Xinyuan Real Estate: The Path Is Becoming Clearer

Xinyuan Real Estate’s (XIN) stock has underperformed the S&P 500 (SPY) by a wide margin so far in 2018 but XIN shares are still outpacing the market over the last year.

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XIN data by YCharts

Based on my review of the company’s Q4 2017 financial results, I told investors that they should stay long the stock. My recommendation has not worked out well so far but, in my opinion, the risk-reward profile for Xinyuan is still attractive today. Moreover, the recent board changes supports management’s long-term business strategy and it actually makes the bull case a lot stronger, of course, in my opinion.

Changes To The Board, The Path Is Becoming Clearer

Xinyuan’s Board Of Directors announced that Mr. Samuel Shen and Dr. Hao Gao were appointed as independent directors. My biggest takeaway from the announcement, besides the fact that this adds to an already long list of board changes over the last 3 years, was the fact that Mr. Shen has an impressive background. Mr. Shen has experience at several major tech companies and he is currently the president of JD.com’s (JD) cloud business.

Xinyuan’s ambitions to become more of a data-driven company have already been well-documented so I believe that the addition of Mr. Shen to the board was management showing investors that they are serious about this long-term strategy. The blockchain rumors are getting most of the attention but it is the agreements with major technology companies that I am most excited about. For example, Xinyuan signed an agreement with a subsidiary of Tencent (OTCPK:TCEHY) to form a strategic partnership to provide value-added applications to customers in the real estate market. The company also signed an agreement with tech behemoth IBM (IBM) to help fuel the progress that is being made with Xinyuan’s real estate blockchain platform.

I believe that management is doubling-down on the data push and, in my opinion, I like these long-term strategic decisions. Will everything fall into place without any hiccups? No, of course not but I do think that management has the future in mind. Let’s all be honest with ourselves, data is driving the global economy and we are heading to a place where blockchain, the cloud, and technology in general will be intertwined into almost everything that is going on.

At the end of the day, the recent changes to the board, and more specifically the addition of Mr. Shen, shows that management is serious about the company’s tech ambitions. I believe that Xinyuan’s path is becoming clearer and, in my opinion, this path will create shareholder value for years to come. It also helps the bull case that the numbers are telling a good story.

A Review Of Data Trends

The two tables below were created with data from Xinyuan’s Form 20-F.

Consolidated Statements of Comprehensive Income 2013 2014 2015 2016 2017 $US Chg (’16 to ’17) % Chg $US Chg (’13 to ’17) % Chg
Total revenue $897,738 $919,748 $1,164,324 $1,561,625 $1,976,907 $415,282 27% $1,079,169 120%
Total costs of revenue -598,740 -677,582 -891,334 -1,203,636 -1,517,279 -313,643 26% -918,539 153%
Selling and distribution expenses -20,724 -39,494 -52,126 -58,214 -75,724 -17,510 30% -55,000 265%
General and administrative expenses -64,498 -105,622 -115,329 -120,416 -136,845 -16,429 14% -72,347 112%
Operating income 213,776 97,050 105,535 179,359 247,059 67,700 38% 33,283 16%
Net income 126,356 48,496 66,481 79,463 80,111 648 1% -46,245 -37%
Net loss/(income) attributable to non-controlling interest 0 19 1 -6,485 -16,483 -9,998 154% -16,483 n/a
Net income attributable to Xinyuan Real Estate Co., Ltd. shareholders 126,356 48,515 66,482 72,978 63,628 -9,350 -13% -62,728 -50%
Earnings per share
-Basic 0.87 0.32 0.47 0.55 0.49
-Diluted 0.85 0.29 0.45 0.53 0.48
Shares used in computation Chg Shares % Chg Chg Shares % Chg
-Basic 145,733,028 151,935,765 142,625,427 133,261,510 128,704,610 -4,556,900 -3% -17,028,418 -12%
-Diluted 149,464,556 177,118,235 146,487,949 137,653,029 131,605,868 -6,047,161 -4% -17,858,688 -12%
Earnings per ADS(1)
-Basic 1.74 0.64 0.93 1.1 0.99 -0.11 -10% -75% -43%
-Diluted 1.7 0.58 0.91 1.06 0.97 -0.09 -8% -73% -43%

Observations from the table:

Total revenue is up 120% since 2013, but expenses (i.e., cost of revenue and S&D) have outpaced the top-line growth. Operating income is up 16% over the last five years but net income is down almost 40% over the same period of time. The basic and diluted share counts are down 12% since 2013 (3% and 4%, respectively, from 2016 to 2017).

The quote, “if you aren’t growing, you’re dying”, comes to mind after reviewing the consolidated operating results. The top-line growth is strong and it is actually very impressive after factoring in that Xinyuan has been contending with stiff headwinds in the Chinese real estate market.

However, I do believe that management has their work cut out for them when it comes to the cost structure. The debt refinancing will come into play – see here for a recent example – in a positive way but this is an area that investors should monitor throughout 2018/2019.

Consolidated Balance Sheet Data(1) 2013 2014 2015 2016 2017 US$ Chg (’16 to ’17) % Chg US$ Chg (’13 to ’17) % Chg
Cash and cash equivalents $587,119 $140,495 $387,528 $578,244 $894,551 $316,307 55% $307,432 52%
Restricted cash 250,098 368,874 363,137 328,499 566,676 238,177 73% 316,578 127%
Deposits for land use rights 297,389 299,739 46,199 153,252 103,716 -49,536 -32% -193,673 -65%
Real estate property under development(2) 932,519 1,714,575 1,887,322 1,719,135 1,996,001 276,866 16% 1,063,482 114%
Total current assets 2,244,528 3,070,459 3,262,964 3,931,445 5,070,212 1,138,767 29% 2,825,684 126%
Total assets 2,382,100 3,231,526 3,561,387 4,236,445 6,384,434 2,147,989 51% 4,002,334 168%
Total current liabilities 807,373 1,592,633 1,650,883 2,060,609 3,674,819 1,614,210 78% 2,867,446 355%
Long-term bank loans 32,804 52,296 13,860 235,885 11,019 -224,866 -95% -21,785 -66%
Other long-term debt 536,943 576,204 910,008 974,791 1,404,814 430,023 44% 867,871 162%
Common shares 15,828 15,831 15,835 16,051 16,314 263 2% 486 3%
Total Xinyuan Real Estate Co., Ltd. shareholders equity 952,636 960,612 935,952 916,152 1,057,013 140,861 15% 104,377 11%

Observations from the table:

Total cash (including restricted) is up 174% since 2013, and up 61% over the last year. Total current liabilities are up over 300% over the last five years, and they are outpacing the growth in current assets.

To start, Xinyuan’s balance sheet is definitely not the strongest that I have seen but the company’s current ratio is over 1 and the net debt balance for 2017 is ~US$45,000. As such, the company’s financial position is not as dire as one might think.

Xinyuan’s operating results show that this company still has a strong growth profile and, in my opinion, the balance sheet will support management’s efforts in the years ahead.

Risks

There are risks that come along with investing in a small-cap Chinese real estate company like Xinyuan, so it would be wise for investors to first familiarize yourself with the company (and its history) before deciding to purchase shares. To learn more about the company, a good starting point would be to review Xinyuan’s website.

Another risk factor is its high debt balance, which has been substantially increased in the last few years. I consider debt as a necessary evil for real estate companies, including Xinyuan, but at some point this company will need to improve its balance sheet by getting a handle on its financial leverage. As such, an increasing debt balance is a risk but not [yet] a significant risk, in my opinion.

Bottom Line

I believe that management’s strategy to make Xinyuan more of a data-driven company will turn out to be catalyst for the stock, so the recent additions to the board should be viewed as welcome news. There is still a lot of uncertainty related to this data strategy, especially while the Chinese property restrictions are creating headwinds, but it is easy to be bullish about this company’s long-term business prospects. The company is growing its top-line and diversifying its business (remember, the property management subsidiary could turn out to be a hidden gem, as Koneko Research described in this post) so there is a lot to like about Xinyuan.

Prospective investors should complete their due diligence before putting capital to work in this Chinese real estate company but I believe that long-term minded investors should seriously consider adding Xinyuan to their watch lists.

Author’s Note: I hold XIN in my R.I.P. portfolio, and I have no plans to reduce my position in the near future.

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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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.