A Look at Xinyuan Real Estate’s Asset Turnover

Xinyuan Real Estate has suffered from its overexpansion in late 2013 and early 2014:

• Launching projects in markets where it did not have a well-developed brand (Chengdu, Changsha, and Sanya)
• High prices paid (Shanghai 14526 RMB/sqm, Chengdu 4150 RMB/sqm, and Suzhou 5816 RMB/sqm)

The consequences of this overexpansion into a weakening market have been:

Amidst the challenges of the evolving market, Xinyuan has some significant corporate strengths:

• Multi-phase land acquisition agreements with governments in Central China (Zhengzhou, Jinan, and Xian).  These agreements facilitate land purchases at favorable prices and long-term project planning.
• International project development (New York, Malaysia, and beyond)
• Unique Chinese/American corporate identity

In order to take advantage of these strengths the company must deleverage and recycle its capital.  Examination of Xinyuan’s project performance over the past six months should be a good indicator of the company’s sales potential:

Note that unsold units are not all currently available for sale.  The pace at which apartments are released depends on the company’s marketing strategy for each project.

Conclusions from the table:

• Zhengzhou – the company continues to be successful in its hometown
• Xingyang -sales in this outlying area of Zhengzhou have been disappointing, but these small projects will not have a significant impact on the company.
• Jiangsu Province (Suzhou & Kunshan) – the company continues to be successful in this core market
• Jinan – the company continues to be successful in this core market
• Xian – the company has made a strong start with the first phase of its mega-project in what is likely to be a new core market
• Beijing & Shanghai – these projects have benefited from strong local markets.  They are also valuable in defining the company’s brand image.
• Chengdu & Changsha – the overall market in these cities has been weak.  Xinyuan had one prior project in Chengdu and was new to Changsha.  It’s encouraging to see that the pace of sales has picked up to a level where the company can see the return of its capital invested even if the return on that capital is going to be low.
• Sanya – Xinyuan projected a high IRR on this development, but sales have been extremely slow.  There should be room to accelerate return of capital through ASP reductions.
• Total – the overall pace of sales remains within the company high asset turnover strategy (target 2-3 years)

At the current pace of sales the company should be able to deleverage over the next year, reduce high cost debt, and increase returns by focusing on its core markets and corporate competitive advantages.  It would be especially positive to see increased sales and recovery of capital from non-core markets (Chengdu Changsha and Sanya).