China Housing & Land Development's (CHLN) CEO Xiaohong Feng on Q1 2014 Results - Earnings Call Transcript

May.15.14 | About: China Housing (CHLN)

China Housing & Land Development, Inc. (NASDAQ:CHLN)

Q1 2014 Earnings Conference Call

May 15, 2014 8:30 am ET

Executives

Bill Zima - ICR

Pingji Lu - Chairman

Xiaohong Feng - CEO

Jing Lu - COO

Cangsang Huang - CFO

Analysts

Angel Lu - Pope Asset Management

Operator

Good day and welcome to the China Housing & Land Development Incorporated First Quarter 2014 Earnings Conference Call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I’d like to turn the call over to Mr. Bill Zima of ICR. Please go ahead, sir.

Bill Zima

Thank you, everyone, for joining the China Housing & Land Development first quarter earnings conference call. The company's results were released earlier today and are available on the company's Investor Relations website at www.chldinc.com as well as on the respective wire services.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties and as such our results may materially differ from the views expressed today.

Further information regarding those and other risks and uncertainties is included in our Registration Statement and in Form 10-K and other documents filed with the SEC. China Housing does not assume any obligation to update any forward-looking statements except as required under applicable law.

On our call today is Mr. Pingji Lu, Chairman of the Board; Mr. Xiaohong Feng, Chief Executive Officer; Ms. Jing Lu, Chief Operating Officer; and Mr. Cangsang Huang, Chief Financial Officer.

Management will provide some remarks about the general business climate, a review of the company’s financial results, supply some prospectus on the company’s outlook going forward.

At this time, I’d like to turn the call over to Mr. Feng. Please go ahead, sir.

Xiaohong Feng

[Foreign Language]

Hello, everyone, and thank you for joining us for the call today.

While the market environment was challenging in the first quarter, our revenue performance in the first quarter exceeded the midpoint of our first quarter revenue guidance by 38%. Four main projects contributed to the majority of our first quarter revenue along with $6.2 million in property management and construction revenue. We launched one new project in the first quarter, Puhua Phase Four.

Well continuous outlook of broad array of units to attract as many sales as possible as overall market conditions remain uncertain. Sales of lower end units at our Ankang and Puhua Phase Four projects generally remain stable, while sales at our higher end projects, such as Puhua Phase Two are not as strong as they could be as potential buyers in this category wait for greater clarity related to new government real estate policy before committing to new purchases. We will remain hopeful the market this year will improve throughout the year, particularly in the second half as we benefit from additional store related to Hanyuan Project 4 and Golden Bay Project. We believe in the long-term strength of the housing market in and around the Xi'an region and were pleased to continue our share repurchase activity during the first quarter.

According to data provided by eHow China's Real Estate Research Institute, total GFA sales in Xi'an decreased to 2.8 million square meters compared to 2.8 million square meters in the fourth quarter of 2013, and 2.7 million square meters in the first quarter of 2013. Average residential sales prices in Xi'an decreased to RMB 6,495 per square meter compared to RMB 7,772 in the fourth quarter of 2013 and RMB 6,930 in the first quarter of 2013.

For CHLN we experienced average residential sales prices for our projects of RMB 5,919 per square meter compared to RMB 6,600 in fourth quarter of 2013, and RMB 5,695 in first quarter of 2013.

The majority of our revenue was generated by our Park Plaza, Puhua Phase Two and Three and Ankang projects during the fourth quarter. We also benefited from $6.2 million in revenue related for company management and construction revenue with additional revenue coming from a completed project that includes Puhua Phase One and JunJing III.

Looking at our potential second quarter performance and expectations for the full year, we expect slower revenue in the first half of the year with higher revenue expected in the second half of the year, due as we benefit from presales activity from new project most notably Puhua Phase Four and Golden Bay.

Now, I'd like to turn the call to our COO Jing Lu to more thoroughly review our operational performance in the first quarter.

Jing Lu

Thank you, Mr. Xiaohong. Our first quarter 2014 GFA sales was 20,460 square meters compared to the 28,583 square meters in the same quarter of last year.

Well our average residential sales price in the first quarter was RMB 5,919 compared to RMB 6,600 in the fourth quarter of 2013, and RMB 5,695 in the first quarter of 2013.

Look at our individual projects, Ankang Phase One generated the highest level of recognized revenue in the fourth quarter. Sequential quarter was 5.3 million in revenue. The GFA sold and the contract sales to Ankang was the highest among our main projects, as we sold 7,816 square meters during the quarter and reports contract sales up to 5.2 million. The first quarter average selling price at the project was RMB 4,025 this rather increased from the average selling price in the previous quarters. This project was about 55,000 square meters in unsold GFAs remaining.

The Park Plaza Phase One was our second largest revenue contributor, responsible for the 5.2 million in recognized revenue. This project recorded the GFA sales of 2,811 square meters and the contract sales up 3.9 million. The fourth quarter average selling price was RMB 8,549 compared to RMB 8,727 in the last quarter. The project over 54,000 unsold GFAs remaining.

The Puhua Phase is responsible for about $2.7 million in recognized revenue. The project recorded GFA sales up to 1,788 square meters and the contract sales is about 2 million. The average selling price was RMB 6,700 compared to RMB 6,754 in the last quarter. The project was about 61,000 of unsold GFAs remaining.

The last of our four main revenues of generated projects, the Puhua Phase Two Eastern region was about -- was responsible for about 1.9 million in recognized revenue. The project recorded GFA sales up to 1,515 square meters and the contract sales up to 1.9 million. The average selling price was RMB 7,751 from RMB 7,099 in the last quarter. This project has over 94,000 unsold GFAs remaining.

During the fourth quarter, we launched one of our new project the Puhua Phase Four. This project brings about compressing of the U3 level unit, which will be continuously sharing the (inaudible) demanding for the (inaudible).

We have the one additional project and the planning schedule for the visitors, the Golden Bay. The project was 552,000 under what is the 252,540 square meters of GFA is scheduled to commence the presales activity in the fourth quarter.

Facing the uncertainty associated with the housing market environment we continue to move the tax regarding the timing of our roll out of handing new projects. Also I am pretty sure that we offered the appreciations of the housing unit to the market and the other two maximize the demanding.

At this point I would like to turn this call over to our CFO, Mr. Cangsang Huang, to review our first quarter financial supplements.

Cangsang Huang

Thank you, Jing. Let’s review our financial results and outlook in more detail. Total revenue in the first quarter of 2014 was $22 million compared to our original revenue guidance forecast of $50 million to $70 million this compares to $56.1 million in revenue in the fourth quarter of 2013 and $51.4 million in the first quarter of last year. Other revenue in the first quarter of 2014 was $6.2 million primarily comprised of property management and construction revenue. This compares to other revenue of $8.9 million in the first quarter of 2013 and $11.1 million in the first quarter of last year.

In the first quarter of 2014 the majority of the company’s real estate revenue came from its Ankang, Park Plaza, and Puhua Phase Two and Three projects.

First quarter 2014 contract sales totaled $19.8 million compared with $31 million in the fourth quarter of 2013, and $82.4 million in the first quarter of last year.

Total GFA sales were 20,415 square meters during the first quarter of this year compared with 28,583 square meters in the fourth quarter of 2013, and 89,691 square meters in the first quarter of 2013.

The company’s ASP in the first quarter of this year was RMB 5,919 compared with RMB 6,600 in the fourth quarter of last year, and RMB 5,695 in the first quarter of 2013.

Gross profit for the three-months ended March 31, 2014, was $5.4 million representing a decrease of 57.7% from $12.6 million in the fourth quarter of last year, and 39.4% decrease from $8.8 million in the first quarter of 2013. Gross profit margins for the three-months ended March 31, 2014, increased to 24.1% compared to 22.4% in the fourth quarter of last year, and 17.1% of first quarter of last year. The increase includes profit margin was mainly due to an adjustment on the total estimated cost of Park Plaza, Puhua Phase Two and Three projects of which the accumulated impact was recorded in the first quarter and fourth quarter of last year it caused the lower gross margin of this (inaudible).

The company did not make any revision on the total estimated cost during the first quarter of 2014. Thus there was no impact on the gross profit margin. Additionally, the company initiated group purchases, sales on its Puhua Phase Three project and discount down in price during the first quarter of last year which also reduced the gross profit margin during that period. The 24.1% gross profit margin during the first quarter of this year was within the company's normal historical range.

SG&A expenses was $4 million in the first quarter of 2014 compared with $5.1 million in the fourth quarter of last year and $3.2 million in the first quarter of last year. SG&A expenses as a percentage of total revenue was 18.1% compared with 9.1% in the first quarter of 2014 and 6.1% in the first quarter of last year. The increase from the first quarter of 2013 in SG&A expenses mainly due to the increase of salary and advertising expenses.

The operating loss in the first quarter of 2014 was U.S. $205,000 compared to operating income in the first quarter of 2013 and $4 million in the fourth quarter of 2013. The year-over-year decrease in operating income was mainly due to reduced sales revenue.

Net loss attributable to China Housing in the first quarter of 2014 was $774,000 or $0.02 loss per diluted share. This performance compares with net income of $3.9 million or $0.11 per diluted share in the fourth quarter of 2013 and a net income of $2.9 million or $0.08 per diluted share in the first quarter of 2013.

As of March 31, 2014, China Housing reported $14.9 million in unrestricted cash compared to $21.3 million as of December 31, 2013.

Total debt outstanding as of March 31, 2014 was $317.6 million compared with $300.7 million on December 31, 2013. Net debt outstanding as of March 31, 2014 was $191 million compared with $161.8 million on December 31, 2013. The company's net debt as a percentage of total capital was 59.5% on March 31, 2014 and 54.1% on December 31, 2013.

As we look ahead to the second quarter of 2014, we anticipate total cost of sales to reach $28 million to $32 million compared with $59 million in the same period of 2013. The company is reporting revenue which are subject to percentage of completion alterations.

This concludes our prepared remarks for today. Operator, we are ready to take questions please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

We'll go ahead and take our first question Angel Lu with Pope Asset Management.

Angel Lu - Pope Asset Management

Good morning. My first question is for Cangsang. I wondered if you can breakdown the gross margin on the Phase Two project.

Cangsang Huang

Yes, sure. We have four main projects ongoing in this quarter. Yes, but we do have some existing completed projects in the market at the same time, right. So for Xinxing 1, we have one unit sold out this quarter. The margin is 42%; it's a commercial one, all right. For Park Plaza, the margin is 22%. For Puhua Phase One, its 42%; it's a high-end unit, but it is only one anyway. And for Puhua Phase Two East Side, the margin is 37%. For Puhua Phase Three, the margin is 30%. For Ankang projects, the gross margin is 23%.

Angel Lu - Pope Asset Management

Okay. So can you explain why the margin in this quarter is much better comparing to your reported full year result last year? Or even talking about there is some adjustment; can you just elaborate a little bit more there?

Cangsang Huang

Yes. Sure. And this first quarter our gross margin is around 24% all right. But actually from the residential side its only roughly 20%. And yes, what I mean at the same time we have around 35% gross margin for other revenue so they kind of bring us our total gross margin to 24%. And the 20% is kind of in the range because of in the first quarter majority of our revenue came from Ankang projects, which has kind of lower gross margin 23%. And the other big contributor will be Park Plaza and its margin is again a kind of low at 22%, right. So that's why our residential side extra margin is kind of around 20%.

Angel Lu - Pope Asset Management

Okay. Before I let you go I would just want to ask you one more question before I go to Chairman Lu and Ms. Lu. Just talking about the share repurchase, can you disclose how much shares have been repurchased as of today?

Cangsang Huang

Well, in total we -- since we first announced the program, we totally we repurchased roughly 1.3 million shares in the past two years. And we actually retired 956,000 shares in the first quarter, right. And the others we are planning to retire in the second quarter because we need to finish all the process still. But anyway we are planning to retire those shares. And we are -- we have the share buyback program ongoing right now. And as you know, first quarter there is no too much room for us to enter into the market because of all those restrictions. And in the second quarter, we are going to -- again we are going to start our share buyback program.

Angel Lu - Pope Asset Management

Okay. Thank you, Cangsang. Now I'm going to ask some general question to Mr. Lu and Mr. Feng.

Jing Lu

[Foreign Language]

Angel Lu - Pope Asset Management

So my question -- second question is regarding the general industry, it seems its entering to a challenging stage. I just wonder what the company expects from another market and especially their expectation under individual project and gross margin.

Xiaohong Feng

[Foreign Language]

Cangsang Huang

Okay. And yes, the market -- the overall market conditions as we all know from the newspaper and all those kind of headline news that recently the market in China across the country is actually not a good, all right. And in Xi’an I have set a numbers can share with you. For the first quarter, the residential side, the transition volume and the ASP is about stable I would say, but of course the ASP now roughly 5% or 6% in the first quarter.

But when we came into the April, all right the data is kind of turning to -- ASP again show a lot, it’s compared to last year decreased roughly April 3% to 6,400 per square meters on average and transaction volume down roughly 3.6%. So the market is kind of slowing down when we go into April.

And honestly, I'd like to mention is the demand and supply change, all right. Because when we look at this number for the last year, the first quarter of last year, the supply to demand ratio is roughly 0.94%, in other words, the demand is greater than supply, all right. But this ratio have been changed to 1.3% during the first quarter and coming into April. So right now generally speaking the supply is less than demand. Okay so that's why the ASP kind of decreased a little bit during the quarter and in April.

And so I think generally speaking the market is not very good and in the low-end and middle market customers kind of waiting for the greater clarity of policy changes, if you will, and on the other hand the competition is coming fierce during that (inaudible) because the buyers are typically sensitive to the pricing level change.

So as we can see during the first quarter some developers aggressively entering to the market using the pricing discount strategy to attract more sales volume and so we would say the low-end to middle end market at least the competition is getting tough in the foreseeable future. For the high-end that’s I think there is another factors kicking in because as we know, China anticorruption policies in the last year so a lot of potential buyers just kind of being squeezed out from the market. So generally speaking the high-end is getting tough too but has different scenario.

So generally speaking within this year the margin might not be very good at least when we can see from the past quarter and April market performance unless there is dramatic change from the policy side so that's how we feel on the market.

Angel Lu - Pope Asset Management

Do you have a guidance for the margin for the rest of the year?

Cangsang Huang

Yes, the guidance for the low end again we, our major project is Puhua Phase Four, which we launched in the first quarter and less for entry level and the margin is not going to be very high around 20% and the Ankang project again is right now at 23%. So I would say our gross margin on the residential side should be in the range about I would say 18% to 22%.

Angel Lu - Pope Asset Management

Okay. And will this range allow the company to be profitable?

Cangsang Huang

Yes, well I think this all schedule a lot of factors right and especially when the market is bad I think cash flow is our priority for sure. So in order to do that we might have to cutback our pricing level in order to generate sales, if we do that that’s going to hit our gross margin of course and because of we are using POC method there is going to be a cumulative impact on our gross margin at a corner we realize that. So we will be cancelling the market and if we have to do the price cut and yes I think that’s going to hit our gross margin going forward.

Angel Lu - Pope Asset Management

Okay. And Ankang has the same problem or it’s less as like a rural area have less of the problem?

Cangsang Huang

I think its okay because when we started that project the target gross margin is actually around 20% to 25%. And so that is not a high profit project at the very beginning and it is targeting entry level again. And so I think that project the sales should be stable but from the total revenue point of view there is actually a kind of smaller projects generate to the company.

Angel Lu - Pope Asset Management

Okay. And tell me about the cash flow I have noticed the cash position like actually getting more comparing to in a rough year and does the company see a lot of pressure from like lending capability, the banks are planning up the credits or how the company have to collect more cash.

Cangsang Huang

The market is -- yes, I think that's right well that’s why we think the cash position always being our priority in the coming futures right. And there is a lot -- well the economy is bad there is a lot of pressures coming from all kind of -- from the suppliers from the markets and even from the governments. So at the meantime the financing for real estate industry especially is actually not very good. And so to get a financing a reasonable cost is getting harder first though the commercial bank is taking longer time to release the mortgage for customers and secondly for construction loan we are using for our construction project is getting harder and the cost is kind of higher than in the past.

And of course we are talking about the private equity side; the market cost level is increasing especially in this year. So it is getting tougher for us to get new financing at reasonable cost. So I think we have to focus on our operation cash flow and we said that I think probably that we will monitor the market closely and that to see the market trend and is necessary for us to do some price cuts in order to generate sales, then I think we might have to do that.

Angel Lu - Pope Asset Management

Okay. So catching in such a high cash position will the company slowdown the share repurchases is that kind of to the plan?

Cangsang Huang

Well, yes share repurchase, yes we would like to continue our share repurchase program but of course it depends on our cash position and the trading window restrictions. So yes, that's a balance. So we will see how to use our cash to the very need, right.

Angel Lu - Pope Asset Management

Okay. I’m sure you have some like a loan that’s going to be material in the second quarter like the Shanghai see any fund, the one like close to $21.5 million. Will the company have problem to retain those loans?

Cangsang Huang

Yes, from day one I think we are in negotiation with them. So I don't think there is going to be a huge problem for us right now.

Operator

(Operator Instructions).

At this time there are no further questions in the queue. I will turn the call back over to management for closing remarks.

Cangsang Huang

Thank you everyone for listening to our first quarter 2014 conference call. We are looking forward to updating you in the next quarter. Thank you.

Operator

And that does conclude today's conference call. Thank you for your participation.

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