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

Matthew Larson - Wells Fargo Private Bank

Good day, everyone, and welcome to the First Quarter 2018 Earnings Conference Call. Please note that today's call is being recorded. I would now like to turn the conference over to Mr. Bill Zima of ICR. Please go ahead.

Hello, everyone. And welcome to Xinyuan's first quarter 2018 earnings conference call. The company's first 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 may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our registration statement in 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, the company's Chief Executive Officer, who will comment on our 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. Now 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 first quarter 2018 earnings conference call. We are pleased to report that the first quarter 2018 financial results were in line with our expectations despite the impact of [indiscernible] on our active projects and the ongoing government policies restricting China's housing market. We began 2018 with strong contract sales growth in the first quarter and improved ASPs compared to first quarter 2017. Contract sales in China grew by 55.9% representing strong demand from our customers for our active projects despite the current market environment. Overseas our project in New York continued to progress as expected. Our Hudson Garden project completed foundational work this quarter and we began transferring and protecting crucial parts of the land market data at our financial report. We also sold two units at our Oosten project in Brooklyn. In addition we are pleased to continue our overseas expansion to London where we met an equity investment in the Madison project. The Madison project is a residential community project in the Canary Wharf is expected completion in 2020. In January and April we purchased two parcels of land based total GFA of 1 million square meters which helped us in large part and brought our top line and support our long-term growth. We are also pleased to continue our diligence payment for this quarter. Now please allow me to turn the call to our CFO, Ms. Helen Zhang. Helen please go ahead.

Thank you Mr. Zhang, hello everyone and welcome to Xinyuan's first quarter 2018 earnings conference call. Allow me to take you through the financial results for this quarter, further discuss our latest operations and initiatives and conclude by updating you on our financial outlook for the rest of the year. First we want to inform you that on January 1, 2018 we adopted ASC-606. Revenue from contracted customers which was issued by the Financial Accounting Standards Board. We adopted ASC-606 on an over time basis. We had a cost input method and applied it under only to contract not completed as of the date of adoption and made some related effect of adjustment to retain earnings recognized as of the date of adoption. Therefore our first quarter results reflect the adoption of ASC-606, especially with regards to revenue within net income and may not be directly comparable to prior period. First quarter contract sales increased 24.7% to about 381 million from about 305 million in the first quarter of 2017. In RMB terms, contract sales were RMB2.4 billion for the quarter. Total GFA sales in China were about 150,000 square meters in the first quarter increased from about 147,000 square meters in the same quarter last year and declined from about 134,000 last quarter. Total revenue decreased 38% to about 174 million from about 181 million in the first quarter of 2017. The decrease was mainly due to the adoption of ASC-606. The average trailing price per square meters sold in China was around RMB16,000 in the first quarter of 2018 compared to about RMB12,000 in last quarter and about RMB12,000 in the first quarter of 2017. SG&A expenses as a percentage of total revenue increased to 22.9% from 12.6% in the first quarter of 2017 and increased from 10.8% in last quarter. The increase was due to costs associated with company expansion and a decrease of revenue due to the adoption of ASC-606. Interest expense this quarter was about 30 million compared to about 25 million last quarter and 9.3 million in the same quarter last year. The increase was mainly due to increase of debt. As a result of decrease in revenues and the increase in SG&A and interest expenses, net loss for the first quarter of 2018 was 12.7 million compared to 7.4 million net earnings for the first quarter of 2017. Diluted net loss per ADS attributable to shareholders was $0.16 compared to $0.11 net earnings per ADS in the first quarter of 2017. The company did not make a share repurchase in the first quarter of 2018. Balance sheet; as of March 31, 2018, the company's cash and cash equivalents including restricted cash decreased to $1.2 billion from $1.5 billion as of December 31, 2017 mainly due to the payment of land acquisitions. Total debt outstanding was $3.8 billion which reflected an increase of $502 million compared to a $3.3 billion at the end of the fourth quarter of 2017. The balance of the company's real estate properties under development at end of the first quarter of 2018 increased to about $3.5 billion compared to $2 billion at end of the fourth quarter of 2017. The increase was mainly due to the adoption of ASC-606 resulting in deferred revenue recognition as well as from the land acquisition. Equity at end of the first quarter of 2018 was about $705 million compared to about $1 billion at end of the fourth quarter of 2017. The decrease was mainly due to the adoption of ASC-606. In summary, with the adoption of ASC-606, first, revenue will be recognized as a completion of GFA sold for property launched before January 1, 2018 which is later than previously estimated under the percentage of completion methods. And second, leverage of different projects in different periods tend to fluctuate depending on a master plan and the progress of the projects. We provided 2017 financial results adjusted for ASC-606 adoption in today's earnings release where you can see the comparison before and after the adoption and the newest match between the revenue recognition and win sales approach. And lastly, the accruement of SG&A and interest expense remain unchanged. Now let's come to our projects update. As of May 20th, we have in total 23 active projects and 16 projects under planning, including 2 projects acquired in January and April of this year with total GFA of around 1 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 May 20th, our total unsold land bank is around 6 million square meters, which lays a strong foundation for our development in future years. U.S. project update; as of March 31st, our Oosten project in Brooklyn, New York has recognized a total revenue of about $456 million from the sale of 174 units out of 216 total units, representing approximately 81% of the total units sold. Revenue from this project in the first quarter of 2018 was $5.2 million. We expect total projected revenue of around $120 million for the remainder of this year and into 2019. Our Hudson Garden project in Manhattan, New York completed foundation work in the first quarter. After optimizing the internal layout of the building, we now expect 92 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 began transferring and protecting crucial parts of the existing theater as scheduled. Malaysian project update; Xinyuan owns the development rights for a total area of 170 acres in Malacca. With the development of surrounding reclamation projects such as Impression City in Malacca and the Malacca Gateway, we noticed that the price of the reclaimed land in Malacca rose by 40% compared to with outside projects. We have conducted our environmental impact assessment and secured related approvals from local governments and are currently in the process of finalizing the reclamation contractor. We plan to launch the reclamation in June-July period of this year. UK project update; we applied 50% equity sharing of Madison Project London in the [indiscernible] neighborhood in March. In the first quarter, all below-ground work has been completed, including the formation of the extensive basement and all piling work have been completed. A structural core of the building has been constructed up to the 12th floor, out of a total 53 floors.. Central mechanical and electrical installations also began during the quarter. Construction remains on track for completion in 2020. At the end of the first quarter, 40% of available market sale units have been presold. And now coming to Construction Management Service business, in the third quarter of 2017 we introduced our new Construction Management Service business when we obtained our first construction management service project in Guangzhou. During this quarter, we have six active projects in our pipeline. We charge a service fee on our Construction Management Service to provide and may receive additional revenue. Our expansion into financing services and minority holding in projects. This asset light business model will supplement our core traditional projects and development business and aid our future growth. Dividend, we announced a cash dividend for the first quarter of 2018 of $0.10 per ADS which will be placed before June 22nd to shareholders of record as of [January] 11, 2018. Now I would like to share with your our understanding of the current market situation. A more restricted policy implemented by the government began around October 2016. It has been well over a year and we expect this government restricted policies to remain unchanged in 2018. High down payments for second home purchases, qualification of homebuyers in the local market and [same] price guidance assuming price. Despite the restriction, overall [MMI] in home buying demands remain favorable in our local markets as demonstrated by our first quarter sales and ASP increases. We believe the goal of environment restriction policy is to maintain healthy and stable development aftermarket by pulling down irrationally escalating prices in certain cities which will support the long-term sustainable growth of the business. We released overall long-term housing demand trends that are very strongly backed by China's stable economic growth and urbanization process in which a large corporation is migrating to Tier 1 and Tier 2 cities. We remain fully confident in our business growth particularly as most of our billable units are preferred homebuyers or buyers to operate our billing standards and not the luxury markets. And finally, on to our full year 2018 financial forecast. Our guidance reflect the adoption of ASC-606 and may not be comparable to prior year period. Our contract sales which are a better indicator for business development with the adoption of ASC-606 are expected to continue to grow especially in the remaining three quarters of the year. Second quarter contract sales is expected to be around 530 million. For the full year 2018. The company expect an increase in contract sales of about 10% and consolidated net income of 15% to 20% over 2017. The majority of company's net income are expected to occur in the fourth quarter of 2018. This is before an early adoption of ASC-606, our newly purchased land before 2018 need a cycle to turn into revenue. This concludes my prepared remarks for today's call. And operator, we're now ready to take questions.

Thank you. [Operator Instructions] We will now take a question from George Gou. Please go ahead.

Hi. My understanding of the accounting rule changes is that it really will be the same, it just shifted. Is that correct?

Yes, and no. Yes, is because the revenue for specific project that actually is fixed as we expected. No, is because it will be shifted to a later period and might not be approved in this year.

Okay. Also I noticed that you paid less tax this quarter -- last quarter. Will the accounting change reduce, because your profit will be less?

I'm sorry. Would you please repeat your question? There has been a disconnection of the line just now.

I noticed you paid less tax on the last quarter earnings report. Because of accounting change, will that due to the tax payment, because of the Chinese [New Year]?

Right, the decrease of the tax for Q1 is because we had a loss. But generally speaking due to the change of the accounting policy, tax were comparatively lower compared to the one we're using in the older accounting method.

Okay. Next question is, I noticed a big -- a large change in sales per square meter in the sales types per square meter. Can you give more color on that why large change in the sales types?

The ASP for Q1 is around RMB16,000 per square meter is mainly because 48% of our sales in Q1 are coming from commercial products. Looking into the remainder of this year, we believe that both the ASP for commercial and residential will hold up for the project of our company in the local markets where we have presence.

Okay. Just to clarify, you said 10% to 20% increase in profit over 2017. Is that based on the [Asian] dollar base or based on the new accounting rule?

Like we have stated we have taken consideration of the adoption of the new accounting policy, so the annual net income guidance that we've given to you guys is between 15% to 20% increase over 2017 number.

So what will be that number because there is a little bit of confusion, what type of is that…?

The number -- sorry.

Yeah, I'm just -- is that okay to give absolute number because of the confusion about the last year's days?

Okay. In renminbi term, the net income for 2017 for the full-year 2017 was approximately RMB530 million.

Okay. I see. So, 10% to 20% over that?

15% to 20%.

Okay. Thank you. Okay, thank very much. Yes.

You are welcome.

We will now take the question from Matthew Larson of Wells Fargo. Please go ahead.

Okay. Thanks for taking my call. Good evening to you guys. Couple of questions, two or three of them. You didn't -- no buybacks this quarter, I mean, usually you do even a small amount because you trade well below book value as you could use your funds and you can retire stock, you pay a high dividend on. What was the reason for that for not buying back stock?

True. We didn't buy any stock in Q1 because the Board will authorize a same price internally. So, if the stock price didn't reach the same price then we're not going to repurchase.

Even at $5. Okay. And you didn't mention much of your technology blockchain initiative that you had highlighted last quarter, with I guess is, you worked with IBM on a blockchain platform and then most recently with Tencent. I mean these are things that clearly could give you at higher stock price. If what I read is accurate, one author tend to piecing that you've got a lot more patents than say Tencent in the area and that your platform could be adopted by certain governmental agencies to help facilitate transactions. Can you give us an update on how your technology advancement is going?

Yes, we are investing in the past two years in the blockchain or related technology. Although we had obtained some patents, number of patents and have some cooperation with some companies such as Tencent, it's still in a very early stage. So we don't think -- if we don't have any material change or development with regards to that business sector it's not appropriate for us to give a lot of exposure or disclose with regard to that sector to our investors. So our core business is still a real estate developer.

So what value -- I'm sorry go ahead.

It does change, it would be a value added service related to our property management sector.

Right. What value would you place on that business at this point? You know with the investments you've made and the sort of valuation of the marketplace is on, you know that sort of facet?

I think it's too early to talk about it. We'll give update to the public once we have a material development.

Got you, okay. And a couple of other questions. The Oosten project in Brooklyn which I've visited its very nice. You have 41 units left as of the end of the quarter, you said you'd had a 225 you've done, 170 or something. You know I live in New York and the market remains pretty strong, particularly Brooklyn. Are you getting full value for those units and are you just holding them off the market until you get the price you want, is that why it's taking this long to close out that project?

The problem is not the pricing of the units. The 40 units left that you are talking about actually are most of latter side with comparatively higher total amount of unit. So naturally by nature it will sell at a slower pace compared to some of our sized units.

I see. So this is at normal pace to close out the project, okay. And I mean I guess how long do you wait, I mean prices have remained pretty strong in New York, so I assume you're getting good value on the units when you do sell them. Back to the blockchain question I had, you know previously you announced you know that you're working on a blockchain initiative not only with Tencent I guess with IBM also some sort of platform and then you worked with I guess with local company [Ruitz] who could tell I don't know how to pronounce it. But you had announced that there is five companies that had earned the national high technology enterprise certification and that one blogger or writer talking about your company said that your platform actually could be the benchmark that is used for real estate transactions, the blockchain, is that a reasonable assessment?

As we have talked about, it's too early to give more comment of that business sector. But I think if that business develop has not generate any material sales or productivity, we should wait to a later time to have further discussions.

Got you. [Technical Difficulty]

Our next question today comes from [Franklin Morton]. Please go ahead.

Good evening and thank you for your report. I would like to step back a second and try to understand why you are moving to the accounting change. Is there something that you all [logged], or is it something you were told to do and why and where does it come from?

And as we will talk about, actually it is required by the U.S. both SEC and the Financial Accounting Standard Board. And the expected date is generally deferred to 2018. So this is required, it's not our choice.

Okay. Okay. And just second question. You said you're very enthusiastic about the Canary Wharf project. But I think a lot of the press side there shows that Brexit is going to hurt the London real estate market. And I'm wondering how -- why you all are so confident given what is likely to happen to the business economy in London?

The project actually has started in year 2015. So it's been almost three years already. And after the due diligence that's been finished. According to our estimation, we believe this project has a nice gross margin which is about 26% to 27%. And our ROE all state of return on our investment is around 16%, 17% on an annual base. So taking consideration of the economy we think it might be a good investment opportunity. On the other hand, we've known the partner, the local partner for a while. So there is kind of a trust between us. It's not a kind of cooperation that we've done with strangers on the street.

But if the market deteriorates and prices go down, are you saying that you bought it so cheaply that even with lower prices you're able to get [constraints] of returns?

No, we're doing the due diligence and also the financial estimation. We've given a kind of buffer both in the cost and the expenses side. So the numbers we just discussed actually is kind of a conservative.

Okay. All right. Thank you

You're welcome, Frank.

Our next question comes from [indiscernible]. Please go ahead.

Hello, everybody. Thank you for taking my call. Mr. Zhang, you gave some interviews with Chinese media, describing details of the company's technology driven business strategy. Can you share some of that same information with international investors?

Okay. The company believes that the next few years will witness increasing serious competition in the traditional real estate market. So it is [impermanent] for property companies to identify and grasp some new opportunities for development, while managing our core business. So I believe for the near future, Xinyuan will play, emphasize -- will place emphasize, not only at core business development, but also at a supporting business. We actually categorize it into five. Let me try to explain or briefing the investors one by one. One is, we talk about it as an -- the industrial property development. Actually it's a combination of residential, commercial and industrial property development platform. In that regard by joining hands with Cambridge and Oxford University, we had conducted a in-depth cooperation in the field such as biotics, AI and new generation of IT, new materials and other fields. And also in March this year, the Central China [indiscernible] Town which is invested by this subsidiary of Xinyuan, was listed as the first branch from municipal future town by Zhengzhou which is the capital city of Henan province. And with the focus on AI and IT and et al and has brought in Fortune 500 companies, such as IBM, Oracle and Lenovo. So this is the early stage of the development with that regard and we're continuing to have cooperation in local government. This is for the industrial property development. And another one is the construction service that we have just talked -- talked about in our prepared remarks. And then our property management arm, that's the third one. We didn't talk about it before and this property management business has been ranked number 14 in China. Another two, one of them is a cloud platform for property management that will help to reduce business cost to increase the efficiency and promote coordination among offices. It not only provides our in-house IT support and also can sell different ERP modules to small-and-medium-sized business in other sectors as well. This is the number four. And the number five, the last one is, we call it business management company, a subsidiary, which aims to provide commercial services to neighborhoods and communities. So that's the one core business and the five supporting business I've been talking about in our earnings release.

Great, thank you for that detailed explanation. Also you had provided guidance that first quarter contract sales would be unchanged from 2017 and actual sales were up 25%. So can you explain the better than expected results?

We're trying to be conservative when we gave that guidance last quarter because Q1 as you know is a low season and with the restricted policies in place in local market. But as we can see that the increase of contracts as an ASP actually gave us confidence and talking about the whole year you see it's extremely back-end loaded as we've talked about the majority of the net income will come in the fourth quarter of this year. So we're confident of our guidance and this is why we stick to the guidance I have given to the public last quarter.

And which projects will make the biggest contribution to the second quarter contract sales?

I believe that will be Zhengzhou area, because with respect to the contract sales contribution also land bank of saleable resources, Zhengzhou area accounts for more than 50%.

Okay. And what is the status of the Tongzhou project in Beijing?

As you know the central government -- some functions of the central government are moving to Tongzhou area. So the master planning has been delayed. I mean the approval procedure has been delayed because of this policy change. We have submitted related documents to the local government and we're waiting for the approval. I don't think that there will be any sales and revenue contribution from this project for this year.

So, that's probably 2019?

Yes.

Okay. And what is your strategy for selling the real estate properties development completed which had a total value of 813 million at the end of March?

I think we're going to develop it into a larger size, it's not small but it's not large enough. So we still have -- we still need to have some more time to nurture that business.

That's all the time we had for our question-and-answer session. At this time, I'd like to turn the call back over to management for any closing remarks.

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

This concludes today's call. Thank you for your participation. You may now disconnect.