Xinyuan forecasts from S&P

S&P Global Ratings updated its analysis of Xinyuan Real Estate in connection with the company’s recently issued 2016 results.  Key points from their analysis (full text here)

  • “B” rating affirmed and outlook revised to “stable”
  • 2017 contract sales forecast 12-14Bn RMB, +3% to +20% from 2016
  • EBITDA margin to improve to 17-18% in 2017 from 16.5%-17.5% in 2016 and 15.4% in 2015
  • Improved interest coverage due to higher EBITDA and lower interest rates paid
  • Revenue to rise 20-30% in 2017
  • Capex of 12-14Bn RMB in 2017.  Leverage to remain high.

Chinese media (LINK) have reported that Deutsche Bank and Morgan Stanley have been appointed to arrange a new bond issue for refinancing of the 13% June 2019 bonds.  Xinyuan’s 3year bond issued last year is currently trading slightly over par (quote) so I expect the refinancing to be successful.  It would be nice if the company can get a 5 year term instead of 3.

 

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4 thoughts on “Xinyuan forecasts from S&P

  1. Thanks for sharing. Do you know about the 70% tax this quarter? This is from the transcript: “In our financial statement, the tax actually is mainly consists of two categories. One is CIT, another is LAT. So for the CIT for year 2016, it’s around $40 million. And LAT is more or less the same, $40 million. And the CIT rate is about 26% and LAT is about 38%.”

    It does not look like a one-time event, but the tax rate was not that high…I wonder what was going on.

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    1. LAT is usually described as “Land Appreciation Tax”. Some description is on page 92 of the 20-F. The 70% rate in 4Q is clearly abnormal. Effective tax rate was 44% in 2015, 39% in 2014, and 40% in 2013. The confusing thing is that XIN income and expenses are incurred in different jurisdictions. Onshore property business is subject to Corporate Income Tax (CIT) and Land Appreciation Tax. You can compare to Central China 54% in 2015 and Yuzhou 47% in 2015. But XIN accrues LAT at the same time as revenues and then makes a final settlement with local authorities a couple of years later. Current period results might include a payment related to past sales or release of a previously accrued contingency. In 2016 XIN also recognized Oosten revenues which will be taxable in the US, but the company may have an NOL carryforward from expenses incurred in prior years when XIN did not have US revenues. XIN also pays interest expense offshore and I’m not sure how this cost is conveyed to tax jurisdictions where the funds are used. And in 4Q XIN paid $12mm for early retirement of its 2018 bonds – where is this cost deductible for tax purposes? I think the tax picture is quite complex, especially if you try to make sense of the numbers form a single quarter. I can’t conclude much from Helen Zhang’s answer on the conference call.

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      1. Thanks, that is very helpful. I think XIN needs to work harder to explain its financials, and tries to give more “run rate” for investors to model it.

        Based on what you said, it seems to me the tax rate for XIN in the previous years are understated, and the tax rate should be closer to 50%, not 40%, which is scary and will change how I estimate its true net income going forward.

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  2. I would normally expect XIN to pay less LAT than other developers because it has had a strategy of high asset turnover rather than long-term landbanking. Competitors sometimes have gross margins >35% on projects with cheap land in top cities, but some of that is offset by higher effective tax rates.

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