Bill Zima - IR Yong Zhang - Chairman George Liu - CFO

Matthew Larson - Morgan Stanley

Good day, everyone, and welcome to the Xinyuan Real Estate Company Ltd. Third Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Zima. Please go ahead.

Hello, everyone, and welcome to Xinyuan’s third quarter 2015 earnings conference call. The company’s third quarter earnings results were released earlier today and are available on the company’s IR website as well as on Newswire services. Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such our results will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our registration statement and our Form 20-F and other documents filed with the US Securities and Exchange Commission. Xinyuan does not assume any obligation to update any forward-looking statements, except as required under applicable law. Today you will hear from Mr. Yong Zhang, the company’s Chairman, who will comment on our operating results. He will be followed by Mr. George Liu, the company’s Chief Financial Officer, who will provide some additional color on Xinyuan’s performance, review the company’s financial results and discuss the financial outlook. Following management’s prepared remarks, we will open up the call to questions. During the Q&A session Mr. Zhang will speak in Mandarin and his comments will be translated into English. With that said, I would now like to turn the call over to Xinyuan’s Chairman, Mr. Zhang. Please go ahead.

Thank you, Bill. Good morning and thank you all for joining our third quarter 2015 earnings conference call. We are very pleased with our operational performance and financial results. We benefited from the continued strong momentum in our business as well as favorable government policies in the real estate sector. There were 19 active projects at the end of third quarter that contributed to our results along with four projects under planning in China. With respect to our operational effort on the government policies to continue to favorably impact our business. In the fourth quarter, we remain committed to driving performance of our shareholders with our quarterly cash dividend program. We will execute our sales purchase program as appropriate based on valuation. Now please allow me to turn the call over to our CFO, Mr. George Liu. George, please go ahead.

Thank you, Chairman. Hello, everyone, welcome to Xinyuan’s third quarter 2015 earnings conference call. We are very pleased with our third quarter 2015 financial performance and made good operational progress with our development activities. Now please allow me to further review our financial results. Contract sales increased by 84.7% to $309.7 million from $167.7 million in the third quarter of 2014 and decreased by 6.8% from $332.3 million in the second quarter of 2015. Total gross floor area sales increased by 132.6% to 233,300 square meters from 100,300 square meters sold in the third quarter of 2014 and increased by 6.7% from 218,700 square meters sold in the second quarter of 2015. The average selling price per square meter sold was RMB8,196, equivalent to $1,328, in the third quarter of 2015 compared to RMB10,272, equivalent to $1,672, in the third quarter of 2014 and RMB9,309, equivalent to $1,519 in the second quarter of 2015. The year-over-year and sequential decreases in ASPs were primarily attributable to stronger pre-sales in tier two cities that occurred in the third quarter of 2015. The company commenced pre-sales of one new project in the third quarter of 2015, Henan Xin Central, which contributed 10.9% of total GFA sales. Total revenue for the third quarter increased by 88.9% to $309 million from $163.6 million in the third quarter of 2014 and increased by 12.3 % from $275.1 million in the second quarter of 2015. Gross profit for the third quarter of 2015 was $82.7 million, or 26.8% of revenue, compared to a gross profit of $43.5 [million,] or 26.6% of revenue, in the third quarter of 2014 and a gross profit of $60.9 million, or 22.2% of revenue, in the second quarter of 2015. SG&A expenses were $48.8 million for the third quarter of 2015 compared to $35.6 million for the third quarter of 2014 and $35.8 million for the second quarter of 2015. As a percentage of total revenue, SG&A expenses were 15.8% compared to 21.8% in the third quarter of 2014 and 13% in the second quarter of 2015. Net income for the third quarter of 2015 increased by 609.4% to $22.7 million from $3.2 million for the third quarter of 2014 and increased by 12.4% from $20.2 million for the second quarter of 2015. Diluted net earnings per ADS attributable to shareholders increased to $0.31 from $0.04 per ADS in the third quarter of 2014 and $0.27 per ADS in the second quarter of 2015. As of September 30, 2015, the company's cash and cash equivalents, including restricted cash, increased to $555.9 million from $441.4 million as of June 30, 2015. Total debt outstanding was $1,793.1 million, an increase of $71.3 million compared to $1,721.8 million at the end of the second quarter of 2015. The balance of our real estate property under development at the end of the third quarter of 2015 was $2,012.2 million compared to $2,097.1 million at the end of the second quarter of 2015. Today, we also announced a cash dividend for the third quarter of 2015 of $0.025 per common share or $0.05 per ADS, which will be paid to investors on December 9 to shareholders of record as of November 25 of this year. At this time, we do not have any intention to change our dividend policy. During the third quarter of 2015, we continued to make good progress in our Oosten project based in Brooklyn, New York. As of the end of the quarter, we had pre-sold nearly 60% of our total units. The building project is on schedule and we continue to install the façade, interiors and mechanical systems. The New York real estate market is generally healthy and the sales prices we are currently receiving for our Brooklyn project remain favorable. Building on the third quarter of 2015, one of our larger pan houses sold for $6.5 million, a record high for Xinyuan on this project as well as a record high among all the residential units sold in Williamsburg, Brooklyn. At Xinyuan, we also continue to explore new opportunities to develop real estate related products and services to complement our core real estate development business. Our property management arm was recently awarded and ranked number 16 among the top 100 property management companies in China by the National Property Management Association, as measured by overall competitiveness, including the effectiveness of management operation of performance as well as quality of services. Our efforts to cultivate real estate related products and services that can complement our core real estate development business will provide us with the best growth opportunities in the quarters ahead. Overall, they will trust in the environment in Xinyuan in the third quarter as market dynamics remain favorable for our sector and our operations as well. Favorable government policies in China's real estate sector, including easy managing policy related home purchase restrictions, and lower downpayment requirements have supported the market we serve and we expect these policies will continue to positively impact on our business in the fourth quarter. Now, I would like to conclude my comments by discussing our full year financial outlook. For the full year of 2015, based on the third quarter results, we reiterate our expectation of full year contract sales and net income growth of approximately 30% compared to that in the prior year. This concludes my prepared remarks for today's call. Operator, we are now ready to take questions.

[Operator Instructions] And our first question today comes from Richard Geronimo, a private investor.

Hello. Yes. Can you hear me?

Yes. Please.

Can you hear me George?

Yes. Please. Can you hear me?

Okay. Yeah. I can hear you. Yes. Congratulations on your good quarter and also it appears that the conferences in New York and possibly Hong Kong will bear fruit and also I hope you enjoyed your order in Cornell, New York. So I have a couple of questions for you.

Yes. Please. Thanks.

You're welcome. So what do you expect for the entire year as far as your revenue - contract sales go and do you expect to - do you anticipate, what do you expect of that please?

We kind of addressed this issue in our earnings release and in the speeches I just made, the remarks I just made. We reiterate our expectation of full year contract sales and net income growth of approximately 30% compared to the prior year period.

Understand. Okay. But then I guess I moved into is the fact that you have the 13.25% bonds and there is a potential that they may be restructured and how would that restructuring work as far as the bonds in China?

We are working on the possibility of onshore bond issuance, but it's still an issue full of uncertainties at the moment and we will announce it once this onshore bond issue has been secured.

Do you feel comfortable with that happening?

We have seen many of our peers have successfully completed onshore bond issues, we like to follow suit. But no one can guarantee it will happen.

I understand. Thank you. And also you talked about getting some more projects outside of China and it seems like your focus was the US and how is that Malaysian issue going as well?

Malaysia one is like, I kind of also talked about this in the prior earning calls. Malaysia one is more an option that we are having. We have no plan to take any message accents on Malaysia project. So it's a small investment compared with our total portfolio and we will wait to see what is the best solution to that project.

And New York?

New York. We are talking about it, you probably also read about the news about our potential efforts in New York City. What I can say is that we are not in a position to make specific comments on specific projects. We are talking to various opportunities and one or some of the materials in near future. We are hopefully, but we can only announce a specific project after it has been finalized.

Okay. You’ve been very good and very kind and I appreciate that. And again congratulations on a great quarter and I certainly respect you as far as the CFO and the company, I think, is in good hands, and hopefully it'll stay that way. One other question is the Board of Directors, there's still a couple of seats available or that have not been filled. How is that working out now?

Our board has recently added one independent member, Mr. Tian who is from Korn/Ferry, another multinational company and the board as far as I know, is keen to add new members one, where appropriate, and when a qualified candidate is found.

Thank you very much.

[Operator Instructions] And we’ll go next to Herman Tye, a private investor.

Hello. Yes. So I want to ask about a year ago, the management said you guys have used a yardstick of 50% ROI when you do that acquisition. So I wonder, is there annual return of 50% or is it the whole project and what is the numerator and denominator used for the ROI?

You mean for our Brooklyn project?

Yeah. I mean, so I imagine that you used a yardstick of ROI of 50%?

What I can say is that we’re doing extremely well on Brooklyn project, but we are not in a position to give any specific numbers at the moment and even though we have so like 60% of the total units, but we cannot give you any specific numbers until or the numbers have been fixed.

Actually, it's not for specific project, but this is a yardstick that you guys used to, I mean when you deployed capital for land acquisition right because you have a ROI expectation and the management said that it’s 50%?

Yes, the management said that we made remarks, I have to check whether the management has made the remarks, but what I can say is that we are confident to achieve whatever ROI they might have given you because this one - this project might do better than our expectations.

So currently you will not see that - your earnings can go to like at least $1 a year and at your current share price, you are earning like 25% return easily. I don't know why you are not more aggressively doing that share repurchase?

Doing what? Hello doing what? I didn't quite get you last sentence.

I wonder why you're not aggressively - more aggressively doing share repurchase when you're earning like 25% guaranteed return almost.

We are doing some share repurchase.

Why are you not more aggressively doing that, considering the return is much higher than like your other land acquisition or whatever?

Yeah. You made a good point. Again, I see whether we can repurchase more, but now we are happier there, we cannot do. At least, we cannot do around this stage.

I mean, for the last quarter, you had a lot of time to do a share purchase, but you are not doing it very aggressively. Why is that?

We - last quarter, we did some repurchases.

But why it's not like more aggressively doing that? I think you only purchased about like 200,000 or so?

It's clearly a judgment call and obviously we think that our focus on the fundamentals is definitely more important than any repurchases planned, but for your information, we did a lot more than - we did a lot more than 200,000 shares in the last quarter.

How many shares do you did? Can you hear me, how many shares did you repurchase last quarter?

We need to check on this, if you are keen to know the exact numbers, you can send us an email.

I see. So my last question is that so your net profit margin compared to last quarter, I think, it does not expand and you're earning like higher revenue. I don’t know why you don't get any operating leverage?

Operating margin has actually increased. I don’t know why you got this impression that it's not much different than - okay. You mean, compared with last year? Compared with last year, you mean? Right?

You increased like 12% or so. So I wonder why the margin does not increase.

I didn't quite get - any increase in the scale would not - generally would not increase the gross margin, it will only increase the net profit margin.

Yeah. The margin, I would expect you to increase like lot more because you get a lot of new bases, so I mean your SG&A should decrease proportionately, I mean decrease in terms of percentage of revenue. I wonder why that's not happening.

Actually, our net profit margin also has increased significantly as compared with the same period last year. Maybe not which you're talking, but it's already like 3 to 4 times better than last year - than that of the same period last year.

And moving on, we’re going to take a question from Brett Mayo, a private investor.

Yeah. Hello, George.

Hello. How are you?

I'm good. First off, I would say, great execution on the quarter, almost 23 million net income, great quarter. I guess my first question would be, I'd seen on the news about the Tianjin blast, the tragic explosion there. And I also noticed that you guys have a presales plan for the fourth quarter, and I didn’t know - I am not familiar with the geography over there, and I didn’t know if you’re land was affected by that or if that affects presales or if you could just give any details about that, the Tianjin. I think you have a planned sales this upcoming quarter for presales?

No, our project is far away from the site where the tragic happened, very far away, it’s basically two completely different directions. Our project has no - has suffered no effect from the tragedy and we are expecting a good presales.

Good. If you could - I know that you guys have about 19 projects going on or something like that, if you could just kind of list the couple or two that I guess internally are most excited about and maybe the bottom two that might give you concerns or where you might have to take discounts or something like that, just kind of the top two, bottom two?

Okay. I’d like to say, with the new project that actually started presales only in the third quarter. We actually were able to manage a contract sales of more than 30 - above $30 million for its presales, and actually we managed more than $20 million on the first day of our presales.

And where was that - what project?

That’s actually in Henan in Zhengzhou. If you look our earnings release, it’s actually the last project in the table, Henan Xin Central. Those business, they are only new project in the third quarter, never happened before and the presales happened like almost in the last week or last two in the second half of the September. However, it has accounted for about 10% of our total GFA sales for the third quarter.

That’s great. Very good news. I noticed, I guess on the projects that maybe not doing quite as stellar, Chengdu, I noticed it, it kind of - if I am just kind of glancing through, it’s average selling price is kind of on the lower end. Is it cheaper to develop land there or is it just kind of an outlier or the margin is just lower on Chengdu and what are the expectations from that project going forward?

If you look at the table in our earnings release, you can realize that even the ASP of Chengdu project in the third quarter is lower, slightly lower than that in the second quarter of this year, but it’s actually higher than the third quarter of last year. So the price is in the [indiscernible] is probably due to a different - due to the location, the flow and direction of different flags. And the good news is you can - if you compare with the sales of - the flat sales in the third quarter of this year with the flat sales in the third quarter of last year, you can see that the sales of Chengdu project in this year obviously is doing a lot - significantly better than that in 2014.

Right. That’s good. And again, a great quarter. I appreciate you coming to New York and doing the kind of the roadshow and I believe Beijing as well, I think it means a lot to investors to be able to spend their time with you and other members of management. Great execution, great quarter. I agree with the last caller or investor, the share buyback, you guys have around $13 a share book value and trading around $3.50 or something like per ADS. It’s a no-brainer to be aggressive on the share buyback. But I understand, priority number one is running the business; number two, I am excited about the potential onshore bond. If you could just as - and I’ll hang up and listen to the answer, but if you - I don’t really understand that process very well. If you could just kind of give some color about what that could potentially mean. But again, you guys are doing a great job of selling real estate, which is your primary goal. And I’ll hang up and listen to the answer on onshore bonds, what other companies are doing and what that could mean for you guys? Thank you, sir. And have a good one.

Okay, thank you. Quite a few real estate companies have issued onshore bonds, but most of them are big boys. We haven’t got any peers with the similar size as ours that have issued onshore bonds. We are actually moving, if not ahead of them, at least in the bond sense faster. We have submitted our application to the authority. We are waiting for their approval. It probably take weeks or even months to get the approval. And the general process is once we got the approval then we are allowed to do the roadshows to sell the bonds to potential investors. Thank you.

And moving on we have a question from Matthew Larson from Morgan Stanley.

Good morning, guys. Actually my question was answered, it’s about the bonds and about share buyback. And I just wanted to say as well, great quarter. You guys seem to be executing on the share buyback. It does make sense from a financial point of view certainly, it’s no-brainer, but I can understand what those small float that may not be as much a priority as one might think. And frankly I think it’s just a question of whether or not global interest in Chinese equities continues to be positive because at some point the value of the company would just be recognized and we see it essentially in the stock price on it. So I just wanted to add that and thanks so much.

Thank you.

[Operator Instructions] And it looks like that’s all the time we have for questions today. Gentlemen, I’ll turn the conference back over to you.

Okay. We thank you for joining us on today’s call and I appreciate your ongoing support. We look forward to updating you on our progress in the weeks and months ahead. Thank you again.

And it does conclude our conference today. Thank you all for your participation.