Xinyuan Real Estate: Very High Risk

• Xinyuan has $999mm of US$ debt due in the next 24 months.
• Xinyuan bonds are trading at yields over 20%.   Refinancing is currently impossible.
• Contract sales have been weak and the company is losing market share.
• The company has too many unproductive assets.
• The New York projects may bring more problems
• The dividend should be suspended.

Xinyuan faces a liquidity crunch as its aggressive expansion plans are not delivering enough cash flow to support the company’s debt in a weak market.  The company has many shareholders who do not seem to know much about its business beyond the company guidance and dividend payments so the stock could drop when the financial difficulties are explained.

Xinyuan’s US Dollar bonds are trading at distressed levels

It doesn’t make sense to own a stock for a 10% yield when the same company’s bonds yield over 20%.

Xinyuan contract sales have been weak

Xinyuan used to rank in the mid-70s among real estate development companies in China, but has dropped to #106 in CRIC’s estimate of 2019 sales through September.

Xinyuan greatly expanded its assets, landbank, and development inventory in 2017-2018

But sales have not increased:

The company has too many unproductive assets:

Xinyuan has too many assets producing no/low returns when it is borrowing in China at rates up to 12%, issued offshore bonds at 14%, and has an implied future borrowing cost above 20%.

The large balance of unsold inventory includes significant parts of Oosten (completed 2016), Beijing Xindo (2015), and Shanghai Yiping (2016).

Property held for lease is primarily Shopping Malls within Xinyuan developments.  2019 rents in place at 12/31/18 were $12.7mm for a $303mm carrying value of properties (4.2% yield).  If the company had access to cheaper financing then it would be smart to retain these assets for long-term appreciation.

The New York developments may bring more problems:

The New York residential market currently has a glut of inventory with more new supply under construction.

NYT: One in Four of New York’s New Luxury Apartments Is Unsold

NYP: Manhattan home prices in ‘near free fall’ as median dips below $1M

Oosten – 39 units were still unsold at 6/30/19.  The carrying value of 40 unsold units at 12/31/18 was $128mm so over $3mm average.

Midtown – The carrying value of the Hudson Garden project was $107mm at 12/31/18 and construction is in progress.

Flushing – The carrying value of the project was $93mm at 12/31/18 and construction has not yet started.

The dividend should be suspended:

Xinyuan desperately needs to raise equity capital in order to improve the terms available for debt refinancing.  Shareholder’s equity was $681mm at 6/30/19, but that includes $207mm of deferred tax assets.  Options:

• Retained Earnings.  Gross margin (27%) and pretax margin (11%) have been OK this year, but a 68% effective tax rate reduced the net margin to just 3.5%.  If Xinyuan refinances all of its existing debt at double digit yields then future earnings will be significantly reduced.
• Asset Sales.  Taking a modest loss would be better than holding no/low yielding assets for years.
• Dividend/Buyback Suspension.  The dividend is running about $23mm/year.  The company spent $6.3mm on share buyback in 1H19.
• Secondary Offering.  Many peers were able to sell shares at high prices during strong market conditions of 2017.  Xinyuan missed its chance.
• Sale of Minority Interests.  Xinyuan can sell stakes in its most attractive assets to partners.  The company would sacrifice some future profit potential in order to receive a combination of cash and a reduction in capex obligations.
• Luck.  A rebound in the financial markets, Chinese economy, and Chinese real estate sentiment could enable the company to squeeze past the current tight liquidity position.

DISCLOSURES AND NOTES

At the time of publication the author held no position in Xinyuan.  The author does not make any recommendation regarding any investment in any company mentioned here.  Investors should check all of the key facts cited here from regulatory filings and other public sources prior to making their own investment decisions.