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

Q1 2012 Earnings Call

May 09, 2012 08:00 a.m. ET

Executives

Helen Zhang – Financial Controller

Yong Zhang – Chairman and CEO

Tom Gurnee – CFO

Analysts

Kun Tao – Roth Capital Partners

Operator

Good day everyone, and welcome to the Xinyuan Real Estate Company Limited First Quarter 2012 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the call over to Helen Zhang, Financial Controller. Please go ahead.

Helen Zhang

Hello everyone and welcome to Xinyuan’s first quarter 2012 earnings conference call. The company’s first quarter earnings result 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 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 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 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 second 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. Our first quarter results were very good and exceed our 13% [inaudible] contract sales revenue and net income. Our project in Suzhuo, Zhengzhou and Xuzhou contributed the majority of total sales in the first quarter. Our quarterly decline in contract sales was less than expected [inaudible].

Return to the market after Chinese New Year it is the improved environment was a result of better mortgage availability and our introduction of discount on several projects. There were 10 active development projects in the first quarter with total GFA sales of 115,000 square meters.

Our presales schedule is on track in the first quarter. We [inaudible] to start presales of Zhengzhou Century East A in the third quarter after we see more sales from Century East B. Our two other key projects in Xuzhou and Zhengzhou are happy to start construction in the third quarter of this year.

We are pleased to raise our full year financial forecast. This reflects higher levels of contract sales in the current operating environment [inaudible] expected easing of purchase restrictions from the Chinese government this year. Our balance sheet remains very strong, and our quality development project in Tier-II and Tier-III cities will allow us to record continued growth in 2012.

Finally, we are very pleased to declare quarterly dividend of $0.04 per ADS as we announced separately. We are firmly committed to improving quarterly return to our shareholders.

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

Tom Gurnee

Thank you, Chairman. We had a very good first quarter of 2012 despite the slow start in January. Contract sales picked up nicely in February and March and continue to pace through April and has started well in the first nine days of May as well. We managed to exceed guidance not only for contract sales but also for revenue net income earnings per share. In short we are off to a good start in 2012.

Contract sales totaled RMB1 billion or a $160 million versus guidance of $105 million to $115 million, up 45% from the mid-point of guidance. Contract sales also compared well to the first quarter of 2011, up 63% from the year ago quarter.

GFA sold in the quarter 114,400 square meters compared favorably to 111,900 square meters sold in the fourth quarter of 2011 and just 81,600 square meters sold in the first quarter of 2011. Reported first quarter 2012 contract sales and GFA were both healthy despite being impacted by 137 sales contract cancellations at our Kunshan project.

If you recall, in 2010 the company did not recognize in its revenue calculations sales reversals of $43 million related to 348 apartments. The company took the position that contracts that were not clearly executable under prevailing government policy should not be recognized as revenue under the percentage of completion method. Please refer to our fourth quarter 2010 earnings release for clarification.

Thus these Q1 2012 Kunshan contract cancellations do not impact revenue under percentage of completion method as they’ve already been excluded from revenue calculations.

As of the end of the first quarter of 2012, 190 unrecognized contracts with a total value of $25.4 million remain outstanding as of the end of Q1 2012. A further 60 contracts have been cancelled in April. The reason for this seemingly sudden cancellations, is that the company initiated a contract cleanup initiative to resolve these old contracts one way or the other so that we may market more units. So long as these contracts were in place, we cannot offer it for sale the underlying apartment units.

Meanwhile, however, newly signed contracts in Kunshan that is excluding cancellations totaled to 9800 square meters or 25% above the fourth quarter of 2011’s GFA. Other project, GFA sales of note in 2012 the first quarter were in Xuzhou International City Garden surprisingly was up from 10,000 square meters in the fourth quarter of 2011 to almost 28,000 square meters in the first quarter of 2012. Chengdu Splendid at 16,400 square meters more than doubled from Q4 2011.

Let's now talk about some pricing trends at Xinyuan. Overall ASPs dropped quarter to quarter but the picture is clouded a bit by the fact that Q4 2011’s numbers included sales of commercial and retail space at nearly double our residential ASPs. That’s not to say however that we do not discount our properties. In several cases, we did discount starting actually in December 2011 but first affecting contracts signed in the first quarter. We had anticipated these discounts in last quarter’s outlook and guidance.

Now, let me give a brief snapshot project by project. At Chengdu One, a nearly sold out project, residential ASPs were virtually unchanged. At Chengdu Two, ASPs were down very slightly, roughly RMB100 per square meter, or less than 2%. Xuzhou prices were discounted RMB800 per square meter in the first quarter or about 8%, and we have provided in our projections with further discounting of up to 11% from Q2 2012 onwards if necessary although March and April ASPs actually rose. Shandong ASPs were down RMB800 per square meter or about 9% from the previous quarter. It provided for a further 4% or so cut in the second quarter in our projections.

Kunshan prices were down about RMB925 per square meter, almost 10% from the fourth quarter of 2011. A further 10% reduction is provided for in our model although April ASPs actually see the margins.

Royal Palace prices actually increased sequentially quarter-to-quarter to 5% to over RMB16,200 per square meter. Modern City residential prices were down RMB350 per square meter to about 4%. The project is nearly sold out, so there might be some further discount to close out the project. Century East B prices were down less than 3% for the quarter and no further discount is expected.

Finally, EP Zhengzhou [ph] prices increased slightly in the first quarter, but we may see some discount here as this project nears completion later this year.

Before leaving the subject of sales activity, let me update you on the seller financed contracts. The use of seller financed contracts trended down as a percent of total contract sales from 25.8% in the fourth quarter of 2011 versus 17.8% in the first quarter of 2012. The biggest seller financed contract users were Royal Palace due to high priced units not eligible for mortgage discount and Kunshan due to unavailability of mortgages to non-residents. The overall trend is that our buyers are better able to get mortgages than they have been in the last two years. I should also note that the milestone collections history on the seller financed contracts is good.

So now let's turn to revenue. In the first quarter of 2012, the company’s total revenue using the percentage of completion Gani [ph] method was $173 million compared to $92 million in the first quarter of 2011 and $200 million in the fourth quarter of 2011.

Revenue exceeded the mid-point of guidance, which was $140 million by over 23%. Based on the strong first quarter 2012 GFA sales, you would have expected revenue to be even higher if not for the present complete impact of a post Chinese New Year labor shortage for our contractors at Chengdu Splendid, Zhengzhou Modern City, and Zhengzhou Royal Palace projects. Contractors of other projects coped better with this post Chinese New Year problem.

Gross margin. Gross profit from the first quarter of 2012 was $49 million or 28.5% of revenue compared to a gross profit of $25 million or 27.3% of revenue in the first quarter of 2011 and a gross profit of $56 million or 28.2% of revenue in the fourth quarter of 2011. There were no major developments on the gross profit front. As we do every quarter, the company revised total project cost and sales projections for all projects in the quarter, in this first quarter of 2012 $1 million of cumulative gross profit was recognized in the percentage of completion method due to changes in estimates compared to $0.8 million being recognized the previous quarter due to changes method.

Now SG&A expenses were $12 million for the first quarter of 2012 compared to $7.4 million from the first quarter of 2011, and $11.7 million from the fourth quarter of 2011. As a percent of total revenue, SG&A expenses were 6.9% compared to 8.1% in the year ago quarter of 2011 and 5.8% last quarter, the fourth quarter of 2011.

The sequential increase in SG&A expenses was partly due to increased legal and consulting expenses in the project search and evaluation process for residential projects in the United States. In part was also due to the hiring of certain senior management in operations and business development roles in Beijing.

Net income for the first quarter of 2012 was $23.2 million compared to $11.7 million for the year ago quarter and $28.3 million in the fourth quarter of 2011. Net income attributable to shareholders is $22.5 million, exceeded the midpoint of guidance of $19.5 million by 15.4%.

Net margin was 13.5% compared to 12.7% in the first quarter of 2011 and 14.2% in the fourth quarter of 2011. Diluted earnings per ADS for the first quarter of 2012 were $0.31, compared to earnings of $0.16 per ADS in the same period of 2011 and $0.38 per ADS last quarter, fourth quarter of 2011.

Let me comment on the balance sheet. As of March 31, 2012 the company reported $516 million in cash or cash equivalents including restrictive cash compared to $488 million as of December 31, 2011. Operating cash flow in the first quarter was $34 million even though we made scheduled payments of $25 million on land purchase in December of 2011.

The total debt outstanding was $283 million, a decrease of $2.8 million compared to $285.5 million at the end of the fourth quarter of 2011. The value of the company’s real estate property under development at the end of the first quarter was $705.3 million compared to $761.9 million at the end of the fourth quarter 2011. Our book value now has reached $650 million. In short our balance sheet continues to get stronger.

Let me comment on outlook for the second quarter year 2012. The company expects contract sales in the second quarter of 2012 to be in the range of $190 million to $200 million. Revenue under the percentage of completion method is expected to range between $210 and $220. Net income in the first quarter is expected to be in the range of $27 million to $30 million. Earnings per ADS should fall between $0.37 per ADS to $0.41 per ADS. For the full year of 2012, contract sales are expected to be in the range of $660 million to $680 million. 2012 revenue under the percentage completion method is expected to range between $760 million and $780 million. Net income is expected to be in the range of $97 million to $107 million. Finally, earnings per ADS should range between $1.33 and a $1.47 per ADS.

As mentioned in our 20-F filed with the SEC last month, we have begun assessing properties in the United States for possible acquisitions. We see potential opportunities for residential properties in the United States at attractive prices that might benefit from incremental demand from Chinese buyers. We have been in the planning and evaluation stage for several months now. We have evaluated scores of properties primarily on the east coast and west coast where Chinese demographics are strongest. We are currently performing due diligence on some projects in the United States and we will make a separate announcement if the transaction is consummate.

Finally, let me turn to shareholder value. The trading price on the New York Stock Exchange where ADS has closed at $3.28 yesterday. That was May 08, 2012, for a total market capitalization of approximately $240 million. With approximately $73 million fully diluted ADS as outstanding and the midpoint of guided earnings being at $1.40 per ADS, our forward 2012 price earnings ratio works out to 2.34. With the March 31, 2012 book value of $656 million, and a book value per ADS of $8.99, closed yesterday with a price to book ratio of just 0.36 or put it another way we traded at discounted book value of 64% [ph].

The annual yield of our declared dividend payable on May 15, 2012, was $0.04 per ADS, works out to a 4.9% yield per year. In short Xinyuan’s ADSs are very, very inexpensive. On Friday I’m headed to the US for several weeks. I hope to meet many investors across the country to try and build confidence on Xinyuan Real Estate. Please feel free to contact me via email at tom.gurnee@xyre.com if you have any questions or you want to meet with me.

This concludes my prepared remarks. Operator, we’re ready for questions.

Question-and-Answer Session

Operator

Thank you sir. [Operator Instructions] We’ll take our first question from Kun Tao with Roth Capital Partners.

Kun Tao – Roth Capital Partners

Hey, thank you for taking my questions. Congratulations on a good quarter.

Tom Gurnee

Thank you.

Kun Tao – Roth Capital Partners

First question, can you comment on the macro side a little bit? We are going to see some positive transactions in lot of fees in March and April. What do you think the policy will be 2012 and how would that impact Xinyuan.

Tom Gurnee

Well, let me comment on what we’ve assumed, and then I’ll let the Chairman comment on what he thinks. What we’ve assumed in our future guidance is that there will be no loosening of the policy guidelines that we’re under today. So we assume that the environment is pretty much no different than it is on guidelines and there might be further price discounting. Now, I’ll defer to the Chairman to give his view, the macro view over the rest of the year.

Yong Zhang

We are very excited [inaudible] related to the overall [inaudible] market, and we think that the demand accumulated from such a high [inaudible] and from the beginning of this year to be very solid.

We wouldn’t expect any drastic change or [inaudible] regarding the pricing and also the GFA sold in the second half or in the remaining of the year.

Tom Gurnee

So, to summarize what the Chairman said and what I said is pretty much more the same where we are right now.

Kun Tao – Roth Capital Partners

Okay. In your guidance for both Q2 and 2012, what's your assumption of your selling price?

Tom Gurnee

Okay. Well I mentioned that during my prepared comments, but let’s go down the list. In Shandong we assume another 3% or 4%. We already went down about 9% in the quarter and reacted well to that. Kunshan prices were down about 10, and in my projections I have got it down another 10. Although, as I mentioned in the prepared remarks, April’s ASPs actually increased over March, and so perhaps we are a little conservative there. Royal Palace prices actually increased sequentially. You have some discounting projected going forward of moderate, the 7% range. Modern City is down about 4% from the fourth quarter. We’ve assumed further discounting as this thing nears completion.

Century East B was down less than 3% in the quarter. We don’t see any further discounting there. Finally, Zhengzhou increased slightly in Q1, but we do show some discounting as the project nears completion and we need to get rid of the last units. To summarize Kun, we have assumed additional discounts for the remainder of the year. In some cases fairly large, like Kunshan at 10% and in some cases very small, okay.

Kun Tao – Roth Capital Partners

Yep. You mentioned about your U.S. projects. When do you think your U.S. projects will contribute revenue?

Tom Gurnee

Will contribute?

Kun Tao – Roth Capital Partners

Yes.

Tom Gurnee

Well, actually from acquisition date it’s possible that we might – I better not say that. Let’s say early next year. It’s probably when we will see our first revenue from projects in the United States.

Kun Tao – Roth Capital Partners

Okay. But that’s not in your 2012 guidance.

Tom Gurnee

No, no, not at all. Nor do we have anything in our 2012 guidance for the properties we purchased in December. So, although we expect to get them operational or moving it by the fourth quarter of this year, we have nothing in our projections for revenue from the two new projects we bought in Zhengzhou and Xuzhou in December 2011.

Kun Tao – Roth Capital Partners

Okay. Well, you mentioned about the properties you bought in Xuzhou. So looking ahead beyond 2012 and going into 2013 and maybe 2014, what's your growth perspective or in other words what [inaudible] looks like for Xinyuan to continue to show the growth?

Tom Gurnee

Well, that's a good question, and we clearly in order to continue growth towards the latter half of 2013, we need some more land acquisitions in China. We have quite a cash hoarded right now. We have the ability to execute on that. We are not exactly sure when and where to do that. We will participate in auctions and we will remain active. I think the Chairman’s track record is very, very good on the timing and prices paid for acquisitions in China, we will continue unabated that strategy reviews. So, Kun, there is no question that we will need to have other land available to be able to drive growth in the second half of 2013.

Kun Tao – Roth Capital Partners

Okay. Well, those are all my questions. Again, congratulations.

Tom Gurnee

Pardon me.

Kun Tao – Roth Capital Partners

I said, that’s all for my questions.

Tom Gurnee

Oh, thank you.

Kun Tao – Roth Capital Partners

Congratulations on the quarter.

Operator

[Operator Instructions] There are no further questions. I’d like to turn the conference back over to management for any further additional or closing remarks.

Tom Gurnee

Well, we want to thank you very much for attending this conference call. Perhaps the lack of questions indicated the thoroughness of the data we provided. We hope that’s the reason. We are very concerned about your holding value and we are committed to making your investment in Xinyuan successful. I want to thank you very much and we hope to see you next quarter.

Operator

That concludes today’s teleconference. Thank you for your participation.

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