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Xinyuan Real Estate Co., Ltd. (NYSE:XIN)

Q1 2009 Earnings Call

June 4, 2009 8:30 am ET

Executives

Jack Zhang - IR Director

Yong Zhang - Chairman of the Board, Chief Executive Officer

Thomas H.R. Gurnee - Chief Financial Officer, Director

Analysts

Kun Tao - Roth Capital

Hao Hong - BMC

Operator

Good day, everyone and welcome to the Xinyuan Real Estate Company Ltd. first quarter 2009 conference call. Today’s conference is being recorded. At this time, I would like to turn the call over to Jack Zhang, IR Director, for opening remarks and introductions. Please go ahead, sir.

Jack Zhang

Good morning, everyone, and welcome to Xinyuan's first quarter 2009 earnings conference. The company’s first quarter earnings were released earlier today and available on the company’s IR website at IR.xyre.com, as well as on newswire services. You can also download the slide presentation regarding today’s earnings results from our website.

So 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 risks and uncertainties. As such, our results may be materially different from the views expressed today. For further information regarding this and other risks 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 applicable law.

So today, we will hear from Mr. Yong Zhang, our Chairman and Chief Executive Officer, who will discuss the general business climate, comments on the current operations, and provide some perspectives on the company’s long-term strategy and its plans in 2009.

[inaudible] Tom Gurnee, our Chief Financial Officer, will go over the company’s financial results and provide some color on our results and our 2009 outlook.

Following management’s prepared remarks, we will open the call to questions. During the Q&A session, Mr. Zhang will speak in Mandarin and I myself will translate 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. Zhang. Please go ahead.

Yong Zhang

Hello, everyone and thank you for joining us today. We made a significant progress during the first quarter in reducing our cost structure [as to the] initiative that we put in place to [amend] our expenses with the current environment [inaudible] positive impacts on our financial results.

Since the end of the first quarter, we have started to experience an up-tick in demand. We believe this is due to several factors. First, the overall marketplace appears to be improving by [inaudible] take advantage of attractive prices. Additionally, we believe that our location is unique characteristic of our properties, and the [inaudible] management upgrade we have made in the field have helped improver performance on our project as well.

We hope that these trends will continue. We have limited visibility into the rest of the year. Consequently, we are taking the following approach to operating our business to best position [Xinyuan] for near and long-term growth.

Given the recent improvement in demand, we are conservatively increasing the development pace on our large projects in Suzhou, Kunshan, and Chengdu. These projects were originally scheduled to be completed in 2013, but we are now targeting completion in 2011 through 2012 timeframe.

Additionally, we are evaluating the possibility of starting development on [inaudible] and develop pieces of land we own later this year. The property is far more [inaudible] in Chengdu, located in the [inaudible] city, and we are [inaudible], a very good price.

Since we already own the land, the additional capital outlay is not as significant, which makes the [inaudible] of the project attractive. However, we are still taking a cautious approach with our cost structure.

We will tightly manage our expenses and focus on efficiently and conservatively deploying our capital.

Secondly, we will continue to focus on strengthening our management team, both at the executive and management level. We are actively benchmarking ourselves against the [inaudible] players in the industry and will not rest until our [inaudible] reaches or exceeds that level.

With that, let me turn the call over to Tom Gurnee, our Chief Financial Officer, to go over some of the financial details for the quarter and our outlook for the remainder of 2009.

Thomas H.R. Gurnee

Thank you, Chairman Zhang. Thank you. Yes, this is Tom Gurnee and let me start by talking a little bit about Q1 2009. Revenue recognized under the percentage completion method had declined 34% sequentially from last quarter from $60.8 million to $39.9 million, at the low-end of our guidance that we gave last quarter. Meanwhile, GFA sales stalled from 61,200 square meters in Q408 to 47,100 square meters in Q109, a drop of 23% sequentially but 24% ahead of the low-end of guidance and 18% from the midpoint of guidance.

ASPs decreased just slightly at 5.4%, but 4.2% of that was mix. In the press release for the first time, we’ve included a table of projects with GFA sales trends and ASPs and I would like to comment on each project.

I will skip the Wang Jiang Garden which was winding up, it’s a very small number. Chengdu Splendid 1 fell moderately quarter to quarter on pure economic effects. The introductory heavy discounting has been discontinued and we are now priced at market, so our current pricing is in the 4,200 to 4,300 ASP range.

Henan Colorful Garden moved nicely and without discounting between quarters. The next one, Financial Square, is winding up. Kunshan International City Garden, our largest project, we accelerated somewhat on discounting but again this trend has been halted this month and we are continuing on in our upward trend there. Elegant Scenery is wrapping up, so I’ll skip talking about that. Shandong International City Garden was our best performer, exceeding Q4 volume without any discounting.

On the negative side, all the Suzhou projects -- Colorful Garden, International City Garden, and Lake Splendid underperformed as we suspended a significant part of our construction activity in a tough Q408/Q109 market.

In addition, we felt it necessary to change out the management team in Suzhou due to some poor execution and poor contract oversight. To head off any risk to the Xinyuan image, we sent senior management from headquarters and other subsidiaries to fill the void and we have since fully restaffed with an experienced and capable management team. The resulting loss of focus did however impact the sales effort in Q1 but as we’ll talk about later, a sharp recovery in April and May, particularly for these projects, has us confident that these problems are now behind us.

Let’s turn to revenue -- the relatively low 39.9 of revenue recognized under the POC method versus $40 million plus in guidance, was more a mathematical anomaly than a performance issue. The total project input costs -- in other words, the spending on our development construction, was just $23 million in the quarter, less than half of what we had been forecasting. So despite higher-than-projected GFA tree sales, this resulted in the percentage completion revenue recognized being lower than expected.

Gross profit under the POC method reached $6.5 million, about 7.7 was on projects; we had some small losses on some other things, or 16.2% of revenue in Q1, up from a very large loss of $75 million in Q4 2008, which included over $80 million of adjustments related to the impairment of Suzhou International City Garden.

SG&A was the big story perhaps this quarter, as it dropped nearly 50% sequentially from Q4 to Q1, on cost-cutting measures taken in Q4 2008 and early 2009. I joined in February. These were well underway before I joined, so I take no credit for this.

Compensation costs dropped sequentially by $1 million, or 41% in SG&A. Headcount has trended downward from 547 at the end of the year last year to 437 at the end of March and to 403 today. That’s about 30% in five months. Much of that cut was in headquarters.

Advertising and promotion spending was down $1.1 million, or 76%. The company obviously recognized a slow market. That will probably bounce back a little bit, nowhere near previous levels.

Travel, entertainment, and communications were down $700,000, or 40%. Professional fees were down 62%, and even stock compensation was down 20%. And a side note on this stock compensation -- we have decided to no longer report non-GAAP results in our press releases since it’s becoming less important and clutters the earnings announcement. For those of you who still want to calculate non-GAAP numbers, numbers for Q1 2008, Q4 2008, and Q1 2009 stock comp was $3,175,000, $1,036,000, and $842,000 respectively.

The net result of these factors was a net income of $1.1 million versus a Q4 2008 loss of $77.5 million, and an outlook guidance that we gave last quarter of $2 million to $4 million loss.

The balance sheet got healthier in Q1, even though the pure cash balance was down $12 million at quarter end, it was more than offset. We paid down debt by $25 million as it became due here in China, and we paid down accounts payable balances by $15 million. The gearing ratio improved a couple of points from 47.9% to 46%, and the debt equity ratio dropped from 0.92 to 0.86. And despite a soft revenue quarter, the balance of real estate under development dropped by $14 million on fairly low input costs. So the trend for this quarter obviously was reducing costs, reducing spending, and it paid off.

So all in all, it was an excellent quarter. GFA was up, presales were up, margins back, operating expenses were down, and we’re trending up sharply right now.

So let me talk about Q2 guidance -- let’s talk about the outlook. Q2 GFA sales are looking sharply higher than Q1. March GFA was 50% above the January/February run-rate, April was 50% above March, and May was 50% above April. So the trend is strong and up and to the right.

We expect at least 100% quarter on quarter growth in GFA sales to 95,000 to 110,000 GFA in Q2, maybe higher. We expect similar percentage growth in revenue to the $75 million to $85 million range, and we expect net income in the $2 million to $4 million range.

SG&A is expected to raise quarter on quarter a little bit on higher commission payments to outsource agents and some compensation increase that will be well below 10% of revenue and continue to trend downwards as a percent of revenue.

I should note why I am saying this that late in the first quarter, the Chairman and the company initiated a program of outsourcing the sales function and that had an impact, a small impact on Q1. But going forward should have a fairly big impact and we’re having very good sales results as a result of it. And the commission rate is 1.2%, so we might see the sales selling expense as a percent of revenue staying low for the rest of the year.

For the year, as the Chairman has said, we are cautious because we can’t yet confirm the sustainability of this market rebound but if current conditions persist, albeit with -- GFA is expected to reach something between 350,000 to 375,000 for the year versus 250,000 to 290,000 guided last quarter. Revenues are expected to hit $270 million to $295 million up from the previous guidance of $225 million to $250 million. Gross profit should continue at 16% and higher. SG&A should remain semi-variable and is trending downward as a percent of revenue and we expect a profit of $8 million to $13 million for the year. So all in all, a pretty sizable increase in the outlook and if today’s momentum continues, we may revisit that next quarter.

So to summarize, and to summarize what the Chairman said earlier, we will continue to hold the lid on costs, as evidenced by the headcount number so far this quarter. We will stick with and tweak the outsource sales model. We are currently accelerating current projects, as the Chairman mentioned, and we have access to enough borrowing to do so. We are preparing -- local borrowing -- we are preparing to execute on the [inaudible] project later in the year and if we can confirm this through market strength and we feel it can be financed via local borrowing.

We will continue to push, the Chairman has continued to push to strengthen operating efficiency. A key campaign of his, and he is determined to benchmark among the elite mainland developers in the coming quarters.

So I thank you very much for listening to all of that and we invite questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Jack Zhang

Excuse me, Operator?

Operator

Yes, sir?

Jack Zhang

It’s a little weak for the voice. Would you like to speak a little bit louder?

Operator

My apologies -- you said you’d like to speak a little bit longer?

Thomas H.R. Gurnee

Louder, he said.

Operator

My apologies. (Operator Instructions) We will take our first question from Kun Tao from Roth Capital.

Kun Tao - Roth Capital

Good morning, everyone. Congratulations. The first question you mentioned a little bit for the gross margin. Your gross margin actually improved sequentially. Can you elaborate a little bit more? Last quarter you have -- because you adjust your revenue projections so you have a loss on the gross margin. But what happens in the Q2? And then you also -- in Q1, sorry, and you also mentioned you expect, I didn’t hear clearly, you expect gross margin will be above 16% or 60% for the 2009?

Thomas H.R. Gurnee

No, no -- don’t let me tell you 60 -- 16.

Kun Tao - Roth Capital

Sixteen -- okay, so --

Thomas H.R. Gurnee

We were 16.2 in the first quarter. We had a -- and for the projects themselves, we hit 18.9% and we lost a couple of percent on some adjustments outside -- not having to do with percentage completion on the landscape business, et cetera. But -- so we expect a high-teens for the -- now you are asking why gross profit shifted so much. The main culprit really is Suzhou International City Garden. When we took that impairment loss, what you do is you write down the carrying value of it and then your target cost of course becomes lower going forward and so we have a 22% to 23% margin on the Suzhou International City Garden Project going forward after the write-down, and so that’s a factor right there.

There were no other impairments and so you will see our gross margin fluctuate a little bit with percentage completion accounting but it should stay fairly stable going forward.

Kun Tao - Roth Capital

Yeah, if I remember right, you had approximately about 20% -- in between 20% to 25% gross margin. Is that -- would that be the case going forward or do you think because you have some price pressure in some of your projects, so your gross margin might be in between 16% to 18% right now?

Thomas H.R. Gurnee

That’s a really good question and what I -- I have to be honest. What I factored into my planning was not a lot of movement in price. Now, in early June we’ve raised prices a little bit, 2.5% to 4% in most cases but that’s a recovery of some discounting we did in the first quarter. And I’ve kept it -- we’ve let that inch up a little bit for our projections but not very much. And the market may be more buoyant than I’ve said but without much price movement from here, I did do my projections based on a high teens return of gross margin.

Kun Tao - Roth Capital

Okay, and go through SG&A cost -- it’s definitely lower than your SG&A costs because industry headwinds, marketing expenses decreased, we think it’s good but it seems like the market is recovering, so what’s your, for instance, marketing expenses, also your promotions or other things? And headcount, would that be increased as well with the market rebound?

Thomas H.R. Gurnee

Well, no and let me explain it -- not headcount but cost will increase because we are paying a commission of 1.2% on every penny sold. And by the way, we pay it a little different. We pay based on GFA sales, on the sales, cash sales not on revenue per POC method. But anyway, Kun Tao, we -- so we do expect at least 1.2% of revenue as an increase going lock-step with revenue.

In addition, we have the salary and staff benefits shouldn’t move that much because this is really oversight management of the sales function, not selling itself. On advertising and promotion, we are at a low ebb here. I imagine we are going to expand it albeit at a lower rate and with the agency sales model, seems to be working without tremendous investment in advertising and promotion.

So on the selling expense side, we expect it to stabilize between 2% and 2.5% instead of the former 3% type model.

On the G&A side, we were down about 40% in salaries and benefits and we are down in all categories, virtually -- communication and traveling, entertainment, consulting and recruiting, audit, legal fees, and we don’t see that bouncing back unless we run off into a listing or something, Kun Tao, and we don’t have anything like that planned.

I think we are comfortable with the headcount and G&A at this point and if we do add some people, we are discussing a program with the Chairman, we -- the Chairman has interviewed hundreds of intern candidates and we might bring in some interns but those are a normal course of business but it’s not going to be a huge dollar number. We also might bring in some senior management but not big.

So if we are -- we’re talking small numbers, so we feel that we’ve permanently, we feel we can permanently keep G&A expense a lot lower than our old model.

Kun Tao - Roth Capital

Okay, thanks. I think the next question actually related to what I just asked, because your guidance for 2009, your top line increased a little bit but your bottom line increased significantly compared to your last time, so is it because your SG&A costs lowered your gross margin actually improved compared to the last time you gave out the guidance? Is that right?

Thomas H.R. Gurnee

No, Kun Tao, I would look at it completely differently. When you are near zero on profit, big swings are easy with small numbers. Actually, I believe profit could even be out of that range or higher. The fact is the revenue swings should be dropping more to the bottom line. My point being you’re right -- we moved profit a lot but not very big in absolute terms, so it’s not a straight percentage. We expect because of -- like take G&A. That fall-through rate should be good. If we hold G&A fairly steady and revenue doubles, we should see a very low percent -- a lower percentage as a percent of revenue and see a good fall-through to the bottom line.

Kun Tao - Roth Capital

Okay. I guess my last question is related to your financing part -- can you give us -- actually this is three questions, two questions together -- what’s your credit line in local banks and what is your CapEx expectation? And are you going to purchase land in 2009, in the second half of 2009?

Thomas H.R. Gurnee

Okay, here we go -- the investment plan, okay, as far as CapEx I think what you mean is development dollars for putting up construction. Yeah, we’re accelerating it right now -- in fact, we change every day, so I would hate to give you a hard and fast number but we are accelerating. The first quarter we spent had a far less, even despite the low revenue, the spending on development was even lower and so we are accelerating all projects, pretty much and so you will see that accelerate.

Now, you asked about the investment plan -- one change from the last quarter; we are pretty much sending a signal here that we are going to fire up our alcohol project in Zhengzhou , and we have already bought that free and clear. It’s in inventory right now and we -- the financing, we believe we can easily get financing for the development cost it will take to finish that project. So we believe that the alcohol project can be financed right here.

Now, as far as other projects are concerned, we’ll make no secret of the fact that we are also vigilant to look at other projects but the financing source may have to be different, because we have to buy the land in that case. And so you may try one of several things -- we could do -- we could enter into a partnership with a financial partner. We could do a -- maybe expand at a floating rate note. We could do a convertible bond. We could do lots of things. I have nothing to announce right now, that’s for sure, and the next project on our horizon does not involve external financing other than bank lending in China.

So I’ll keep you posted as we get closer but we definitely feel we would need some sort of external financing to do another project on top of the alcohol project.

Kun Tao - Roth Capital

Okay, so are you going to -- do you have probably detailed numbers, how much land you are going to purchase going forward for future development?

Thomas H.R. Gurnee

No, I do not. Let me explain -- I do have certain pro forma projects but we are not looking at specific -- we haven’t got identified yet specific targets to go push. When we do, we’ll move fast and -- but we do not have specific targets other than the land we already own. We own a piece of property in Chengdu, we own one in Zhengzhou . The one in Zhengzhou is a beautiful one to execute on. It’s got a low land price, the land is already ours, we can finance the construction -- great way to get back on the growth curve.

We’ll see if that -- perhaps that generates enough cash to go look at another project without anymore financing but I have my doubts. But I have not, Kun Tao, got specific projects to report to you that are on our table that we have in our plan. And in fact, my profit numbers and sales numbers I am giving you do not even include the alcohol project because this is a very recent development. And I do not --

Kun Tao - Roth Capital

Okay. All right. That’s all for my questions. Thank you very much.

Operator

(Operator Instructions) Moving on, we’ll take our next question from Hao Hong from BMC.

Hao Hong - BMC

Thank you. I actually have a question on your gross margin. Actually, I believe that your gross margin is actually coming down in the first quarter. If I strip out your write-down in the fourth quarter, and also for the entire 2008, I am seeing your gross margin is about 25%-ish but somehow in this quarter, we are below 20% and you are guiding for the full year at about 16%-ish. So I’m just wondering, after the substantial write-down we did in fourth quarter 2008 which has provision for future loss, why should we expect the gross margin to come down from the 2008 level?

Thomas H.R. Gurnee

Well, in 2008, you had several projects at their peak with land purchased in 2006, 2005 that had high margins. We do have a lineup of projects that were purchased like Kunshan and Chengdu, Suzhou -- they were all purchased in 2007 that don’t have the margin in the land like those others did.

Now, only Suzhou was impaired but the others are of lower -- slightly lower margin profiles. Now, that’s improving -- that is improving but they are generally in the high-teens. You know, Suzhou after the impairment is in the 22 range to 23, Kunshan is in the 15 range -- what’s the other -- Chengdu is in the 18, 19 range, so those newer projects do not have big historical gross profit rates of 40%.

Now, we feel that’s going to be -- the alcohol project of course, we do that, we expect much higher margins than that. And I might also point out there’s a -- some weird effects from POC -- I am still a novice at POC but there’s -- I’ll give you an example; Project Colorful Garden in Suzhou, it has a margin of 13.3% but in the month we reported 8.4. Why? Because of some anomalies of the way POC accounting works.

But on an ongoing basis, on a grand total basis from that project is 13, so there’s some anomalies of the math I would be happy to go through with you maybe one-on-one or something.

But anyway, you’re right though -- we will not -- the old days of 25%, on these projects we’re looking at that we purchased in 2007 only, those are not going to get back to the 25% range. New projects will and some of the older ones will and you’ve got that right.

Hao Hong - BMC

Okay. Thank you. Also, on your cash position, I am just curious -- you mentioned that -- I noticed that your cash excluding restricted cash seems to be coming down. You mentioned that you pay down some payables and you have a little bit of an increase in receivables. I’m just wondering, going forward, on a per month basis, how much cash do you expect to pay on a monthly basis for construction?

Thomas H.R. Gurnee

Well, there’s a good question -- somewhere in the neighborhood of $50 million -- no, per quarter, I’m sorry -- you said per month. No, I’m sorry, more than $50 million but in the first quarter, we were slated to do about $50 million and we only spent 23. But I think you’re -- okay, on the restricted versus non-restricted cash, kind of an anomaly also happened in first quarter. We borrow when available. We borrowed some money here and yet we shut down construction activity, or slowed it down in several sites. And we built up cash that was restricted cash. It was borrowed for purpose of a project but wasn’t spent, and so that’s why you have this expansion. You’ll see that drop substantially in second quarter, the restricted cash. But you won’t see cash drop.

Hao Hong - BMC

Okay, and so just to make it clear, it’s $50 million, about $50 million for construction costs per quarter, yes?

Thomas H.R. Gurnee

I better confirm that. I don’t have that right off the -- yeah, it’s approximately -- that’s what I projected in the first quarter and I missed, so it’s --

Hao Hong - BMC

Okay.

Thomas H.R. Gurnee

I don’t -- I can’t quote that number off the top of my head, I’m sorry. But I’d be happy to send it to you.

Hao Hong - BMC

Okay. And also, just now you mentioned it seems to me that you don’t have a big land acquisition planned for the rest of 2009. If so, why do we need external financing because if you, your sales are going up, you are curbing your corporate expenses, your construction costs, you are trying to maintain that under control -- why should we -- and you don’t have a big land acquisition planned, then why should we need external financing?

Thomas H.R. Gurnee

Well, you’ve just hit the nail on the head -- not everything I’m reporting there -- okay, you’re right. If we don’t do new projects, we don’t need external financing, non-bank borrowing outside of China. We don’t need it. And so you are right from that standpoint. So why do we discuss external borrowing? You know, we could borrow -- well, to accelerate a project, for example. If we decide to accelerate construction on a project, we need the financing to do it. The sales rate is independent of the construction rate but we do not foresee -- now that we are going to do the alcohol project, that would probably mean we’d probably get financing of $200 million to do that.

In fact, we did a study the other day -- we figure there’s about $750 million of RMB in Chinese bank lending available to us if we do the alcohol project and accelerate other projects.

But you’re absolutely right that if we don’t do another project, why in the heck would we go borrow from the bank? We won’t.

Hao Hong - BMC

Yeah.

Thomas H.R. Gurnee

Does that answer your question or did I miss it?

Hao Hong - BMC

Yeah, well -- so okay, so you don’t have a land acquisition plan for 2009 and probably once you build out your two parcels of land you have in your portfolio, then you may consider buying more land. Is that the right way to look at it?

Thomas H.R. Gurnee

Sort of. You have to listen to our subtlety here. Two months ago we reported to you that we are not thinking about anything. We were thinking about cutting costs and trying to create cash flow. Now here we are after three months of good results, of good sales results and we are telling you that we are going to start the alcohol project and we are looking at outside projects.

The Chairman and all of us are cautious. Three months does not a major change, sea change make, and so once we -- we are working like heck to get the alcohol project ready to go but if this trend flattens or isn’t sustained, we are going to be careful. We’ll probably -- we’ll still go ahead and do the alcohol project, I’m sure, but then we have to be careful about buying new land to do new projects. But we intend to grow, no question about it and we were looking for the opportunity. We think we found it. I mean, we are conserving money on the operating expense side. We’ve conserved money on the inventory side and we are generating some cash. We are getting through what we consider to be a cash poor period but that period, we’ve resolved that and we are pleased to see the better results. So we will expand -- I just can’t tell you what the numbers are and I can’t tell you exactly which projects.

I can tell you this -- the Chairman is very clear, there’s three markets he’s most interested in growing. That would be in Jinan and in Zhengzhou and in Hefei, or the provinces of [Hunwi], [Changdong], and what’s the other one -- [Hunan]. So back to our -- a little bit back to our knitting there, where we are strong.

Hao Hong - BMC

Okay, and also another question on your outlook -- I noticed that you realized your outlook in terms of volume and dollar sales but I noticed that your volume increased -- your volume increase is actually faster than the dollar sales increase. I’m just wondering, are you expecting, are you using a lower pricing strategy to generate more sales or is it just a conservative sort of dollar sales guidance?

Thomas H.R. Gurnee

It’s conservative and I’m a little worried about percentage of completion and what happened this quarter because through a mathematical anomaly, I hit the low-end of guidance and it didn’t make sense because all of our numbers were good, or were better than I had projected. So I have to confess to being a neophyte on percentage completion accounting in the real estate industry and I am being a little conservative out there, yes.

Hao Hong - BMC

Sure. Just two more questions -- sorry, it’s a bit long winded. In terms of bank financing, how much credit facility do you have in place right now with the Chinese banks?

Thomas H.R. Gurnee

Okay, I am going to have to look for somebody to give me that exact answer. Jack, is it $550 million and then 200 -- in your projection, you said we had 550 capacity to borrow now, 200 with the alcohol project, 750 -- 750 including the alcohol project of 200.

Jack Zhang

RMB, RMB.

Thomas H.R. Gurnee

It’s all RMB, yes.

Hao Hong - BMC

Okay. And also just one last question -- I noticed that your tax rate for this quarter is actually rather high. You know, it’s -- let me see -- it is one of the highest in your --

Thomas H.R. Gurnee

Yes, I know. Very good catch. And let me tell you what happened here -- our latest projections at the time we were doing that close with Ernst and Young, et cetera, that we had lowered -- obviously you saw what our numbers were last time, we had lowered our outlook and in lowering the outlook, you had like a Suzhou, you have losses, tax losses in that province that you can’t offset against gains anywhere, and so we had a higher effective tax rate because of that. Because this is administered by province, not by the federal way.

I believe as we get deeper into the Suzhou and as we accelerate the closing of Colorful Garden, that we may be able to offset a substantial amount of those losses in Suzhou against taxes at Colorful Garden. So we are working very hard on the tax plan. You can expect the effective tax rate to drop over time.

Hao Hong - BMC

Okay. Thank you so much for your time.

Thomas H.R. Gurnee

I can’t say exactly the percent. I’m not an expert yet. I can’t tell you exactly the percentage.

Hao Hong - BMC

All right. Thank you so much for your time.

Operator

And at this time, it appears there are no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thomas H.R. Gurnee

We all wish you a great weekend and a great market today and we hope -- we are willing to take whatever questions you might have separately when you call in. We thank you very much for attending the call.

Operator

Thank you. That will conclude today’s conference. We thank everyone for their participation.

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