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Investing has been my passion for a long time, and my path to managing money has been anything but conventional. I was born in the former Soviet Union, in the shadow of the Cold War, and as remote from the capital markets as possible. In fact, I was being brought up to be free from the “shackles... More
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  • Xinyuan Real Estate: An Undervalued Company With A Margin Of Safety 0 comments
    Aug 27, 2013 1:54 PM

    Xinyuan Real Estate Co., Ltd. (NYSE:XIN) is a Chinese real estate development company. XIN primarily focuses on building large residential complexes for the increasingly urban Chinese population. It mainly operates in the smaller, higher-growth and more affordable Tier II and Tier III cities of China such as Zhengzhou, Chengdu, Hefei, Jinan, Suzhou, Kunshan and Xuzhou. Recently the company expanded to the suburb of Beijing by buying a plot of land there, and to the USA by acquiring development projects in Irvine, CA, Reno, NV and Brooklyn, NY.

    XIN was founded in 1997 and began trading its American Depositary Shares on the New York Stock Exchange in December of 2007, with each ADS representing two common shares. Since then, the company's growth has been impressive, based on the table below. Revenue and income have expanded, and so have the margins; book value has grown consistently.

    Year

    2008

    2009

    2010

    2011

    2012

    Revenue ($US Mill)

    356.6

    449

    450

    687.5

    914.8

    Net Income/(Loss) ($US Mill)

    (23.6)

    42.4

    51.1

    103

    158.1

    Net Profit Margin (%)

    N/A

    9.4

    11.4

    15

    17.3

    Book value per ADS ($US)

    5.30

    5.90

    6.76

    8.70

    11.01

    Apart from operating results, XIN management has shown other evidence of financial acumen. In 2012 XIN bought a portfolio of finished lots and undeveloped land in the Reno-Spark metropolitan area for $7 million and promptly resold parts of it, recouping its cost and in effect owning the remaining land for free.

    XIN has a strong balance sheet. At the end of Q1 2013 the company had $626 million in cash and cash equivalents which more than offset its $316 million debt. In fact, XIN's unrestricted cash holdings exceed the company's entire market capitalization. The company's interest coverage ratio is 11.6 and it pays a quarterly dividend of $0.05 per ADS, for the yield of 4%.

    The company has solid insider ownership. XIN founder and CEO Yong Zhang continues to hold 38.9% of shares outstanding. Equity International, a real estate investment firm led by Sam Zell is also an investor.

    Despite this positive company record, a recent ADS price of slightly above $5.00 means that one can now buy XIN at 45% of its book value and 52% of its net current asset value (current assets minus total liabilities). The company trades at the trailing 12-month P/E ratio of 2.25. By comparison, its smaller US-listed competitor China HGS Real Estate Inc. trades at the price-to-book ratio of 4 and trailing P/E of 25. China Housing and Land Development, a highly leveraged company, trades at the P/E of above 4.

    It's difficult to know the reasons for the market's eventual recognition of XIN's value, but there are a few possibilities:

    Share repurchase. XIN has bought back shares in the last two years and recently announced another share repurchase plan in the amount of $60 million, enough to buy back more than 16% of shares outstanding, assuming present price levels. Apparently, company management is thinking of ways to correct the undervaluation.

    Better visibility. With a relatively low market cap of $355 million, XIN doesn't have the attention of institutional investors. XIN's website states that currently there are no analysts covering the company. As XIN grows and becomes more involved in the US market, the investment community should become more familiar with its story. The company's recent road show tied to the issuance of senior notes also should raise awareness of XIN's potential.

    Doubts over accounting will subside. There is a wide-spread perception that most Chinese companies commit accounting fraud. Indeed, there have been well-publicized accounts of cheating at US-listed companies doing business in China and they reflect negatively on most Chinese companies. However, in the case of XIN investors should look beyond generalizations to the impressive company performance.

    Conclusion

    Both on the asset value and earnings basis, XIN is a company deeply undervalued by the market. With the recent price of slightly above $5 and value of at least $10, its shares offer upside potential close to 100%, a healthy 4% dividend, and a comfortable margin of safety.

    Disclosure: I am long XIN.

    Additional disclosure: Copyright ©2013 Max Popov. Views expressed are solely those of the author and should not be construed as investment advice.

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