Xinyuan Real Estate Co Ltd American Depositary Shares

Real Estate Company 3rd 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 Chen, Managing Director of the Blue Shirt Group Asia. Mrs. Chen, please proceed.

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 the Chief Executive Officer, Mr. Brian Chen, Chief Financial Officer, and Mr. Zhang Hongwu, President. Mr. Zhang Yong will deliver opening remarks, and Mr. Brian Stan 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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual result may be materially different to some 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 statement, except as required under PICU rule law. With that, let me now turn the call over to our Chairman and CEO, Mr. Zhang Yong. Please go ahead, Mr. Zhang.

Thank you, Julia, and hello, everyone. Thank you for joining our third quarter of 2020 Earnings Conference Call. Jinyuan delivered a strong quarter thanks to rapid economic recovery. effective control of pandemic of resumed demand in real estate residential sector. We are pleased that several major projects started pre-sales in Q3, resulting in recovery from top land to bottom land. 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 value of high-quality residential units in top tier cities that we have accumulated in the past two years with with sufficient sellable results on hand. Xinyuan is more capable of withstanding market fluctuations and saving business opportunities. On the financial end, We made our endeavors to further optimize our balance sheet with the recovery of cash collection and active debt management. Our short 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 Chin, who will offer more details on the financial performance. Brian, please go ahead.

Thank you, Chairman. Good morning, everyone, and thank you all for joining the call. We hope you had a great Thanksgiving holiday and hope that all of you and your family members are safe and healthy during these challenging times. As some of you already know, Chinese government already effectively control its COVID-19 pandemics. 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 Parade, the first project. Due to strong consumer demand and recovery of construction and investment, we generated $665 million of revenues. 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 a 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 an aggregate 514.5 million RMB, senior notes, due 2022, listed on Singapore Exchange. Then, in September, we issued another 300 million senior notes due in 2023, also listed in Singapore. Finally, in November, we issue another 900 million RMB of corporate bonds, which are listed on Shanghai Exchange. This series of equity and debt restructuring brings down our shortened debt to 37% of total debt, an improvement from 46% at the start of the year. We now had $1.25 billion of cash on hand to accelerate business development and drive continuous growth. Next, let me go through the key financials in this quarter. Revenue from this quarter was $665.4 million, up 130.5%. over year and 31.7% sequentially. Gross profit for the third quarter was 105 million compared to a loss of 19.2 million in the second quarter of 2020. SG&A expense was 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 has supported rapid revenue growth. Net income was $29.5 million, comparing to net loss of $30.1 million in the second quarter. Net margin was 4.5%, comparing 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 registered cash grows 252.2 million to over 1.25 billion US dollar. 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 project 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 profit 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 developments and economical frustration, as well as the government restriction on the real estate industry, we expect contract sales at around 118 billion RMB for the whole year of 2020. With that, let's open the call for questions. Operator, please go ahead.

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for a moment without everyone's signal. We will now take our first question from Stephen Robson from SACS. Please go ahead.

Good evening.

Hi, morning.

Two major questions. One sort of 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?

To answer the question, Target is actually located for the whole floor in the basement, as well as the majority of the space on the first floor. And yes, we expect the signs have 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.

All right. 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?

Yes, that is correct.

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

Yes, we actually have a three fully furnished model house and a studio, a one-bedroom and a two-bedroom is open for 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 interest buyers for these properties 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 now the deal. So in terms of the pre-sales in New York, we see a lot of walk-in already in the last few weeks. We see very positive feedback for the property. We do receive a few offers, but at this point, we're still in the negotiation phase, haven't finalized the deal.

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

For this two-year project, 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 pretty decent, or I would say well-furnished sales office and model unit on site. So a lot of the customers actually walked in and sighted you on the spot. At the same time, we also had a lot of customers referred by the outstanding client, and some of them also signed online. without necessarily to go to the site on time on the sales office.

Is there an average number of the percent of sales that happen on site versus through the clientele?

Or is every project just different? 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 side. They still want to see the model price. They still want to walk around. They 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 deal are still coming from the on-site, from customer working the sales office.

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

Yeah, the other one is in Xi'an, which is in the west of China.

And the project, the full project name?

Full project name, let me pull it out, give me a sec. The first one is called Beijing Tongzhou Project. The other is called Xi'an, give me a sec, the name. Xi'an Chang'an Parish.

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

Yes. As part of the overall operation initiative, We are not just actively launching 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 800 million Chinese yen, and we had a pretty decent gain from this disposal.

Was this a developed property?

It's a developer property, but later on it got turned into a rental for investment purposes. It's a rental property.

All right. Thank you for taking my questions.

Thank you. Thank you, sir. We will now take our next question from George Goop from a private investor. Your line is open. Please go ahead.

Hi. Good sales. With the kind of big value outlook for quarter four of this year, And also, what's the guidance for the profit for this year? Okay. So overall for the year, outlook for the contract sales is around 18 billion Chinese yuan. And in terms of the profitability, we expect the overall year will be at 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 had from the year before, but we'll be at a profit position. I see. You have a huge increase of 18 billion yuan, but it didn't break down in the first quarter. Just for clarity, what is the expected sales for the first quarter? Yes, sure. I can tell you that for the first three quarters, the sales is about 12 billion for the first three quarters. So we expect another $6 billion in the fourth quarter. My question is, I noticed that you have very high taxes this quarter. Is that normal? Overall, the tax rate is high compared to our peer real estate developer in Western world. Because in debt reporting lives, 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. It's part of the cost that's associated with the development itself. You can almost count it as part of the cost of the development. 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. Okay. When do you receive your dividend? Do you have a percent? An increase in the dividend. Say again? Sorry, can you repeat your question? You are asking whether the division will come back to the original level? Is that your question? Okay, good. You know that this year is an unusual year, but we keep our commitment to our shareholders. After this point, we keep like about one quarter of what we pay out the year before. We expect that with this solid liquidity and this size for land bank, we expect that the business will come back to normal in the future. When business come back to normal and liquidity are satisfactory, We are planning and we expect dividend level will come back to somewhere in light with the year before. Thank you. And final question is, you know, I noticed you do some repurchase of stocks this quarter, but it's a much smaller amount. What's your plan for the future repurchase of stocks? We actually have 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 amounts of the share repurchase is at the company's description. We closely monitor the market condition. and we'll add according to when does it hit.

Okay, thank you very much. You're very good at sales.

Thank you, Josh.

As a reminder, to ask a question, please press star 1. We will now take our next question from Franklin Morton, private investor. Please go ahead.

Good morning, Brian. How are you?

Hi, Frank. Good morning.

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 significantly meaningfully in the last few months and just wondering how the fundamentals of the business are doing.

Okay. Probably service economy, the business itself actually grows very healthy. You look at the mid-year press release, it actually completes its own 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 if you look at it in a longer span, the share price actually increased a lot. comparing to just a few months ago, you can count the recent decline as some healthy adjustment according to 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-based company shares are all going down for the last few weeks. But overall, it's still on the rise. At this point, they still have a decent market cap for the moment.

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?

In the long term, we want to continue to invest in these business lines, 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 is 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 investors in this business.

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... It's a wonderful compliment 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.

Thank you. Absolutely.

Thank you. Thank you, Frank.

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

Thank you, operator, and thank you all for participating on today's call. And 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.

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