Xinyuan Real Estate (XIN) Q1 2016 Results - Earnings Call Transcript

May 10, 2016 11:21 AM ETXinyuan Real Estate Co., Ltd. (XIN)
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Xinyuan Real Estate Co., Ltd. (NYSE:XIN) Q1 2016 Earnings Conference Call May 10, 2016 8:00 AM ET

Executives

William Zima - Partner, ICR

Yong Zhang - Director, Chairman of the Board

George Liu - Chief Financial Officer

Operator

Good day, everyone, and welcome to the Xinyuan Real Estate Company Limited First Quarter 2016 Earnings Conference Call. Please note that today’s call is being recorded.

I would now like to turn the conference over to Mr. Bill Zima of ICR. Please go ahead, sir.

William Zima

Hello, everyone, and welcome to Xinyuan’s first quarter 2016 earnings conference call. The company’s first quarter earnings results 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 the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results will 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 U.S. 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, the company’s Chairman, who will comment on our operating results. He will be followed by Mr. George Liu, the company’s Chief Financial Officer, who will provide some additional color on Xinyuan’s performance, review the company’s financial results, and discuss the financial outlook. Following management’s prepared remarks, we will open up the call to questions. Please limit your number of questions to no more than three during the Q&A session. Also during the Q&A session, Mr. Zhang will speak in Mandarin and his comments will be translated into English.

With that said, I would now like to turn the call over to Xinyuan’s Chairman, Mr. Zhang. Please go ahead.

Yong Zhang

Thank you, Bill. Good morning and thank you all for joining our first quarter 2016 earnings conference call. We’re pleased to report stronger financial results. For the first quarter of 2016, with both contract sales and net income achieved greater than 50% growth in our first quarter of last year.

Revenue growth was driven healthy levels on the sales activity and demand at most of our projects. And we continued to benefit from variable national and local government productivity.

During the first quarter of 2016, we successfully completed a new RFPs land acquisition in New York located in midtown Manhattan. Additionally, we completed three new land acquisitions in Beijing, Kunshan, and Zhengzhou during the month of April. These new land acquisitions are impacted and contributes to our future cost.

We made our commitment to our shareholders through our quarterly dividend policies and share repurchase program. Our strong first quarter results and a favorable outlook and will add to increase our full-year initial forecast.

Now, please allow me to turn the call to our CFO, Mr. George Liu. George, please go ahead.

George Liu

Thank you, Chairman. Hello everyone, and welcome to Xinyuan’s first quarter 2016 earnings conference call. We’re very pleased with strong financial performance for the first quarter and continued to make good progress on the execution of our growth strategy.

During the first quarter, Xinyuan continued to benefit from favorable government policies in China’s real estate sector, which how support the markets we sell. Our sales also benefited from our choice of projects in the Tier 1 and 2 cities that have favorable economy and population growth trends, and where we have an existing presence and good track record of performance.

Now please allow me to further review our financial results. For the first quarter of 2016, contract sales increased by 51.2% to US$279.6 million from US$184.9 million in the first quarter of 2015. Total gross floor area sales increased by 82.7% to 206,600 square meters from113,100 square meters sold in the first quarter of 2015.

The average selling price per square meter sold was RMB8,839, or US$1,354 in the first quarter of 2016, compared to RMB10,031, or US$1,634 in the first quarter of 2015. Total revenue for the first quarter increased by 41.2% to US$235.4 million from US$166.7 million in the first quarter of 2015.

Gross profit for the first quarter of 2016 was US$48.9 million, or 20.8% of revenue, compared to a gross profit of US$48 million, or 28.8% of revenue in the first quarter of 2015.

SG&A expenses were US$31.5 million for the first quarter of 2016, compared to US$27.7 million for the first quarter of 2015. As a percentage of total revenue, SG&A expenses decreased to 13.4%, compared to 16.6% in the first quarter of 2015.

Net income for the first quarter of 2016 increased 53.3% to US$6.9 million, compared to US$4.5 million for the first quarter of 2015. Diluted net earnings per ADS attributable to shareholders were US$0.09, compared to US$0.06 per ADS in the first quarter of 2015.

As of March 31, 2016, Xinyuan’s cash and cash equivalents, including restricted cash increased to US$1.03 billion from US$750.7 million as of December 31, 2015. Total debt outstanding was US$2.15 billion compared to US$1.73 billion at the end of the fourth quarter of 2015. The balance of our real estate property under development at the end of the first quarter of 2016 was US$2.04 billion compared to US$1.89 billion at the end of the fourth quarter of 2015.

In the first quarter, our China subsidiary completed the issuance of its Second and Third Tranches of Onshore Corporate Bonds in China. The issue size of the Second Tranche Bonds is RMB700 million, with a coupon rate of 7.47%, while the size of the Third Tranche Bond is US$500 million with a coupon rate of 7.09%. Overall, we completed the issuance of our Onshore Corporate Bonds in China, representing our total principal amount of RMB2.2 billion.

During the first quarter of 2016, we continued to make good progress on our Oosten project, based in Brooklyn, New York. As of the end of the first quarter, the company had pre-sold approximately 69% of its total units compared to 64% at the end of December 2015. Unit demand pricing remain healthy for this project during the quarter, and we expect to fully deliver the entire project in the second-half of this year earliest.

While the newly acquired project located in midtown Manhattan, our architectural, engineering and marketing teams have already been assembled. The project is currently in the planning and design stage, and will be a mixed use project, which will include some retail space.

As just discussed, our new Manhattan project represents our second land acquisition in New York City, which we announced in January. We also announced three new China land acquisitions in April in the cities of Beijing, Kunshan, and Zhengzhou. We have carefully selected these land parcels, which are in attractive locations, are in existing markets we serve and also enjoy rapid development and population growth. As such, we expect this new project to generate strong investment returns.

During the first quarter of 2016, we repurchased 3,634,240 ADS at a total cost of approximately US$14.2 million. Today, we also announced a cash dividend for the first quarter of 2015 of $0.025 per common share, or $0.05 per ADS, which will be paid to investors on June 8, 2016 to shareholders of record as of May 25, 2016, or we’ll remain committed to this progress in 2016 to maximize shareholders value.

As we look ahead to the remaining quarters of 2016, while there still remains uncertainty in the real estate industry, we believe market conditions will be stable in the coming quarter and expect favorable government policies to continue to enjoy additional demand for our projects. Based on our strong performance in the first quarter and the outlook for the business in the coming quarters, we are raising our 2016 full-year financial forecast. We now expect full-year contract sales to grow between 15% to 20%, our net income growth of 20% to 25% compared to 2015.

Please note that our 2016 forecast also include a partial contribution for our Oosten project in Brooklyn, New York.

This concludes my prepared remarks for today’s call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take a question from Craig Marie [ph].

Unidentified Analyst

Congratulations on your first quarter and you’ve aggressively purchased during this period. I had a question regarding the Oosten project. According to the register of these US$7 million worth of units were delivered and – to the first quarter. I was wondering what’s your expected gross profit was on those project?

Yong Zhang

Gross margin about Oosten project, we are spending a margin roughly like 30%. We – since this project is being both in a – accounting methods different from what have – what we have to be booking our China project. So we still need to finalize the margin calculation on the project. You’ve been develop, have been deliver and but generally we are expecting gross margin like 20%, 30% or 35% in expense are, how are those final settlements will look out.

Unidentified Analyst

Okay. And on those two units that were delivered in March, those sales price was up a little bit higher than the list price, was that additional work that you did for the project or was just bidding for the units?

Yong Zhang

We are – again we just mentioned that the pricing and sales trend in the booking, on our pacific growth project is warehousing. So generally we have been able to stow our unit in Brooklyn project, better than we have planned for at a beginning.

Unidentified Analyst

Okay, thank you very much.

Operator

[Operator Instructions] We’ll go next to Herb Singh [ph] with Singh Family Trusts.

Unidentified Analyst

Hello, good morning George. My question also relates to the Oosten project. You said that some of that full year guidance includes some net revenues associated with that. I was wondering if you could give me a perspective based on the sales trend, when we could expect the benefit of the sales to hit the financial statements. What quarters you expect that to happen over?

George Liu

We expect some to happen in the second quarter, but majority will probably happen in the third and the fourth quarter. But we probably wouldn’t not go all of the Oosten project this year. So soft and will be left in 2017. So in the second quarter, we expect to put a little better, a little more than what we have bought in the first quarter, but we will be – we’ll probably coming in the last quarter of this year.

Unidentified Analyst

I have one follow-up to that. Do you think that by the end of Oosten, some of that would be into 2017? Can you give me an idea of the percentage of the revenue you would expect to book at the end of this fiscal year versus the remainder of 2017?

Yong Zhang

First, it’s really still – it’s still just too early to make any impressed projections. And we are expecting to – both roughly half of the project in 2016. It could be as low as 40% or it could be as high as 60%. But chance is probably 60-40 divided between this year and next year.

Unidentified Analyst

Great. Is there – can I ask another question, or do you want me to get back in the queue, I don’t know how long the queue is?

Yong Zhang

Okay.

Unidentified Analyst

Okay. So the….

Yong Zhang

Yes, please?

Unidentified Analyst

Okay. So the other question relates to the buybacks, I’m very pleased to see the buyback and I was wondering about the intentions for the remainder of the fiscal year, I got the impression that it’s something the company is positive about continuing. But could you give me an idea of the magnitude that you expect to possibly do for the remainder of the year?

George Liu

We will continue to look at the possibility of repurchase program. But again that we purchased itself is not going to increase the sub-price as you would have hopeful. From order track record of what we have done in the purchase program in the past full-year, which we have concluded that repurchase program alone does not make much difference, but again, we are having to look at the possibility of further repurchases in the coming quarters, while we will continue to focus on improving our fundamentals.

Unidentified Analyst

Wonderful. Thank you so much.

George Liu

Thank you.

Operator

[Operator Instructions] We’ll take our next question from Brett Mayo.

Unidentified Analyst

Yes. Hi, Mr. Liu. Yes, I would agree with what Craig and Herb said, great job with buyback, back of the envelope math, it looks like buyback is around 5% of the outstanding shares this quarter, which is fantastic for existing shareholders to increase our ownership, so that’s – like I said, that’s fantastic. I noticed that $44 million difference between contract sales and revenue, and also in Q4, it was much more than it was like $161 million between the contract sales and revenue. Can you give some details on that? And I guess, particularly, do you expect those to come close together? And what does that – does that affect overall margins?

George Liu

It’s a timing difference of – there’s always a timing difference between the contract sales and the revenue. First, we need to also need to calculate the percentage of completion for all the contract sales that we have made in – to conclude revenue. However, any difference in the regard of gross margin, huge early would be caused by the mix of different projects with different margins rather than the difference between contract sales and the revenue.

Unidentified Analyst

Okay. That’s helpful. I did notice that Sanya project and I apologize if I’m pronounced that wrong, but it had no sales this quarter. What is going on with that project? And are there any updates on it?

Yong Zhang

Which project?

Unidentified Analyst

Yazhou Bay?

Yong Zhang

That Yazhou project?

Unidentified Analyst

Yes, sir.

Yong Zhang

Okay. Yes, I know based on the initiative measures that have been imposed on the neighborhood where our Yazhou project A, so they see not just our project, all the projects in that location has been put on hold due to the initiative measures imposed by local government.

Unidentified Analyst

All right. Well, thank you, sir. And again, congrats on a great quarter and tip of the hat for the increase in Yazhou buyback. Thanks, sir.

Yong Zhang

Thank you.

Operator

[Operator Instructions] We’ll go next to Richard Geronimo [ph].

Unidentified Analyst

Hi, George, how are you?

George Liu

Good, how are you?

Unidentified Analyst

Good, thank you. I just have a couple of questions. The Tranche that you guys did for the Third Tranche obviously the 13% bonds are going to be coming up in the 2017 and 2018 year. What are your plans to spend of those?

George Liu

We are definitely looking at since we’re – as a matter of fact, our blending cost – our financing has been decreased to a level like 8% or 7% – between 7% to 8%, so that means that it is really reasonable to consider any possible works on 13% of that that we currently we have.

But then a couple of options that we are waiting, we are actively consider the matters to review our financing cost including this high yield bonds that we have that we did a couple of years ago. But we haven’t made any affirm actions and once we have done it, we will announce it separately.

Unidentified Analyst

Okay, so I kind of understand a little bit of that. So you’re looking at that, but that’s one of your largest percent bonds that you have, I know it’s difficult to transfer from China to the U.S., but you’re expecting to try to do it this year, I mean I know there’s also a penalty to pay, but your thoughts?

George Liu

Yes, again there are many ways to do it. One thing I just say we can try to transfer our R&D out of China to hire them – we hire those high yield bonds. And there’s also since our financing cost have been reduced that if we go by some cheap bonds or that’s out of China, we could also use first things to replace these high cost high yield bond. All those options are being way and we are actively exploring different possibility. And once this system has been made or action has been completed, we will definitely announce it separately.

Unidentified Analyst

That’s great and you’ve made a lot of purchases this year for land, which I really applaud. Do you think it’s going to continue or are you just going to just see what the market there just far as the rest of the year goes?

George Liu

Again we – we’re real estate company, so if there is any good land parcels been priced at reasonably, we are happy to consider it and we probably will acquire that. As for our four or five land lots that we have acquired, one, we are now doing generally that is in Manhattan. We think that is a very good addition to our Brooklyn project and it’s been – it’s also thus good to our brand image in New York City and we consider that we become more land international homebuilder.

But instead of a China, one by taking this kind of steps, which we will continue to restore in the future. And about the other four lands that we acquired in Beijing, Kunshan, Jiangsu, respectively all the four lands been acquired at a price that we’re very happy with that. They are the opportunities we cannot miss. That’s why we are – we have taken those steps. I could easily elaborate a little bit about these acquisitions.

Kunshan in Beijing as you can see from our announcement that land acquisition cost per square meter construction area, we’re talking about roughly RMB11,000 per square. However, neighborhood the land, the property – the residential property has been so and roughly RMB40,000 per square meter and any new land lots that in option being pushed up a rather neighborhood and probably would be started in RMB30,000 to RMB35,000 per square meter.

In terms of Kunshan project, which we announced our land cost is roughly 5,000 per square meter. However, anyone could tell you that the price had almost increased 40% in the first quarter in the very location and it was a reasonable projection would be much higher than land costs we have secured, probably I would expect 50% more than we have secured.

In terms of Zhengzhou, which is – where this company has been founded and started, we have working on those land lots for over two years and now it’s time for us to harvest the efforts we have made for past two years. And as you can see there, we got up land lots at a cost of roughly RMB2,000 per square meter considered that the property price, average property price for residential in Zhengzhou is now around RMB9,000 to RMB10,000 per square meter.

So all the properties are good deals, we are very happy that we have done that. For the future for the coming quarters again, again if they are good deals we are definitely join – but if there is no good deals if the market continue to get and getting such a level that the land acquisition become cost in effective that we will walk away from those deal.

Unidentified Analyst

Okay, thank you. And one more question, so do you think you may do some more onshore bonds to potentially to give rate of the 13% bonds on this U.S. – the U.S. dollars?

George Liu

Yes, again as I just mentioned that the rate is about 13% U.S. dollar bond is definitely something which we are taken serious condition – calculation and they have many ways we’re doing. In off shore bond we can get and a cost like 8% or 9% is also a good way to reprice that.

And for the onshore bonds, apart from the 7% or 7.5% financing cost that we have on the current onshore bonds, if we can continue to get those money at a reasonable financing cost by below 8%. It might be – we might consider to repricing to use that to replace cost loans that we are paying across higher than 8%.

Unidentified Analyst

Well, thank you very much. It was a great quarter and I appreciate talking to you.

George Liu

Thank you.

Operator

With no other questions in queue at this time, I’ll turn it back to management for closing remarks.

George Liu

Thank you. We thank you joining us on today’s call and appreciate your ongoing support. We look forward to updating you on our progress in the weeks and months ahead. Thank you again.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference. You may now disconnect.

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