Xinyuan Absolute Acreage (XIN) shares accept collapsed 55% from their 52-week high, hardly worse than the boilerplate 45% bead for HK/US listed Top 100 China absolute acreage companies. Xinyuan operating after-effects accept been advised in several contempo Gluttonous Alpha accessories and added capacity are in the 2Q18 Columnist Release, Appointment Alarm transcript, and Mid-Year Banking Statements.
The allotment amount weakness reflects accepted challenges of ambagious accounting, anemic profitability, and boundless debt, but the aggregation has not announced aloft developments to shareholders that could decidedly enhance approaching returns. The Xinchuang Technology advance affairs totalling over 75Bn RMB accommodate the Xinyuan Group with admission to a ample accumulation of bargain acreage in adorable markets and abate approaching assurance on absolute acreage bazaar cycles.
This commodity does not accomplish any advocacy apropos advance in Xinyuan. Investors may use the advice in this commodity to appeal bigger aggregation acknowledgment about Xinchuang and added new business initiatives. For aggregation accomplishments advice see the Anniversary Report, aggregation website, and Broker Presentation.
Adoption of ASC606 and a change in the accent of Xinyuan client affairs created a ambagious alloy of acquirement acceptance treatments, but ultimately these are aloof timing differences. Already anniversary accommodation has been delivered to a client the final acquirement and assets are the aforementioned beneath every treatment. See the aggregation columnist releases and accessories by added authors for added abundant accounting analysis. This commodity will focus on basal business trends.
Progress of Xinyuan’s business is best abstinent through arrangement sales which are estimated to accept remained able through 3Q18:
Pace of Sales: Xinyuan’s ambition is to accomplish accumulative banknote breeze breakeven about 7 abode afterwards a activity begins development (see presentation folio 7). Accustomed projects will advertise bound and banknote accustomed from chump deposits (downpayment mortgage) will awning the actual architecture costs after cartoon on accumulated financing. Excellent sales achievement in contempo abode larboard Xinyuan’s unsold account at 6/30/18 at a multi-year low:
Most of Xinyuan’s projects are aing to awash out with alone the Xinyang Splendid II captivation some crumbling inventory. Alike the best afresh launched projects accept already recorded abundant sales.
The boilerplate gross allowance affected for allotment of achievement accounting has remained in a advantageous ambit (details are in the mid-year banking statements).
The ambit of estimated gross margins from alive projects shows slight abrasion due to characterless allotment accepted on some newer developments (ZZ Intl New Burghal 3A 3B 3D, and ZZ Fancy Burghal 2N)
Over the accomplished year, Xinyuan has aing partnerships with added absolute acreage developers for assertive projects as abundant on folio 7 of the Broker Presentation. Clarification was accustomed from Xinyuan Broker Relations about whether these projects would be circumscribed in Xinyuan banking statements or appear as an disinterestedness entry, but no acknowledgment has been received.
The Xinchuang Technology business (a 100% endemic subsidiary) is declared in the Broker Presentation as “industrial absolute estate”, but a authentic adaptation of the Chinese description as a “technology boondocks operator” is added accurate. Xinchuang is planning and architecture business communities with offices, analysis space, residential buildings, and accepted bartering and business services. The ambition is to activate absorption and networking furnishings agnate to Silicon Valley or the North Carolina Analysis Triangle.
The huge acreage breadth anchored for development is an aboriginal indicator that this business may become actual successful. Xinyuan’s Broker Presentation (page 6) says that “Xinchuang Technology has additionally entered into official agreements with several government authorities and has bound in a absolute acreage breadth of 29,627 mu”. A “mu” is a Chinese assemblage of admeasurement agnate to 666.7 sqm. Xinchuang’s “locked in” acreage breadth is according to about 20mm sqm and over four times bigger than Xinyuan’s appear “landbank” of 4.9mm sqm at 12/31/17.
Xinyuan has accustomed alone two of the official agreements to investors, but at atomic 6 added accept been publicized in China by Xinyuan, Xinchuang, government authorities and Chinese media. An added four developments are briefly mentioned on Xinchuang’s website, but I cannot accretion any acceptance whether there are agreements in these cities, or conceivably aloof proposals, or maybe aloof aspirations.
Basic advice about best of these projects is provided on the Xinchuang website. Example:
Xinchuang and Xinyuan angrily advance advance on these projects in China, but acknowledgment to shareholders has been minimal. The Anniversary Address and Mid-Year financials do not alike acknowledgment the actuality of this business. If acreage breadth of 29627 mu is “locked in” again it is actual acceptable that ample agnate planned investments charge additionally be “locked in” and should accept been appear in SEC filings.
Government Relations are analytical to the success of this business. Local government admiral are amenable for developing the admeasurement and affection of the abridgement in their jurisdictions. Residential acreage use rights in adorable locations are commonly awash through auctions to accomplish best revenues for borough services. However Bartering and automated acreage can sometimes be awash at favorable appraisement to companies that will accompany new business to the area. This could be a ample employer, but it could additionally be a absolute acreage developer such as Xinchuang if it can present a acute plan to actualize a business association that will allure accustomed enterprises. This commodity describes continuing Zhengzhou government captivation and abutment for Xinchuang’s Hangmei activity including hire subsidies and aliment of an on-site government appointment to accelerate licensing and added authoritative assistance.
Competition. The abeyant to cheaply admission acreage use rights makes this blazon of development actual ambrosial and abounding companies are aggressive for these opportunities. Xinchuang accustomed an absorbing acceptance of its success at an industry appointment aftermost summer back it was ranked amid the “TOP10 Science and Technology Boondocks Operators” alongside acclaimed technology and bartering absolute acreage firms:
Xinchuang’s Aggressive Strengths:
Xinchuang’s locations are burghal sites a adorable Tier-2 cities. The Zhengzhou Hangmei activity is a the airport, about 30km from the burghal center.
The Dalian activity is additionally about 30km from downtown:
These locations accommodate the advantage of ample sites at acutely favorable prices. The aboriginal breadth of acreage use rights in Dalian for analysis use amount alone 541RMB per buildable aboveboard beat and the aboriginal residential breadth amount 1036 RMB/sqm. If Xinchuang builds a accustomed association again anniversary consecutive appearance of development will become added valuable, but admission to acreage is already bound in. if Xinchuang fails to allure businesses again a armpit may become a apparition town.
Clarification was requested from Xinyuan Broker Relations about the afterward capacity (in some cases added than once) and no answers accept been received:
Xinyuan’s advantage (non-cash assets/equity) is abundant college than aeon and Fitch afresh revised the company’s ratings angle to Negative (Fitch announcement). Xinyuan’s US Dollar bonds due 2019-2021 are trading at yields breadth refinancing would be acutely expensive.
Xinyuan added appreciably to its landbank during able bazaar altitude of 2017 and 1H18 in a acceptance that a beyond acreage assets would accommodate greater afterimage to lenders and advance admission to financing. So far it does not assume to accept worked. Fitch appear that “The aggregation does not plan to admission acreage in 2H18 or 1H19”. The acreage bazaar has attenuated in contempo months alms abeyant bargains for accommodating and well-capitalized buyers (not Xinyuan).
Comparing Xinyuan adjoin the aeon profiled in Three China Absolute Acreage Bargains:
China South Burghal and Modern Acreage are additionally B-rated absolute acreage companies with bonds acquiescent over 15%.
Xinyuan’s alive projects accept awash able-bodied so a ample allotment of their development amount has been financed with presales (shown on the antithesis breadth as “customer deposits”). Xinyuan’s antithesis breadth is abounding by a ample account of amplitude at completed projects with a amount of about $60mm/year ($710mm accustomed amount at 8.37% 1H18 boilerplate absorption rate).
Xinyuan’s $1.9Bn of abridged debt is essentially covered by $1.5Bn of banknote investments, but the aggregation needs to deleverage in adjustment to abate absorption expense, refinancing risk, and put itself in a bigger position to accomplish abiding investments.
Despite the low banal price, allotment acknowledgment is not an adorable use of funds appropriate now compared to repurchase of outstanding bonds application the $50mm allotment accustomed in August. Bond repurchase captures a accretion on concealment of debt and reduces leverage. Allotment repurchase would be accretive to book value, but additionally access leverage.
Clarification was requested from Xinyuan Broker Relations as to whether the Fitch account about 2H18/1H19 acreage acquisitions was correct, but no acknowledgment has been received.
Clarification was requested several times from Xinyuan Broker Relations apropos aggregation affairs to advertise crumbling account in Beijing and Shanghai, but no acknowledgment has been received.
As a “foreign clandestine issuer” Xinyuan and its admiral are absolved from SEC requirements to address affairs in Xinyuan securities, although ample shareholders such as Chairman Zhang are still appropriate to book and alter forms 13 D/G. Buying disclosures in the anniversary 20-F filings appearance that 5 assembly fabricated abundant sales during 2017 and 5 captivated no shares at year-end.
Non-shareholding admiral participate in authoritative aloft decisions affecting shareholders after administration in the consequences. With Xinyuan banal trading at a 2-year low investors are justified in analytic whether these Admiral accept acquired abundant aplomb to acquirement shares.
Xinyuan’s poor advice with investors about Xinchuang and added new business initiatives may aftereffect from poor advice with the company. Xinyuan’s Broker Relations action is managed by its accounting department. Agents there may not be acquainted of what is accident at the new businesses which are not yet affective banknote and creating cogent antithesis breadth assets and liabilities. During 2017 above CFO Helen Zhang was clumsy to explain the company’s blockchain analysis and Xinyuan absent the befalling to ride the accompanying bazaar activity and accession disinterestedness at an adorable valuation, a huge blunder. The accounting administration knew how abundant basic had been avant-garde to the blockchain accessory but may not accept had any abstraction how that money was actuality used. Xinchuang has active agreements that “locked in” a huge acreage breadth and this appears to be a actual development, but the alone banknote movement and accounting entries appropriate so far accept been baby payments for the aboriginal allocation of acreage use rights in Zhengzhou. If actual again this suggests a administration and babyminding botheration that needs to be addressed at a chief level. Bigger advice aural Xinyuan would aftereffect in bigger advice with investors. If this approach is amiss and the accounting administration has been a about all accumulated developments again they accept aloof been accomplishing a poor job of broker relations and that should be addressed by chief management.
Longtime China accountant Drew Bernstein of Marcum LLP afresh abbreviated the “SECRETS TO IPO SUCCESS FOR CHINESE COMPANIES” and it provides a accessible advertence for convalescent Xinyuan’s broker relationships. Excerpts:
In a contempo Chinese media interview, Xinyuan CEO Zhang appear that the company’s acreage administration subsidiary, Xinyuan Science & Technology Service (XSTS) was advancing for a HKEX advertisement in 1-2 years. Koneko comments on the unit’s able 1H18 results, accepted NEEQ listing, and fair amount were provided here. It looks like XSTS will account from an acceding active beforehand this year enabling dual-listing of NEEQ firms in Hong Kong.
Based on comps already listed in Hong Kong, the fair amount of XSTS is in a ambit of US$69-197mm.
In affiliation with an HK listing, XSTS would apparently affair new shares agnate to 25% of absolute basic at the low end of atone valuations. In time the shares should acknowledge to the average of atone valuations and potentially serve as bill for accretive accretion of new acreage administration contracts.
The ambition of an HK advertisement appears to be a actual absolute development that should accept been appear to shareholders.
The 2Q18 appointment alarm brought a acceptable change with accord of Chairman Zhang and CEO Zhang in the Q&A segment. Hopefully they will animadversion on the afterward capacity in the 3Q18 alarm during able animadversion or in acknowledgment to broker questions.
Compared to arch peers, Xinyuan trades at a lower price/book arrangement but has college leverage, weaker profitability, and has delivered lower abiding allotment (see Three China Absolute Acreage Bargains).
If Xinyuan were able to advance its advantage to associate levels again its shares should acknowledge essentially to bout associate appraisal multiples. Xinchuang could accommodate a foundation for approaching success, but basal disclosures accomplish it difficult to accredit any amount to its approaching potential.
The aerial yield-to-maturity of Xinyuan bonds implies cogent acclaim risk. A slowing China abridgement is arch to a ample action abatement which should relax refinancing burden on lower-rated acreage developers and abutment sales in the Tier-2 cities breadth Xinyuan does best of its business. If action abatement is not acceptable to balance China’s abridgement again Xinyuan will be a chancy holding.
This commodity did not analysis Xinyuan’s New York projects. The Oosten acreage in Brooklyn has angry into a money-loser due to a huge amount overrun. The Midtown activity faces a abrasion Manhattan address market.
At the time of publication, the columnist is a actor of Xinyuan, Guangzhou R&F, and Yuzhou Properties. The columnist does not accomplish any advocacy apropos any advance in any aggregation mentioned here. Investors should analysis all of the key facts cited actuality from authoritative filings and added accessible sources above-mentioned to authoritative their own advance decisions.
A archetype of this commodity was beatific to Xinyuan Chairman Zhang, CEO Zhang, CFO Li, and Audit Committee Chairman Gurnee with a awning letter requesting the afterward measures be implemented as anon as possible:
A articulation to this commodity was beatific to Xinyuan Broker Relations. If the aggregation can point to absolute errors in the commodity application advice accessible as of 10/25/18, again corrections will be fabricated as promptly as possible.
Disclosure: I am/we are continued XIN, YUZHOU, GZUHF.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it. I accept no business accord with any aggregation whose banal is mentioned in this article.
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