Xinyuan Real Estate's (NYSE:NYSE:XIN) stock has taken shareholders on a roller coaster ride over the last 12 months, but let's not forget that XIN shares are still outperforming the broader market by a wide margin over this period of time.
I have had a Xinyuan position in my R.I.P. portfolio for years now and the XIN shares have been a top performer, at least lately, but I believe that there is still room for the stock to run. To be clear, while there are definitely major risks that need to be considered before investing in Xinyuan, I believe that the risk is currently to the upside.
Q4 And Full-year 2017 Results
On February 9, 2018, Xinyuan reported impressive top- and bottom-line results. The company's Q4 2017 revenue (US$729M) and adjusted EPS (US$0.47) grew by 44% and 160%, respectively, when compared to the same period of the prior year. Other highlights from the quarter include:
- Contract sales were up 72% YoY (from US$465M to US$802M)
- Selling, General and Admin ("SG&A") expenses as a percentage of revenue were 10.6% for Q4 2017 (up from 10.4% in Q4 2016)
- Average selling price ("ASP") per square meter sold in China (i.e., the company's primary market) was US$1,794 for Q4 2017 compared to US$1,616 for Q4 2016
There is a lot to like about these results, especially the strong top-line growth and uptick in ASP/square meter sold, but the full-year results are even better after you consider the last three fiscal years.
| $ - in millions | 2017 | 2016 | 2015 | Chg ('17 to '15) |
| Contract Sales | $2,466 | $1,761 | $1,390 | 77% |
| Chg | 51% | 27% | ||
| Revenue | $1,980 | $1,561 | $1,164 | 70% |
| Chg | 30% | 34% | ||
| Gross Profit | $457 | $358 | $273 | 67% |
| Chg | 7% | 7% | ||
| SG&A | $211 | $178 | $167 | 26% |
| Chg | 2% | 1% | ||
| Net Income | $79.8 | $79.5 | $66.5 | 20% |
| Chg | 0% | 1% | ||
| Adjusted EPS | $0.94 | $1.06 | $0.91 | 3% |
| Chg | 0% | 0% |
Source: Table created by W.G. Investment Research with data from the Q4 2017 and 2016 Earnings Presentations
As shown, Xinyuan has significantly grown its business over the last few years. The bottom-line numbers are nothing to brag about, but, after taking a step back, it is hard not to be impressed by the fact that this company has grown its revenue by ~100% over the last five years.
As the old saying goes: if you aren't growing, you're dying. Xinyuan is indeed growing and I believe that reporting this type of revenue growth is no small feat, especially when you consider the fact that this company is contending with stiff headwinds in China. The Chinese government implemented restrictive policies and the changes have had a significant impact on Xinyuan's business. However, this management team has made things work and, in my opinion, this is exactly why Xinyuan's expansion outside of China is key to the company's long-term story.
The Oosten has not been the turning point that management may have hoped for, but, in my opinion, this project put Xinyuan on the map in the U.S. As such, I believe that the other U.S. properties have the potential to take this company to the next level. It also helps that management entered into a joint venture deal to better manage its U.S. operations.
Lastly, Xinyuan provided strong 2018 guidance (contracts sales to increase by 10% and net income to increase in the range of 15%-20%), even though they expect for the Chinese restrictive policies to be in place, so the future for this Chinese real estate company looks even brighter.
Risks
The most significant risk is (and has been) related to the fact that Xinyuan is a company from China. There is a long list of Chinese companies that have turned out to be frauds so U.S. investors tend to error on the side of caution and avoid putting money to work in companies from this country. But, I do not believe that Xinyuan should be viewed in this negative light. To start, the company has paid a quarterly dividend for years now and this typically does not happen when a company is a fraud. And more importantly, the company has operations in the U.S. and has continued to purchase land outside of China so it would be hard for management to get away with a fraudulent scheme like this, at least in my opinion. There is always a chance that the company could turn out to be a fraud but, in my opinion, the chances are slim to none.
Xinyuan's financial leverage is a concern, especially given the fact that it is a real estate company (i.e., will be significantly impacted by a downturn in the economy). Therefore, it makes sense that investors are somewhat worried about Xinyuan's growing debt balance.
| $ - in millions | 2017 | 2016 |
| Cash & cash equivalents (including restricted cash) | $1,481 | $905.9 |
| Total debt | $3,311.8 | $2,092.8 |
| Cash as a percentage of debt | 45% | 43% |
However, as I previously described here, I believe that debt is a necessary evil for a company like Xinyuan. Furthermore, during the conference call, management mentioned that Xinyuan's land bank at the end of 2017 was 2x higher than it was at the end of 2016 so it is not like the company has nothing to show for the rising debt balance.
There are indeed legitimate risks that need to be considered before investing in Xinyuan but I believe that the potential reward, especially given the company's current valuation, far outweighs the risk.
Valuation
Xinyuan is cheap based on several different metrics.
So, yes, there are risks that need to be factored into your evaluation of Xinyuan but, in my opinion, the shares are trading at an attractive enough valuation that warrants at least a look.
Bottom Line
There is a lot to like about Xinyuan's Q4 and Full-year 2017 results, so I plan to stay long the stock. I believe that Xinyuan has several catalysts - the U.S. properties, a positive change to sentiment, lower interest debt, lift of restrictive policies in China, etc. - that have the potential to create a significant amount of shareholder value over the next two years. Plus, no one really knows what is going on with the company's use of the blockchain technology (there have been some high-level reports but everything that I have read provides very little detail) but this, too, could turn out to be significant catalyst for the stock. Of course, that is, if management helps investors understand what the company intends to do with the technology.
Investors should not run out and purchase XIN shares tomorrow, but I do believe this company has great business prospects, even with the challenges created by the Chinese government. Therefore, investors should treat any pullbacks as long-term buying opportunities.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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