There has been a lot of hesitation with writing this article. So much good work has been done already with Xinyuan, that I don't offer much original thought to the debate. That said, let's get started!
Xinyuan (Ticker: XIN) is a Chinese real estate developer, focused on residential properties for middle-income consumers, primarily focusing on selected Tier II cities in China. You can think about high-rise middle-income apartment complexes, within a city, and that gets you close to what they do. Xinyuan also does auxiliary services and amenities, such as retail outlets, leisure and health facilities, kindergartens, and schools.
But why should you invest your hard-earned money in this company? Good question!
The Stock of Xinyuan is mis-priced. By every single financial measurement I can think of, this Stock is under-valued. Here's a breakdown of some common metrics:
P/E (Price/Earnings) = 2.2 X's (for an earning's yield of 45%!). Anyway, you slice that, it's cheap. An American company selling under 10 X's (earning's yield of 10%) is cheap. We're talking about Xinyuan being 70%-90% under valued. They earned $159 Million in net-income (after salaries, bonuses, taxes, etc.), and yet the entire company could be bought for $347 Million on the open Market, which works out to $4.87 per Share.
Book Value = $11.55 per Share. The Market is saying this company is worth significantly more dead than alive. Yet, this thriving enterprise employees over 500 people, and earns over $100 Million per year. This company is currently trading at 42% of their book / liquidation value. Bargains like this are rare. I will acknowledge, I can't predict the timing of when this situation will correct itself; but I can come to conclusions about Xinyuan being terribly mis-priced.
Price/Sales = 0.39. They did close to $900 Million in Sales last year (with terrific margins), and look to repeat that this year.
Dividend = 4%.
*for non-math nerds, you can skip this next paragraph and go straight to the $60 Million Share Buyback part.
Relative Graham Value / Intrinsic Value = $32.93 Ben Graham, the father of value investing came up with a formula for intrinsic value. The formula is "Value = Earnings per Share(8.5 +2g)"...g stands for annual growth rate. I used 5% as a super-conservative guess for the future growth rate. Here's the math. Value = $1.78 EPS multiplied by (18.5). Value = $32.93.
$60 Million Share Buyback. This Share repurchase goes through 2015 (and they should accelerate it to take advantage of these low prices). Anyway, at today's prices the buyback will cut the outstanding Share count by 17%.
So, a 45% earning's yield, plus a 4% dividend, plus a 6% share reduction (per year); that comes out to a 55% return on investment. If that doesn't get you excited, check your pulse!
Other reasons to buy Xinyuan:
TPG Capital invested $109 Million into Xinyuan common shares and convertible notes. A large private equity firm like TPG putting up millions is a huge vote of confidence in Xinyuan's future. You can bet your bottom dollar that TPG did a huge amount of due diligence (site visits, cash audits, meetings with Management) before putting millions at risk.
The founder and co-founder of the company still own about 40% of the company's outstanding shares. You can bet the founder's want the stock to perform well too.
Despite the doom-and-gloom stories about ghost cities, China moves on. I mean, this fascinating article came out just this week;
Urbanization in China will continue. Around 53% of the Chinese population now lives in Urban areas, up from just 26% in 1990. And, there are predictions for around 70% in cities by 2035. Even if that proves overly optimistic, make no mistake; the trend from rural to city will continue. And, Xinyuan building in Tier II cities should bode well for this urbanization move. My hypothesis is Tier I cities (Beijing, Shanghai, etc.) have already experienced the hyper-growth phase; and it should be easier for Tier II cities to continue growing at reasonable levels.
Another Chinese real estate company; Soho China Ltd (Ticker: 0410 , Hong Kong Exchange) has largely rebounded off their 2008 low's. Soho has risen almost 200% since their 2008 bottom. While no slouch, XIN has risen about 125% since their 2008 bottom.
Okay, time to wrap this up. I'm sure people will bring up the SEC judge barring the Big Four Accounting firms being suspended from auditing U.S. listed Chinese companies for 6 months (the accounting firms have already appealed this decision). It is a big deal, I don't make light of it; but if anything, this ordeal has offered an even better price for a great company.
Warren Buffett said, "I prefer a lumpy 15% return to a smooth 12% any day." Well, owning Xinyuan will be lumpy. But, in the long-pull, owning Xinyuan may be the best investment decision you'll ever make.
Please let me know your thoughts, I look forward to a very lively debate in the comments section below!
Disclosure: I am long XIN, GLW, BRK.B, BKE, CYAN, .
Additional disclosure: I am not a professional security analyst. I do however enjoy investing, and learning everything I can about business. But make no mistake, my article should only be used as a starting point for further research. I wish you the best!