* XIN trades at 20% of Book-Value ($2.59 Stock vs. $13.28 BV).
* XIN has authorized $60 million for Share Repurchases through year-end.
* XIN has spent less than $20 million of the $60 million authorized.
* XIN's Stock price suffers from management's mistakes.
A few things before starting: I am a long-term Xinyuan Real Estate (NYSE:XIN) shareholder and have never sold a share. I care nothing about the day-to-day, week-to-week, or month-to-month stock movements. However, over a 5-10 year period I care a great deal about what the business and subsequent stock price does.
Your first question should be, "why on earth does XIN trade at only 20% of Book?"
1) XIN is a Chinese Real-Estate Company. If you casually watch Chinese real-estate you are bound to catch a 60-Minutes special about ghost-cities along with pundits talking about the coming Chinese real-estate collapse. Also, China's economy is experiencing slowing growth, and the Stock Market over there is on the fritz.
2) XIN's net-income has been declining, while expenses and debt have been increasing. Debt particularly has increased at an alarming rate.
2013 = $126 Million
2014 = $49 Million
Selling and General Expenses:
2013 = $85 Million
2014 = $145 Million
2013 = $840 Million
2014 = $1,542 Million
3) Non-existent Investor Relations.
Now let's talk about buybacks:
Stock buybacks do not always make sense. If I were emailing Under Armour (NYSE:UA)) I would not ask for buybacks, because their Stock is too expensive relative to intrinsic value. It would cost them more than $2 to buy $1 worth of stock. And, they can better use that money throwing it back into and growing the business.
The situation with XIN is drastically different. Every $1 XIN puts back into running the business may earn $1.05-$1.07 (5%-7% net-margin), which is fine. But, every $1 XIN puts into buying back stock buys $4-$5 worth of assets / equity in the company. So, for every $1 XIN uses to buyback stock the Shareholders essentially earn a 300%-400% ROI. In other words, Stock buybacks are a better use of Shareholder funds simply because the stock price is such a bargain right now.
Funny enough, if XIN was trading at say $25 per ADS, I would be making the opposite argument. I would be emailing XIN saying, "please issue Shares, raise money from the issuance, and take advantage of this inflated share price!"
To my calculations, if XIN used all $40 million buying back Shares they could buy about 13 million ADS or more. That would eliminate over 33% of all the outstanding float! That means current shareholders would have their interest / ownership in the business increased by 33% minimum.** Let's say, for example, I own 1% of all outstanding float (400 K of the 40 million shares outstanding). After the buybacks I would own something close to 1.5% of all outstanding shares (400 K of the 27 million shares outstanding). It would also dramatically increase the Chairman / Founders ownership seeing as he rarely buys or sells any of his stock.
** For the above illustration I did not include the Chairman / Founders 29 million shares. He (Yong Zhang) was essentially gifted these Shares at IPO and to my knowledge he has never bought or sold a share. That said, if he decides to sale some of his stake there would be significant dilution.
Not only would the buybacks make the shares more rare / scarce / precious. The act would also show Investors that the company is serious and believes in itself and its' stock.
I personally think using all the buyback monies would drive the stock up more than 50%. However, that is not why I want it done. I want it done to take advantage of the ridiculously out of place share price. If XIN waits until next year, they may wind-up buying shares back at double the current price.....especially once the New York project (The Oosten) starts kicking in.
A quick word on The Oosten project, and why it is a big deal. I conservatively estimate XIN will earn $90 million net-income off this one project. XIN bought $56 million worth of land in Brooklyn, New York in 2012. They hired Starchitect Piet Boon and this project seriously could not have work out better. They have taken about $200 million in debt for the build out. And, based on public sales data available on streeteasy.com it looks like XIN may have at least $350 million in revenue from this 216 unit project. That said I don't believe this is a repeatable event. It will be a wonderful one-time windfall, but it's important to understand the non-repeatable aspect of this project. It will also be telling what XIN decides to do with the money once it starts coming in.
Back to buybacks:
So, why is the board choosing to throw money in the business rather than repurchase shares? It's my belief that management thinks they can grow the business into something significant. If XIN becomes a bigger company they'll get better access to land deals, government contracts, etc. Most importantly, if XIN grows it can eventually borrow money at cheaper interest rates. They've said many times on conference calls that they want to do $10 Billion Yuan in revenue per year. My take is, what good is $10 Billion Yuan if your margins are terrible? It's the quality of the revenue (and subsequent earnings) that matters. And the absolute best way to improve that metric would be a significant reduction in the share count.
I'd like to quote Warren Buffett on the buyback matter. If you do a google or baidu search for "Warren Buffett on Stock Buybacks" you will find him MUCH more eloquent on the matter than me. And I would love for all of you to go and read his thoughts on it. But, I will pass along this one quote that gets to the heart of the matter,"If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice."
XIN has a rare opportunity to do something to positively affect the company for the long-term. I believe buybacks should be their number one priority at this time. Let's be more blunt, how can management Not buy Shares at these prices!? The Stock trades at 20% of Book, trades at only slightly higher than the cash in the bank, trades at a Forward P/E of 3, and has lost 84% since IPO in 2007. XIN should be run for the benefit of its owners. Management chooses to pay a 7% dividend and fly around on a corporate jet that cost $1.4 million per quarter. It is beyond clear to me that XIN is being run for the benefit of management and not shareholders.
Please leave me a comment. I will work hard to respond to all. Thank you for your time!
Disclosure: I am/we are long XIN.