Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Helen Zhang – Financial Controller

Yong Zhang – Chairman and Chief Executive Officer

Thomas Gurnee – Chief Financial Officer

Xinyuan Real Estate Co., Ltd. (XIN) Q1 2013 Earnings Call May 10, 2013 8:30 AM ET

Operator

Good day, and welcome to the Xinyuan Real Estate Company., Ltd First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Helen Zhang, Financial Controller, for Xinyuan Real Estate. Please go ahead.

Helen Zhang

Hello everyone, and welcome to Xinyuan’s first quarter 2013 earnings conference call. The Company’s first quarter earnings results that 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 Provision of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, our result would be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our registration statement and our Form 20-F and 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.

Today, you will hear from Mr. Yong Zhang, our Chairman and Chief Executive Officer, who will comment on current market operations and provide some perspectives on the market environment. He will be followed by Mr. Tom Gurnee, our Chief Financial Officer, who will provide some additional color on our performance, review the company’s financial results in the first quarter of 2013, and discuss the second quarter and full-year outlook.

Following management’s prepared remarks we’ll open the call to questions. During the Q&A session, Mr. Zhang will speak in Mandarin, and I will translate his comments into English. Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to Xinyuan’s Chairman and CEO, Mr. Yong Zhang. Please go ahead sir.

Yong Zhang

Hello, everyone, and thank you for joining us today. We’re pleased to report another stronger quarter with the first four quarter 2013’s revenue compared to the sales and net income exceeding our previous guidance significantly. The current fundamentals of the housing market in China remained healthy as expected on the general housing prices were stable in the first quarter. So far homebuyer settlement demand has remained stronger in cities we’re seeing office in the wake of the central government's latest home purchase restriction announcements.

Our first quarter 2013 results were impacted by the usual Chinese New Year seasonality effect. We expect our sellable inventory levels to decrease in the second quarter, which will impact our sales in second quarter. However, we have three new projects scheduled to commence pre-sales and contribute to our result in the second half of this year.

Therefore, we are pleased to raise our full year 2013 guidance accordingly, which reflects higher levels of contract sales for the end of this year. As we continue to evaluate opportunities to maximize these returns for our shareholders and are pleased to announce that our Board of Directors has approved a quarterly dividend of US$0.05 per ADS payable to shareholders in May.

Overall 2013 is off to very promising start for Xinyuan, although there is a possibility that policy market may introduce additional restrictions to close up housing market, the current environments remains stable and we are confident in Xinyuan’s long-term strategy and growth potential.

Now I would turn the call over to Tom Gurnee, our Chief Financial Officer.

Thomas Gurnee

Thank you, Chairman. Once again our first quarter numbers for contract sales, revenue and net income, we are better than we’d expected going into the quarter. The impact of Chinese New Year is always the source of consternation. In predicting the first quarter results in any year, but this year the impact seem softer than before and despite more government’s business about enforcement of the home purchase restrictions, we did not suffer any discernible ill effects in pricing or sales volume.

Our selling price is firm as they normally do as projects mature. ASPs appear flat in our press release, but that was mainly due to higher mix of lower price projects, which mask apples-to-apples higher permit prices in the first quarter of 2013. [Xinyuan plan is simple] with our finishing inventory of sellable apartment, this trend will continue in next quarter with the relief in the form of new projects coming with the introduction of two new projects in the third quarter and one or two in the fourth quarter, more on that later.

Let me remark on contract sales, contract sales in the first quarter at a US$178 million fell bit short of last year’s US$188 million but did beat this year’s first quarter by, fourth quarter, last year’s fourth quarter by 12% and exceeded the guidance for this quarter by fully 32% so we were a bit surprised.

It is apparent that Xinyuan and other developers in China all benefited from strong demand and increasing ASPs in the first quarter. In addition, our Jingsan, Zhengzhou Century East A and B properties outperformed our expectations both in GFA volume and price.

Revenue under the U.S. GAAP percentage completion method, totaled US$169 million and that was 36% short of last year’s exceptional numbers, last quarter’s exceptional numbers and 2% short of the first quarter of 2012, but fully 26% higher than the mid point of guidance for this quarter.

Simply put, higher than expected revenue generally resulted from higher than expected contract sales. Let me remark on gross profit, first quarter gross profit totaled US$58 million or 32.9% of revenue, compared to last year’s first quarter of US$49 million or 28.2% of revenue and last quarter’s gross profit of US$88 million or 33.4% of revenue.

Each quarter, we review in detail our project cost estimates. As a given project nears completion and delivery permits are issued, settlement conferences are held with contractors and government bodies, which serve to confirm and to clarify the net impact of the gives and takes with the suppliers and customers over a multi-year project. Last quarter, Chengdu and Kunshan project cost estimates were revised downward in light of such ongoing settlement conferences.

This quarter two new projects, two additional projects had the same effect, Yipin Xiangshan II and Chengdu II were similarly revised downward. In addition, each quarter we review in detail our total project sales estimates. In the first quarter we revise sales estimates upwards to recognize continued ASP from us. Our royal place project in Zhengzhou revised is total project sales estimates upwards up over US$8 million for example. Also the total gross profit impact of changes in cost of sales estimates was a US$11.8 million in the first quarter which was in line with the previous quarter’s change of estimates impact of US$11.6 million.

Operating expenses edged slightly higher as a percentage of revenues to 7.3% compared to 6.9% in the first quarter of 2012 and 5.4% last quarter. However, absolute dollar spend on operating expenses dropped from US$14.1 million in the fourth quarter of 2012 to US$12 million this quarter.

Net income for the first quarter of 2013 was US$26.6 million compared to US$23.2 million for the last years first quarter, and US$33.6 million last quarter the fourth quarter of 2012. Fully diluted earnings per ADS were US$0.37, compared to US$0.31 in the year ago first quarter and US$0.47 in the fourth quarter of 2012.

As of the end of March 2013, we’ve reported US$626 million in cash that was a decrease of US$15 million from December 31, 2012. Total debt edged up US$3 million from US$314 million in December to US$317 million at the end of March.

Cash flow from operations totaled US$66 million in the quarter, while US$83 million was spend on land bureau deposits for future auctions, which brings the cumulative total for such deposits to US$127 million for five projects our book-value increased another US$26 million in the first quarter to US$808 million this equals over US$11 per ADS. We issued a bond in the quarter let me comment on that on May 3, 2013 the company announced a closing of its offering of 13.25% senior notes, with an aggregate principal amount of US$200 million due in 2018.

The proceeds will be used to pay down certain debts, invest in new projects and for general corporate purposes. Debts to be settled include US$40 million plus accumulated interest on a 15.6% Forum note and US$60 million of back-to-back RMB the U.S. dollar loans and US$29.2 million plus accumulated interest to repay a seller note on the Williamsburg property in New York. As of this call the Forum notes have been fully settled and repaid. So the questions, we get from investors, of course, is why did we initiate the bond, when we have such a large cash balance? Well, there are two basic reasons, first, we have big plans for land acquisitions in 2013, over US$650 million expected to be spend for new projects in China alone.

Second the remittance of U.S. dollars by Chinese entities via intercompany dividends is subject to a 10% withholding tax a dilemma not unlike what Apple faced in their recent bond although on the opposite direction, this factor was the genesis of the back-to-back loans, we initiated last year, our investments in the USA obviously require U.S. dollars and the bond proceeds are a way of dealing with that. I should also note the repayment of these back-to-back loans I mentioned earlier, will resulted an equal value or of RMB restricted cash being reclassified to unrestricted cash and that’s usable to pay for land acquisitions in China.

In summary this bond issuance helps finance growth in both China and the USA for 2013 and onwards. Why was the coupon rates at 13.25% is another question we get, it’s simply because that is what it took to fill the order book as a smaller size developer and as a first time issuer, meanwhile the bond has been quoted higher, earlier today, the bond was quoted at 108.5 bid, 109.5 as for a yield of approximately 10.7% to 11.0%, obviously, if you were to issue another bond in future under current market condition it was certainly be cheaper than 13.25%.

Let me comment on our land acquisition activities, we’re hopeful of acquiring five Zhengzhou area projects this year under our managed auction program, we’ve been developing this program for over a year whereby we enter into agreements with local land bureaus to make refundable deposits to facilitate site preparation work to bring projects to auction, we have invested cumulatively over a US$127 million in such deposits by the end of March and one auction is tenably scheduled for this quarter. Of course, we do not control the government auction process, so there maybe fluctuations in auction target dates.

We expect to roll this program out selectively to other jurisdictions like Shandong for example. Also we plan to continue to participate actively in arm’s length auctions as we in the past and has been our previous business model. Now I think investor are very curious about our U.S. operations and I like to turn this call over to discuss your surprises to John Liang, an Executive Vice President with Xinyuan. John?

John Liang

Yes. Thank you. Just to give investors a brief update of the status of our U.S. project, our U.S. team on the ground has been very busy in the last quarter preparing our Williamsburg or Brooklyn project for construction. Architects and MPE and several structural environmental engineers of all disciplines and marketing consultants, and in addition offering planned attorney were all engaged in the first quarter of 2013. And right now, we’re still in the design development process and we just finished the systematic design stage.

Building permits are tentatively targeted for September of 2013 with the start of construction slated for early Q4 2013. We are also working on the preliminary application for the offering plan to the State Attorney General’s office. We continue to target delivery in the first half of 2015. So in a nutshell, the project is on plan and on budget.

Now I’ll turn the podium back to our CFO.

Thomas Gurnee

Thanks, John and of course you’ll have the opportunity to ask John more questions in the Q&A period. Let me comment now on our current outlook. We’re projecting second quarter contract sales of US$150 million versus US$178 million in the quarter just ended, that’s down 16% sequentially as we’re running short of sellable inventory as we have foreseeing for the last few quarters.

There are essentially three projects that are driving the second quarter contract sales, Shandong Splendid in Jinan, Zhengzhou Century East A and B in Zhengzhou obviously and Royal Palace also in Zhengzhou. Fortunately, all of these projects are performing well.

Revenue under the percentage of completion method for the second quarter is projected about US$140 million, while net income is expected to reach US$25 million. This US$25 million includes an US$8 million release of a tax provision from our pre IPO days upon expiry of a five year waiting period.

Three new projects and perhaps four will be coming online in China in the third and fourth quarters providing a boost to sellable inventory. These projects are Zhengzhou, Xuzhou, Beijing, and Suzhou perhaps. But given the stronger than expected first quarter results and continued favorable market conditions, the company has raised its full year 2013 guidance. Contract sales are slightly to reach about US$850 million, up 2% from our previous guidance. Revenue guidance for the year was increased 8% to US$820 million, while net income guidance was revised to a US$105 million that’s up 11% from US$95 million mid point projected last quarter. And our 2014 expectations are high as we accelerate the land acquisition process this year to provide sellable inventory for next year.

And a few shareholder notes before I finish my prepared comments, the trading price of ADS' was US$4.75 yesterday on the NYSE closing, by virtually any measure our ADS continue to be undervalued. We are trading at a trailing PE ratio of 2.1, a forward 2013 PE ratio of 3.3 and a discount to book value of 57%. We are pleased to announce earlier today that a dividend of US$0.05 per ADS will be paid on May 31, 2013 to shareholders of record on May 21, 2013. The payout ratio on 2013 earnings is less than 14% and on 2012 earnings less than 8%. Our position continues to be that a dividend once established should be maintained or expanded over the long-term. We intend to maintain an attractive dividend for foreseeable future.

Operator, that concludes our prepared remarks, we are ready for Q&A period.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from (inaudible)

Unidentified Analyst

Hello, (inaudible) phone, I dial from Paris in France, I participated for you, yes, I participated your last conference call for the year end back in February or March. And well congratulations for these results. I got basically two questions for you if I may, one, you mentioned the last conference call about improving or getting a new Investor Relation network in the U.S. I wanted to know if you have make down any further improvement on that and in use on this front. And the other thing is regarding your US$200 million senior notes, how much of that will go to payback your older senior note and how much is left to finance the construction of the working project. Thank you very much.

Yong Zhang

Okay. Well, thank you and welcome back to our call. Let’s take this Investor Relations question first. At the time we did the call last quarter, we didn’t really have a plan to do this bond offering. So, we came with the conclusion that our managed auction process was going very well and the size of it was expanding, and we decided that we should be doing a bond to raise money to expand. And because of that, that’s where our attention went in the quarter. So, we did not take any initiatives on the IR front in the first quarter. What we did instead was, we chased this bond and we got that done on May 3. We are ready to now that that’s done, we’re taking we’re doing this call and we’ll take a deep breath and we’ll get after the IR activities around the world. So, I have to say we changed our plans.

Unidentified Analyst

Okay.

Yong Zhang

The second item was about the deployment of the US$200 million and let me, I probably read this too fast, so let me go back and read my…

Unidentified Analyst

Yeah, please, thank you.

Thomas Gurnee

So, we borrowed US$200 million. The first payment we made was actually the payback what we call the forum, no that was from 2010 a three year note that came due in April 17, and that was the amount of US$40 million plus interest. The coupon rate on that was 15.6%. The total cost of that including warrants was more like 20%, so we paid down that loan. The next item on our list of course was to pay down back-to-back loans. We’ve done back-to-back loans, where you make deposits in RMB in China or Hong Kong and your loan dollar is in (inaudible). And we used, we have US$60 million of those outstanding to finance the U.S. acquisitions and other expenses.

And so, we’re going to those down, the reason we did the back-to-back loan was to avoid withholding tax on the intercompany dividends. Okay, in addition to that, there is 29 that was given by the seller of our Willamsburg project. That interest is going to be paid back very soon. That is due by September but we’ll be settling that before that. So and then in addition to that, you heard from John, we are going to be putting 10 to 25 equity, additional equity into the Willamsburg project to complete that project – dollar. So, you got 40, you got 60, you got 30, that’s a 130…

Unidentified Analyst

Okay.

Thomas Gurnee

Plus you got, let’s say US$20 million, now the remaining 50 will be used for general corporate purposes plus, we don’t have any specific plans for acquisitions in the U.S. but it could be used for that. Is that okay?

Unidentified Analyst

Well, yeah, but the construction cost for Brooklyn will be done well from the cash.

Thomas Gurnee

Well, construction cost for Brooklyn will be paid through equity. We’ve already, after we pay down that note, we’ll have about 55 million, 56 million of equity in it, we’ll have to another 15, or 20, and then we will get the construction loan, for the remainder as we progress with construction and I forgot to mention…

Unidentified Analyst

The construction loan will be – what sort of size would it be?

Thomas Gurnee

Something about 60% of loan to value and the total amount on this, John do you want to chime in here.

Unidentified Company Representative

Well, we have received quite a lot of interest from banks with the intention to help us with the construction financing on the condo development project. We don’t have right now we feel we haven’t finished the development process and we don’t have a building permit. So it is a little premature to talk to bank in details about the exact terms and rate and duration of the loan. But Tom is correct that our anticipation is we can get a construct and financing for the development projects, somewhere near the 60% loan to the cost range.

Unidentified Analyst

So 60% of the total cost, can you remind me of the total amount over total cost of the project?

Thomas Gurnee

The total cost is anywhere between a US$180 million to US$200 million, including the land cost.

Unidentified Analyst

Including the land cost, it’s okay. Okay. Thanks very much and you’re confident regarding the building permit. Do you have any fear about something which could go wrong or some delay or whatever in our building permits, it is always very difficult to access when you get it, actually get permit.

Unidentified Company Representative

Well we already hired a expeditor which is one of the most experienced one in New York City. We do not expect any delay, but at this stage we’re just trying our best.

Unidentified Analyst

And you’re not seeking any entitlement changes, right?

Unidentified Company Representative

No.

Unidentified Analyst

Okay, Well thank you again very much for answering my question.

Unidentified Company Representative

And before let you go, I think it’s important I clarify one thing, the back to back loans, we pay those, as we pay those banks US$60 million. Keep in mind, that we have US$60 million of restricted RMB in China that get released at that time. So as we pay back this back to back loans of US$60 million in the U.S, it freeze up US$60 million worth of RMB to be invested in projects in China.

Unidentified Analyst

Oh I see okay. Good, it was, subcontract is not restricted.

Unidentified Company Representative

Right, it goes from restricted to unrestricted.

Unidentified Analyst

And in regards of finish maybe just one last question, what will be your most let’s say, fee at the moment regarding the management and the development of the company, you’re very successful but there are always some fear about it’s construction cut in China, is it pool of the business in China, is it, I don’t know, what are your fees at the moment? Or let’s say, I will ask why you are less confident?

Unidentified Company Representative

No, we’re pretty confident, our future plans are aggressive and they are based on land acquisition, so we have to execute on introduction of our new projects and on acquiring land.

Unidentified Analyst

It’s ready to…

Unidentified Company Representative

I’m not, yeah.

Unidentified Analyst

Okay.

Unidentified Company Representative

I’m not…

Unidentified Analyst

Thank you very much.

Unidentified Company Representative

I’m not feeling any (inaudible) to do that, but okay. Thank you.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions) We’ll now go to Alexander Anderson, private investor.

Unidentified Analyst

Hi, I was wondering what would you, what do you say to anybody who has any belief that the company might be cooking their books?

Thomas Gurnee

Actually we are not and then I tell them that we have been audited for about eight years by Ernst & Young, and that we are auditor, we just in fact, we just put out the 20-F. So we went through a full rigorous audit, published that on April 15, that’s what I tell them.

Unidentified Analyst

So, how do you believe this target is so undervalued?

Thomas Gurnee

I think there is a lot of sentiment. There has been some frauds in China, and there is concern about bubbles, there is lots of concern. So I would say there is many Chinese stocks that are undervalued with possible exceptions being the Internet space, but there is been up, there is definitely been in law in the valuation of China based U.S. listed stocks, it will come back.

Unidentified Analyst

All right. Thank you.

Thomas Gurnee

Thank you.

Operator

At this time there are no further questions, I would like to turn the conference back to you for any additional or closing remarks.

Thomas Gurnee

Well, thank you for protruding into this call. We had a great quarter. We’re very thrilled about it. We’re very excited about the future. We hope you call again. We hope your investment in Xinyuan stock is a profitable one. Thank you.

Operator

Thank you. We do have a follow-up question from (inaudible).

Unidentified Analyst

No, just allow myself to answer another question, not so many people attending the conference call. One last question regarding the suite on your senior note of 13.2%. I think the one market has been very active in recent months and how does this rates you got 13% compared with over, let’s say similar real estate developers in China with bond who came to the bond market recently, recent months. Do you have any ideas when you compare with lets the company of medium size about your rating by kind of (inaudible), did we get similar, more or less similar to these rates on their notes.

Thomas Gurnee

Well we were rated B-plus by data’s of Standard & Poor. We are the interest rate well, our competitors are almost universally larger than we are. We learned a lot. We ran the road show doing this bond. This is our first bond. So generally the first bond, they don’t know you got to pay a little bit more, and they are comparable size. There aren’t so many comparable size. They are not that far off. But the issue is, repeating a bond offering.

Now our bonds are trading at less than 11% yield. That would indicate very clearly that the next time we do a bond if there is a next time, we would enjoy much lower interest rate on our next bond. So the 13.25% was higher than our expectations. It’s what in done to get the deal done and its very attractive to investors as shown by the price of the bond today on the open-market which is about a 109 and yielding less than a 11%. So it was higher than we would have liked but we got the deal done. We’re happy about it and we’re looking forward to the future we think we can if there is future bonds in our head of us that will be more attractively priced, we’re sure of that.

Unidentified Analyst

Okay, yeah. Thank you for that.

Thomas Gurnee

Thank you.

Operator

And there are no further questions. That does conclude today’s Xinyuan Real Estate Company limited conference call. Thank you for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Xinyuan Real Estate's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts