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Executives

Helen Zhang – Financial Controller

Yong Zhang – Chairman and CEO

Tom Gurnee – CFO

Analysts

Kun Tao – Roth Capital Partners

Albert Jones – Jones Capital Management

Xinyuan Real Estate Co. Ltd. (XIN) Q4 2011 Earnings Call February 23, 2012 8:00 AM ET

Operator

Good day everyone. Welcome to the Xinyuan Real Estate Company Limited Fourth Quarter 2011 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Helen Zhang, Financial Controller for opening remarks and introductions. Please go ahead.

Helen Zhang

Hello everyone and welcome to Xinyuan’s fourth quarter and full year 2011 earnings conference call. The company’s first quarter earnings result were released earlier today and are available on a company’s IR website as well as on Newswire services.

Before we continue, please note that a 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 result will be materially different from the views expressed today.

Further information regarding this 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 outlook for the first quarter of 2012.

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 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 and thank you for joining us today. We are pleased to achieve our revenue and the net income guidance for the fourth quarter. Well, demand for our project was affected by home based restrictions. Our development projected total (inaudible) have been better protected from much weaker. Housing prices inter one cities. There were 11 active developments protecting the fourth quarter with a total sales of about 112,000 square meters. We also made two new land purchases in the fourth quarter. The two (inaudible) allotting to gain greater excise (inaudible) where our past projects in these cities have general is then returns.

For the four year 2011 our revenue increased by 53% to US $688 million and net profit. At cities US dollar were 100 million which is double from last year. This strong performance has allowed us to purchase land, reduce our debt, establish a stock buyback program and initiate invented program. Well we expect contact the sales to remain in 2012. There is no easing of buyer. We expect the revenue and the net income grew for senior this year. We have formed the balance sheet and the capital result is for the development of our projects. We continue to see land additions and focus on amazing shareholder returns.

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

Tom Gurnee

Thank you Chairman. Let me start this call by saying how pleased we are that we were able to exceed the $100 million net profit milestone for the year 2011. This resulted in earnings per ADS more than doubling from $0.66 per ADS in 2010 to $1.36 per ADS in 2011. We believe that growing revenue by 53% and doubling our profits while adding a 182 million in cash in a period of government policy overhang was a very major accomplishment. My thanks go out to all of our employees and contractors for fine performance in 2011.

Now that we have congratulated ourselves, let’s examine the results for the fourth quarter 2011 and outlook for 2012. In the fourth quarter of 2011 our quarterly financial performance was strong once again. With revenue and net income achieving the high end of previous guidance and contract sales falling slightly short despite market headwind. Contract sales were 172 million in the quarter did fall 33% from the 257 million achieved in the previous quarter. We have largely but not fully anticipated the sequential decrease in our guidance for the first quarter as we projected contract sales of 180 to 200 million.

However we experienced an unexpected 38% sequential month-on-month drop in demand in November which is followed by an equally abrupt 38% sequential increase in December. This in turn was followed by another sharp drop in January and a sharp increase in February. Needless to say it’s difficult to establish a pattern here. Since the fluctuations have been surprisingly consistent across all projects, we believe we are experiencing the long term effects of broad government policy initiatives and those effects are negative or so we have assumed in our projections.

The GFA sold in the quarter also fell from 189,000 square meters in the third quarter to 112,000 square meters in the fourth due mainly to two factors. First there were two new product launches that took place in the third quarter which was followed by more normal at sales activity in the fourth. So in other words, no new product launches in Q4. And second, overall market demand has mentioned earlier did moderate as described above.

The ASPs held firm with our aggregate ASP rising sharply from $1,362 per square meter to 1,538 per square meter and this is primarily due to a relatively stronger mix of the higher prize projects but also due to the sales from retail space at Zhengzhou Splendid and at Xinyuan Modern City and these retail spaces have prices three to five times high as residential prices. However even without this effect, ASPs were slightly increased in the fourth quarter.

Now given the choppiness in the market, we have taken some isolated pricing actions late in the fourth quarter to jump start sales activity. We have implemented discounts ranging from nil in the case of Zhengzhou Royal Palace to 12% in the case of Kunshan International City Garden.

Discounting had little impact on January sales but seems to have been very effective post Chinese New Year. Also we have maintained our sales agent commission rates in Q4 after we raised them somewhat sharply in the third quarter of 2011.

Now just a few project notes. Kunshan International City Garden continued to show some light after intervention of the seller financed contracts in the third quarter of 2011. We believe 44% of our Kunshan sales in the fourth quarter were seller financed contracts as opposed to historical mortgage contract. The Zhengzhou Royal Palace contract sales held up very nice in Q4 after successfully launching in September. ASPs were RMB15,000 per square meter in the fourth quarter, up from $14,400 in September. Zhengzhou Century East B launched at the very end of Q2 and beginning of the third quarter continued its strong sales performance in the fourth quarter at 13,100 square meters. The Zhengzhou Century East A project launch has been pushed back to the second quarter of 2012 to concentrate selling efforts on its neighbor right next door which is Zhengzhou Century East B.

So let me talk just a minute again about our seller financed contracts because they are important to us. Due to the unavailability of mortgages for many buyers, particularly nonresident or second apartment buyers, we introduced seller financed sales contracts in the third quarter. We specifically were targeting Kunshan buyers but the contract proved useful and popular on other projects as well for qualified buyers unable to procure mortgages due to government policy restrictions.

As stated earlier 44% of Kunshan contracts signed in the fourth quarter were of the seller financed variety versus traditional mortgage contracts for the remaining 56%. The contracts also proved useful for higher end properties where mortgage availability is limited namely Zhengzhou Colorful Garden and Xuzhou Colorful Garden Town homes as well as Zhengzhou Royal Palace Apartments.

These contracts generally call for a 10% down payment upon signature, a second payment of 20% within 30 days, a third payment of 50% six months after contract signature and a final 20% payment 30 days before delivery. In short full 100% payment is required within six to 18 months from the signature date. In some projects our terms are even more onerous. In Chengdu for example our seller financed sales contracts call for full 100% payment within six months of signature in just two or three payments.

We’re highly confident that these contracts would be successful for several reasons. First, we perform credit checks to ensure buyers ability to pay. Second buyer nonperformance terms are highly punitive. Third, we retain a substantial collateral, the apartment plus installment payments made today. Fourth, the lack of a third party mortgage provider in these contracts will limit any buyer allegations of force majeure as they did when government policy changes were being made.

And fifth and finally all these contracts are not cancelled with not provisions for buyer termination without Xinyuan’s blessing. Payment history on these contracts since we introduced them has been very strong and supports our contracts in these contracts.

Let me discuss revenue for a moment. Revenue under the percentage of completion method of accounting totaled $200 million in the fourth quarter. That’s down 6% on the previous quarter but up fully 46% over the fourth quarter of 2010. Our fourth quarter guidance had been $180 million to $200 million so we achieved the high end of that guidance.

As reported last quarter the third quarter of 2011 construction progress was impaired by contractor migrant labor shortages and curfews. As expected these issues were resolved in the fourth quarter such that the percent complete progress was very healthy leading to solid revenue recognition in the fourth quarter under the percentage of completion method of accounting.

We continued in our policy of not recognizing any revenue on any sales contracts with the mortgage contracts or seller financed contracts where the collected deposits at period end were less than 30% of the full contract amount.

Now gross profit. Gross margin in the first quarter was $56.4 million or 28.2% of revenue. That has edged down from 29.9% of revenue last quarter and 30.2% in the fourth quarter of 2010 and this was due to a lower change of estimates impact so let me explain. The company updates its total project cost of sales projections quarterly. The fourth quarter of 2011 cumulative gross profit impact of the changes in estimates was $0.8 million favorable versus $3.7 million favorable in the third quarter of 2011 and $7.9 million favorable in the fourth quarter of 2010.

In the last several quarters we had predicted price discounting that had failed to materialize and this led to positive changes in estimate. This quarter projected discounts are materializing leading to a less positive but mind you, positive changes of estimates impact.

SG&A, Selling, General and Administrative Expenses decreased by $2.5 million from last quarter to $11.7 million in the fourth quarter. This is equivalent to 5.8% of revenue versus 6.7% last quarter. Sales agent commissions dropped quarter-to-quarter commensurate with the drop in contract sales. Also with our new product launches in the fourth quarter advertising and promotional expenses dropped sharply. The fourth quarter 2011 G&A was impacted by nearly $1.7 million of accruals for additional bonuses to employees on that fabulous 2011 profit performance.

Net income. Net income for the fourth quarter was $28.3 million versus $31.2 million in the third quarter of 2011 and $21.6 million in the fourth quarter 2010. Net margins were 14.2%, 14.6% and 15.8% respectively for the same years.

Previous guidance had been $26 million to $30 million of net income so we’re slightly about the midpoint of guidance. Diluted earnings per ADS was $0.38 versus $.42 per ADS last quarter. The average shares decreased by over $1.5 million ADS quarter-on-quarter as a result of our 10 million share buyback program.

From inception in Q2 2011 to the fourth quarter of 2011 we have cumulatively spent $8.0 million buying back $3.8 million ADSs. Income tax totaled $19 million or 40.1% of pre-tax earnings in the fourth quarter 2011 versus $19.6 million or 38.6% of pretax profit in the third quarter of 2011.

In the fourth quarter we have accrued $3.7 million of withholding taxes on inner company dividends deemed to be ultimately required to settle our outstanding U.S. dollar notes payable and to finance the buyback program we’ve already announced and future shareholder dividends. Our effective tax rate going forward is likely to be between 37% and 38%.

Balance sheet, in the fourth quarter we contracted to purchase two parcels of land, one parcel in Zhengzhou as a gross floor area of 208,000 square meters for a purchase price of $88 million of which $59 million was paid in December 2011 when we brought it and the remainder was paid in January of 2012.

The other parcel in Xuzhou in Zhengzhou Province accommodates a gross floor area of 118,000 square meters for a purchase price of $37 million of which $24 million was paid in December and the remainder is due in June 2012. We were very pleased to win these two auctions at prices that were more than 20% below our expectations and below what we had prepared for in auction. So we are very pleased with that.

As of December 31, 2011 the company reported cash and equivalents of $488 million compared to $525 million last quarter end. Total debt outstanding however decreased from $304 million at the end of Q3 2011 to $286 million at the end of Q4 2011. So cash less debt has dropped from $221 million in the third quarter to $202 million in the fourth quarter despite spending $83 million on new land.

So let me discuss the outlook for a moment. As mentioned at the beginning of this call, since November 2011 we are experiencing some sales turbulence and we have all heard that the residential real estate industry in China is experiencing downturn. Well we’re not immune from all these factors. In our fourth quarter 2011 conference call we expected some softening and we related this to investors. Since that time markets segment seems to have deteriorated a little and we have experienced a weak November followed by a December boost, then a weak January followed by a February boost. How much of this fluctuation is due to seasonality versus market conditions is hard to say without any certainty.

The guidance numbers I’m about to give are based on current market conditions persisting for all of 2012 without allowing for possible policy loosening measures. So we predicted first quarter contract sales are projected in the range of $105 million to $115 million obviously showing the effects of Chinese New Year as it does every year.

First quarter revenue under the percentage of completion of method is projected to range between $135 million and $145 million. Net income should fall between $18 million to $21 million in the first quarter of 2012 and for full year guidance we guide a range of $635 million to $655 million for contract sales, $755 million to $775 million for revenue and $95 million to $105 million for net income.

Now shareholder value initiatives, we reiterate to believe that a dividend once initiated should be sustainable over the long term. Previously our preferred method of declaring or remitting dividend was to declare an annual dividend soon after the annual filing of 20th.

But we are changing our minds largely due to investor feedback. We now intend to declare remit dividends on a quarterly basis, we will not wait till the 20th as filed to do so although we are not prepared to make a definitive announcement on dividend at this time. There will be a separate dividend announcement in the next weeks. So please stay tuned for that separate announcement in the next few weeks.

We do intend to continue our buyback program until we have spent the full $10 million authorized by our Board. With current trading patterns we expect to complete the program by the end of the first quarter of 2012.

So this concludes my prepared remarks and operator can you please open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Kun Tao with Roth Capital Partners.

Kun Tao – Roth Capital Partners

My first question is under the current marketing environment, all real estate developers tried to reserve cash as much as possible but based on your Q4 number and your Q1 guidance, Xin (ph) didn’t slow down the construction even sales increased quite a bit. So can you tell us your reason on this why not just slow down the construction and try to reserve cash.

Tom Gurnee

Let me turn over to chairman after making this remark. We do have deliveries, we have to accomplish for both Kunshan and Suzhou some of the older projects but we are still seeing, we are still predicting pretty darn good demand in the Tier II cities once things iron out.

Helen, can you propose that question to the chairman?

Yong Zhang

[Foreign Language]

We have a healthy balance sheet the company would like to maintain at that ratio up to about a 50% and also year 2012, we plan we made the plan ourselves on schedule and also we have done plan to acquire new land.

Tom Gurnee

Okay, I will add this in my outlet, in my projections, I was not that aggressive, I was lower than our operations department under projections and percent complete and spending next year. So and we have proved very clearly in 2009 and 2008 we can sort our spending pretty quickly and we got to that just far and we feel we are in a pretty good shape and we are in a much better cash position than we were back in those days.

Kun Tao – Roth Capital Partners

Okay in your guidance for Q1, how much of AS (ph) fee increase do you expect?

Tom Gurnee

None in fact I commented in my prepared notes here, I have projections of decreases and it varies by project, there is couple of projects few where we have no decrease for example Zhengzhou Royal Palace but we have others that we feel needs to strive the arm so Kunshan we have about 12% decrease as I mentioned in my prepared remarks. We have got some that are 6%, there is one in 11. We do have discounts in the outlook and in our estimates used for POC.

Kun Tao – Roth Capital Partners

Okay. What’s the most margin you expect in 2012 overall?

Tom Gurnee

We are still up in the 28% range but the big difference here is that last year 2011 and mostly in 2010 when we had change in estimates that was always positive and we even had positive in this fourth quarter. But we don’t generally project that we will have changes in estimates that are positive. Generally, so in this particular first quarter the first half of this year, we have projected in my estimates some price decreases. In the past I have projected them and they didn’t happen and I had positive impact.

So, you are going to have a little less gross margin than we showed last year but it really doesn’t mean anything because it was due to changes in estimates. The real margins are quite healthy.

Kun Tao – Roth Capital Partners

Okay my last question is both you and Mr. Zhang mentioned, commented already one of – can you tell us more about we are seeing your projects has the best sales and what do you think the market condition is in 2012?

Tom Gurnee

Why don’t we pass it on to the chairman?

Yong Zhang

[Foreign Translation]

In the year 2012 our Zhengzhou and Shandong will contribute a majority of overall sale and for Shandong, 2012 (inaudible) some of the project is nearly completed. If the overall market remains sluggish we believe that most of our project may perform well compared to project which is further from the downtown area. If the overall marketization will be recovered and then we believe that the overall sales performance will better.

Operator

(Operator Instructions). And we will go next to Albert Jones with Jones Capital Management.

Albert Jones – Jones Capital Management

Can you tell me the remaining balance on the convertible notes that were issued to forum?

Tom Gurnee

Well there are no convertible notes.

Albert Jones – Jones Capital Management

Convertible debt I am sorry.

Tom Gurnee

Well it's not convertible. It's just debt and it's 40 million, it's the face value 40 million, original is 40 and its still 40.

Albert Jones – Jones Capital Management

To anticipate having that paid off by when?

Tom Gurnee

It's due and payable on April 2013.

Albert Jones – Jones Capital Management

Okay do you anticipate paying that early or no?

Tom Gurnee

Well we would have to negotiate and because there is no provision for early repayment. So no in my planning I do not anticipate it because I have negotiated with them before. But I do not anticipate it but I am going to give it a try, I need to assess, well we need to assess a lot of things what potential projects are out there whether I pay that down or not.

Albert Jones – Jones Capital Management

Okay. I know this one year land purchases seems to have given you extended terms for final payment as opposed to the customary timeline was at an exceptional circumstances.

Tom Gurnee

It happens from time to time. I usually has to do with, they got to clear an existing small building, one of the properties we bought once had a small military installation and they had to have some time to knock that down, so extended the payment terms. It's usually because they can’t give you permitting until later date. So the terms weren’t much, one of them was one month.

You noticed we auctioned it in December and paid in January, so that wasn’t much in the way of terms and then everyone was, it's just six months, its payable in June and purchased in December. So these aren’t fabulous terms but they are split.

Operator

(Operator Instructions). And it appears that there are no further phone questions at this time. I will turn it back over to the speakers for any additional remarks.

Tom Gurnee

Well we thank you all for participating in this. We are very, very pleased with our results and so we start this year with great anticipation, a little sluggish but we are sure our performance will be good. So, thank you for tuning in with us and best of luck and we will talk to you next quarter.

Operator

And again that does conclude today’s call. We thank you for your participation.

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