Xinyuan Real Estate Co., Ltd. (NYSE:XIN) Q3 2020 Earnings Conference Call November 27, 2020 8:00 AM ET

Company Participants

Julia Qian – Investor Relations, Managing Director of The Blueshirt Group Asia

Yong Zhang – Director, Chairman, Chief Executive Officer

Brian Chen – Chief Financial Officer

Conference Call Participants

Steven Ralston – Zacks

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Xinyuan Real Estate Company Third Quarter 2020 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s call. If you have any objections, you may disconnect at this time.

I will now hand the call over to Julia Qian, Managing Director of The Blueshirt Group Asia, Ms. Qian please proceed.

Julia Qian

Hello, everyone. Thank you all for joining us on today’s conference call to discuss Xinyuan Real Estate Company’s financial results for the third quarter of 2020. We released the result early today. The press release is available on the company’s website, as well as from the Newswire services.

On the call with me today are Mr. Zhang Yong, Chairman and Chief Executive Officer; Mr. Brian Chen, Chief Financial Officer; and Mr. Zhang Hongwu, President. Mr. Zhang Yong will deliver opening remarks and then Mr. Brian Chen will provide additional details on the company’s financial results and outlook.

Before we continue, please note that today’s discussion will contain forward-looking statements made under Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actually results may be materially different from expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filing with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

With that, let me now turn the call over to our Chairman and CEO, Mr. Zhang Yong. Please go ahead, Mr. Zhang.

Yong Zhang

Thank you, Julia, and hello, everyone. Thank you for joining our third quarter of 2020 earnings conference call. Xinyuan delivered a strong quarter, thanks to rapid economic recovery, effective control of pandemic, resumed demand in real estate residential sector. We are pleased that several major projects started pre-sales in Q3, resulting in recovery from top-line to bottom-line. We also made encouraging progress on projects in Beijing and Xi’an, which are planned to launch in the fourth quarter. Generally speaking, we are seeking to our project launching plan for 2020, unlocking substantial volume of high-quality residential units in top-tier cities that we have accumulated in the past years with sufficient salable results on hand. Xinyuan is more capable of withstanding market fluctuations and seizing business opportunities.

On our financial health, it remains our endeavor to further optimize our balance sheet. With the recovery of cash collection and active debt management, our [short-term] debt at the end of Q3 was covered by the cash on hand. In the future, we will still be very careful on balancing the growth as well as maintaining the financial health. We had a solid recovery in Q3, as we strive to manage our financial position prudently. The dividend for this quarter will be the same as the previous quarter. We are proud of our persistence of paying dividends for the past several years.

With that, I will now turn the call over to our CFO, Brian Chen, who will offer more details on our financial performance. Brian, please go ahead.

Brian Chen

Thank you, Chairman. Good morning, everyone, and thank you all for joining the call. We hope you had a great Thanksgiving holidays and hope that all you and your family members are safe and healthy during these challenging times. As some of you already know, Chinese Government already effectively controlled its COVID-19 pandemic. So consumer demand is actually recovering rapidly. As planned, this quarter, we launched pre-sales at several major projects in Zhengzhou and Qingdao, namely Lingshan Bay Dragon Seal project; and Xinyuan Palace, the first project. Due to strong consumer demand and recovery of construction and investment, we generated $655 million of revenue, 130.5% sequential increase. Our bottom-line was equally impressive. We generated net income of $29.5 million, a $59.6 million sequential improvement.

A top priority for us is to optimize our balance sheet and capital structure for growth. In July, we successfully completed HK$127 million worth of the follow-on offering for our Property Management company listed in Hong Kong. After completion of the offering, Xinyuan now owns 54.55% of the Property Management company. In July and August, we issued in aggregate RMB514.5 million senior notes due 2022, listed on Singapore Exchange. Then, in September, we issued another RMB300 million senior notes due in 2023, also listed in Singapore. Finally, in November, we issued another RMB900 million of corporate bonds, which are listed on Shanghai Exchange. This series of equity and debt restructuring brings down our short-term debt to 37% of total debt, an improvement from 46% at the start of the year. We now have $1.25 billion of cash on hand to accelerate business development, and drive continuous growth.

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Next, let me go through the key financials in this quarter. Revenue from this quarter was $655.4 million, up 130.5% over year and 31.7% sequentially. Gross profit for the third quarter was $105 million compared to a loss of the $19.2 million in the second quarter of 2020.

SG&A expense were $57.9 million, up a bit from the $51.4 million in the second quarter. The increase was due to sales and marketing spending, which supported rapid revenue growth. Net income was $29.5 million compared to a net loss of $30.1 million in the second quarter. Net margin was 4.5% compared to a negative 10.6% in the prior quarter.

Now, let’s look at the balance sheet. Through the debt optimization, which I covered earlier, our cash and restricted cash rose US$252.2 million to over US$1.25 billion. This solid liquidity position enables us to accelerate growth, meet debt obligations and pay dividends to our investors. Furthermore, total projects on our balance sheet are now $3.2 billion. This consists of real estate properties under development of $2.6 billion and completed real estate projects of $657 million. Our total debt of $3.4 billion, short-term component was $1.3 billion and the long-term was $2.1 billion.

With our large cash balance, and multi-billion dollar property pipeline, we are highly confident that we can sustain growth for years to come. We remain optimistic and positive for the balance of 2020. But in light of the future uncertainty related to the COVID-19 development and economical fluctuation as well as the government restriction on the real estate industry, we expect contract sales at around RMB18 billion for the whole year of 2020.

With that, let’s open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]. We will now take our first question from Steven Ralston from Zacks. Please go ahead.

Steven Ralston

Two major questions. One sort of just leads into the other. I noticed in the press release, it said that you had the grand opening of Target at your Hudson Garden project in late October. Does that mean that, that store on the first level and I guess part of the basement is operating and open?

Brian Chen

To answer the question, Target, actually located in — for the whole floor in the basement, as well as the majority of the space on the first floor. And yes, we expect — the site has been on. We expect Target to open soon. With that being said, with the COVID-19 issue in New York, we are constantly in touch with Target and see whether there’s any change of their opening date. At this point, we haven’t heard any change.

Steven Ralston

And in the residential units, I saw that you pre-launched in China itself, and you marketed the units to your customer base or your client base there in China and that you expect to continue a second phase of sales in New York City itself and that started in the third quarter of this year. Is that correct?

Brian Chen

Yes, that’s correct.

Steven Ralston

And so there’s a — on-site there’s a model that says it’s fully furnished. So clients can go in now in New York and see those units?

Brian Chen

Yes. We actually have three fully furnished model house and a studio, 1-bedroom and 2-bedroom, it’s open, so anyone can walk in. Come back to your earlier question about the sales, we actually received very positive feedback from our Chinese domestic customer base. You might know that we have over 200,000 outstanding clients, which a lot of them are recurring purchasers, and they are bringing in a lot of interested buyers for this property in New York. The only surprising thing is that with the COVID issue across the border, a lot of these potential buyers, they cannot fly to New York and nail the deal. So in terms of the pre-sales in New York, we’ve seen a lot of walk-in already in the last few weeks. We’ve seen very positive feedback for the property. So we do receive a few offer, but at this point, we’re still in the negotiation phase, haven’t finalized the deal.

Steven Ralston

That leads me to my — the real question is that when these two properties, Zhengzhou Xinyuan Palace and the Qingdao Lingshan Dragon Bay Seal, those have begun pre-sales. Are they — are those pre-sales happening on-site or are they occurring to your clientele?

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Brian Chen

For these two new projects, for the quarter, we already recall significant sales. I would say, it is a combination of those two that you are talking about. We had a pretty decent, or I would say, well-furnished sales office and model unit on-site. So a lot of the customers actually walk-in and sign the deal on the spot. At the same time, we also had a lot of customer referral by the outstanding client and some of them also sign online without necessity to go to the site — on site, on the sales office.

Steven Ralston

Is there an average number of this percent of sales that happen on-site versus through the clientele or is every project just different?

Brian Chen

They are different. I would say in China, even if they are referred by the clientele, most of the Chinese buyers still want to be on the site. They still want to see the model price. They still want to walk around and want to see the construction. They want to walk around. So these two numbers actually are kind of mixed together, they are not really a clear-cut between these two. But I would say that the majority of the deals are still coming from the on-site, from customer walking into the sales office.

Steven Ralston

And could you give me the specific project names of the — where you expect to have pre-sales in the fourth quarter? I think the one you mentioned was Beijing.

Brian Chen

Yes. The other one is in Xi’an, which is in the West of China.

Steven Ralston

And the project, the full project name?

Brian Chen

Full project name, let me pull it out. Give me a sec. The first one is called Beijing Tongzhou project. The other is called Xinyuan Chang’an Palace.

Steven Ralston

And last question. I noticed on the income statement there was this line item, look at it myself, gain on disposal of property held for lease, it was a substantial gain of about $82 million, $83 million. What was that?

Brian Chen

Yes. As for the overall operation initiative, we are not — I would say actively launched the sales and do the debt refinancing. But at the same time, we’re also trying to dispose some of the property. This is related to a disposal for an investment property that we held in Zhengzhou. For the quarter, we accomplished the sales. And the overall proceeds is around RMB800 million and we had a pretty decent gain from this disposal.

Steven Ralston

Was this a developed property?

Brian Chen

It’s a developed property, but later on, got turned into a rental and for investment purpose is a rental property.

Operator

We will now take our next question from [George Goop], a Private Investor. Your line is open. Please go ahead.

Unidentified Analyst

Group sales, can you breakdown your outlook for quarter 4 of this year? And also what’s the guidance for the profit for this year?

Brian Chen

Okay. So overall, for the year, our outlook for the contract sales is around RMB18 billion. And in terms of the profitability, we expect overall the year will be in a gain position. The gain is a little bit hard to tell with the complexity in the external environment and so many uncertainties there. But we can be assured that we should be at a gain position for the year, not necessarily as big as what we have from the year before, but we will be in a profit position.

Unidentified Analyst

I see. You have year-end sales of RMB18 billion, but can you breakdown may be fourth quarter, just for clarity, what is the expected sales for the fourth quarter?

Brian Chen

Yes, sure. I can tell you that for the first three quarters, the sales is about RMB12 billion, for the first three quarters. So we expect another RMB6 billion in the fourth quarter.

Unidentified Analyst

Okay. So last question is, I noticed that you have a very high tax rate this quarter. Is that normal?

Brian Chen

Overall, the tax rate is high compared to our peer real estate developer in Western world, because in that reporting line, there are actually two components. Only half of them related to the typical corporate income tax. The other half is relating to something called land appreciation tax, is part of the cost that’s associated with the development itself. You can almost count it as part of the cost of the development. If you take it out, you will see that typically, the real corporate income tax is at about 25%, which is in line with our peer company and the Chinese Government regulatory requirement.

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Unidentified Analyst

Okay. When do you resume the dividend? Do you have a percent? Is there an increase in the dividend?

Brian Chen

Say again, sorry, can you repeat your question?

Unidentified Analyst

Do you plan to go back to the old dividend?

Brian Chen

You are asking whether the dividend will come back to the original level. Is that your question?

Unidentified Analyst

Yes.

Brian Chen

Okay. Good. You know that this year is an unusual year, but we keep our commitment to our shareholder. Up to this time, we keep like about one-quarter of what we paid out the year before. When — we expect that — with this solid liquidity and this sizable land bank, we expect that the business will come back to normal in the future. When business comes back to normal and liquidity are satisfactory, we are planning and we expect dividend level will come back to somewhere in line with the year before.

Unidentified Analyst

And final question is, I noticed you did some repurchase of stocks this quarter, but it’s a much smaller amount. What’s your plan for the future repurchase of stocks?

Brian Chen

We actually had a sufficient room from the share repurchase plan, which are all approved by our Board. Yes, for the quarter, we didn’t repurchase a lot. The exact amount of the share repurchase is at the company’s discretion. We closely monitor the market condition and we’ll act according to when there is a need.

Operator

[Operator Instructions]. We will now take our next question from [Franklin Morten], a Private Investor. Please go ahead.

Unidentified Analyst

Congratulations on a great quarter. I have a question about the Property Management business that is public. Can you just give us an update on how that is doing and what’s going on there? I noticed the stock price there has declined meaningfully in the last few months and just wondering how the fundamentals of the business are doing?

Brian Chen

Okay. Property service company, the business itself actually grows very healthy. You look at the mid-year press release, it actually accomplished — is on track to accomplish the annual growth plan and the profitability. Give me a sec. The market share does decrease to some extent, in the last few weeks, but you look at in a longer span, the share price actually increased a lot compared to just a few months ago. You can count the recent decline as some healthy adjustment according to the — some of the — I would say, the market does — the share price increase faster than actually we expected. This is also related to the overall market condition, with this COVID, with the election and pretty much the property management — the whole property management industry for the Hong Kong listed company shares are going down for the last few weeks. But overall, it’s still on the rise. At this point, we still have a decent market cap for the moment.

Unidentified Analyst

Okay. And is your plan to hold on to your position for the long term? Or do you look to sell it to reduce your debt? What do you think you all will do with your position long-term?

Brian Chen

In the long-term, we want to continue to invest in this business line. We trust that the nature of this business model is profitable. It will have greater chance to grow faster than even the development business itself and it’s a very profitable business. We have no intention to reduce or to dispose our ownership. Right now, our ownership goes down a little bit. This is more due to a follow-on issuance that we bring in some more strategic investor in this business.

Unidentified Analyst

Okay. I’m glad to hear that. I think the Property Management business is a great business. It’s asset-light and rapidly growing. And I think that is a wonderful complement to the property development business. And I would encourage you to keep it and hold on forever because I think it is a great business.

Operator

Thank you. Seeing as there are no more questions in the queue, let me now turn the call back to Brian for closing remarks.

Brian Chen

Thank you, operator, and thank you all for participating on today’s call. As always, thank you for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.



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