Hello everyone and welcome to Xinyuan’s First Quarter 2008 Earnings Conference Call. The company’s first quarter earnings results were released earlier today and are available on the company’s investor relations website at ir.xyre.com as well as the newswire services. You can also download a short presentation regarding today’s earnings results from our website. Today, you will hear from Mr. Yong Zhang, our Chairman and Chief Executive Officer, who will discuss business highlights for the first quarter of 2008 and the overall market conditions in the real estate industry in association with our guidance for 2008.
In addition, Mr. Zhang will provide an update regarding the situation in Zhengzhou following the earthquake on May 12, 2008. He will be followed by Mr. Longgen Zhang, our Chief Financial Officer, who will go over the company’s financial results. Following management’s prepared remarks, we will open the call for questions.
Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our reports 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 form S1 and other documents filed with the US Securities and Exchange Commission. Xinyuan does not assume any obligation to update any forward-looking statement except as required under applicable laws. I will now turn the call over to Xinyuan’s Chairman and CEO, Mr. Yong Zhang.
Mr. Zhang will be speaking in Mandarin, and his comments will then be translated into English. Please note that unless otherwise stated, all figures mentioned during this conference call are in US Dollars. Please go ahead, Mr. Zhang.
Yong Zhang (translation)
Hello everyone, and thank you for joining Xinyuan’s First Quarter 2008 Earnings Conference Call. In our earnings release issued earlier today, we announced very good results for the first quarter of 2008. Total revenue for the quarter was $125 million, an increase of 447% from the same quarter of 2007. Net income for the quarter was $33 million, representing a 380% increase from the same quarter of the prior year.
We are pleased with the successful execution of our expansion plan into other tier II cities, and the main contributors to our strong growth in revenue and net income during the quarter were sales from new development outside of Zhengzhou. Total sales from Suzhou, Jinan, and Hefei accounted for over 90% of total sales during the first quarter, representing 43%, 34%, and 15% of total sales respectively. In the first quarter, we announced a Suzhou International City Garden Project which consists of 1678 units, with total developable GFA of over 200,000 square meters, and we completed construction of a combined total of approximately 115,000 square meters of GFA in our Jinan Elegant Scenery and Suzhou Lake Splendid projects.
As of March 31, 2008, we had 14 completed projects, 8 projects under construction, with a total developable GFA of around 1.2 million square meters and an additional 5 projects that are pending with a total developable GFA of around 1.2 million square meters.
During the first quarter, we continue to rely on our standardized and scalable business model and emphasized rapid asset turnover and strict cost controls to deliver results. We also concentrated our efforts on strengthening our local subsidiaries and increasing our understanding of the local markets, and our first quarter achievements are a reflection of this success.
In today’s earnings release, we also provided the full-year guidance for 2008. Our CFO will explain our guidance to you in greater detail in a moment. However, I would first like to take a few minutes to discuss overall market conditions within the real estate industry and the effect governmental policy changes will have on our business and outlook for the remainder of the year.
As many of you are probably familiar by now, the real estate sector in China has enjoyed record growth over the past couple of years and is considered at risk of overheating by the Chinese government. Aiming at cooling down the market, the government has recently introduced several new policy tightening measures, certain tightening of the supply of credit, and increasing the down payment for second-home buyers. It also strengthened the enforcement of measures such as reclaiming idle land not developed within two years and levying land appreciation taxes. The policy changes have created a degree of uncertainty within the market, affecting both supply and demand and the amount of credit available to developers. To date, the effect of these changes has been more pronounced in tier I cities.
While Xinyuan’s focus on tier II cities and unique business model dedicated to quick asset turnover and no idle land bank has been an advantage compared to many other peers, the decreased sales velocity and tightening of credit supply along with higher raw material costs may affect our business results this year. However, we firmly believe that the effect of the regulatory controls on the industry will now create a strong long-term housing demand in tier II cities in China. Because strong housing demand is fundamentally supported by China’s continued economic growth and urbanization process along with an increasing population of middle income households who are our targeted consumers, we are confident that the foundation for long-term growth remains secure and that Xinyuan will continue to benefit from strong demand and maintain fast growth in the next 5 to 10 years.
In terms of land acquisition, although we did not purchase any new land in the first quarter of 2008, we continue to research potential cities and land acquisition targets that match our business expansion plans. We remain conscious with our land acquisition strategy given the uncertainties of the market. We plan to review our land acquisition strategy by the end of June based on the progress of sales, available credit, and overall market condition. In line with our overall business strategy, our current land bank can sustain 1.5 to 2 years of future development, giving us the flexibility to remain disciplined in our land acquisition strategy and allowing us to only purchase land that meets specified investment criteria. Going forward, we will continue to execute our proven business strategy, and our extensive experience and successful track record provide a good foundation for future expansion.
Lastly, on behalf of everyone at Xinyuan, I would like to express our sincere condolences to all the Sichuan earthquake victims and their relatives. As we announced recently, Xinyuan and its employees have made a cash donation totalling over RMB 2.3 million. With the donations, a Xinyuan high school will be built in the earthquake area. In addition to the cash donation, many of our employees in Chengdu have volunteered to help transport food items and shelter materials to the victims.
As previously mentioned, there was no damage to Xinyuan’s two development projects in Chengdu. While certain delays are expected as a result of the earthquake, we are very happy to report that construction of Chengdu Xinyuan Splendid I has resumed. The earthquake will have an effect on demand in the short term, but it is too early to predict the extent to which it will be felt. Because Chengdu is the provincial capital and is away from the epicenter of the earthquake, there is a possibility that sales could recover faster than expected.
We would also like to mention that the construction and design of our two Chengdu projects are in full compliance with government regulations. Our Phase I project was designed and is being reinforced during construction with anti-seismic steel rings to reinforce the concrete walls to withstand earthquakes of up to magnitude 8.0. This design structure will also be used in the Chengdu Xinyuan Splendid Phase II project.
With that, I will now turn the call over Xinyuan’s CFO, Mr. Longgen Zhang, who will give us an overview of the financial highlights for the first quarter of 2008. Longgen, please go ahead.
Thank you Mr. Zhang. Hello everyone and thank you for listening to our call today. As a reminder, all of the following numbers are stated in US Dollars. Please note the certain figures we will talk about are non-US GAAP including all measures that are given including share-based compensation expenses. You can find a reconciliation of these figures in the financial tables at the end of our press release.
Though typically the first quarter and fourth quarter are the slowest seasons in the real estate industry, I am pleased to report that Xinyuan posted strong growth in the first quarter of 2008, with significant increases in total revenues and net income.
Total revenues for the first quarter of 2008 were US$125.1 million, an increase of 36.9% from US$91.4 million for the fourth quarter of 2007 and 447% from US$22.9 million for the same period in 2007. The quarter over quarter increase in revenue was primarily due to increased revenue of US$54.8 million from Xinyuan International City Garden, Suzhou Lake Splendid, and Suzhou Colorful Garden compared to the fourth quarter of 2007. The year-over-year increase in revenue was mainly attributable to additional revenue from 7 new property developments with sales in the first quarter of 2008, including Suzhou Lake Splendid, Suzhou International City Garden, Anhui Wangjiang Garden, Suzhou Colorful Garden, Jinan Elegant Scenery, Zhengzhou Commercial Plaza, and Jinan City Family.
Gross profit for the first quarter of 2008 was US$36.6 million, compared to US$12.7 million and US$30.3 million for the first and fourth quarters of 2007, respectively. The gross margin percentage for the first quarter of 2008 was 29.2%, compared to 55.3% and 33.1% for the first and fourth quarters of 2007, respectively. The quarter-over-quarter decrease in gross margin percentage was mainly because of fourth quarter of 2007 included a favorable adjustment of approximately US$3 million to the cost of revenue, resulting from a change in management's estimate of future revenue after reviewing actual market conditions. The year-over-year decrease in gross margin percentage was attributed to the first quarter 2007 sale of Zhengzhou Central Garden West and Zhengzhou Central Garden East which generated higher gross margins due to lower land acquisition costs and construction costs.
Selling, general and administrative expenses amounted to US$10.9 million for the first quarter of 2008, a decreased from US$13.9 million for the fourth quarters of2007, and a substantial increase from US$2.9 million for the same period in 2007. The quarter-over-quarter decrease was primarily attributable to decreased selling and marketing activities in the first quarter of 2008 due to cold weather and public holidays during the period, as compared to the fourth quarter of 2007. The year-over-year increase in total selling, general and administrative expenses was due to increased selling and marketing expenses to promote new projects, salaries, and other expenses associated with the addition of new employees, stock-based compensation amortization, and professional fees.
The operating margin for the quarter was 20.5%, compared to 42.6% in the corresponding period of 2007 and 17.9% for the fourth quarter of 2007. Excluding share-based compensation expenses, non-US GAAP operating margin for the quarter was 23.1%, compared to 42.6% in the corresponding period of prior year and 22.9% in the fourth quarter of 2007.
Change in Fair Value of Derivative Liabilities: In the first quarter of 2008, the company recognized a gain of US$11.3 million arising from a decrease in fair value of the warrants issued with floating rate notes, compared to an expense of US$2.4 million arising from an increase in fair value of the warrants in the fourth quarter of 2007.
Net income for the first quarter of 2008 was US$33.0 million, an increase of 379.9% from US$6.9 million for the same period in 2007, and 302.4% from US$8.2 million for the fourth quarter of 2007. Basic and diluted earnings per share amounted to US$0.22 and US$0.13 respectively and basic and diluted earnings per ADS amounted to US$0.44 and US$0.26 respectively. Each ADS represents two ordinary shares.
Now, I would like to move to guidance. As Mr. Zhang mentioned earlier, the biggest factors affecting our outlook for 2008 are lower demand and tightened credit. As you may recall, last quarter, we discussed the overall business environment and the way in which credit tightening measures may impact our future results. At the time it was difficult to predict the effect these measures would have on the industry, and as a result, with all our business operations, while there is a few degrees of uncertainty and while the government maintains its control on credit lending, we feel that prices will remain relatively stable in tier II cities, and we believe that our healthy balance sheet and cash flow position will provide us with future opportunities for growth going forward.
Because of this, we expect our total revenues for 2008 to be in the range of US$550 million to US$630 million, representing a year-over-year growth in the range of approximately 77% to 103% respectively. In addition, the 2008 net income is anticipated to be between US$60 million and US$70 million, representing year-over-year growth of approximately 31% to 53% respectively.
At this time, we are happy to take your questions.
(Operator Instructions) Your first question comes from the line of Michael Rosenthal with QVT. Please proceed.
Michael Rosenthal – QVT
If you could describe the pace of sales and some of the pricing you’re seeing in the various projects?
We have the figures. For the first quarter, our average selling price is RMB 5643 per square meter, and compared to fourth quarter of 2007, that is RMB 5365 per square meter, so we feel that in the first quarter still, we achieved a very good quarter, and also the sales price and [__________] still slightly increased.
Michael Rosenthal – QVT
And would you say the pace of take-up is consistent with the fourth quarter or has it improved a little bit?
We think that in the first quarter compared last year’s fourth quarter, the velocity of sales in some cities has slowed down. It varies from city to city, but we still see some cities are good like Hefei and also in Zhengzhou and Jinan cities, but other cities, for example, we see that in Suzhou and also in Chengdu, the velocity of sales has slowed down.
Michael Rosenthal – QVT
My other question relates to your decision to not acquire any land in auctions. I’ve seen a couple of article stating that a lot of auctions have been canceled because there aren’t enough bidders in attendance. Was that a factor for not participating in auctions or you are just cautious about the pricing of land and you’d rather wait?
As you know, credit has been tightened this year, and there are uncertainties in the market, so we believe it’s more prudent for us to review our land acquisition strategy after June of this year. The main purpose and focus is to prepare for our growth in years 2009 and 2010.
In Xinyuan’s business model, once we have the land, we can start constructing within 4 to 6 months, and within the year, we can get the cash back, so that allows us to be more flexible to cope with uncertainties in the market. We can take advantage of lower land market which is currently available in China, unlike other companies which have large land banks and they are under pressure to get funding to develop their land. Xinyuan will benefit from our business model. We have an advantage position and very flexible position.
As you may know, Jiantou Xinyuan in which we own 45% of shares has acquired two parcels of land in April, so we did acquire some land, but not as much as everybody expected, I guess.
(Operator Instructions) Your next question is a followup from the line of Michael Rosenthal. Please proceed.
Michael Rosenthal – QVT
I guess construction costs have gone up somewhat dramatically in the last few months. How have you built that into your expectations, and do you feel you’ll be able to pass along those costs?
For the first quarter of this year, our average unit cost of revenue is RMB 3900 per square meter and cost of revenue percentage increased almost 2.6% compared to last quarter. That’s due to material and also labor cost increase. We believe that increase can be transferred to the selling price and to keep our target gross margin.
Michael Rosenthal – QVT
Do you feel you’re now fully accrued for projects under development for the increase in expected costs, or in some of the projects under development, there’s going to have to be [inaudible] at the end of the project?
Michael, for the projects under construction, because we outsource our construction to third parties, most of them is already part of fixed cost, excluding the steel price. We may share the steel price increase, but that accounts for a small percentage of the total construction cost. For example, in the first quarter, the average land cost was around RMB 1789 per square meter. The construction cost was around RMB 2112 per square meters. For the projects under construction, yes, because we outsource to third party construction and we use the bidding system, so whichever one bids the lowest and has more efficiency, we go and select that as the winner. Most of our third party construction companies are our long-term strategic partners, so still think we can control the construction cost by outsourcing through our strategic partnerships and also concentrating purchase and controlling our costs, and we believe we still can control that.
(Operator Instructions) As there are no further questions in queue at this time, I’d like to turn the presentation over to Longgen Zhang for closing remarks.
Thank you everyone for joining us on today’s call. Even with the difficulties in the current market, we delivered good results for the first quarter with high year-over-year and quarter-over-quarter increases in revenues and net income. Looking forward, we remain optimistic for 2008 as our current land bank can sustain 1.5 to 2 years of developments, and financial position is healthy. Throughout the remainder of 2008, we will continue to focus on strengthening our execution ability and streamlining our cost structure to capitalize on growth opportunities that will be available once the market begins to stabilize.
If any of you have any questions, please feel free to contact us at any time. Thank you.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day!
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