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Executives

Yong Zhang - Chairman

Kevin Wei - CFO

Helen Zhang - Financial Controller

Analysts

Albert Jones - Jones Capital Management

Pat O'Donohue - Weeden & Co

Xinyuan Real Estate Co., Ltd. (XIN) Q3 2013 Earnings Conference Call November 8, 2013 7:30 AM ET

Operator

Please standby. Good day, and welcome to the Xinyuan Real Estate Company Ltd. Third Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. And now at this time, I’d like to turn the call over to Ms. Helen Zhang. Please go ahead.

Helen Zhang

Hello everyone, and welcome to Xinyuan’s third quarter 2013 earnings conference call. The Company’s third 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 might 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 doesn’t 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 who will comment on current operations and provide some perspectives on the market environment. He will be followed by Mr. Kevin Wei, our Chief Financial Officer, who will provide additional color on our performance, review the Company’s third quarter 2013 financial results and discuss our outlook for the fourth 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 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 our third quarter revenue and contract sales exceeding our previous guidance. These results were driven by solid operational execution within our existing development projects, which include close to new projects launched during the quarter and was aided by robust home player [ph] sentiment in the cities in which we operate.

The past few months have been an eventful period for Xinyuan. We’ve created a strong considerable investment position and strength our future revenue pipeline by adding five new projects to our development portfolio in the last two months alone. In the fourth quarter we’ve three new projects scheduled to commence pre sales, namely at Beijing Xindo Park, Xuzhou Colorful City and our newly acquired project in Kushan.

During the third quarter, we reached an agreement with TPG, one of the world’s leading private investment firms, on which TPG has invested US$109 million in Xinyuan. We are pleased to partner with TPG and believe their proceeds and long-term support will allow us to expand our land portfolio and improve our internal infrastructure and our operational capabilities to drive future growth.

We expand our management team (indiscernible) through the addition of industry veterans Xinqi Wang as our CEO and Kevin Wei as our CFO. Mr. Wang and Mr. Wei are highly experienced executives (indiscernible) which is for full growth potential.

Overall, (indiscernible) has been a very protective year for Xinyuan’s development (indiscernible). The current environment our domestic (indiscernible) base industry remains stable and that we’re confident in Xinyuan’s long-term strategy and growth potential. Finally, we’re pleased to release our full year’s guidance outlook today and to have recently announced our third quarter quarterly cash dividend this year.

Now, I’ll turn the call over to Kevin Wei, our Chief Financial Officer.

Kevin Wei

Thank you, Mr. Chairman. Hello everyone. I’m Kevin Wei. I’ve just recently joined Xinyuan as the CFO in September and I would like to thank you for joining our call today.

This past third quarter was a transformative one for Xinyuan. First, we have successfully completed a strategic partnership with TPG, who have invested US$108.6 million in our Company. Investment was comprised of US$75.8 million or 5% convertible note and a US$32.8 million of common shares.

With investment proceeds and the long-term support from TPG, we’re positioned to further extend our land portfolios and continue to develop our internal infrastructure and operational capabilities to drive future growth. Secondly, we announced two new projects that generate over 35% of this quarter’s contract sales in just one month of operations in September. Now needless to say, customer demand at these projects in Zhengzhou XIN City and Suzhou XIN City exceeded expectations and helped us overcome diminishing inventory at our legacy projects.

The next quarter promises to be just exciting as new project launches are planned in Kunshan, Suzhou, with our flagship Xindo Park project in Beijing as well. In the mid execution of these five projects launches in just the last four months of 2013, the Company has been acquiring less inventory to secure of future growth. And I will talk a little bit more of that later.

We were sufficiently encouraged by our sales activities and project execution that we are once again raising contract sales revenue and net income guidance for 2013. Now let me walk you through our third quarter audit numbers, which are all in U.S dollar unless otherwise noted.

Contract sales in the third quarter reached US$243.7million, versus US$196 million recorded in the second quarter for a sequential increase of 24%. We were also 16% ahead of the previous guidance. New project contract sales at Zhengzhou XIN City and the Suzhou XIN City reached 31,600 square meters and a 29,300 square meters respectively, representing 40% of the total GFA sold by Xinyuan in the third quarter. Contract sales for these two new projects were virtually flat the level we expect in our previous guidance.

Jinan Xinyuan Splendid remain our best selling project with 48,500 square meters sold in Q3 with higher ASP. Overall, ASP continue to firm up in a still robust market, but also due to several projects nearing completion where we historically began to sell higher cost commercial space.

Our reported weighted average ASPs grow 20% from RMB8,312 per square meter in Q2 to RMB9,976 per square meter in Q3. This was partially due to the strong market and a greater mix of commercial versus residential sales in our legacy projects and it was also due to the fact that Q2 include a lower ASP contractual off-market sale to the (indiscernible) 46,800 square meter in Jinan Xinyuan Splendid project.

A major improvement from the second quarter was our inventory of saleable GFA from active projects. As you may see from our earnings release, our saleable GFA or our active projects significantly increased to 440,200 square meters at the end of September from a 278,000 square meter at the end of Q2. While adding the planned project saleable GFAs, a total saleable GFA pipeline has increased to approximately 1.58 million square meters. Now I will discuss about the land acquisition at a later stage.

Now for GAAP revenue, under the U.S. GAAP percentage of completion method totaled US$240.7 million, up 21.3% sequentially and 12% higher than the previous guidance. Now this is mainly driven by the contract sales improvement of 16%, although that has mentioned earlier. The top three old projects contributed under US$33.2 million or 55% of Q3 GAAP revenue. These three projects are Jinan Xinyuan Splendid, Zhengzhou Century East B and Zhengzhou Royal Palace. Now two new relaunched project in Q3 as I mentioned above, achieved US$47.9 million GAAP revenue or 20% of total Q2 revenue.

The third quarter gross profit totaled US$78.5 million, or 32.6% of revenue as compared to the last quarter’s gross profit of US$69.9 million, or 35.2% of revenue. Project completion settlements have significantly favorable impact on our gross margin in the second quarter. (Indiscernible) amounts were much less significant in the third quarter. Total estimates with total project costs was stable in Q3, while project revenue estimates reached little bit higher ASP improvement realized in the third quarter.

As far as operating expense costs, selling and distribution expenses grow significantly in the third quarter from US$2.9 million in Q2 to US$5.6 million in Q3 or from 1.4% of revenue to 2.3% of revenue. Well this is due to more advertising and promotional spendings on Zhengzhou XIN City, and Suzhou XIN City projects which were launched in September.

General, administrative expenses rose from $11.9 million in the second quarter to $17.4 million in Q3 or from a 6% of revenue to 7.2% of revenue. The one cause of this rise in G&A was 44% increase in the management headcount over the Q2 or from 159 headcounts to 229. These headcount increased to handle our increase to project launch activities as well as to execute our land acquisition plans.

Another factor for this increase was the accrual and a partial payout of additional incentive and the retention bonuses for key managers in preparation of accelerated growth in the future. The net income in the third quarter of 2013 was US$28.7 million compared to US$39.4 million in the second quarter. The sequential shortfall was due to only -- was due not only to an investment SG&A spending, but also due to the fact that the second quarter of 2013 results benefited from a one-off (indiscernible) income tax benefit realized.

That being said, with this be the US$27.5 million midpoint guidance are US$1.2 million of the net income for Q3. Third quarter fully diluted earnings per ADS was US$0.39 compared to US$0.64 in the second quarter and US$0.44 in a year-ago second quarter.

On the balance sheet item, as of September 30, 2013 we had US$796 million in cash and cash equivalents, including restricted cash as compared to US$874.7 million as of June 30, 2013 due to substantial land purchases made in the quarter.

Total debt outstanding was US$515.6 million, an increase of US$4.9 million compared to US$510.7 million at the end of the second quarter of 2013. The balance of the Company’s real estate property under development at the end of the third quarter was US$534.7 million compared to US$605.7 million at the end of the second quarter. The book value was US$11.55 per ADS, as of September 30, 2013. In short, we’re continuing to enjoy healthy cash positions while adding substantially to our land resources.

Now regarding the land acquisition as noted last quarter our operational team has been very focused on land acquisitions, and the third quarter starts to show the results of new efforts. In the third quarter, we purchased three parcels of land near Zhengzhou City and one parcel in Suzhou, the total consideration of approximately US$501 million. As of September 30, 2013 we have paid approximately US$154 million of this total with further payments of US$347 million due in Q4 and of future years.

The three parcels near Zhengzhou was successfully purchased under our negotiated acquisition model which was initiated over a year ago whereby we entered into the agreement with local land dealers to make refundable deposits that facilitate high preparation to bring projects to auction. There’s no assurance that we’ll always be a successful bidder in any negotiated acquisitions, if we were not a successful bidder we’d receive back our deposits.

In October, 2013 we also completed an acquisition of entity only a parcel of land in Kunshan for a total consideration of US$137 million. Total GFA for this project is 284,000 square meter of which 24,000 square meter is currently under [ph] restoration for which we can expect to commence presale in the first quarter of 2013. Now this is also another new alternative way of five new development projects other than some under land auctions. Going forward senior management team remains focused on making additional land acquisition through new different channels.

Now a quick update on our U.S. operation. Our Williamsburg project in Brooklyn, New York remains of schedule as the groundbreaking remains projected before they end this year. We will remain active in seeking future similar attractive ES development opportunities. Regarding our guidance, for the fourth quarter of 2013 the company expects contract sales to reach between US$210 million to US$220 million. We’ll continue to be at exciting transition period for Xinyuan as we plan to adopt three new projects in Kunshan, Suzhou, and Beijing with a total GFA of 519,200 square meter pipeline.

GAAP revenue under the percent of completion matter for the fourth quarter is estimated to be US$255 million to US$265 million. Fourth quarter net income is estimated to be in a range of US$20 million to US$30 million. Please note that these estimates are based under managements latest forecast and are subject to change. Depending on the successful launch in Q4 of Beijing Xindo Park project and the contract sales contributions from the two other new launches as well as the existing active projects.

As for total year 2013, based on the latest forecast of Q4 by raising our full-year guidance in light of the account of continued ASP firmness and higher confidence in ability to launch three additional new projects on time in Q4. Contract sales are expected to be US$930 million to US$940 million up from previous guidance under US$900 million. GAAP revenue is estimated to reach between US$850 million and US$870 million up from the previous guidance of US$820 million. Net income is expected to exceed US$150 million up from US$110 million guided previously.

Now, this concludes our prepared remarks. Operator, we’re now ready for questions. Please go ahead with the first quarter.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll go with our first question Albert Jones with Jones Capital Management. Please go ahead.

Albert Jones - Jones Capital Management

Hello, gentlemen. Can you give me a quick update on the Reno and Irvine properties? Was there anything sold in the quarter?

Kevin Wei

The Reno and Irvine project we sold at a relatively small amount, but it's substantially completed at the end of this quarter.

Albert Jones - Jones Capital Management

Can we expect any meaningful sales in the current quarter?

Kevin Wei

The fourth quarter you mean? Not significantly.

Albert Jones - Jones Capital Management

This fourth quarter, you can’t anticipate anything coming from there?

Kevin Wei

No. Not a significant amount.

Albert Jones - Jones Capital Management

Okay. Is there any settlement conferences this quarter or the following next quarter?

Kevin Wei

Can you repeat that question again, settlement what?

Albert Jones - Jones Capital Management

Settlement conferences on cost estimates for projects near completion. I noticed as projects get near completion you’ll have some settlement conferences to where you might garner some funds coming in like you had in the last few quarters?

Kevin Wei

Sure, I mean, I think the previous quarters I think are quite significant, and this quarter we had some like close to around US$3 million, US$4 million, but in the future I think Reno amount is not significant amount as expected.

Albert Jones - Jones Capital Management

Okay. Can you talk about the price range for Beijing Xindo Park and the margins on that that might be available being at Beijing is a higher price point?

Kevin Wei

Yeah, well it's going to be probably one of the highest ASPs among our active projects. It could be in a range that’s exceeding RMB20,000 per square meter. So having said that, we haven't launched that project yet. The project in Beijing, as you’re aware, the Tier 1 city is actually very, very strong. So, and also there is certain amount of the rules and regulation that’s imposed by Beijing Government for example that, as soon as we obtain the sales permit I think government sometimes what they want to impose a ceiling price on that as well. So, we're actually very careful of the evaluating strategy of getting the sales prices. So the land cost already were disclosed before too, I mean the construction cost together is higher probably than the Tier 2, Tier 3 cities, but we remain very confident and hopeful that the gross margins for this project is going to be strong.

Albert Jones - Jones Capital Management

I noticed a few months back there was a mention of possibly going into Shandong area with a managed option situation for some land acquisition there, has anything moved forward on that?

Kevin Wei

You know we are considering lot of different type of opportunities in Shandong as well in Zhengzhou areas. There’s one large project and we usually fight a bit, but we decided to switch it through some alternative options and then we have as we talked about earlier, we already successfully obtained three land from the negotiated acquisition model as well, so we will continue to utilize that. But so far we haven't announced any major acquisitions in one of those provinces, but we’re very active in several key markets as we speak.

Albert Jones - Jones Capital Management

Can you also tell me whether you guys are actively looking outside of China for development projects?

Kevin Wei

Yes, we’ve always been presented with opportunities given the fact that we already invested on several project in U.S. and it was a major one in Williamsburg. We have been constantly seeking contractive opportunities including West Coast, East Coast in U.S. as well. On top of that, I think we’re still open for potentially other part of the world that where be mostly attracted to potential Chinese buyers for investment or integration kind of the intention.

Albert Jones - Jones Capital Management

One final question on the New York project, your financing cost over there, do you anticipate those to be less expensive than what you get in China?

Kevin Wei

Well, I guess, yeah. I mean the construction loans, these types of things that in U.S. dollar we can get domestically in U.S. it should be comparable to all the other most of the companies in U.S. so between 4% or 5% I think should be significantly lower.

Albert Jones - Jones Capital Management

Okay, thank you. Good quarter guys.

Kevin Wei

Well, thank you for your question.

Albert Jones - Jones Capital Management

You are welcome.

Operator

(Operator Instructions) And we’ll hear next from Pat O'Donohue with Weeden & Co.

Pat O'Donohue - Weeden & Co

Sorry if this is already addressed. I was wondering if you could comment on the SG&A growing from 9.6% from 6.6% two years ago, 45% increase. I was wondering if you could comment on that.

Kevin Wei

Yes. As we mentioned earlier, I mean we're continuing to expand. So we have expanded our headcounts in various functions to continue to seek more land acquisition opportunities as well as the function of the new projects that as we talk about. In addition obviously with the recruitment, our new management team we have accrued a certain amount of the incentive compensations, retention compensations in the third quarter. We can look at this as it could be sort of applicable for the early part of this year as well and move that part up for the future quarters as well. So, we do expect the G&A expenses will continue to be at a level that will sustain our investment in the (indiscernible) capital, if you will.

Pat O'Donohue - Weeden & Co

Do you expect this 10%’ish trend to continue higher or maybe go back down or?

Kevin Wei

Well I think that ratio part is always a little bit difficult to inquest on the fact that we’ve given the guidance of much higher revenue for the fourth quarter. I think even with some kind of a slight increase lets say if we do have an increase in the percentage should we remain a relatively stable or potentially slightly over, but that’s why if you notice that we did give a fairly larger range I guess in terms of net income for the first quarter, on the US$20 million to US$30 million.

Pat O'Donohue - Weeden & Co

Okay. Thank you.

Kevin Wei

Thank you for your question.

Operator

(Operator Instructions) And we’ll take a question from a Private Investor, (indiscernible).

Unidentified Analyst

Hi, guys. Just kind of related to the last question but I know you’ve been putting a lot of things in place the last couple of quarters which has increased in expenses. When do you expect profits to increase, it’s been a little dry for the last couple of quarters?

Kevin Wei

Could you repeat the last sentence, will you expect our profit to what, sorry?

Unidentified Analyst

Profit and profit guidance seriously a little flat last couple of quarters. I was wondering, when do you expect that to pick up again.

Kevin Wei

We unfortunately cannot give any future guidance other than the first quarter and entire year. But I think the upside obviously is the fact that we invest so much in the land acquisition as you noticed that our salable GFA was at a fairly low level in the end of the second quarter, and we had brought it up to 440,000 square meter, and then the fact we already have acquired more land to have a total 1.58 million square meters GFA, I think it will indicate that our future revenue first of all the contract sales could be significantly higher than what we have achieved this year. I mean in short, we’re going to have in part this year as a result we’ll get some additional loans, that the interest expense could be higher, but we remain very hopeful that these investment will payout in the little bit longer term lets say over 12 months period, 12 to 18 months period lets say.

Unidentified Analyst

Okay, great. So, and I expect next quarter we’ll get more guidance as to what you expect for 2014?

Kevin Wei

Yes, I mean we’ll evaluate the basis for based on our new budget and the current market conditions the project status while we announced our fourth quarter to give a, we always gave a current quarter, next quarter guidance as well as maybe the annual guidance as well.

Unidentified Analyst

Okay, great. Thanks for the info and I’m glad you’re doing some exciting things.

Kevin Wei

(Indiscernible) thank you for your question.

Operator

(Operator Instructions) And with no additional questions, I would like to turn the call back over to management for any additional or closing remarks.

Kevin Wei

Well, thanks everybody for joining our call today. We’re looking forward to speaking with you in the next quarter. Thanks again.

Operator

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation.

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