Xinyuan Real Estate - A Few Worries, But What More Can The Company Do?

| About: Xinyuan Real (XIN)

Summary

The first quarter results are out.

Nearly everything is positive.

Is it time to buy XIN?

Elliott R. Morss, Ph.D. ©All Rights Reserved

Introduction

According to the Company's latest quarterly report, revenues, profits and inventories are all up. The company has continued its share buyback program and maintained it quarterly dividend at $0.10 per ADS. And this, despite foolish government policies to reduce real estate supplies at a time when housing supplies should be increased to meet the demand. And yet, XIN's stock price remains way below a reasonable valuation. Why? Is there more the company could do to allay fears?

Latest Results

Table 1 provides data on the "standard" financial numbers. As indicated above, they are all up. There is some bad news on the Oosten project. John Sheehy reports that costs came in above budget and there is a legal dispute with the general contractor. The company believes it has accounted for the likely outcome of the dispute, but is reluctant to make any further comment until it is resolved.

Table 1. - XIN's Latest Financial Results

Source: SEC Financial Reports

There are several things worth noting about the Table 2 data. The first is the steady reduction in number of shares resulting from the company's buyback programs. Since the beginning of 2015, shares have been reduced by 12%.

The company also deserves credit for trying to attract new customers by increasing the dividend. However, as a result of the dividend increase, the payout ratio has grown: and the 91% payout ratio in the first quarter of 2017 is troublingly high. However, there is a mitigating factor: it does appear that a "seasonal element" is involved - first quarter earnings appear to be lower than the other quarters. Nevertheless, the payout ratio this should be watched closely going forward. Needless to say, the price would take a real hit if XIN lowered the dividend payment.

Table 2. - Xinyuan Earnings and Dividends

Source: SEC Financial Reports

The company also deserves credit for trying to attract new customers by increasing the dividend. However, as a result of the dividend increase, the payout ratio has grown: and the 91% payout ratio in the first quarter of 2017 is troublingly high. However, there is a mitigating factor: it does appear that a "seasonal element" is involved - first quarter earnings appear to be lower than the other quarters. Nevertheless, the payout ratio this should be watched closely going forward. Needless to say, the price would take a real hit if XIN lowered the dividend payment.

What is Happening to Real Estate Prices?

Table 3 provides data on residential properties near to or in cities where XIN has developments. Not surprisingly, government efforts control real estate markets by limiting housing supplies has not reduced the rapidly escalating prices.

Table 3. - Prices of Newly Constructed Residential Buildings

Source: China: National Bureau of Statistics

Table 4 provides historical data on average selling prices of XIN's developments. The company cautions that these prices are not reliable indices because in any quarter a particular type of property might dominate sales. For example, with restrictions on residential sales, an unusually large portion of sales for many projects will be commercial rather than residential. Nevertheless, it is nice to see that for overall average prices are up for both the same quarter last year (+34%) as well as relative to the last quarter (+14%).

Table 4. - Average Selling Prices at XIN's Developments

Source: SEC Financial Reports

Sales by Area

Table 5 provides data on sales by area. And here, the effect of the government restrictions can be seen. Since the first quarter last year, area sales are down by 32%. As compared to the last quarter, they are down by 37%.

Table 5. - Sales by Area

Source: SEC Financial Reports

Inventories and Debt

Table 6 provides data on XIN's inventory and debt. Both have increased in the most recent quarter.

Table 6. - XIN Inventories and Debt

Source: SEC Financial Reports

Conclusions

Last September, XIN was at $6.64. Today it is at $4.62, a decline of 30%. Why? I have no idea. Sheehy speculates that "something in the YE16 financial results appears to have triggered selling by quantitative investing models."

Should you buy XIN? Real estate development is a risky business. However, if you are willing to hold a NYSE stock with a price/earnings ratio less than 5, a dividend rate greater than 8% with a significant upside potential in the next couple of years, you should.

Disclosure: I am/we are long XIN.

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.

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