Benchmarking Xinyuan Real Estate after its rally

After a 78% YTD rally Xinyuan shares are no longer uniquely undervalued relative to competing Hong Kong listed Chinese real estate developers (prices as of 9/20)

xin-comp-valuations-092016

In absolute terms, Xinyuan and peers are all still at low valuations.  Relative to peers, Xinyuan trades at a below average price relative to earnings and book value, but also has below average profit margins.  Significant price appreciation towards book value and the higher end of comp valuations would depend on improving its profitability.  In particular:

  • Xinyuan needs to follow a prudent land acquisition strategy, not overpaying during boom periods such as right now and building capital for deployment when better opportunities are available in the future.  For additional background see Comments on Xinyuan Real Estate’s Gross Margins
  • Xinyuan needs to lower its financing costs.  Most of the company’s interest expense is capitalized and reported as part of cost of real estate sales.  For example, in 1H16 the company paid $90.7mm of interest of which $80.6mm was capitalized.  Fantasia’s USD bonds are trading around the same yield as Xinyuan, but the other competitors shown above are 200-250bp lower.
  • Xinyuan needs to maintain a strong brand image.  The company has cultivated a distinctive Chinese/American corporate identity and its property management services are highly ranked (see Xinyuan Property website).  The company needs to maintain its recent focus on core markets rather than investing money where its brand is not well known.
  • Xinyuan needs to continue to build on initiatives in providing value-added services to residents such as insurance, cleaning, ecommerce etc…  Property management was traditionally considered just from the perspective of selling more apartments.  However each apartment project is a gated community and many opportunities are available to make greater use of the manager’s 24hour access and established resident relationships.

To its credit Xinyuan has demonstrated a strong commitment to rewarding shareholders by raising its dividend rate and aggressive share repurchase.(see: Xinyuan Real Estate’s Aggressive Share Repurchases Send a Strong Signal About Shareholder Value)

The companies selected as benchmarks provide examples of strategies that have enabled them to earn higher margins

Future Land Development (Website, Investor Presentation)

Furture Land is primarily a regional developer with a focus on the Yangtze River Delta (especially Suzhou, Nanjing, Shanghai, Changzhou and Hangzhou).  These markets have been extremely strong in 2016 and have good long-term economic potential.

The company has formed partnerships with other real estate companies to bid jointly at land auctions in order to reduce competition and prices paid.

The company has new business initiatives (movie theatres, insurance, asset management)

The company reorganized its corporate structure so that the Hong Kong listed parent company owns 68% of a Shanghai listed subsidiary (Future Land Development Holdings CH:601155).  Other businesses still 100% owned by the parent company such as residential property management, entertainment-related ventures, and international real estate could be separately listed in the future:

future-land-corporate-structure

CIFI Holdings (Website, Investor Presentation)

CIFI has primarily been a regional developer with a focus on the Yangtze River Delta (especially Shanghai, Suzhou, Hangzhou, Nanjing, and Hefei).  These markets have been extremely strong in 2016 and have good long-term economic potential.

The company has tried to limit land cost in 2016 by focusing on laggard markets with reasonable prices (e.g. Ningbo Foshan Tianjin Wuhan and Zhengzhou), private acquisitions (rather than public auctions), forming JVs (to limit competition in bidding), and acquiring commercial property rights (where land cost is lower).  The company has also formed partnerships with offshore developers (Henderson Land and HongKong Land) to develop some of their Chinese property rights.

SCE Property (Website, 2016 Mid-Year Report)

SCE was a regional developer with a focus on Fujian Province (especially the city of Quanzhou), but in recent years wisely shifted new investment towards major cities (Shanghai, Beijing,Hangzhou, Shenzhen and Tianjin).

Yuzhou Properties (Website, Investor Presentation)

Yuzhou was a regional developer with a focus on Fujian Province (especially the city of Xiamen), but in recent years wisely identified strong markets in the Yangtze River Delta (Hefei Nanjing and Shanghai)

The company seeks to maintain an above average 30% gross profit margin by limiting land costs, controlling overhead, and keeping a strong brand image

The company has an ambitious target of 30Bn RMB contract sales in 2018 and 50Bn in 2020.

Central China Real Estate (Website, Investor Presentation)

Central China is a regional developer with an exclusive focus on Henan Province.

The company has projects in 37 cities, but has shifted the emphasis of its new investment to the province capitol, Zhengzhou.

The company is promoting new “asset-light” business lines including hotels, resident services, and management of property development for third parties.

Fantasia (Website, Investor Presentation)

Fantasia was a regional developer with a focus on the Pearl River Delta (Shenzhen, Dongguan, Huizhou)

The company has positioned itself as a  holding company with subsidiaries pursuing various businesses using real estate as a base.

Fantasia’s residential property management business was spun off in 2014 into a listed subsidiary (Colour Life HK:1778) and it has subsequently been an aggressive acquiror of management contracts from other developers.

Fantasia’s commercial property management business was spun off in 2015 into a listed subsidiary (Home E&E NEEQ:834669).

 

 

 

 

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