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

Q2 2013 Earnings Conference Call

August 8, 2013 08:00 ET

Executives

Helen Zhang - Financial Controller

Yong Zhang - Chairman and Chief Executive Officer

Tom Gurnee - Chief Financial Officer

Analysts

Yvonne Cheng - Brean Capital

George Fong - Goldman Sachs

Ibrahim Toure - Black Pearl Finance

Operator

Please standby, we are about to begin. Good day, and welcome to the Xinyuan Real Estate Company., Ltd Second Quarter 2013 Earnings Conference Call. As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to Ms. Helen Zhang, Xinyuan Financial Controller. Please go ahead ma’am.

Helen Zhang - Financial Controller

Hello everyone, and welcome to Xinyuan’s second quarter 2013 earnings conference call. The company’s second quarter earnings results were 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 Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our result may 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 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.

Today, you will hear from Mr. Yong Zhang, our Chairman and Chief Executive Officer, who will comment on current 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 second quarter and discuss the outlook for the third quarter and full-year of 2013.

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’ll translate his comments into English. Please note that unless otherwise stated, all figures mentioned during in this conference call are in U.S. dollars.

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

Yong Zhang - Chairman and Chief Executive Officer

Hello, everyone, and thank you for joining us today. We’re pleased to report another stronger-than-expected quarter. In the second quarter of 2013, our revenue compared to sales and net income rise again exceed our previous guidance. The current fundamentals of the housing market in China remained healthy and the buying demand at our development projects were stable in the second quarter. So far homebuyer settlement demand has remained stronger in cities, where Xinyuan operate.

Looking at second half of this year, we expect to continue developing projects at a measured pace with our four new projects scheduled to commence pre-sales and contribute to our result in the second half of this year. As a result, we are once again raising our full year 2013 financial forecast. At the same time, the company is actively seeking opportunity (indiscernible) in the second half of the year.

As announced earlier, our Board of Directors has recently approved second quarter cash dividend payment for 2013 of US$0.05 per ADS. Our regular dividend compared with our new US$30 in outstanding share repurchases program demonstrates our confident in Xinyuan’s long-term growth prospects. We thank you for your level of investor support.

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

Tom Gurnee - Chief Financial Officer

Thank you, Chairman. And as the Chairman has already said once again our second quarter numbers for contract sales, revenue and net income, were much better than we’d expected going into the quarter. We were (specifically) encouraged by our sales activity and by the progress made on bringing inventory from four new projects online in the third and fourth quarter that we are raising our full year guidance forecast once again more on that later. So, let’s get started with contract sales in the quarter.

Contract sales in the second quarter reached US$196 million versus US$178 recorded in the first quarter for a sequential increase of 10%.We were fully 31% ahead of previous guidance as our project sales department has performed very well in the second quarter. Included in the second quarter, contract sales was the sale of 47,000 square meters of low cost space at our Chengdu Splendid project to the local government authorities in Jinan for over US$43 million but at a price of less than RMB5800 per square meter.

This below market price sale was specified in the land acquisition bid document back in 2010 and that had been contemplated in our projects estimates for the last few years. Our selling prices continue to firm up as several projects near completion. Our reported aggregate ASP however dropped from RMB8985 per square meter to RMB8312 per square meter in the second quarter and this was due to the below market price sale I just mentioned. If we exclude this one-off market sale, prices per square meter for our residential apartments and our four most active projects were brilliant.

Zhengzhou Royal House ASP was RMB8991 per square meter up 1.7% over the previous quarter. Zhengzhou Century East ASP was up 5.9% over the previous quarter. Zhengzhou Century East B’s prices were up 13.5% over the previous quarter and Chengdu Splendid’s ASP came in 3.5% up. So, all of our legacy projects showed higher ASPs than the previous quarter.

Holding us back somewhat in the second quarter was our diminishing inventory of sellable apartments. As you can see from the first table of our earnings press release, the sellable GFA at our active projects has fallen from 425,000 square meters at the end of the first quarter to 278,000 at the end of second quarter. Fortunately we have four new projects expected to come online in the back half of the year.

In the third quarter of 2013, we expect to commence pre-sales of two projects Zhengzhou XIN City with a total project GFA of 207,000 square meters and Suzhou XIN City with a total project GFA of 126,000 square meters. Together we expect these two projects to record contract sales of about US$40 million for the third quarter. Additionally in the fourth quarter of 2013, we expect to commence pre-sales of two additional projects Xuzhou Colorful City with a total project GFA of 118,000 square meters and Beijing Xindo Park with a total project GFA of 118,000 square meters.

Revenue under the U.S. GAAP percentage of completion method totaled US$198.5 million up 17.5% over the first quarter of 2013 and nearly 42% ahead of previous guidance. The contract sales improvement of 31% I mentioned earlier over guidance was certainly a factor in the upside. However another key factor to this quarter was the favorable outcome of project completion settlements with contractors, utilities and municipal authorities on three projects Chengdu Splendid, Zhengzhou Modern City and Kunshan International City Garden.

Under the percentage of completion method of accounting the result in cost savings on these three projects of approximately US$15 million resulted in higher than expected completion percentages, which in turn increase cumulative revenue recognition for these projects and some of this was expected in our guidance but not all. In the second quarter, we also recorded US$4 million of revenue in USA mainly from the sale of five apartments at our (indiscernible) project in Irvine, California. In short, in Q2, we find ourselves in the midst of a virtuous cycle with higher than expected prices and sales volumes along with lower than expected project costs.

So, let me comment on gross profit. Second quarter gross profit totaled US$70 million or 35.2% of revenue compared to last quarter’s profit US$57 million or 32.9% 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, utilities and government bodies, which serve to confirm and clarify the net impact of the gives and takes with suppliers and customers over a multi-year project. In the fourth quarter of 2012, two quarters ago Chengdu Splendid I and Kunshan International City Garden cost estimates were revised downward in light of such settlement conferences. Then in the first quarter of 2013, two quarters ago Yipinxiangshan II and Chengdu Splendid II cost estimates were similarly revised downward. In this second quarter, Chengdu Splendid II cost estimates were once again revised downwards as were Zhengzhou Modern City and Kunshan International City Garden.

In short, we have a lot of projects being completed and as they completed their settlement conferences with vendors and these are resulting in favorable adjustment project cost estimates. In addition, each quarter we review in detail our total project sales estimates. In the second quarter, we revised total project sales estimates upwards by over US$10 million to recognize continued ASP firmness on the Shandong Splendid and Zhengzhou Century East A and B project. Again under the percentage of completion method of accounting these increases in sales estimates resulted in lower than expected percentage in sold ratios, which in return lower cumulative cost recognition.

Okay, operating expenses. Operating expense for the second quarter edged higher as a percentage of revenues to 7.7% compared to 7.3% in the first quarter of 2013 and 6.2% in the second quarter of 2012. The sequential spending increase was $2 million from the first quarter is mainly attributable to approximately US$700,000 of consultant spending on HR practices overall and IT security service as well as the catch up for employee retention bonus of almost US$900,000.

Net income for the second quarter was US$39.1 million compared to US$26.6 million for the first quarter up 47% sequentially. Net income was up 56% from the midpoint of guidance but down 43% on the US$69 million in last year’s exceptional second quarter. As expected, net income was favorably impacted by $9 million one-off income tax benefit realized on the expiration of a five year statute of limitations period.

Second quarter fully diluted earnings per ADS were US$0.54 compared to US$0.37 in the first quarter when compared to US $0.94 from a year ago second quarter. The balance sheet as of June 30, 2013 we reported US$875 million in cash an increase of US$248 million from March 31, 2013 mainly driven by the proceeds of a new US$200 million bond issue in May of this year.

Total debt rose from US$316 million at the end of last quarter to US$511 million as of June 30th. Net cash that is total cash minus total debt rose by US$54 million in the quarter to fully US$364 million at the end of June 2013. Book value per share marched along and reached US$847 million as of June 30th versus US$808 million last quarter and US$719 million a year ago. In short, we continue to generate cash and add to our book value. But I must note we did not purchase any land in the second quarter so let me talk about land acquisition plan.

The entire management team has been very busy with land acquisition plans in China. As mentioned last quarter, we are hopeful of acquiring several Zhengzhou area projects this year under our managed auction program. But also we’ve expanded our sites for this program in several other jurisdictions including Chengdu and Kunshan and others, where negotiations are underway. This managed auction program was initiated over a year ago whereby we entered into agreements with local land bureaus to make refundable deposits to facilitate site preparation work to bring projects to auction.

Through the second quarter of 2013, we have invested cumulatively US$143 million in such deposits while one auction was expected last quarter the land bureau simply did not progress fast enough now we expect to see two managed auctions in Zhengzhou area in the third quarter. There is no issuance however that we’ll be a successful bidder in any of these managed auctions. If we are not that successful bidder we’ll keep back our deposit plus interest but we’ll not have additional lands developed. Mean while we are preparing to step up our participation in the traditional (on-site) land auctions for the rest of the year. At this point, we expect to bid at auctions in Xuzhou, Suzhou, Kunshan, Chengdu, Jinan, Zhengzhou (indiscernible) so it’s quite an expanded list from the pervious period.

Let me remark on the status of U.S. operation. Our Williamsburg New York project remains on schedule. We filed with the City of New York for building permits on July 13th. This was officially recorded on July 22nd. Detailed cost estimates are being generated by our provisional general contractor in preparation for engaging with construction lenders. We expect to make final general contractor selection later this quarter or early in the fourth quarter. In the same timeframe, we expect to select the sales brokers, submitted operating plan to the City of New York shortly thereafter. Groundbreaking remains projected for the fourth quarter of 2013 and we continue to target delivery in the firs t half of 2015. In short, the project is on plan and on budget.

So, now some words about the outlook for our company. First I’ll talk about the third quarter. We are projecting third quarter contract sales of US$200 million to US$220 million. It will be an exciting transition quarter for Xinyuan as we launch two new projects, Zhengzhou XIN City and Suzhou XIN City. The contract sales contribution to these two projects in the third quarter will more than offset the reductions at Century East A & B and Zhengzhou Royal Palace, which we expect that virtually be sold out during the third quarter. Revenue under the percentage of completion method for the third quarter is projected at US$210 million to US$220 million and third quarter net income was expected to reach US$25 million to US$30 million. No unusual tax related events are expected. Total year 2013, we are raising our full year guidance (inline) with continuing ASP firmness and higher confidence in our ability to launch four new projects on time in the second half of the year.

Contract sales are expected to exceed US$880 million up from previous guidance of about US$850 million. Revenue is expected to exceed US$820 million. This would be higher not for the fact that, a shift in contract sales from mature projects to new projects will result in a lower overall percent of complete ratio under the percentage of completion accounting.

Net income as expected to top US$110 million up from the US$105 million we guided previously. And it should be noted that this full year projections do not fully contemplate our internally targeted project launch dates and GFA demand. So, there is potential upside in this number. I should also note that an expected strong fourth quarter will provide an excellent platform for sales and revenue growth in 2014.

Just a few notes on shareholder value. We are pleased to announce as the Chairman mentioned on August 5th, we announced a dividend of US$0.05 per ADS will be paid at the end of August. The payout ratio is just 12% based on 2013 earnings guidance. During the second quarter 2013, the company also acquired 1.3 million ADSs on the open market for a total consideration of US$5.8 million at an average price of $4.39 per ADS.

Finally my retirement, this will be my final Xinyuan Real Estate quarterly conference call. As a couple of months, in order to notice that company announce my upcoming retirement from Xinyuan at August 2013. My successor has been identified and is expected to be on board in the first half of September. We’ll announce his (indiscernible) identity and background at a later date in the details firmed up. I’ll continue as CFO until the day of his arrival. I want to thank the Chairman, the Board and my fellow employees for their wisdom, support and hard work over the last five years and I want to thank our investors for their continuing interest in Xinyuan.

Operator, can we go to Q&A please.

Question-and-Answer Session

Operator

Absolutely (Operator: Instructions) And we’ll take our first question from Yvonne Cheng from Brean Capital.

Yvonne Cheng - Brean Capital

Hello. Hi, thanks for taking my question. I have questions about the new project in Chengdu and Jinan and could you give more detail about the huge Jinan project. And also I want to know, what is the current position of this project?

Tom Gurnee

Its probably most appropriate to ask the chairman answer that. Helen, do you want to translate that?

Yong Zhang

We’ve signed a letter of intent with the local government however the visit schedule of the land auction hasn’t been decided yet. So, the company has had been in active dialogue with the local government. And up to now there is no material information to report but the company hopes that once we’ve the material information we’ll let the investors know.

Yvonne Cheng - Brean Capital

Got it. okay. Got it. Thank you.

Operator

(Operator Instructions) And we have a question from George Fong from Goldman Sachs.

George Fong – Goldman Sachs

Hi. I have a question about net gearing and that you’ve a net gearing target towards the end of the year and also the financing mix do you have an idea of how much loan versus bond going forward like when you issue your higher bond that (indiscernible) was better than it is now. So, going forward do you have an idea as about like how much bond versus loan you have on your balance sheet? Thanks.

Tom Gurnee

Well I think it’s a good question but this is so highly dependent on land acquisitions that its really hard to call. So, right now we’ve a negative gearing ratio. In other words, we’ve more cash than we’ve debt but and we don’t expect that to continue of course we cumulate that cash in contemplation of fine property. But so no, we don’t have – we’ve very many properties we’re going to be looking at and we do have covenant established gearing ratios and such that we’ll follow but we’re not even close to those. We’re not even within the ballpark. And so, I think the best time to ask that question is probably next quarter when we see how we’ve done on the land acquisition front. I’m sorry to bugger off on your question but I think the question gets much more relevant next quarter.

George Fong – Goldman Sachs

Sure. And your capacity for loan versus bonds like you have like any complete guidance on that?

Tom Gurnee

Well Helen is our expert on construction loans here in China. Helen do you have any comment on loan capacity. I guess, we’ve four new projects so there is capacity there.

Helen Zhang

This year we’re going to launch four new projects and for the first two we’ve already got the approval from the local banks and also we’ve already got the loan from the banks. There is another two on the way. The third one we’ve already got the approval from one of the local banks with very attractive interest rate. And the third one we’re expecting the approval from the local banks sometime two weeks later. So, that in conclusion we don’t have any problem in getting the bank loans for this year.

George Fong – Goldman Sachs

Sure. Thanks.

Tom Gurnee

Thank you.

Operator

(Operator Instructions) We’ll take a question from Ibrahim Toure from Black Pearl Finance.

Ibrahim Toure – Black Pearl Finance

Hello. Thank you for taking my question. And I might have missed this but did you get the permits for the building in Brooklyn, New York?

Tom Gurnee

No, we applied for the permit. We applied for the permits on July 15th.

Ibrahim Toure – Black Pearl Finance

Okay. All right. Thank you. And a follow-up question is there anything that you believe you can do to increase shareholder confidence? Have you considered the auction of a cash audit given that many investors hear that Chinese the market because of cash front?

Tom Gurnee

Yeah good question, that’s a good question. This question has been lingering for two years now and from time to time I’m asked on this conference call about it. We do, do cash audits. We do spot surprise cash audits here on a monthly basis but also Ernst & Young our auditors for many years now has really stepped up well as all the auditors have they have stepped up their cash verification producers and they went through an in-depth cash flow audit taking much precautions for example (indiscernible) various levels in the banks etcetera.

And so, we believe we’ve taken all the measures that we can to establish our cash is real and we don’t have VIEs, you can go kick our assets they are not going anywhere. You can find them. You can see them. You can kick them. And I’ve had people recommend a forensic audit but that’s a bit of a negative thing. There is, we’re conducting regular audits, which I instituted about a year ago, where we’re doing surprise audits on our largest bank balances done by our internal audit department on surprise visits. So, I think between that and E&Y I think, I think, we’re pretty covered in investor. It takes a lot to convince investors to have confidence and we’re doing the best we can.

Ibrahim Toure – Black Pearl Finance

Yeah. Thank you very much.

Tom Gurnee

Thank you.

Operator

(Operator Instructions) And it appears we have no further questions.

Tom Gurnee - Chief Financial Officer

Okay. Well, thank you Nicole and thank you investors for dialing in we appreciate it. And I think the management team, minus me because I’m retiring are looking forward to the next conference call, next quarter. Thank you very much.

Operator

And once again, ladies and gentlemen, that conclude today’s conference. We appreciate your participation today.

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