Earlier this year I researched a group of companies. They are similar in the sense that they are all deeply undervalued Chinese companies that are well known locally but not as well-recognized in the U.S. where they are listed. The list includes: NQ Mobile (NQ), Qihoo 360 (QIHU), SouFun (SFUN), YY (YY), Dangdang (DANG), Vipshop (VIPS), Ctrip (CTRP), Noah Holdings (NOAH), and Xinyuan Real Estate (XIN). I named them the Fabulous Nine. They are all good companies with excellent management teams, attractive business models, and strong balance sheets. I did my due diligence (I always do) and ultimately decided to focus on the most attractive and most undervalued one - Xinyuan. In my mind, it also is the least risky one. As I analyzed in my previous article, I think Xinyuan's stock is conservatively worth 7.7x P/E and 1.17x P/B which gives a $14 target price (180% upside from the current level). Cash and cash equivalents, including restricted cash, are currently $874.7 million or $12.10 per share at the end of 2Q (the company has a cash audit program in place). Book value grows at more than 20% every quarter. I am confident that Xinyuan will one day be trading at $14. I just don't know how soon.
Turned out that I failed as a stock picker (so far). In terms of recent stock performance, Xinyuan has come out at the bottom of the list and its stock gain far lags its Fabulous Nine peers. The group's stock performance (excluding dividends) is below (with the benefit of hindsight, I removed a few companies in the gaming industry that also went up but not as much).
I talked to a few Xinyuan shareholders and they rushed to sell their shares at around $5.00 and were very satisfied with their small profits. Their lack of confidence in the company is perhaps not due to the possibility that this may be a fraud - the famous Citron Research performed thorough due diligence on Qihoo 360 and concluded that it is a FRAUD and no matter, the stock is up 122% this year and 345% over the past 12 months. Muddy Waters found solid proof that Spreadtrum (SPRD) is a FRAUD and no matter, Spreadtrum is up 69% YTD and is going into a privatization deal at relatively healthy multiples. No short seller has been able to dig up anything on Xinyuan. The reason that Xinyuan underperformed the Fabulous Nine group is perhaps not because its business outlook is not bright either - its Beijing and NYC projects are as hot as they can be. The true reason, as the few shareholders and I concluded, is that there is insufficient information regarding this company and my previous research article was bland and poorly written and too long. For that, I take responsibility and apologize to my fellow Xinyuan shareholders.
By contrast, investors praised the well written article by a better author regarding NQ Mobile. It gives them comfort and they decided to hold on to the stock longer. The article headline is clearer and more effective. And indeed it was beautifully written. NQ Mobile is up 94% over the past 1 month.
Xinyuan sold $200 million of bonds on April 25. Barclays, Morgan Stanley, BofA Merrill Lynch and ICBC International were Joint Lead Managers on the issuance. Standard and Poor's and Fitch issued their ratings. A fraud case involving a bond issuance is extremely rare, as bondholders are understandably risk-averse. The bond is currently trading at above par, as bondholders still want even more of Xinyuan's bond. The bond Offering Circular can be viewed here.
On average, the Fabulous Nine have gone up 119% YTD vs. Xinyuan's 23%. Some other smaller Chinese companies performed even better. On Monday, Mecox Lane (MCOX) went up by 65.3% on a single day. Jiayuan International (DATE) went up by 28.1% on the same day. For Chinese undervalued companies, winter appears to have passed and spring is in full swing. These are the few months of music, and as Citigroup's former CEO Charles O. Prince famously pointed out, "as long as the music is playing, you've got to get up and dance." Some may think there are risks, but life's reward rarely comes risk-free.