Xinyuan: Attractive Valuation And Good News, But Unique Risks

| About: Xinyuan Real (XIN)

Summary

Buyback announcement is shareholder friendly. High Dividend, low p/e, low price to book.

Very Attractive valuation and unique risks.

An interesting opportunity but not for all investors.

Thesis:

Recent News:

Xinyuan Real Estate Co., Ltd. (NYSE:XIN) Announces $40 Million Share Repurchase Program

PR Newswire

BEIJING, April 18, 2017

(NYSE: XIN), an NYSE-listed real estate developer and property manager primarily in China and recently in other countries, today announced that the Company's Board of Directors (the "Board") has approved a new share repurchase program, under which Xinyuan may purchase up to US$40 million of the Company's ADS through December 2019 (the "2017 Repurchase Program").

Repurchases under this program will be made from time to time through a combination of open market and privately negotiated transactions.

Mr. Yong Zhang, Xinyuan's Chairman, stated, "The implementation of a new share repurchase program reflects the confidence in our long-term growth prospects. We believe Xinyuan's strong financial position and our ability to generate operating cash flow to fund the new share repurchase program will create additional value for our shareholders."

This is shareholder friendly to the extent that the company actually makes the purchases of the stock and follows through on the announcement. The shares also offer a 8.58% dividend yield.

Company Overview: Xinyuan Real Estate

Real Estate investments in both China and New York Markets.

In China, the Company develops and manages large scale, high quality real estate projects in over ten tier one and tier two cities, including Beijing, Shanghai, Zhengzhou, Jinan, Xi'an, Suzhou, among others. Xinyuan was one of the first Chinese real estate developers to enter the U.S. market and over the past few years has been active in real estate development in New York. The Company aims to provide comfortable and convenient real estate related products and services to middle-class consumers

Earnings:

Fourth Quarter 2016 Highlights:

  • Total fourth quarter revenue increased 22.2% to US$505.3 million from US$413.6 million in the fourth quarter of 2015.
  • Gross profit for the fourth quarter of 2016 increased to US$126.4 million, or 25.0% of revenue compared to US$81.4 million, or 19.7% of revenue, in the fourth quarter of 2015.
  • Net income was US$16.7 million, compared to US$19.1 million in the fourth quarter of 2015 and US$28.0 million in the third quarter of 2016.
  • Diluted net earnings per American Depositary Share ("ADS") attributable to shareholders were US$0.18, compared to US$0.26 in the fourth quarter of 2015 and US$0.41 in the third quarter of 2016.

Full Year 2016 Highlights:

  • For the year ended December 31, 2016, total revenues increased 34.1% to US$1.56B
  • Sales increased 14.2% to 1,126,100 square meters from 986,100 square meters in 2015.
  • Contract sales increased 26.7%
  • Gross profit was US$357.6 million, or 22.9% of revenue in 2016.
  • Net income was US$79.5 million in 2016 compared to US$66.5 million in 2015.
  • Diluted earnings per ADS were US$1.06 in 2016 compared to US$0.91 per ADS in 2015.

Mr. Yong Zhang, Xinyuan's Chairman, stated, "Our fourth quarter results were in-line with our forecast from last quarter. Despite the implementation of new government restriction policies impacting China's overall housing market, our revenue and gross profit still achieved strong levels of growth on an annual and quarterly basis.

"We continued to make progress with our real estate development projects in both mainland China and overseas markets. Among our U.S. projects, our Oosten project in Williamsburg, Brooklyn is performing well with approximately 80% of the total units pre-sold as of December 31, 2016.

NYC Projects:

As construction at Oosten nears successful completion, we are pleased to recognize a total of $152 million in revenue from this project in 2016. Our two other NYC projects-one in Manhattan and the other in Queens, are progressing according to plan. In China, we continue to add to our land bank for future development with the recent acquisition in 2017 to secure land use rights for three land parcels in Zhengzhou, a market where Xinyuan has enjoyed great historical success."

Liquidity:

The company has ample liquidity due to their strong financial position. At nearly 2x the current ratio, it's hard to find a company with such a strong cash position.

XIN Total Current Assets (Annual) Chart

XIN Total Current Assets (Annual) data by YCharts

Valuation:

Exciting valuation:

The p/e is very low at 4.5, the current ratio near 2X is very strong, especially for a real estate company, the price to book is exceptional and the yield is very attractive. The valuation makes the shares very interesting for a value investor who is comfortable with the general and unique risks of this company.

XIN Current Ratio (Annual) Chart

XIN Current Ratio (Annual) data by YCharts

Technical overview:

The shares peaked at around $7 and have been drifting lower due to lower earnings in the last quarter (.18 vs .26, a 31% drop) (via Marketsmith) towards the $4 level. The recent buyback announcement gave the shares a big lift and I would expect the shares to consolidate the gains before moving higher.

The shares have significant resistance at $4.77 and $5.33, so upside in the near-term is limited, depending on earnings.

I began writing this article when the shares were at $4 and since they have spiked to $4.66, it makes it harder for me to recommend chasing a stock that has spiked 16% on good news.

XIN Chart

XIN data by YCharts

General Risks:

Low Share Price below $5:

The shares trade below the $5 level, and some mutual funds and institutions are prohibited from owning shares that trade below the $5 level.

Thinly Traded:

At times, it seems that the shares trade less than the 150,000 shares per day that they actually do. Also, the shares can be quite volatile during earnings announcements. (Next earnings; May 10).

The shares do offer options, which is an advantage and therefore, selling calls is a possibility for those who prefer this approach.

Strange Asset Mix:

The company has many projects in China, but has also invested in two rather expensive developments in New York and Brooklyn. The OOsten project was quite successful contributing $117.5M to the latest earnings of $505.3M, but it presents a strange mix of assets to analyze and is another factor making it more difficult for the company to gain attention from Wall Street research firms and analysts. It also requires extra skill from management to be able focus on such different real estate markets.

In China, the Company develops and manages large scale, high quality real estate projects in over ten tier one and tier two cities, including Beijing, Shanghai, Zhengzhou, Jinan, Xi'an, Suzhou, among others. Xinyuan was one of the first Chinese real estate developers to enter the U.S. market and over the past few years has been active in real estate development in New York. The Company aims to provide comfortable and convenient real estate related products and services to middle-class consumers

Volatility/ Earnings:

Due to the lack of an institutional shareholder base, the company can have larger swings in price around earnings.

Gaining attention from institutions:

The company deserves credit for trying to attract more coverage from Wall Street, but there is still minimal research coverage of XIN. We do see their efforts resulting in a higher ownership by institutions.

XIN Chart

XIN data by YCharts

Unique Risks:

China: Since the company invests in China, there are unique risks associated with doing business in that country including stability, rule of law, government restrictions, and other unique risks that an investor needs to be comfortable with before investing in this company.

Unlocking Value: The shares trade at a very attractive valuation but the assumption that the value gap will be closed quickly is not a good assumption. It will take the time for the company to overcome the drawbacks to investing in the company. For those comfortable with the risks, the shares are very attractive and undervalued in an overvalued market.

Conclusion:

Xinyuan Real Estate is a very unique company that is very attractive in terms of valuation, the dividend, buybacks, p/e, liquidity, and earnings.

Balancing these attractive features are some unique risks and general risks.

At the current time, due to the fact that the shares have run up on recent good news (the buyback announcement) and are at resistance levels, my recommendation is to wait on the shares until after earnings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 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.

Additional disclosure: Please evaluate the risk factors before investing.

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Tagged: , Residential Construction, China, Foreign Stock, Speculative, Value
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