|Like most investors, I have no interest in companies with capital size below US$500M. However, I found XIN was a significantly undervalued company, like an article said, probably the most undervalued stock on the NYSE. By the end of last week (7 Jan 2011), XIN’s price closed at US$2.74, the company’s PE was 3.97 and the capital size was 209M. What made such a low stock price? |
I. What’s the problem with XIN?
When the Company completed the IPO in NYSE, the price was US$14, till today the price already declined too much. Not like other low price Chinese stocks, XIN did not have any big issue in common：
1） No corporate governance issue noted. The PE funds entered in year 2006 and help the company complete the IPO, now they still with the Company. Blue Ridge is a famous fund, commonly the PE fund will help the company to build up or strength the corporate governance. The CFO and independent directors were pretty good and the management were stable according to the filing documents.
2） The way XIN go public was good. XIN entered NYSE by a successful IPO in 2007. Not like some Chinese Company they enter the US capital market by reverse acquisition, RTO and then upgrade to Nasdaq. From IPO, the auditor was E&Y and never changed.
3） No fraud issue exposed and the integrity of management were never been blamed before. Effective corporate governance, right way to go public, stable management team, good internal control and famous auditor, till now, no financial scandal noted.
4） There is no significant operation issue. XIN developed residential properties in tier 2 cities. The real estate market in China, especially in tier 2 city were grow very fast, which can be proved by XIN’s good performance.
5） XIN proved to have good ability to make profits. Except for 2008, XIN made profit every year. In 2009, the Company’s revenue was US$450M and the net profits were US$42M. According to the Company’s outlook, in 2010, the revenue was expected to range between US$435M on and US$445M while net income was expected to range from US$43M to US$46M.
6） The Company beat the outlook each quarter during last 2 years, which shows the business were well managed and management were reliable.
7） XIN is not a huge company, however, considering XIN’s business is develop residential property in tier 2 city, financial figure shows XIN is not a small company. More than US$400M’s sales and always have new projects in pipeline, XIN is not a small company and should have ability to withstand potential risk.
8） The stock of XIN was active traded and institutional investor accounts for a significant part. The average daily volume is 450 thousand and the institutional investor accounts for 36 percent.
9） The Company has a strong balance. As at 30 Sep 2010, the total cash was US$260M (the company’s capital size was only US$209M), total current liability amounted to US$320M, and the Company had US$650M’s inventory.
II. Any big issues with Chinese real estate market?
The real estate bubble, new regulation, property tax, increasing interest rate….. Too many news every day, will Chinese real estate market decline in near future? Nobody love high property price. Both Chinese and American believe in the truth they want to believe. However, come to our senses, high property price is the fact we need to face now. Why the price so high? There are too many reasons, in addition, these reasons were too complicated, let’s leave the question to economists in TV show. What we need to know is that high property price is a fact we cannot change.
1） Is the price reasonable? The question is too emotional. Every year, millions of properties were sold, the total amount can reach trillion. Who can say the prices were not fair? It is fair market value. Nobody, even the government cannot determine that. Who can give us a fairer price?
2） Why the property price cannot drop? Let’s look back, after SARS in 2003, the property price keep raising in tier 1 cities, some properties’ price increased from RMB3000 to 4000 per square meter to RMB20000 to 30000 per square meter today. Every time government took strong measures to control, the result was stronger rebound. It is ironic that all the time government to take action became good buying points. In Sep 2010, government issued new regulation, but only after 1 or 2 month, the unit price of a land transfer in Guanghzou break new record. And by the end of year, both the price and volume of realty transfer raised. Most of people expect the market will grow in 2011. Why the price of realty cannot fall down? The reason is quite simple, because except for the people who did not buy property, nobody wants the price drop: 1) local government do not want so, because land transfer accounts for a major part of their income 2) the banks do not want it fall down. Banks are creditor of property developers and property buyers 3) property developers do not want so. 4) People who own properties do not want their assets depreciated; If their assets depreciated, their purchase power will be affected; and if it is government who caused assets depreciation, will they hate government? For high property price, government did not have a clear attitude. Government declared the objective was to make the property price not increase too fast, not low down the price. Now we can see in tier 1 cities, the price can not decline, while in tier 2 cities, the price still have room to increase.
3） Will the bubble break? Here is the experience of American: Bad housing loan, fast growing realty market, subprime, bubble break, big recession….. Will such thing happen in China? From what we mention above, I do not believe the property price will decline. Here I want to discuss Chinese people’s paying capacity. In China, all property buyers have the ability to repay their bank loan. The mortgage accounts for less than 70 percent of total purchase price, some mortgages only account for to 50 percent. In Banks’s view, most housing loans are good loan, if not due to restriction by government, they want to lend more.
4） Will property tax have great impact? Let’s leave the question to economists, it is not clear, you can do some research, different people have different view. My view is that the property tax will not work, because the government did not want to low down the price. If the price was low down, I am pretty sure government will take action to boost it again as they have done before.
III. Why XIN was undervalued?
XIN’s problem is the Company entered into a wrong capital market, rather than operation or industrial.
1） American did not understand Chinese realty industrial, someone even did not understand China. I want to add more colors on this issue. Centuries ago, some western China experts did their research in library, now I want say some American Chinese stock experts did the same way: They read report, perceive the think of report buyers, and then cook new report. These reports made them so called Chinese stock experts, some of these experts only have short trip in China for sightseeing, maybe some experts never have been to China. While for the news reporters, they also have significant contributions for the GAP. I do not deny that Chinese media sometimes mislead Chinese people regarding western, but I am pretty sure their US counterparts did a better job. Recently, some American experts like to talk about “ghost town” in China. Ghost town? What an example for Chinese realty industrial, but American willing to believe it is the true China. Mislead by the media, people only believe what they want to believe. Comparable with the ghost city, I want to introduce the fact: In China, Henan Provinc has a population of 130M; the resident population of Zhengzhou, the capital city of Henan Province, is 7.3M, if take floating population into accounts, total population in Zhengzhou might reach 10M, and XIN is based in Zhengzhou. If you ever being to China, and see this busy city; if you ever experienced the traffic jam in Zhengzhou; If you see many properties’ unit price over RMB10000 per square meter; If you see the great community developed by XIN; you will get to know XIN conduct right business in right place, and it has did a great job, XIN is pretty famous in Henan Province.
2） American did not like realty industrial. To some extent, the big recession they experienced was triggered by the realty industrial, till now they yet recovered. Due to their experience, when Chinese government talk about high property price and bubble in a unclear tone, American believed the story, what they want to believe are pretty selective. Most American believe in the purchasing power of Chinese, they are confident that luxury goods market will be doubled, the tourist from Chine will be doubled, while at the same time, they believe the realty market will fall down due to Chinese people’s paying capacity. If American investors know below fact well, they will have a better understanding: a) the property price will not decline b) Chinese people have the capacity to pay the house they purchased.
3） Some investor sell short intentionally. From 2010, many investors sell short Chinese stock, some experts also contribute their efforts. Many reports mislead the investors, we did not know whether due to writer’s ignorance or intention. They made everything quite complicate.
IV. How much XIN has been undervalued?
The data blow can give more color about it. I’d like to draw your attention that XIN’s management are seasonable and reliable, all outlook/estimate provided by management were beat in past, so the estimate below is reliable. Considering the realty market boost recently, I think the industrial might beat the expectation.
1) By the end of last week (7 Jan 2011), XIN’s price closed at US$2.74, the company’s PE was 3.97 and the capital size was 209M.
1） In 2010, the revenue was expected to range between US$435M on and US$445M while net income was expected to range from US$43M to US$46M, earning per share will range between US$0.57 to US$0.60.
2） Estimate earning per share for 2011 is US$0.99.
3） As at 30 Sep 2010, the total cash was US$260M (the company’s capital size was only US$209M), total current liability amounted to US$320M, and the Company had US$650M’s inventory, total net assets were US$490M; Net assets per share was US$6.4.
I am not an expert, I do not provide objective, you can calculate it yourself. But I believe, given th low stock price, even XIN liquidated in 2011, you can still make money.
Due to the strong rebound and easy monetary policy in 2011’s first quarter, property developer should have a good start in new year. I believe finally the price will reflect the value of the Company.