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I wrote an article recently arguing that Xinyuan Real Estate (XIN) is really cheap and I expected that the third quarter would be a good quarter.

Last Wednesday Xinyuan reported the third quarter results, and the stock tumbled for four trading sessions afterwards from $3.10 to $2.57, a 17% drop. So were the results bad?

According to the headline of an AP news piece ("Xinyuan 3Q net income fall by 33 percent"), it certainly was. The news delivers a poor image of Xinyuan -- share tumbled; net income fell short; quarterly revenue dropped year over year; and the government policy was uncertain.

The news told the truth, just not the whole truth. In my view, such news and the subsequent price drop created the best chance for investors to accumulate the stock and gain from its coming appreciation.

What the news failed to mention are:

  1. Xinyuan beat on the Q3 revenue. It made $107m revenue, $7m more than the analyst consensus
  2. Xinyuan guided Q4 revenue $125-$130m and 17-21 cents EPADS, above the analyst consensus of $124m and 17 cents.
  3. Xinyuan's miss on earning was due to a one-time retroactive tax item of $6.4m caused by a new local tax interpretation.
  4. Xinyuan was making money and its tangible book value now increased to $6.35 per ADS.

So Xinyuan did have a good quarter, even with headwinds from the government regulations. The drop in the past four days created a great entry point for value hunters.

The following table (click to enlarge) shows that Xinyuan's peers listed in China market are four times more expensive by P/E, P/B and P/S but their operating metrics are comparable.

click to enlarge images

Tom Gurnee, the CFO, finished the last conference call with these goodbye words: "We look forward to having a great quarter in the fourth quarter and reporting stellar results to you in about three months. " I believe that Tom meant what he said here.

Buying Xinyuan at this price has a very good risk/reward ratio even with the uncertainty in the China real estate market. With the book value at $6.35 per ADS, $2.57 surely look like a steal.

Disclosure: Long XIN

Source: Xinyuan Real Estate: A Buy After 'Bad' Earnings