Blow-Out Quarter Confirms Xinyuan Real Estate On The Right Track

Feb 28 2013, 11:35  | 28 comments  |  about: XIN

Disclosure: I am long XIN. (More...)
 http://seekingalpha.com/article/1233491-blow-out-quarter-confirms-xinyuan-real-estate-on-the-right-track

Xinyuan Real Estate Co., Ltd. (XIN) just announced a terrific quarter for Q4 2012. Contract sales, revenue and net income results were much better than guidance provided by management. Contract sales for the fourth quarter exceeded the midpoint of guidance by 21% and revenue exceeded the midpoint of guidance by a whopping 81%. Net income, at $33.6 million, exceeded guidance by a mind-boggling 82%.
Looking forward, XIN's future seems to be very bright. It will have a flat 2013, but 2014 looks extremely promising because four new projects will come on line in Q3 of this year.
I've noticed XIN has made tremendous progress in many fronts. I've listed several in the following paragraphs.
Positive Developments
XIN continues to strengthen its internal control. In Q3 last year it started to upgrade its ERP system with help from Shenzhen Saipu Management Consulting Company. It also signed a five-year management consulting agreement with IBM to help improve its internal process and mechanism.
XIN started to generate sales from its U.S. projects. It sold seven of the 12 parcels it acquired in Reno for $8.3 million, almost $1 million more than the total acquisition cost of the whole Reno project.
The Jinan Project has been proceeding well. This is the biggest project in terms of sellable square footage among XIN's active projects. Sales are very strong and the piling issue has been fully resolved.
XIN's weighted average fully diluted ADS outstanding fell from $72.1 million in the third quarter of 2012 to $71.0 million in the fourth quarter. This can do wonders when coupled with increasing profits. As a result, book value per ADS increased to $10.97 at the end of 2012.
In the past, XIN has normally acquired parcels of land via public auction. Recently it has tried to be a little bit more creative in order to lower land acquisition costs. For example, XIN invested $143 million under deposit framework agreements to assist three land bureaus in China to bring lands to auction. This kind of arrangement can further increase XIN's land bank at attractive prices.
To further expand its construction capacity, XIN signed a strategic cooperation agreement with the No. 7 Division of China Construction, one of the largest construction companies in China. This cooperation will further strengthen XIN's capability to scale up its real estate portfolios.
Still Dirt Cheap
At $5 per share, XIN's market cap is $355 million. This is ridiculously low for a company like XIN with solid fundamentals.
As of December 31, 2012, XIN reported $641.9 million in cash and cash equivalents and total debt outstanding was $314 million. So the net cash was $328 million, only $27 million shy of its market cap. In addition, XIN has over $700 million in projects under development.
At the end of 2012, XIN's book value per ADS was about $10.97. Its net income was $157 million in 2012, while the stock was trading at about $5. These translated into a P/B ratio of .46 and a P/E ratio of 2.3.
There are several Chinese real estate companies traded on the Hong Kong stock exchange. The P/E ratios of those companies range between six and eight. If XIN was given a valuation similar to its HK peers, it would be worth at least $15.
So at $5 per share, XIN is still a terrific buy. Investors will double or even triple their money in the next two to three years if they step in right now.