Xinyuan Real Estate Co Ltd (XIN) CEO Yong Zhang on Q1 2020 Results - Earnings Call Transcript

Xinyuan Real Estate Co Ltd (NYSE:XIN) Q1 2020 Results Conference Call June 5, 2020 8:00 AM ET

Company Participants

Julia Qian - Managing Director, The Blueshirt Group Asia

Yong Zhang - Director, Chairman of the Board and Chief Executive Officer

Brian Chen - Chief Financial Officer

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Xinyuan Real Estate Company Limited First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s call. If you have any objections, you may disconnect at this time.

Now, I'll turn the call over to Julia Qian, Managing Director of The Blueshirt Group Asia. Ms. Qian, please proceed.

Julia Qian

Hello, everyone. Thank you all for joining us on today's conference call to discuss Xinyuan Real Estate Company's financial results for the first quarter of 2020. We released the results early today. The press release is available on the company's website as well as on Newswire services.

On the call with me today are Mr. Zhang Yong, Chairman and Chief Executive Officer; Mr. Brian Chen, Chief Financial Officer; Mr. Li Shangrong, Director and President of Xinyuan, China; Mr. [Mr. Dong Fongwu], Vice President. Mr. Zhang Yong will deliver opening remarks and Mr. Brian Chen will provide additional details on the company’s financial results and outlook.

Before we continue, please note that today's discussion will contain forward-looking statements made under Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

With that, let me now turn the call over to our Chairman and CEO, Mr. Zhang Yong. Please go ahead, Mr. Zhang.

Yong Zhang

Thank you, Julia. And hello, everyone. Thank you for joining our first quarter of 2020 earnings conference call. Our first quarter results were heavily affected by the COVID-19 outbreak. Revenues were US$125.8 million. GFA sales in China were 90,500 square meters. A few large project construction and pre-sales were delayed by the nationwide lock-down, which disrupted our supply chain and sales. In the end of the March, China had gradually reopened business. We are seeing an early sign of economic recovery. With all suppliers and partners to restart construction, we anticipate returning to normal business pace early of the third quarter this year.

Despite the short-term challenges from this unprecedented pandemic, our fundamental business remains solid. Our Hong Kong-listed property management company performed well. Our good cash position and ample liquidity enabled us to fully redeem US$200 million senior notes o0n March 19. We will continue to repurchase our ADRs depending on market conditions. With the majority of our projects in China, we remain optimistic about our business outlook for this year. Our high-quality residential projects and best-in-class property services continue to attract our customers. We believe these efforts will drive positive performance for the rest of 2020 and beyond.

Because we are confident in our long-term outlook, as well as near-term recovery in our business, we will keep paying dividend again this quarter despite the crisis. It will be low than previous dividend as we drive to manage our finances for '20. Presently, we are proud of our persistence of paying dividend for several years. It’s related to our commitment to enhance our shareholder value and our continued confidence in our business, our financial capabilities and the long-term market potential.

With that, I will now turn the call over to our CFO, Brian Chen, who will offer more details on our financial performance. Brian, please go ahead.

Brian Chen

Thank you, Chairman. Good morning, everyone, and thank you for joining the call. We hope that all of you and your families are safe and healthy during these tough times. First, let me give you update on the impact of COVID-19. The impact on the business performance in Q1 was evident.

In China, most of the cities had shut down business in part or entire of first quarter. We took immediate actions once the outbreak started, which hurt business, but ensured the safety of our employees and customers. We closed our sales and construction sites, which disrupted construction and pre-sales.

The main impact was in large projects in Beijing, Zhengzhou, Henan and Xi'an. The construction delay caused a significant decline in sales and revenue. We are working closely with our suppliers and construction partners to resume operations. We expect normal growth to resume in early Q3.

Next, I will go through the key financials in this quarter. Affected by COVID-19 lockdown, total revenue in Q1 was $125.8 million, down from a US$468.9 million in the first quarter of 2019. Contract sales in China totaled US$153.3 million in the first quarter of 2020 compared to US$478.9 million in the first quarter of 2019. The company's GFA, the gross floor sales area -- area sales in China were 90,500 square meters in the first quarter of 2020 compared to 211,400 square meters in the first quarter of 2019.

Gross profit for the first quarter of 2020 was US$28.1 million, or 22.3% of total revenue. This is a 6.1 percent point improvement from the first quarter of 2019. Sales and -- SG&A expenses were US$44 million, down 21.5% compared to first quarter of 2019. The cost savings are mainly due to lock-down and internal cost saving which reduced our sales and marketing expense. Throughout the crisis, we accelerated the platform and system integration, digitized our business process and further improved our operating efficiency. We will continue to optimize our cost structure in the quarters ahead.

In addition, during the time, we have been aggressively exploring innovative sales channels, leveraging our both online and offline platforms. We develop our own online sales system. This will further help us to attract customers and increase our sales efficiently. Now, sales offices are reopening, so we’re optimistic about resuming our business pace.

The net loss for the first quarter of 2020 was US$39.1 million compared to net income of US$18.2 million in the same quarter of 2019.

Next, I will discuss the balance sheet. Our cash position and liquidity are solid. At quarter end, we had cash and cash equivalent, including restricted cash of US$933.1 million. This was after we redeemed US$200 million of senior note on March 19. As Mr. Zhang mentioned, we will again pay in dividend this quarter and may repurchase our ADRs depending on the market conditions. Our overall asset position remains strong.

At this moment, we have US$3.2 billion of projects under development, US$0.4 billion of project that’s completed and US$5.2 billion of projects under planning. As you all know, in China and in the past, our real estate projects pre-sold. So we expect to generate meaningful cash flow as sales translate into cash.

We remain confident in the outlook. We still expect contract sales of about RMB20 billion to RMB22 billion this year with consolidated net income in the range of $60 million to $80 million in line with last year’s performance.

Let me conclude. Despite short-term turbulence, our long-term business fundamentals are intact. Our Hong Kong-listed property management company performed well and positive management is a recurring revenue business that is not particularly impacted by outside factors, such as this epidemic, the economic and other forces.

Recently Xinyuan Property Management once again recognized for its leadership position in the industry. In May, it was designated as a 2020 leading listed company or property management service in business performance. We are proud to achieve this honor.

With that, let's open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. We'll take our first question from [Franklin Morton]. Please go ahead.

Unidentified Analyst

It sounds like it was a tough period, but there's some interesting pieces in your press release that I wanted to pursue a bit. With your stock trading where it is, you have a market cap of about some odd $140 million. What is the market cap, the value of the shares you own in the property management business today?

Brian Chen

For that one, it’s slightly higher than the parent company at about -- I believe it’s about US$120 million equivalent.

Unidentified Analyst

So my simple mind would say that I'm paying -- as a shareholder, I'm paying for the property management business, and I'm getting the property development business for free?

Brian Chen

You can almost say that. This is why we're doing these trade and listings on Hong Kong Stock Exchange. Within Xinyuan, other than the main business line, we have five or six other business. All of them have -- either are really well established or have a great potential to go on capital market operation. At this point, we don't see our share price and the capital market for the listco reflect those values, let alone the true value of the main business line. So what your appreciation and what you said are absolutely right.

Unidentified Analyst

Yes. As a investor, I’d like to get things for free and I hope someday people pay a lot of money for them. Can you talk a little bit about your repurchase strategy now that you've lowered the dividend that gives you a little more financial flexibility? Have you bought any stock since the COVID outbreak and at what point do you think you might repurchase stock?

Brian Chen

For that time period, we purchased about 230,000 ADS with value on somewhere close to $0.5 million. Going onward, we'll look at the market condition and might continue to repurchase on the right timing.

Unidentified Analyst

Yes. I mean just, as you and I talked before, with your book value at, I don't know, $13 a share and the stock at [4.5]. And based on your earnings projection, you're talking a couple of times, a PE multiple of 2, it's pretty compelling. And I would refer to that as prudent to consider -- continue the repurchase program. And just the last thing is I wanted to just compliment you on how well you all held the business together in what was obviously a very, very difficult period. I mean a lot of companies when they shut down sales, shut down construction, they don't come back and you all appear to have come back very quickly and very strong, and I think that's a testament to the quality of the management and your strategy. So I just want to congratulate you on that. And that was my last comment.

Brian Chen

Thank you, Frank. Our fundamentals are still there. We had a strong land bank. We believe that this hit is just temporary. With the epidemic phase down in China gradually, even within Q1, month-by-month, we see noticeable improvement. Q2, we are still hanging there but we see even better recovery. We believe that by early Q3 business will go back to normal. We’ll be able to even recover those postponed or pent-up demand and sales in Q3 and Q4.

Operator

[Operator Instructions]. We'll take your next question from [George Guo]. Please go ahead.

Unidentified Analyst

Hi, Brian. Thanks for taking my call. My question is, with recent recovery in place, when do you expect to restore the dividend, like to go back to the old dividend?

Brian Chen

You know that Xinyuan, we have maintained this record for many years. Under this difficult time, we still continue on this change. At the same time, we have to make some big cuts due to the environment. We will continue to look at the business and strike a good balance between our shareholder and the debt equity -- debt investor as well as other stakeholders in the business. At this point, we expect that the business will recover to a bigger extent in Q2 and should have a full recovery in Q3. So the dividend policy will be reviewed on a quarter-by-quarter basis and will be decided by the Board members a few -- one week before the earnings release. So with that, I hope I answered your question.

Unidentified Analyst

Yes. Thank you. Yes. Because I can understand you are making a lot of cuts at the company and employees, maybe the balance of that -- everybody takes some sacrifice. That's -- is that a good understanding, my understanding?

Brian Chen

Yes. We had pretty good control internally too. Yes, go ahead, second question.

Unidentified Analyst

Second question is about your New York property. Because it's hard to do the comparison because I don’t remember how much units you sold last quarter. So is there any [units sold in the quarter]? And also how is the Manhattan project in -- on the 10th Street -- Avenue?

Brian Chen

Yes. First of all, on the Manhattan project on the 10th Avenue, we -- originally we had some road show in China, leveraging our well established sales office and sales channel. We actually received a very positive feedback, expect to realize some sales in Q1. Now due to the epidemic, those Chinese buyers, they cannot come to New York. So those sales need to be postponed. At the same time, the local sales expected to kick off by the end of the March. But again, due to the epidemic, the sales also got postponed. At this point, you know the situation in the New York is even more serious comparing to those China Mainland markets. So we closely monitor the open up and the sales activity will be depending on how the epidemic situation goes. In this quarter we haven’t realized any sales.

In terms of Oosten, very similar, no sales in the quarter. We did receive some interest some walk in before the epidemic because of it got postponed, including the [4] -- in Oosten, we have commercial gallery, had a buyer very close to sign a deal. In the last minute because of the epidemic it got postponed. And in terms of the London project, we had one sales or a unit. The construction and sales also got impacted by the epidemic for all of these projects.

Operator

And we will take our next question from [Eugene Cha]. Please go ahead.

Unidentified Analyst

So, my first question is, I mean I’m from China and I can speak Mandarin, but for most of the U.S. investors, they're unable to use the original language. So it's very hard for them to conduct due diligence and some investor may -- especially after what happened with [La Quinta Bay] this year. So some investor has doubts about the company’s financials and stuff. And I conduct --conducted due diligence and I know the company's financials are very real. But in order to help U.S. investors better understand the company, have you considered to increase transparency by disclosure -- by better disclosure about your individual projects on your Investor Relations website, as well as maybe maintain a social medium awareness. For example on Twitter, or Facebook or even Youtube, so that investor get a better up-to-date information about your projects?

Brian Chen

First of all, Xinyuan since we list in New York Stock Exchange, in the past, we really care about our reputation and company’s integrity. For the past 13 years in a row we have been audited by BNY, being compliant and stuff. We maintain a really good record. We are not those bad appels that we didn't want to comment on. We focus on ourselves. And you're absolutely right that a majority of our shareholders at the moment still mainly coming from U.S. from the East Coast and West Coast.

We commit to you really the communication we’ve done. Earlier this year, I spent three months time in New York. We replaced our PR company. We are exploring more communication channels including those on social media. At the moment, we already laid down some plans. After this call, we are going to implement a few of them to enhance the communication and more in-depth and several communication, including the detailed project disclosure. And on top of this investor call, we mean to create more road show and more real time presentation and taking more questions from shareholder on more on [moments] and more platforms.

Unidentified Analyst

Yes. That would be great, because every time I listen through the conference call, like the only question that investors are able to ask is your London project or your New York project. But that's a very small part of your overall business. And I think you know that. So yes, like my biggest concern is -- by the way -- and my second question is, like your company has -- like generally -- like for business -- for real estate development business listed on Hong Kong, like generally they have relative high valuation compared with your P/V ratio. So have you considered maybe have a dual listing in both Hong Kong and U.S. so that you can potentially get a revaluation from the market?

Brian Chen

At this moment, the Board and the capital market department will explore all alternatives. Wherever alternatives fit, we're going to do duly consider and grab the opportunity to share the value for the company, to our shareholders and the stakeholders.

Unidentified Analyst

Okay. Yes, if you can have a dual listing I think you will have a significant higher valuation compared with today and because I mean U.S. investor really don't understand a lot about your Chinese business, so that could be an option to realize shareholder value.

Brian Chen

Yes, thank you for highlighting that. And we are continuing to educate and communicate with our U.S. shareholders. And as mentioned, on the presentation at this point, our land bank has a fair value of over CNY60 billion, not like most of the businesses and peer company in U.S. Typically with that high quality land in the Tier 1 and Tier 2 cities, with our solid fundamentals, our reputation typically is supply driven. The epidemic might impact our business temporarily, but it's just a timing impact. With epidemic going phased away, if only the supplier and the -- and those projects in place, typically we can do pre-sales, we can realize over 50% of the sales on the day one and majority of cash proceeds can come back to the business. We have pretty solid cash business in place with majority of business in Mainland China.

Unidentified Analyst

Yes. That'd be great. Yes. And also if you can -- as your business recover from the pandemic, if you can maybe increase dividend and potentially maybe one day returning to the normal dividend level. That'd be great also.

Brian Chen

Note taken. Thanks for that suggestion.

Operator

[Operator Instructions] And it appears we have no further questions. At this time, I would like to turn the call back over to management for any additional or closing remarks. I'm sorry we do have a question in the queue. We will take our next question for [Max Koenig]. Please go ahead.

Unidentified Analyst

Yes, hello, it’s [Max Koenig] calling from Germany. First I want to say thank you to the Board that you will still be able to pay a dividend of $0.025. I think it's really important for many of us that you continue to pay dividends to us. And my second remark is, I want to ask former speaker who is able to speak Mandarin, if he can perhaps join us at the Yahoo! shareholder board or Facebook group. Perhaps you can ask him some questions or we can have a conversation with him. And yes, my third remark or question is, I already sent this question to the management or to Investor Relations team, because I don't understand the short selloff since -- during the last month. I've seen like FINRA short interest sites that they have shortage of stock on every day which is sometimes 50% of the volume. And so it is really -- it’s important for us, if you see the decrease at the beginning of 3%, 4%, 5% in our share and we don’t know the reasons. Okay, I see the reason is manipulating by short sellers but I don’t understand why you’re not acting on them because the data is publicly available and you can punish them if you are buying back the same amount on really next day or larger amount so they keep their fingers out of this company.

Brian Chen

Thanks, Max, for your feedback and appreciate you sharing -- first of all, sharing those communication platform with the other shareholder. Our Investor Relations and myself would like to participate and are willing to or eager to answer whatever question you have, either through e-mail or those social media platform. Secondly, about the short sell activity, we realize that there are some activities going on and we are closely monitoring that. With that, the company with that philosophy in mind, one thing is that some of the short sell maybe is based on the misunderstanding about our business model and misinterpretation of some of the number and might be impacted by the external environment including some of the Chinese company like previous shareholder mentioned. We are not like one of them. Since we list in New York Stock Exchange, 18 years ago, we keep our reputation. We continue to improve our communication. Believe that -- some of the short sell, we’re eager to approach them and talk to them and understand what's the logic behind; and hopefully those practice could be milled down.

Secondly, we believe in the fundamental of our business. We had a solid -- we have a high quality land bank. We have good reputation. We have a very efficient internal operation and we continue to improve it especially for the past 12 months. Most of the impact should be realized for the next six to 18 months. We believe our performance, our credit rating, a lot of the obvious performance, we will be able to share to our shareholder. So the share price will be coming up through that performance presentation.

Last but not least, as mentioned on a previous call, we also closely monitor the situation. We -- if the timing is right, we’re not shy to doing the buyback. The Board does have umbrella or bucket approval. For the share buyback it’s up to capital market team to make the call when the timing is right.

Operator

[Operator Instructions]. And seeing now we have no further questions, I'd like to turn the call back over to management for any additional or closing remarks.

Brian Chen

Thank you, operator, and thank you for participating on today's call. And thank you for your support. We appreciate your interest and looking forward to reporting to you again next quarter on our progress. Thank you.

Operator

Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect your phone lines.