Bill Zima - IR, ICR Lizhou Zhang - CEO Helen Zhang - CFO

Hunter Diamond - Diamond Equity Research Matthew Larson - Wells Fargo Private Bank

Good day, everyone, and welcome to the Xinyuan Real Estate Co., Ltd. Fourth Quarter 2017 Earnings Conference Call. Please note that today’s call is being recorded. I would now like to turn the conference call over to Mr. Bill Zima of ICR. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Xinyuan’s fourth quarter 2017 earnings conference call. Company’s fourth 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 discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. 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 and it’s quite possible. So, 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 U.S. 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. Lizhou Zhang, Company’s Chief Executive Officer, who will comment on Company’s operating results. He will be followed by Ms. Helen Zhang, 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. With that said, I would now like to turn the call over to Xinyuan’s CEO, Mr. Zhang. Please go ahead.

Thank you, Bill. Good morning and thank you all for joining our fourth quarter 2017 earnings conference call. We are pleased to see strong growth in contract sales during the fourth quarter despite ongoing government restrictions on Chinese housing market. Thanks to steady demand at our active projects, contract sales grew to $802.4 million, or over RMB5.4 billion, above our guidance range of RMB4.6 billion to RMB4.8 billion. This growth drove our full-year contract sales growth to 40% from previous year, above our guidance range of 35% to 37%. During the fourth quarter, we purchased six parcels of land with total GFA of 1.8 million square meters which helped us enlarge our land bank. Although, this resulted in temporary higher leverage in this quarter, we believe it is important for us to add to our pipeline, so as to support long-term growth. We are pleased -- we are also pleased to continue our dividend payment in this quarter. Now, please allow me to turn the call over to our CFO, Ms. Helen Zhang. Helen, please go ahead.

Thank you, Mr. Zhang. Hello, everyone. And welcome to Xinyuan’s fourth quarter 2017 earnings conference call. Allow me to take you through the financial results for this quarter, further discuss our latest operations in each areas, and conclude by updating you on our financial outlook for year 2018. Fourth quarter contract sales increased 72% to $802 million from $465 million the same quarter last year. In renminbi terms, contract sales were RMB5.4 billion for the quarter, RMB600 million above the high end of our guidance. Contract sales for the full year increased 40% to $2.5 billion from US$1.8 billion in 2016, 3% above the high end of our guidance. Total GFA sales in China is 444,000 square meters in the fourth quarter, double from 222,000 square meters in the same quarter last year, and increased 12% from 370,000 last quarter. Full year GFA sales in China increased 21% to 1.4 million square meters from 1.1 million square meters in 2016. Total revenue increased 44% to $729 million from $505 million in the fourth quarter of 2016. Total revenue for the year increased 27% to $2 billion from $1.6 billion in 2016. The average selling price for square meters sold in China was around RMB12,000, in the fourth quarter of 2017, compared to about RMB11,000 in last quarter and RMB10,000 the same quarter last year. SG&A expenses as a percentage of total revenue, increased to 10.6% from 10.4% in the fourth quarter of 2016 and it’s the same with last quarter. For the full year, SG&A expenses decreased to 10.7% of total revenue in 2017 compared to 11.4% in 2016. Interest expense this quarter was $25 million compared to $11 million last quarter and $13 million in same quarter last year. Full year interest expense increased to $66 million from $30 million last year. The main reason is some interest hasn’t been capitalized into our project. As we begin construction this year on our newly purchased projects, capitalized portion of total interest will increase and thus bring down interest expense. Income tax in 2017 was higher than in 2016, mainly because there was a one-off tax refund for the Kunshan project last year for a total of around RMB60 million. We didn’t have any project settlement in 2017. So, no similar refund was made, which brought up our total income tax and tax rate. We expect to have one or more project settlements in 2018. In line with sales performance, net income for the fourth quarter of 2017 was $35.1 million compared to $16.7 million for the fourth quarter of 2016. For the full year, net income was $80 million, similar with last year. The slower growth in net income is due to higher interest expense and tax, as mentioned earlier. A comparatively lower net income attributable to Xinyuan shareholders this year is because we have some non-controlling interest related to Zhengzhou International New City Phase I. This project contributed a large portion of net income and is upgraded to a joint venture in which we own a 51% beneficial right. Other phases of the Zhengzhou International New City are all 100% owned by Xinyuan. Diluted net earnings per ADS attributable to shareholders were [Technical Difficulty]. So, shall we continue or shall we wait?

Please go ahead.

Okay. Let’s come to diluted net earnings per ADS attributable to shareholders were $0.47 compared to $0.18 in the fourth quarter of 2016. For the full-year, diluted earnings per ADS were $0.94 compared to $1.06 per ADS in 2016. The Company did not make a share repurchase in the fourth quarter of 2017. Now, let’s come to balance sheet. As of December 31, 2017, the Company’s cash and cash equivalents including restricted cash, increased to $1.5 billion from $1.2 billion as of September 30, 2017. We’re glad to report that our cash collection ratio remains higher than industry average, even under current restricted policies. This allows us to better position to capture opportunities in the merger and acquisition market, and to cope with potential systematic or policy risks. Total debt outstanding was $3.3 billion, which reflected an increase of $819 million, compared to $2.5 billion at the end of the third quarter of 2017. This is mainly due to the new bond insurance as well as trust of bank loans related to new projects acquired in the quarter. The balance of the Company’s real estate properties under development at the end of the fourth quarter of 2017 was about $2 billion, similar to that of the third quarter. Now, come to the project update. As of year-end 2017, we have in total 22 active projects and 14 projects under planning, including 6 projects acquired in this quarter with total GFA of 1.8 million square meters. The new projects are mainly located in our existing markets with solid track records, and we believe they will drive our long-term growth. As of the end of 2017, our total unsold land bank is around 5 million square meters, more than two times higher than in the beginning of the year. This lays a strong foundation for development in future years. U.S. project update. As of the end of 2017, our Oosten project in Brooklyn, New York has recognized total revenue of $251 million with $99 million generated in 2017, a 172 units have been sold out, out of 216 total units with 66 of those units sold in 2017. We expect foundational work to be completed on our Hudson Garden project in Manhattan, New York, in the first quarter of 2018. We are also pleased to announce that after optimizing the internal layout of the building, we now expect 87 units to be available for sale, an increase from the original 82 units. We continue to execute on planning, governmental approvals and predevelopment of our ground-up development project in Flushing, New York. The Landmark Protection Committee has approved our landmark protection plan and awarded us a Certificate of Appropriateness. We expect to begin transferring and protecting crucial parts of the existing theater in the first quarter of 2018. As we are constantly making efforts to enhance our management capabilities in the U.S., we are now operating our U.S. projects through a joint venture with Kuafu Properties. The venture is called Xin Fu and is majority owned by Xinyuan’s U.S. unit. Kuafu’s engagement will complement and strengthen Xinyuan’s existing capabilities in New York by supplying professional services and support related to construction management and marketing. Xinyuan retained 100% ownership of the three of our New York projects and will continue to control overall project development. Kuafu will help with construction management and marketing. The combined team will take advantage of the resources and expertise of both sides to deliver better projects and services to our customers in the U.S. market. Construction management service business. Last quarter, we introduced our new business segment, construction management service, when we obtained our first project in Guangzhou. This quarter, another three projects were added to the business segment’s pipeline. This asset-light business model will supplement our core traditional project development business and aid our future growth. In addition to receiving revenues from service fees and interest spread yields, we may also invest in minority shares of the project companies. Dividend: We announced a cash dividend for the fourth quarter of 2017 of $0.10 per ADS, which will be paid to investors on March 15, 2018 to shareholders of record as of February 28, 2018. Technology initiatives: Earlier today, the Company published a press release that provides an update on our blockchain initiative. Xinyuan started a study on blockchain in 2016, and some key achievements since that time can be found in the separate press release. We plan to further develop a blockchain platform, so that it would be applied to real estate and across different industries. While the Company’s core business is still real estate development, we hope to establish a practical blockchain platform, which could help us capture market opportunities in China. Before we step into 2018 outlook, I would like to share with you our understanding of the market environment. We expect the government’s restricted policies to remain unchanged in 2018. High down payments in home purchase restrictions are still in place. Despite the restrictions, overall underlying home buying demand remains favorable in our local markets. We believe the goal of the government’s restriction policy is to maintain healthy and stable development of the market, by pulling down escalating prices in certain cities, which we support for the long-term sustainable growth of our business. We believe, overall, long-term housing demand trends are strongly backed by China’s stable economic growth and urbanization process, in which a large population is migrating to tier 1 and tier 2 cities. Now, for our 2018 guidance. 2017 was a year in which we equipped our sales for future development. We have gained strong contract sales and adequate land bank and a healthy cash position at a cost of higher debt and interest expense. However, we believe that this is crucial for us, especially in a market where both housing and financing restrictions persist. After these efforts, in 2017, we are committed to and more focused on profit generation in 2018. For 2018, we expect an increase in contract sales of about 10% and an increase in consolidated net income in the range of 15% to 20% over 2017. Similar with 2017, 2018 will be a second half loaded year with around 65% of our sales to take place in the second half of the year. This is because of inventory ready for sale is comparatively small at this moment, and the newly purchased lands need a cycle to turn into contract sales. As such, contract sales growth for first half of the year was limited. For first quarter of 2018, the contract sales total is expected to be flat, compared to the first quarter of 2017, and we expect a significant pressure on earnings in the first quarter, due to slower sales, associated with Chinese New Year and increased interest expense, associated with new debt from land acquisitions in May 2017, while operating expenses remain fixed. We will try our best to accelerate the preconstruction and construction progress of certain projects and recognize their contract sales contribution as early as possible. And this concludes my prepared remarks for today’s call. Operator, we are now ready to take questions.

Thank you. [Operator Instructions] And we can now take our first question from Hunter Diamond from Diamond Equity Research. Please go ahead.

Hi. Can you just provide a little more guidance around the blockchain developments and what you’re looking to do in that area?

As we have disclosed in the press release earlier today, we now has a team, about 100 employees. The blockchain initiative has been developed for about a year and a half. We’ve invested about $7 million by far. It’s still in the very early stage. We have applied for a private patent for Chinese government officials and we’re still working on it. We hope that the development of the blockchain will help us to find new opportunities in China’s real estate and also some other industries. It’s still in the early stage. We’ll give you some update once we have some material information to report.

Okay, great. Thank you.

[Operator Instructions] We will now take our next question from Matthew Larson from Wells Fargo Private Bank. Please go ahead.

Hello. Thanks for the call. I have been shareholder for many years of probably 1% of your outstanding and I have to say that you - management has done quite a bit to try and enhance shareholder value, whether it’s being consistent share buybacks, the dividend of course has been very nice to have, and your projects in New York where I’m based, certainly showed your intent to grow and diversify. I can say, the Oosten project is really world-class. And actually, I’ll be working over in the Hudson Yards area. Speaking of Hudson Yards, is it true that Target will be your -- one of your primary tenants in the building?

Yes.

And I read at someplace that that is likely to be the largest retail lease in Manhattan. Is that also true?

I guess so.

Okay. Well, that’s impressive. I’ve got a couple of other things. Okay. The blockchain question I had has been answered. And then, I read periodically that your new initiative to have a management -- real estate management division in the PRC, I’ve heard that you may -- could potentially list that locally, so would trade separately to establish a value on that. Is that correct?

Are you talking about our blockchain business?

No, not necessarily. To be honest with you, I don’t have the notes in front of me. I read a blog that, again, you have a management division that you discussed on this call that you would take small pieces of -- equity pieces maybe in some projects but you would primarily be offering real estate consultation and advice and what have you for a fee, and that that division might be listed at some point.

I guess, what you are talking about is our construction service segment that was just discussed. Currently, we don’t have any plans for public listing; it’s still in the very early stage. We haven’t talked about that yet.

All right. And I didn’t have time to go through the whole news release, but can you confirm? Your book value looks to be $14, $15 now. Is that accurate?

Yes.

All right. And then, on that, this is just a side thing. Each quarter, you announce land purchases and what have you to increase your land bank, so that you can grow. Your Company in my mind has always been undervalued, certainly on a price-to-book, on a PE multiple and any number of things. Even though you have a significant presence here in the United States; you are listed; you’ve done several large debt offerings, dollar based, so you have capital here. But, I see that other companies, I wanted to highlight one just for a momentum, and I wonder whether companies such as yours would be interested in view that consolidation is taking place that I understand in the PRC amongst developers. There’s a company that’s been brought to my attention with the ticker CNTF which Merrill Lynch had wrote about 10 years ago and it recently sold their Beijing headquarters for a 144 million in cash which closed last year and yet the whole company trades for 28 million and they have other assets, real estates in the Hangzhou and Shenyang if I am pronouncing it. My reason of bringing it up is, is that normal for not only a company like yourselves to be trading at less than book value, even though you are listed in the U.S., and this other company, symbol CNTF which trades at 10% of book and just raised almost $150 million cash, and that’s five times its market cap. I mean, is it likely companies that have that sort of discount would be acquisition targets, because it seems to me if I was buying new land to develop but I could buy another company, $0.15 on the dollar or at least make an offer for it, that would be a better use of my fund. The company I am talking about has less than a $30 million market cap that probably has $200 million to $300 million in real estate. Is that something that you feel in the future will be realized, I guess as people become more I guess comfortable owning smaller cap Chinese stocks or as the real estate market becomes more -- even more mainstream in the PRC? Sorry, long question.

Okay. Yes. Absolutely, we notice that our book value is high compared to our capitalization. There is kind of a discount, approximately around 50%. If you compare a real estate company of our size with other real estate companies listed in Hong Kong larger size, you will notice that we are actually not alone. Companies of our size listed in Hong Kong are more or less the same discount -- the same discount level, like us. And you are talking about merger and acquisition. I heard about this company that you are talking about, but I am not quite familiar with that one. So, I think I am not sure if I am in a very good position to talk about company. But, in terms of merger and acquisition, it was noticed that there is a trend in China real estate sector is that the bigger ones are getting bigger. That’s for true. We are actually working with other developers and also we’re doing merger and acquisitions through share transfer or share repurchase. So, we build -- we acquire land together and we build the project together. But, in terms of the transaction, sometimes it’s quite complicated and you need to be very careful because real estate sector, when the other side is acquiring land, whether it’s clean or with some legal problems, we need to be very clear and cautious. And I would say that a trend here in China is going on and we’ll evaluate very carefully when it comes to merger and acquisition, either working with a single project company or with a share transfer model.

Okay. Well, then, I will talk my book, CNTF is the ticker, and it might be worth a look. So, with that, I got a better understanding of how your business works. And thank you very much for the information.

Thank you.

[Operator instructions] We can now take our next question from George Gou [ph] from private investor. Please go ahead.

Hi. I am also owner of other 1% of shares. [Ph] One thing I read from your Chinese website that you are planning to have 25% gross margin, and 10% net margin. But so far, you are only getting 5% after tax. I am just wondering, how you are going to achieve 10% net margin?

I am not sure, which article you are reading and who is giving the guidance to you. In terms of the guidance for 2018, we just stated that we expect 10% in contract sales for next year and 15% to 20% increase to our net income -- consolidated net income. We try to be conservative because it’s still early time for the year and we have stated that we expect the year is going to be backend loaded. I think, there is some upside, but I will feel comfortable to share more information with you as we have more visibility.

It’s the investment presentation for September 2017 in your website, the main Chinese website, which makes sense because you already achieved 25% gross margin right now -- 24%, but far away from the net margin. For example, like non-controlling interest, you pay them through the after tax money, shouldn’t that be -- shouldn’t you pay [ph] tax also, question like that, I don’t know…

I think what you are talking about is, when we’re talking about merger and acquisition and evaluation of new project, our goal is to have 25% gross margin and 10% net margin for the project. That’s my understanding.

Okay. I see. Second question is, in your construction management business, how do we calculate the profit? Because you have a business model, say, 10% net margin for construction for the -- selling real estate, but for management, how do we calculate the profit?

Our business model here is we will receive revenue from service fees and interest rate yields and we’ll also have some minority shares in the project of company. We started the business -- actually, we started the business last year and we have some nice development, but it’s still in the early stage. And both the revenue and profit contribution for year 2018 would be very limited. But I think, we are going to have a very nice growth in year 2019. But, it’s still early to talk about it. I’ll give you a more information as time goes by.

Okay. I did a quick calculation. Your book value is over $16 per share. Now, if you think for the share price, it’s like every dollar you buy the share, you get $2.5 equivalent increase in the value. I’m just wondering why not continue the share buyback because the return on investment is 150% instant?

On the one hand, actually, we have done the share buyback for a quite few quarters in the past. Within the Company, we had a threshold [ph] for the price I would say, biding [ph] price. I think you understand that at end of -- around the end of last year, stock market goes very high. So, we just suspended the stock buyback. We will evaluate the market opportunity and see, if we will resume the stock buyback, after evaluating the stock performance and the overall market environment.

I see. I feel that your stock price is a very good marketing tool for selling real estate because people will track your stock price, if you see it goes up, you feel more comfortable with your company. So, I would encourage you to continue buyback, raising your minimum price, it cannot be the fixed price, because it should increase your -- the price you pay; that’s my point.

Thank you very. And as we will talk about that we’ll have some internal discussion to see how to set this bidding [ph] price and whether we’ll resume the share buyback in the future.

Okay. Thank you.

Thank you.

We will now take our last question from Richard Geronimo, [ph] who is a private investor. Please go ahead.

Hi, Helen. That’s a great quarter for Xinyuan, and I have great expectations for the 2018. I do have a couple of questions, although quite a few have been answered. What are your -- the $300 million bonds, what are they trading for now, and I guess in Singapore, what are they trading for now?

Yes. You are right. The market is in Singapore.

No, I understand. But what are they trading for? Are they trading above par, are they trading below par?

It used to trade above par, and you understand that in the past few days stock market dropped a lot, that will give a negative impact to the bond trading. So, it’s about 99, a little bit below par.

Okay. So, I guess what I am leading to is, your refinance, your costs are still what I consider a little high at 8.75%. And with the continued profit and also the growth of your Company, first, I have to ask, is financing readily available to you? And do you think in the next round when you are going to have to refinance and as times goes on that that rate will come down? I know that’s -- I’d like your idea.

First of all, as to the price, it’s related to the rating. We have two rating agencies, one is Standard & Poor’s, another is Fitch, both of them gave a rating as single B. For a single B company, there is a price range there, which is market-oriented. And also, there is two factors that they pay much more attention on. One is the scale, you know we’ve already talked about it, sales contract, our contract sales in 2017, 2018, so you have a idea. And second one actually is the debt-to-EBITDA that’s the ratio; you need to reach a certain level. So, the rating agency will consider whether they are going to upgrade you or not. According to our estimate, as we mentioned, we believe that 2018, probably we’re going to still have the same rating, which is single B.

Okay. So, at what stage, as far as your -- the size of the Company, when does that become something as positive for the company? In other words, if you are at say 2 billion or 3 billion revenue, when does Fitch and S&P feel that that becomes a positive for Xinyuan?

In my mind, contract sales probably should reach RMB30 billion, that’s our contract sales. So, we still have some -- we still have a far way to go.

Understand.

Yes.

Okay. Now, another question I have is, you said there’s going to be a lot of pressure as far as for net income in the first quarter. Do you anticipate making a profit in the first quarter of 2018?

We’re saying that we have a significant pressure on net income for Q1. So, if we’re taking Q1 alone, I am prepared for a loss.

Okay. So, potentially, there is going to be a loss for the first quarter. However, your guidance for the whole year is -- sorry?

Yes. That’s true. If you check Q1 track record in 2016 and 2017, you will see that we are -- we were making profit, but the number is quite minimal. And since we have more interest expense because of the leverage associated with the more debt of land acquisition, so I am prepared for a loss for Q1. But for the whole year, because 65% of the contract sales were coming from second quarter -- from second half of the year, mainly because of this cycle of our launch of new projects. So, we are still giving the guidance to see that we are going to have a consolidated net income increase upto 15% to 20%. That’s what we can see.

Okay. So, now, is Xinyuan having any problem at all getting financing for any of your projects?

I don’t think so. This is timing.

I don’t understand -- I am not quite sure I understand that. You don’t think so. So, in other words there is a potential that the financing might not be available?

No, I don’t think so. We are not seeing any more difficulty in financing in China.

Okay. So, if things stay the same, then for you to continue, to develop the project you have, financing will be available?

Yes, as long as you have the quality projects, as long as the project is in a nice location.

Which, I assume, you have doe the research, the due diligence and that’s where you buy land, right?

Yes, you are right. We are saying that we focus on tier 1 and tier 2 cities. And in the tier 2 cities, most of the projects are located in the capital city of the province.

Okay. So, now, other companies of your size, are they running into problems with financing?

Probably yes. The financing actually is more related to the quality of your project. If they have project in tier 3 and 4 cities, then I think they are having some problem.

Okay. Now, how about the Malaysian project, the Malacca, what is the status of that?

Malaysia project, we have been having active discussion with the local government, and we plan to launch the reclamation around June this year.

Okay. It seems to be being pushed back further and further. Is there any issue with that, or is it just normal bureaucracy things that have to be done with the government?

I think two factors. One is, we are continuously evaluating the market environment in Malacca. So, we are not in rush. Starting the reclamation earlier probably wouldn’t give us more benefit. The second is we are continuously talking with the local government to see what is better time for us to launch the reclamation. And we need pass -- there are some certificates from the local government before the reclamation is started.

Okay. So, now, you purchased that quite a while ago for I guess $10 million or something like that. It’s appreciated in value regardless of what you do?

The $10 million that we purchased is the reclamation right. So, we need to make the water into land first and sell the -- either sell the land or build a building afterwards. According to our estimation, if we finish the reclamation and sell the land, we’ll make profit. That’s our forecast.

Okay, great. And it appears that the -- like you mentioned in your statement that the price is of around -- the average price you’re selling your units for is about RMB12,000. Is that being consistent in 2018? Is that still about the same or is there some pressure?

ASP for 2017 increased by 18% to 20% compared to year 2016, as we’ve just talked about that for 2018, we expect the restricted policies will continue. And I think, I should be conservative. It really depends on which market you’re in, and the current market -- what the current market price is. I think, to be very cautiously optimistic, our price will go up, but it wouldn’t go up that quickly, for 2018.

Well, that’s good. That’s great. I appreciate you taking my questions. And again, congratulations for all of us, both you and I, I hope continued success with Xinyuan.

You’re welcome. Thank you.

There are no further questions in the queue. I would now like to turn the call back to the host for any additional or closing remarks.

We thank you very much for joining us on today’s call and we appreciate your ongoing support. We look forward to updating you on our progress in the months ahead. So, thank you again.

Thank you. That concludes today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.