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

Q3 2009 Earnings Call

November 9, 2009 7:00 am ET

Executives

Helen Zhang - Director of IR

Yong Zhang - Chairman and CEO

Tom Gurnee - CFO

Analysts

Kun Tao - Roth Capital

Liang Hsu - Brean Murray

Operator

Good day, everyone and welcome to the Xinyuan Real Estate Company, third quarter 2009 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Ms. Helen Zhang, as Integrated Corporate Relations for opening remarks and introductions. Please go ahead, Ma’am.

Helen Zhang

Hello everyone, welcome to Xinyuan's third quarter 2009 earnings conference call. The company’s third quarter earnings results were released earlier today and 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 US 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 those and other risks and uncertainties is included in our registration statement and our Form 20-F and other documents filed with the US 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 and discuss our fourth quarter and full-year guidance.

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 will translate his comments into English.

Please note that unless otherwise stated, all figures mentioned during this conference call are in US 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 I must thank you for turning out today. We are pleased to report another quarter of solid improvement in revenues and profitability.

We have revenues of $128.2 million and the POC was slightly below the low-end of our guidance. Due to less cost of spending, GFA sales of 184,500 square meters, this is the mid point of our guidance, and net income of $15.4 million, as it is the high-end of our $9 million to $12 million guidance range.

Additionally this result must (inaudible) compared to the both the second quarter of 2009 and the third quarter of 2008, we saw growth in average selling prices and the GFA sales across all of our active projects.

We also retained high end pressure on controlling our expenses. We have significantly reduced our cost of [transfer] on the past year, which allows us to improve our profitability. Our balance sheet also continued to strengthen during the quarter. We generated more than $67 million of cash and reduced our debt by $109 million. We also [propped] our progress in acquiring for new properties.

Over the past two months, these properties are located in high growth second tier cities and help build our [pattern] then for growth in 2010 and beyond. In September, we entered into agreement to acquire the remaining interest in our joint venture Jiantou Xinyuan, which we hope to close by the end of the year and we’ll further add to our main pack.

The outlook for China is a promising as the growing economy encourages urbanization [release] state development and demand for our properties. We believe we are well positioned to benefit from this favorable macroeconomic environment. As we continue to draw customers to our high quality, affordable development, [despite the] growing market. We will lead to our low inventory and the high asset turnover business model, to accelerate revenue growth and improve profitability.

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

Tom Gurnee

Hi. Yes, this is Tom Gurnee, CFO of Xinyuan. I am going to go start with GFA sales. GFA gross floor area surged from 128,000 square meters to 184,000 square meters between Q2 and Q3. That’s up 44% and the strongest sales were in Kunshan International City Garden, Chengdu Splendid and City Garden projects, quite similar to Q2s trends. Those, all three of those projects strengthened. There was a bit of a slowing in September, but it was short-lived as October was our strongest GFA sales month of the year.

Our aggregate ASP increased by 10.2% from RMB5,343 per square meter to RMB5,886 per square meter. Again, we have raised all prices on all apartment categories in all projects, and we consistently doing so even this quarter. The ASP increases have accelerated, as ASPs in the month of September were actually 18% higher than the month of June. So we are accelerating during the end of the quarter.

Contract sales represents the gross amount of contracts consummated with buyers or pre-sales, as we call them, and it essentially equals square meters sold in terms the price per meter. Now, we haven’t reported this before, but it is something I continue to report on from here forward. Contract sales in Q3 ‘09 totaled 159 million or up 58% over Q209, due both to GFA sales and ASP growth. The contract sales for Kunshan were up over 94% and Suzhou Colorful Garden, up 91%, Shandong International City Garden, 75%, Chengdu, up 58%, all this over the second quarter. October contract sales were actually 14% higher than our previous high watermarks in July.

Revenue recognized in the POC method increased 40% over Q2 '09, which in turn had increase 130% over Q1. Under the POC method revenue per given project is calculated as cumulative contract sales less 5.5% business tax, times project spending to-date, divided by estimated total project spending and you subtract from the that the cumulative revenue booked in prior periods.

And it’s a complex calculation, and once again revenue grew slower than contract sales for two primary reasons. Number one was Q3 construction spending at 33.2 million, it simply didn't increase from Q2 in fact it was slightly lower than Q2. Had spending equaled our forecast, our composite percent completion would have been 2% higher than actual recorded, and revenue would have been higher on this simple little under payment issue, it would have been higher by 13.2 million. Of course this will even out overtime in the future more revenue will be recognized in the future.

Revenue growth was strongest in our less mature projects, Kunshan at 54% complete and Chengdu at 64% complete. Thus revenue was booked with the lower percent complete projects.

Anyway, back to sales volume, obviously there is a rising tide in that sector not so recently but due to government expansion initiatives, credit availability and prior confidence, but one should also recognize that our three largest projects, Suzhou, Kunshan, Chengdu are still in the very early stages of development and have a lot of growth to go.

ASP increases do not seem to have diminished demand. Price increases have continued to pay until today.

We are also seeing the effectiveness of outsourcing our sales efforts, which took effect in March of this year. [And certainly] we saw another effect of that back during Chengdu, the Chengdu project had been the only project where we did not (inaudible), in late September we did do so and it showed positive effects in October.

Let’s take a look at the rest of the P&L. Gross margin was reported at 20.4% of revenue, up from 16.8% in the second quarter, primarily due to a change in estimate of one of our projects and again this is going to be complicated because of POC. That project is Henan Colorful Garden based in Zhengzhou. This project is relatively mature with nearly 90% of the total project costs incurred through Q3 and is expected to sell out in Q3 next year. Based on sales activities in the last two quarters, it become clear that sales and net ASP for the Henan Colorful Garden project would exceed previous estimates; namely those made in the dark days of Q1, 2009.

We raised our sales estimate in Q3 by $12 million from a total of $166 million to $178 million, without a significant ASP increase expectation from here forward. Now the project is 63% sold. After adjusting the sales target it would have been 67% sold had we not changed the sales target. This drop in the percentage sold under POC method led to $6.4 million lower recognition of cumulative cost to sales, than would have been the case had we not changed the sales estimate.

SG&A, SG&A expenses rose in dollar terms in the quarter by $1.5 million from $7.5 million to $9 million in the third quarter, but it fell from 8.1% of revenue to 7%. Advertising and promotion expenses rose $0.8 million from $1.8 million to $2.6 million, as promotional spending and commission payments were largely purely variables during the quarter. SG&A compensation cost, edged up $0.6 million or $600,000 on an annual bonus accrual catch up.

Total company headcount drift is slightly lower from 397 as of June 30th to 384 at September 30th. As conversion outsourcing of the sales representatives in Chengdu had a small impact. We expect headcount to increase in future with new projects coming on line, but in a tightly controlled manner and a rate slower than the sales growth. Thus, we expect SG&A as a percent of revenue to remain stable in the short-term and decrease over the longer term.

Our 45% joint venture, Zhengzhou Jiantou Xinyuan or Xinyuan as we call it, JianXin as we call it, I am sorry, booked profits of $2.3 million in the quarter, pretty close to last quarter, which was $2.5 million. Once again JianXin sales and financial performance near ours, we expect to finalize the purchase of the 55% of JianXin we do not already own by December as the Chairman mentioned. The JV currently has three active projects and one project under planning, totaling 270,000 GFA between the four projects as of September 30th, 2009.

The decrease in our ADS price in the third quarter to $4.64 drove a non-cash warrant accretion credit to income of $1.6 million with the warrant liability valuation setting at 443,000 at September 30th. There are 5.4 million warrants outstanding at a [strike] price of $5.60 per share or $11.20 per ADS. These warrants expire in April 2010, thus ADS price does not exceed $11.20 between now and April, the balance of the warrant liabilities (inaudible) from the balance sheets other income.

No unusual tax items to report now like last quarter. Net income in the third quarter totaled $15.4 million versus $3.9 million in Q2. It should be noted that, that we do not forecast changes in the value of warrants in any guidance we might give.

On the balance sheet, it was a good month for cash flow, good quarter. At the end of September, we held cash of $304.5 million versus $236.9 in June and $193.6 million in December 2008. Third quarter cash flow from operations totaled $93 million, versus $39 million in Q2 and just $14 million in Q1. Debt decreased by $29 million from $361 million in Q2 and $333 million in Q3. Real estate property under development fell sharply to $496 million from $584 million in Q2.

Let me talk about the land acquisitions for a minute and please refer to the table in the earnings release. In the 36 day period starting on September 23, we acquired four parcels of land parcels of land via auction, totaling 888,000 GFA and of course we lost several auctions during the last few months but we’ve maintained that we’re not willing to chase prices.

These four parcels joined the Longhai Road or [Alcohol] project in the Chengdu splendid two parcel adjacent to current Chengdu project. In our land bank, the average target margin for the six properties in land bank is 28%, with a range from 17% to 44%. This does not represent any fundamental change of philosophy about land bank. We continue to use the fast turn model and will begin development of these parcels as soon as practical.

We expect to finance these purchases and the subsequent development of those parcels with cash on hand, internally generated cash flow on existing projects, local bank construction financing and potentially trust to bridge the gap between land acquisition and the availability of local bank construction financing. For future acquisitions of land, it maybe necessary to access US capital market.

Let me talk about the outlook for the remainder of 2009. The fourth quarter 2009, GFA sales are expected to range from 150,000 to 160,000 square meters, down slightly from third quarter due to expected seasonal softening in December. Thus far, in Q4 October was strong as I mentioned earlier and the first week of November was strong. Fourth quarter contract sales are expected to reach $135 million to $145 million. I am reporting and guiding with contract sales, because, number one, our competitors do so and number two, it’s not subject to POC distortions. So I will continue to keep reporting contract sales.

Fourth quarter revenue, using the percentage completion method is expected to total 120 million to 130 million. There are upsides to this, if spending increases as expected, and if contract sales rates falling through November.

Net income is expected to be in the range of $9 million to $11 million. There are several upsides to this, potential upsides. One is contract sales, if we stay strong, the second is the project spending or construction spending, if its higher than previous quarters, you will see higher percent completes and higher revenue. Potential changes in estimates, if our pricing profile stays the way it is in the improved outlook for several projects confirmed, there could be changes in estimates of target sales that might have a favorable impact on our P&L. The one downside, of course, is the warrant accretion, if our stock goes up.

So this results in full year 2009 numbers with GFA sales ranging from 510,000 to 520,000 square meters. 2009 contract sales are expected to total about 430 million to 440 million. Revenue, under the percentage completion method, will range from $380 to $390, perhaps higher and net income is expected to be in the range of $29 to $31 million.

We will provide guidance for 2010 next quarter, but we need to do some work between now and then and it should be – but it should be noted that we do have a land bank available now, that could feasibly drive contract sales over RMB6 billion not including the JV, JianXin, if that JV is consummated in December.

What percent of this that we can achieve is something we'll determined in the next couple of months and determine what months it will take place.

So that concludes my discussions of the results. It was a good, very good quarter. It’s looking very good for next quarter and the next year and we appreciate you are tuning in.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kun Tao with Roth Capital. Please go ahead.

Kun Tao - Roth Capital

Good morning, everyone, congratulations on the good quarter. First question is we have seen some policy changes regarding for instance, finding second home buyer mortgage and potential mortgage discount cuts. Have you seen any of this that is affecting Xinyuan’s sales and pricing and could you provide some market updates on the current transaction.

Tom Gurnee

Let me have the chairman address that.

Yong Zhang

[Foreign Language]

Helen Zhang

We believe that short-term, there wouldn’t be any material change with regard to the government policy, for example, the policy related to the second home buying and the monetary policy. Even today, there is some news from the industry, saying that, one, no material change of government policy, especially a local government policy by the end of the year, and we believe that the current policy will be sustained by the end of next year.

At same time, with regard to the possible change of the government policy in the normal year Q4 will be a low season, but we didn’t see it and actually from our operation the sales in Q4 is even go up.

Tom Gurnee

I should add to that, that our business model sort of insulates us somewhat from that effect, because over 90% of our apartments sold are to owner occupiers, not investors and so they are not second homebuyers, over 90% are first homebuyers and owner occupiers. This is the beauty of the second tier city, middle income positioning (inaudible) is done.

Kun Tao - Roth Capital

Second question is, I remember your Kunshan, Chengdu, Suzhou projects would have or has some sales slowing down in 2008 and early 2009, what is the current situation on that three projects right now?

Tom Gurnee

Okay, well Kunshan has lighted up. Kunshan, is selling very well and the ASPs have increased 40% from the beginning of the year. It’s by far the big, biggest seller of all of ours, so it’s really accelerated and we continue to raise prices as we go. So Kunshan has lighted up. So is Chengdu, Chengdu had a rough start to the year. We had to give some discounting in the first quarter and fourth quarter of last year, but this has really, really bounced back this year and Chengdu is pretty much our second largest project. The only project that has perhaps laagered is Suzhou, where it’s increasing, but not nearly at the rates that we’re seeing in Kunshan and Chengdu. So, two out of the three are doing exceptionally well and the third is healthy but not doing exceptionally well.

Kun Tao - Roth Capital

I look that your ASPs have increased. Was there any help in the Q3 that due to change of estimates?

Tom Gurnee

I am sorry. Could you repeat that? There was some noise when you started that question.

Kun Tao - Roth Capital

Okay. Your ASP in Q3 increased compared to your previous quarters. Were there any help on Q3 on the results is due to change of estimates?

Tom Gurnee

Well, just on the Henan Colorful Garden project as I mentioned in my remarks. So, just one project had that effect. The other ones we have not, that's the irony of POC. We have not changed our target sales, and as the project is more mature, so we can confirm that it's a viable and a permanent change. So there was only one project Henan Colorful Garden, where we did increase the sales estimate from $166 million for the entire project to $178 million. That project finishes up mid next year, so we have very good visibility on it and it's already sold in the mid 60%.

Now, company like Kunshan or let’s take Chengdu are still early in their sales cycles [one 17%] sold the other 27%. Kun Tao to answer your question, as those get more mature and as we confirm that ASPs et cetera are firm then you are right there is a potential, there is a potential, but it's not in my projection. There is a potential that you could have upsides due to revision estimates.

Kun Tao - Roth Capital

Okay, so in Q4, your guidance is not included on any of the change of estimates revision.

Tom Gurnee

Exactly, I chose to estimate based on exactly the targets we have at the end of Q3 that we used to produce Q3 results.

Kun Tao - Roth Capital

Okay. That's very helpful, my last question on your new four parcels of lands. Can you provide some details of when the construction starts and when the presales starts in 2010?

Tom Gurnee

Let me let the Chairman do this one on the new parcels.

Yong Zhang

[Foreign Language]

Helen Zhang

Kun Tao, just let me add something, with regard to the project that Mr. Tom Gurnee just mentioned. For Chengdu, the GFA cost per square meter is RMB1,600 and for Kunshan, cost GFA per square meter is RMB2,200 and both of the projects are doing very well in terms of sales volumes and we think the price is competitive and even for next year and the year after. For Suzhou, the project is located in the center of the city, cost per GFA is RMB5,000. We don’t think it’s high.

Yong Zhang

[Foreign Language]

Helen Zhang

For the four new land parcels that we acquire in the past two months, we are actually preparing for year 2011 and most of the constructions will start after four or five months and the total contracts sales would be around RMB17.1 billion preparing for the next two couple of years.

Kun Tao - Roth Capital

Can you provide a little bit of details on the new parcel lands on the schedule of construction and pre-sale estimate on this?

Tom Gurnee

I'm sorry somebody just interrupted me so I'm sorry Kun Tao, repeat that question again?

Kun Tao - Roth Capital

That was actually previous question the same as can you provide some details on the schedule of your the new four parcel lands pre-sale and construction starts?

Tom Gurnee

Got it.

Yong Zhang

[Foreign Language]

Helen Zhang

So all the new land parcels, construction will start after four or five months, its about four or five months time which is about Q2 next year and pre-sales will be start sometime during the second half next year and most of the sales contribution will be made in 2011 and 2012.

Tom Gurnee

I should mention there is two projects we already own that we hadn't started that is the Longhai Road or alcohol project and the Chengdu Splendid 2 project, Chengdu Splendid 2 is now scheduled for first pre-sales in March that's quite a movement ahead now. Of course, for guidance I might equivocate on that little a little bit. But on the alcohol project that scheduled for May, presales activity. So there is six projects wholly-owned by Xinyuan that are in land bank, that would be alcohol project, Chengdu Splendid 2 and the four purchases we just made.

Operator

(Operator Instructions). Our next question comes from Miss. Liang Hsu from Brean Murray. Please go ahead.

Liang Hsu - Brean Murray

I think Kun Tao just ask all the questions that anyone can ever think of, but I am glad that I can still find a couple. The first one is that just when you are bidding for the land, do you have a lack of target return on your mind, when you do that? What would be the reason of all gross margin assumption, especially related to your recently acquire the land parcel in Zhengzhou, Suzhou, and Jinan?

Tom Gurnee

You’ll probably get two answers, one from me and one from the Chairman. I’ll start. The target is going in, by the way, I was very impressed with Xinyuan’s pre-auction preparation, very, very impressive, lots of details, lots of studies, lots of demographics, everything. So we usually get it right on the pretty much the estimates of cost and sales. Anyway, the minimum gross margin that we stipulate when we want to walk. That the straight prices which we’ll walk out of an auction is anything substantially less than 20% as far as the gross margin basis, and of course that’s with conservative ASPs with upsides. Of the four projects, they range from about 20 up to 27%, as our first pass look at it. I will be producing, of course we will refine those and we will set firm targets just when we’re doing pre-sales. So, that’s why I am equivocating little bit on 2010 guidance.

Liang Hsu - Brean Murray

Okay. The Chairman is going to talk about something.

Yong Zhang

Yes.

Liang Hsu - Brean Murray

Okay.

Yong Zhang

[Foreign language]

Helen Zhang

From the second half of this year, we are preparing to acquire new land. We are selective with regard to cities and the scale of the project. We’ll try to make the growth margin and revenue scale which will fit our business model and we believe that in the coming quarters if there is no significant change of the market environment all the new project will deliver good performance.

Yong Zhang

[Foreign language]

Helen Zhang

In Q2 and Q3, a lot of state owned real estate enterprises are rushing for land acquisition, which is a hot season for us. That’s why we try to avoid that season and we believe that the land that was acquired are at a competitive price.

Liang Hsu - Brean Murray

Okay, great. So you’re talking about these four projects are going to be above 20% gross margin?

Tom Gurnee

Yes, on average, yes.

Liang Hsu - Brean Murray

Okay excellent. So Q3 is seasonally strong quarter for you, right?

Tom Gurnee

Yes.

Liang Hsu - Brean Murray

So you are saying that it is, such great quarter. You think its majority due to the seasonality or you do see the strong recovery for the real estate market or you think its benefit from the governments favorable policy.

Tom Gurnee

Let me have the Chairman who is twenty times more experienced than I am answer that one and then I’ll handle a little at the end.

Yong Zhang

[Foreign language]

Helen Zhang

We believe that real estate market this year is really good in term of the sales volume and the ASP is already resumed to the year 2007 and will even outperform the year 2000.

Yong Zhang

[Foreign language]

Helen Zhang

Projects like Kunshan, Chengdu and Suzhou are large scale with revenue contribution of more than 50% and we believe the selling price is [as it is].

Yong Zhang

[Foreign language]

Helen Zhang

The three projects we just talked about and also the Longhai project, we believe for next year would be making larger revenue contribution.

Yong Zhang

[Foreign language]

Helen Zhang

Besides those four projects we mentioned, and our existing projects, most of our existing projects actually are nearly completed and we believe the sales performance would be good.

Yong Zhang

[Foreign language]

Helen Zhang

After the financial crisis last year, we believe the management team of Xinyuan is growing with regards to the acquisition ability.

Tom Gurnee

Now, to address your specific calendar problem or question, let me just put it this way. Generally, the Chairman told me, I remember this very carefully once, said that the first quarter is usually the weakest. So we had to have a ratio, it goes something like, 60-70, 90-80 or 60-70, 90-70 is the ratio, the normal calendarization that I was told here once. But, of course nothing is normal, Q1 was abnormal, we did much worse than that and Q3 may have been normal but maybe Q4 is stacking up to be a little abnormal because I think we might its possible we get to beat Q3 in Q4.

Liang Hsu - Brean Murray

Okay.

Tom Gurnee

So your, seasonality you are right, Q3 is the highest that's the general wisdom Q2 and Q4 similar Q1 lop.

Liang Hsu - Brean Murray

Okay. So you are saying that Q1 is the weakest and the Q4 is also weaker, but it’s kind of a wildcard right now you might speak it?

Tom Gurnee

People tell me this is my first winter in China in the real estate business and people tell me that December, it slows down a lot. October was good, November so far is good, we've gotten December yet, so I haven’t experienced it yet but we’re having our projections of soft December.

Liang Hsu - Brean Murray

Okay. So October generally is good and these are also reflected in your ASP and GFA sold for your three key projects right now?

Tom Gurnee

Yes. I'm comparing to July. July was our peak so far this year.

Liang Hsu - Brean Murray

Okay.

Tom Gurnee

GFA was a few percent high, it was higher just by a little by about 3% or 4%, about two or three. But then the contract sales were up 14%, 15% over July. So it’s a combination of GFA and pricing that’s driving the higher contract sales.

Liang Hsu - Brean Murray

Okay. Then this is like the average for three projects?

Tom Gurnee

Well, it’s the average of all the projects, there is like 10, some are almost virtually complete, but, yes.

Liang Hsu - Brean Murray

I think and my last question is actually for Tom. I see that in your F3 disclosure, you have one item called total development cost and that one -- I assume that’s the all in cost including the land cost as well, right.

Tom Gurnee

What’s the term total, what cost?

Liang Hsu - Brean Murray

Total development cost. When you disclose the project levels data, and there is one level is a total development cost, is that including?

Tom Gurnee

Liang, I am going to have to reply to you offline, I haven’t got my F3 memorized, I call it our total target project cost, may be we use a different term in the F3. I think total development cost would equal the land and the construction cost.

Liang Hsu - Brean Murray

So you’re based on that to calculate percentage of completion, right. In the use that to multiply, if you multiply that percentage completion by the contract sales, but somehow the recognized revenue is consistently lower than that month.

Tom Gurnee

This is the frustration of POC. Let me explain, so the big sales in Chengdu and Kunshan, there are lower percent competes, a dollar of sales in Kunshan net you about, let’s say $0.55 in revenue, where is the dollar of sales in Financial Square [Wang Jiang Garden] it’s almost compete at $0.99. So the mix in the last two quarters has tended towards the newer projects Kunshan, Chengdu, that then get a lower recognition of revenue, because they are less percent complete.

Liang Hsu - Brean Murray

Yes I understand that Tom, but I am saying is that, if you just take the percentage of completion time to the contract sales, intuitively it’s supposed to equal to the cumulative recognized revenue.

Tom Gurnee

Oh, I got it.

Liang Hsu - Brean Murray

But somehow, right, but somehow it’s always like a several percent lower.

Tom Gurnee

I got your answer, I got your answer. It’s business tax.

Liang Hsu - Brean Murray

Okay.

Tom Gurnee

What we do is, contract sales is really gross, and when we book revenue, we take contract sales times 94.5% because business tax is 5.5%.

Liang Hsu - Brean Murray

Okay.

Tom Gurnee

So, we take revenue, we take contract sales as 94.5%.

Liang Hsu - Brean Murray

Okay.

Tom Gurnee

[Add your] basis for margin calculation.

Liang Hsu - Brean Murray

But, it’s not like consistently 5.5% lower, sometimes it’s like a 10% lower. I mean, that number is supposed to be like a fixed ratio, right?

Tom Gurnee

Unless there is a change in the quarter of its estimate. If there is a change in estimate, not only you have a cumulative pick up for every previous penny of revenue you’ve had in the past.

Liang Hsu - Brean Murray

I see, okay. So, that 5.5%, assuming everything stays the same, that 5.5% is not going to get reverse anywhere?

Tom Gurnee

No, no.

Liang Hsu - Brean Murray

Is it means that your recognized revenue will always be lower

Tom Gurnee

Correct.

Operator

(Operator Instructions) Our next question comes from (inaudible) from Brean Murray. Please go ahead.

Unidentified Analyst

I have a couple of questions. The first one is on your effective tax rate. I see, the number is 27.5%, which compares with about 45% for the second quarter of '09. Is this the tax rate that we should anticipate going forward, and why is the tax rate lower in this quarter than in the previous quarter?

Tom Gurnee

Last quarter, we had an unusual item. I don't if you have seen our press release from the last quarter. But the last quarter there was an unusual item, a cumulative pickup of tax on revolving tax issue on the transition between 2007 and 2008 tax rates. The tax rate went down to 25.

And because of that we started booking tax at that rate for the entire project. But what the government determined is that withholding they did before the end of 2007 was taxable the higher rate and everything after that taxable the lower the rate. So, it's a -- you will find it in our second quarter press release, it had an impact of $1.3 million or maybe $1.5 million just a moment please. One moment please.

Unidentified Analyst

Okay.

Tom Gurnee

$2.1 million. So, we had a $2.1 million one-time shock in Q2 of a tax charge for previous year taxes on a difference of interpretation made by the tax authorities. That will not recur.

Unidentified Analyst

My second question is on the gross margins for two projects Henan Colorful Garden and also Alcohol project. The recently amended act, you actually disclosed that they anticipated projects for Henan Colorful Garden will be 4.2%, but because of your today’s press release, I believe that this number is going to change, going forward. Do you know what is the current gross margin that you will be booking for Hunan Colorful Garden and also for the [Alcohol] project, do you already have an expected gross margin for that project as well?

Tom Gurnee

Yes, and yes. 7.5%, up from 4%.

Unidentified Analyst

Okay.

Tom Gurnee

In the 40 plus for alcohol or Longhai Road project.

Unidentified Analyst

I see.

Tom Gurnee

That is kind of a target there and I wouldn’t swear to it, until we actually get to the pre-sales date and, I assess the current market environment and then perhaps reset the targets. But it’s a much higher margin because we bought it a long time ago. We had it because of title difficulties, et cetera. But we have got it now and it’s a much lower land cost.

Unidentified Analyst

My last project is on the JianXin, Jiantou Xinyuan current projects. First of all, what is the percentage of completion for those projects and also if you have this number available, the gross margin for those projects?

Tom Gurnee

Okay. Well, there is one project that hasn’t started.

Unidentified Analyst

Okay.

Tom Gurnee

It is called (inaudible), I can’t pronounce it. Number two and that’s 198.4 thousand square meters. The others are from 85% to 100% complete. Well, 85%, 95% and 96% complete for the three other active projects. Their margins on those active projects, there is [EP Shangshen 1] has the lowest margin at single digits. The others are 22% to 45%.

And on the new [EP Shangshen] EP Xinyuan project, it's in the high 30s, low 40s.

So that leaves me, perhaps I should have put it out on this call, firstly expected margin for Q4 without adjustments for change and its probably around 18, 19%.

Operator

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

Tom Gurnee

This is Tom. I'll sign off I want to thank you very much for signing in. I should note that Helen Zhang, who is our IR Manager, she doesn't work for ICR said at the beginning of the call. She actually works for Xinyuan. Anyway Helen is going to be at the Brean Murray conference on November 19th Helen, November 19th, so anybody who wants to contact Xinyuan, Helen will be at that conference on November 19th.

So thank you very much for calling in.

Operator

This concludes today's conference. Thank you for your participation.

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Source: Xinyuan Real Estate Co., Ltd. Q3 2009 Earnings Call Transcript
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