The Election Is Over - Time To Think About An Investment Strategy For The Next 4 Years

| About: Xinyuan Real (XIN)

Well, it's the "morning after," and President Obama has a job for the next four years. With the myriad problems facing the U.S. economy, it's definitely not a job I would want.

Seeking Alpha is no place for a postmortem on the election. But with January's fiscal cliff, stagnant prospects for economic growth, a "new normal" of high unemployment, and the ever-looming deficit, one has to wonder if President Obama's win should be considered a "win" or a "consolation prize."

Today, it's appropriate to take a deep breath and not only start to think about an investment strategy for 2013, but also for the next four years.

Gold jumped overnight, rising $11.30 to $1,726.30 an ounce. This, I believe, highlights the inevitability of a weaker U.S. dollar. Gold has also been forecast by some to reach $2,000 per ounce by year-end. I'm not sure that I concur that gold will reach $2,000, but it's worth keeping an eye on it to see whether this post-election jump in the price is the beginning of a trend.

Jim O'Neill, chairman of Goldman Sachs Asset Management and the person who created the BRIC acronym for Brazil, Russia, India, and China, has said that it is now time to buy Chinese equities. I've been saying the same thing in some of my articles here at Seeking Alpha.

All this brings me to a China-based company that I believe is worthy of investor consideration, Xinyuan Real Estate Co. (NYSE:XIN). The company is the first Chinese developer to obtain a listing on the New York Stock Exchange, which should provide a certain comfort level regarding transparency and disclosure for investors. The company is trading at what I see as an unbelievably low P/E of 1.84.

Xinyuan Real Estate will announce its third-quarter results on Nov. 9, but let's take a quick look at some reasons why I believe the company is worthy of investor consideration before the earnings announcement.

Most of Xinyuan Real Estate's activities are China-based. The company is a developer of large-scale real estate projects targeting middle-income Chinese consumers. The company's focus has primarily been on what are referred to as China's Tier I and 2 cities. The company has targeted Chinese markets with a population of over 64.7 million in eight cities: Beijing, Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou, and Chengdu.

In October, Xinyuan Real Estate announced that it had acquired the land use rights for its first project in Beijing. The development site consists of a total area of approximately 621,000 square feet in the city's Daxing District, between the city's fifth and sixth southern ring roads. The company indicated that its target customers will be first time home buyers, young couples, and commuters who work in downtown Beijing. The company indicated that it would build smaller-sized and affordable apartments on the development site.

A subsidiary of Xinyuan Real Estate, XIN Development Group, Inc., is proceeding with three U.S. projects. As a component of this strategy, on Sept. 28 the company announced that it acquired a development site in the Williamsburg section of Brooklyn for $54.2 million. The company indicated that the Brooklyn site will accommodate an approximate 506,000 square foot residential condominium development. It will be interesting to see what impact Hurricane Sandy will have on the company proceeding with this project, due to the project's proximity to the Brooklyn waterfront.

The company also has luxury apartments for resale in Irvine, Calif., and 325 finished lots and 185 acres of raw land in the Reno, Nev., area. It appears that part of the company's strategy will be to market the California apartments, the Brooklyn condominiums, and homes in the Reno area, in China.

Xinyuan Real Estate's Financial Results

While Xinyuan Real Estate's third-quarter results will be out shortly, let's take a quick look at the company's second-quarter results. The company's second-quarter financial results were the company's best ever, with record revenues, contract sales, and net income.

Total second-quarter revenues were $253 million, an almost 39% increase from the $182.7 million reported for the second quarter of 2011. Its contract sales were $258 million, a 14.5% increase from the $225 million reported for the same quarter of 2011. Most importantly, the company's net income was $69.4 million, an increase of 118% from the $31.8 million of income for the second quarter of 2011, and an almost 200% increase from the net income of $23.2 million report for the first quarter of this year.

During its second-quarter earnings call, the company stated that its full-year 2012 net income will be in the $130 to $140 million range. I will have to see if this gets updated during the company's third-quarter earnings call.

Xinyuan Real Estate's earnings per American Depositary Share (ADS) for the second quarter were $0.94, compared to $0.40 for the same quarter of 2011, and $0.31 for the first quarter of this year. As a dividend payer, the Xinyuan Real Estate story is also worthy of attention by investors. On Oct. 16 the company announced its third quarterly dividend payment for this year, of $0.04 per ADS. With the shares currently trading in the $3.77 range this is a minimal dividend, but it does show the company's commitment to pay dividends.

Also of note is that Xinyuan Real Estate has been buying back its shares. In June, the company announced that it had completed a $10 million share buyback. The company also announced that it was beginning a new $20 million buyback.


I will definitely take a look at Xinyuan Real Estate's third-quarter results, which will be out shortly, and see if the company is maintaining its growth in revenue and net income. Since the company has projected full-year 2012 net income in the $130 million to $140 million range, this will likely be the case.

I'm very comfortable with the company's China strategy, but am unsure as to how successful Xinyuan Real Estate will be with its U.S. business direction. The U.S. is a different business environment than that of China, and I believe that the U.S. will provide ongoing challenges for Xinyuan Real Estate. While I believe that it's likely that the company will announce additional U.S. projects and acquisitions, I believe that its U.S. strategy may end up being a distraction from what I believe the company should be doing -- focusing on real estate development in China's Tier 1 and 2 cities.

Other Chinese Companies That Should Grow as the Country's Economy Continues to Grow

One of my focuses here at Seeking Alpha has been on identifying Chinese companies that meet a few general criteria. These criteria include positive trends in the growth of revenue and income; low P/Es; companies that are focused on internal Chinese demand rather than export; and companies with good growth prospects for the future.

Other Chinese companies that I believe are also positioned that meet those criteria, which I've discussed here at Seeking Alpha before, include:

China Automotive Systems (NASDAQ:CAAS): Through eight joint ventures in China, the company manufactures and sells power steering components and systems to China's automotive industry, and also exports to North America. The company is the largest power steering manufacturer in China's domestic market. For the second quarter of this year, the company's sales increased 2.8% to $80.4 million. For the second quarter of this year, China Automotive Systems' net income was $8.6 million, up from $7.2 million for the second quarter of 2011. Its P/E is 7.10.

Asia Carbon Industries (OTCPK:ACRB): Its principal product is carbon black, which is primarily used as a key raw material in the manufacture of tires. The future of Asia Carbon Industries' business is tied to the growth of the tire industry in China, and to the growth of China's auto industry as well. The company's revenues for the second quarter of this year were $13.195 million, which, on an annualized basis, is slightly more than the $49.12 million the company reported for all of 2011. The company's net income for the second quarter of this year was $1.87 million. Its P/E is 1.28.

China Carbon Graphite (OTCPK:CHGI): It is one of the country's leading wholesale suppliers of fine grain and high purity graphite, and a top overall producer of carbon and graphite products. Its revenues for the second quarter were $11.88 million, and its net income was $870,000. Its P/E is 3.82.

Xiniya Fashion Inc. (NYSE:XNY): The company designs, manufactures, and sells men's clothing and accessories. For the quarter ended June 30, the company showed an increase in revenue of almost 25% to nearly $25 million. But despite the increase in revenue, net income for the quarter was almost $3.2 million, a 43% decrease compared to the second quarter of 2011, due to primarily increased selling and distribution costs. My conclusion is that the company has already started reining in these costs, and that the likely decrease in these costs will be reflected in the company's third- and fourth-quarter results, making the company a definite candidate to be considered for investment. Its P/E is 1.75.


Investing in smaller-capitalization companies, as well as investing in companies in emerging markets (including China), is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks.

The companies mentioned above include smaller capitalization companies with operations based in China. All the companies mentioned trade in the U.S. are all U.S. reporting issuers and therefore subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors. As mentioned above, Xinyuan Real Estate Co. is listed on the New York Stock Exchange, so this NYSE listing should provide additional comfort regarding disclosure and transparency for investors.

Disclosure: I am long OTCPK:ACRB. I may initiate a long position in XIN before it announces third-quarter earnings, specifically sometime in the next 48 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.