. So, we barely got enrolling.

Kun Tao – Roth Capital Partners

Okay.

Thomas Gurnee

We only sold 11.3. So, we have got a vast majority in future ahead of us. The next largest was Chengdu Splendid and it has 217,000 square meters to go and it started with 230.9 for the total projects. We have only sold 13 there. And then I will get you a full table of this later.

Kun Tao – Roth Capital Partners

I understand. I can figure it out, how much you sold in terms of square meter, but what’s your price or I might get wrong on the pre-sale amounts instead of getting your percentage getting your total square meter? So, maybe you can give me the pre-sale I can figure out myself on the…

Thomas Gurnee

I’m not sure I followed the question, I am sorry could you try that try again?

Kun Tao – Roth Capital Partners

So, I can figure it out the total square meter that you sold accumulated, but what’s your pre-sale amount. Because I might use a different price versus your actual price sold.

Thomas Gurnee

Sure well. Well the, I can give you, okay, the dollars expected. Actually, if I could give this to you in millions of RMB.

Kun Tao – Roth Capital Partners

Yeah.

Thomas Gurnee

Let me just make sure I get the right numbers there, just one second. Let me pick that up towards the end of the call, can I?

Kun Tao – Roth Capital Partners

Okay. I have no problem. Okay, just take your time. So, my another question is you just mentioned a little bit, you say you have I didn't hear it clearly you have line of credit in Zhengzhou for how much?

Thomas Gurnee

Well we got about 500 million to 600 million in, not in Zhengzhou no, in Kunshan and Suzhou.

Kun Tao – Roth Capital Partners

A line of credit 500 million to 600 million in RMB?

Thomas Gurnee

Yeah, but, yeah so what we basically say we have that borrowing capacity there. We've chosen not to draw it down, because when we draw it down it becomes a [significant] cash we got to spend it on construction. So, we've chosen not to draw that down. It can be done when we decide to start driving construction at a faster pace.

Kun Tao – Roth Capital Partners

All right. My last question, I'll go back to the queue. So, I might have asked you that question before, but we have seen high senior management turn over, CEO or CFO all those things. So, to what extent you think the operation was negatively impacted by the turn over in 2008? Okay.

Thomas Gurnee

Wish really the Chairman to answer that or do you want me to give a try.

[Multiple Speakers]

Yong Zhang

[Foreign Language]

Jacky Zhang

I told that Chairman just want to

Yong Zhang

[Foreign Language]

Jacky Zhang

I am sure, I think [Audio Disturbance] I mean Chairman just won't advertise us on that. In a downturn of the market its probably as your comment, I mean operating practice for the real estate developer in China, and need to kept the headcount in Xinyuan our cost [will control]. And actually, the company is going to strengthen its management team and hiring to return a more capable person and to replace our regional person even in a higher level such as the our regional COO or CEO and to strengthen our management team.

Kun Tao – Roth Capital Partners

Okay. So, there is no, you don't see any operational project being delayed or maybe execution some other things being impacted?

Yong Zhang

[Foreign Language]

Jacky Zhang

Actually after the IPO of Xinyuan and we really I mean have hired a series of people, such as COO and CFO from Beijing. And but, you know the basic I mean core team for Xinyuan's daily operating is mainly based on the General Manger in the subsidiary, because who is in-charge of the real pre-sale activity and the promotional activity, and can generate the cash flow for company and of course this level is very stable.

Kun Tao – Roth Capital Partners

All right. Thanks.

Thomas Gurnee

Okay.

Operator

(Operator Instructions). And we have no further questions in the queue. So, I’d like to turn the call back over to management for any additional or closing remarks.

Thomas Gurnee

Okay. Well this is Tom Gurnee again. Kun let me assure you I will call you on the phone after this, if you are still there. But thank you very much ladies and gentlemen for listening in. And we are pleased that you took the time to do so. And we look forward to talking to you at the next quarter's meeting. Thank you.

Operator

This concludes today's conference. We thank you for your participation. And you may now disconnect.

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