Bill Zima - ICR Lizhou Zhang - CEO Xuefeng Li - Interim CFO Yong Zhang - Chairman

Matthew Larson - Wells Fargo

Good day, everyone, and welcome to the Xinyuan Real Estate Company Ltd. Second 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, sir.

Hello, everyone and welcome to Xinyuan's second quarter 2018 earnings conference call. The Company's second 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 Mr. Xuefeng Li, the Company's Interim Chief Financial Officer, who will provide some additional color on Xinyuan's performance, review the Company's financial results, and discuss the financial outlook. Mr. Yong Zhang, Chairman of Xinyuan is also present for the call. Following the 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 second quarter 2018 earnings conference call. We are pleased to achieve above guidance contract sales of $633.9 million during the second quarter of 2018. Given a consistent delay challenge hosting market in China demand is our expectations, well instructed regulatory environment of China progressing market caused down over overall housing purchase which laid down the fiscal sales growth at our active projects. ASC 606 adoption also negatively impacted our top line since part of our revenues now must be recognized at a later time. However, demand for our active projects in China remained positive and our average selling price per square meter sold in China improved by 18.7% during the second quarter of 2018, compared to the prior year period. During the quarter, we also made investments to support long-term growth. In March 31, we have purchased six parcels of land and enlarged our total land bank GFA by 2.44 million square meters. In addition, we continue to move forward with our overseas project as planned. In New York City, our housing project, our Hudson Garden project inhales catering neighborhood of Manhattan finished excavation during the second quarter of 2018 which followed the completion of foundation work in the first quarter of 2018. During the same quarter, we started the protection master molds, and removal of crucial parts of the landmark setter at our Flushing project. As part of the plan for later offsite restoration of the landmark, we will start the transfer phase in the third quarter of 2018. Our Austin project in Brooklyn have sold 176 units by the end of the second quarter, recognizing total revenue of $259.3 million since it started pre-sales. In London, the Madison project which is under construction in the Canary Wharf neighborhood is expected to completed in 2020, or else the 144 housing apartments out of the total 423 well-ventured units as the project have been pursued to a regulated affordable housing provider. Finally, we are also pleased to continue our dividend payment in this quarter, and we are proud of our ability to deliver September value to our shareholders. Now, please allow me to turn the call over to our Interim CFO, Mr. Xuefeng Li. Xuefeng, please go ahead.

Thank you, Mr. Zhang. Hello everyone, and welcome to Xinyuan's second quarter 2018 earnings conference call. Allow me to take you through the financial results for this quarter, further discuss our latest operations and the initiatives and conclude by updating you on our financial outlook for the rest of the year. To comply this ASC under financial accounting standards or requirements, we adopted ASC 606 revenue from contracted customers on January 1, 2018. We adopted ASC 606 on an overtime basis while the cost input method and applied the standard only to contract not completed as of the date of adoption. That means part of our profits will be recognized later than previously estimated under the percentage of completion method. Our second quarter results reflect the adoption of ASC 606, especially with regards to revenues and net income, and may not be directly comparable to same period last year. Second quarter contracted sales decreased 13.4% to about $633.9 million from about $732.4 million in the second quarter of 2017 and the increased consistency of 25% from $380.7 million last quarter. This was higher than our guidance of the $530 million. Total GFA sales in China were about 283,000 square meters in the second quarter, decreased from about 420,000 square meters in the same quarter last year, and increased from about 150,000 last quarter. Total revenue decreased 26.1% to about $350.6 million from about $488.2 million in the second quarter of 2017, and increased 107.1% from the $174.1 million in the first quarter of 2018. The decrease was mainly due to the adoption of ASC 606. The average selling price per square meters sold in China was around RMB14,000 in the second quarter of 2018 compared to about RMB15,000 in last quarter and about RMB12,000 in the second quarter of 2017. Selling, general and administrative expenses as a percentage of total revenue increased to 12.6% from 9.8% in the second quarter of 2017, and decreased from 22.9% in last quarter. The increase was due to costs associated with company's expansion and decrease of revenue. Interest expense this quarter was about $26.6 million compared to about $30 million last quarter, and $20.2 million in the same quarter. The increase is mainly due to increase of debt. Exchange loss in this quarter was about $21.4 million compared to about $11.6 million exchange gains last quarter, and 46,000 exchange loss in the same quarter last year, the loss is mainly due to the U.S. dollar to RMB exchange which has increased to 6.6166 this quarter from 6.2881 last quarter. The income tax in the second quarter of 2018 was $29 million from $0.1 million in the last quarter. As a result of decrease in revenues and the increase in interest expenses, exchange loss and the income tax net loss for second quarter of 2018 was $9.1 million compared to $20.8 million, net earnings for the second quarter of 2017. The rotated [ph] net loss from American depository share attributable to shareholders were $0.11 compared to $0.14 net earnings per EPS in the second quarter of 2017. The company repurcahsed 611,958 ADS in June and 342,247 ADS in July of 2018. The balance sheet; as of June 30, 2018, the company's cash and cash equivalents increased to $1.5 billion from $1.2 billion as of March 31, 2018, mainly due to the increased of cash and cash equivalents generated from contract sales. Total debt outstanding was $3.6 billion which reflected a decrease of $228.7 million compared to $3.8 billion at the end of the first quarter of 2018. The balance of the company's real estate properties under development at end of the second quarter of 2018 increased to about $3.7 billion compared to $3.5 billion at end of the first quarter of 2018. The increase was mainly because of [indiscernible] in the second quarter. The Zhengzhou International New City files, Zhengzhou Hangmei International Wisdom City II will have new projects; Jinan Zhengzhou projects, Suzhou New Project, and Qingdao West Coast Projects. Equity at end of the second quarter of 2018 was about $380 million compared to about $705 billion at end of the first quarter of 2018. The decrease was mainly due to the $21.4 million exchange loss in second quarter. Project update as of June 30, 2018, we have in total 26 active projects and 18 projects under planning, including 6 projects approved in second quarter. The new projects are mainly located in our existing markets with solid track record, and we believe if you dwell our long-term growth as of August 10, 2018, our total unsold land bank is 6 million square meters, which lays a strong foundation for our development in future years. U.S. project updates; as of June 30, 2018, our Oosten project in Brooklyn, New York has recognized a total revenue of about $259.3 million from the sales of 176 units out of 215 total units, representing approximately 81.5% of total units sold. Revenue from this project in the first half of 2018 was $8.8 million. Our Hudson Garden project in Manhattan, New York completed excavation and foundation work in the first half of 2018, a total of 29,000 square feet out of 38,000 square feet of retail commercial space has been leased to the U.S. department store retailer Target with a 20-year lease. We continue to execute on the planning, governmental approvals, and pre-development activities of our ground-up development projects in Flushing, New York. After the Landmark Protection Committee's approval on our landmark protection plan and awarded us Certificate of Appropriateness. We began protecting mastering molds and removing artifacts during the second quarter of 2018. Transfer work will start in the third quarter of 2018. U.K. project update; in the second quarter of 2018 construction has continued to progress well including the formation of the extensive basement and all piling work has been completed for the Madison Project in London. The structural core of the building has been constructed up to the 23rd floor out of total 53 floors. Construction remains on-track for completion in 2020. By the end of the second quarter 2018, all of the 104 affordable housing apartments of the 423 unit Madison Project have been restored [ph]. Of the remaining 319 apartments, 130 apartments have been filled representing 31% of the units. Dividend; we announced a cash dividend for the second quarter of 2018 of $0.10 per ADS which will be placed before September 12, 2018 to shareholders of record as of August 27, 2018. I would now like to share with your our expectations on the current environment. Government restricted out on holding much to begin around October 2016 and was elevated in the first half of 2018 which we believe will project into 2018. High down payment for second home purchaser, qualification of homebuyers in the local market, and the city price guidance remains in price. The positive restrictions overall underlying home value demands remains favorable in our local markets as demonstrated by our second quarter sales increases. We believe those policies will have to roll and flourish healthy and stable market by cooling down irrationally escalating prices in certain cities which will support for the long-term sustainable growth of our business. In China, a large population is migrating to Tier 1 and Tier 2 cities. This organization foresight feels long-term housing demands track as most of our available units are for first homebuyers and not the luxury market. We are fully confident about our future sales and business growth. And finally, on to our full year 2018 financial forecast. Our guidance reflects the adoption of ASC 606 and may not be comparable to prior year's period before we begin to adopt the new accounting standard. Our contract sales which are better indicator for business development with the adoption of ASC 606 is expected to continue to grow in the remaining two quarters of the year. Third quarter contract sales is expected to be approximately $440 million. For 2018, the company expects an increase in contract sales of about 10% and increase in consolidated net income of 15% to 20% over 2017. The majority of the company's revenue [indiscernible] to net income are expected to occur in the fourth quarter of 2018. This is because under the adoption of ASC 606, our newly purchased land before 2018 needs a cycle to change into revenue. This concludes my prepared remarks for today's call. Operator, we are now ready to take some questions.

[Operator Instructions] We will our first question from Ian [ph].

I have a question about buybacks, in fact I think all your shareholders have a question about buybacks. How much did you buyback over the last quarter?

The Company repurchased $30 million in the second quarter of 2018, buyback.

And second question related -- why didn't you just privatized the Company? At the current share price you would get -- this price of 1.30 [ph] a book you're giving out over 8% in dividend, doesn't make sense just to privatize the Company?

Our Company didn't consider this question.

Operator, we can continue with the next question.

You didn't answer to my question.

[Foreign Language] So currently, the company has no plans for privatization.

And we'll take our next question then from John [ph].

Are you seeing any relaxation of home price restrictions in your key markets in recent months?

[Foreign Language] So from our perspective, we think the first half of the year as -- the overall market experienced a tough situation [indiscernible] this years. The environment experienced relaxation to some extent.

And can you share some comments on the current lending environment for real estate developers and how you are managing your financing needs?

[Foreign Language] So the overall lending environment forward is the Company since last year has been heightened. But the lending for specific projects are still open, that's pretty much the answer to your question.

And can you share some comments on the current status of your business part developments in Zhengzhou, Dalian [ph], Changsha, Xi'an, and I think Xuzhou?

[Foreign Language] So regarding the four cities that you just addressed, the Zhengzhou accounts the highest percentage of the latest acquired projects for this year for our Company, though we applied three projects and for Dalian [ph] and Xuzhou, each of the city required one project and contrarization [ph] though substantial's about our project updates was in terms of Xi'an.

I have some more questions, I'll go back in the queue and see if there are other participants. Thank you very much.

And our next question comes from Matthew Larson of Wells Fargo.

I didn't hear the response when first caller asked how many shares were purchased in the first quarter. I read something on your news release, it didn't seem to be the same thing as the verbal response. Could you just confirm to me that level?

The Company repurchased in June 611,958 ADS and in July the number has dipped to 342,247 ADS.

Right. So you bought a couple of million dollars' worth. I mean, frankly, I don't think you should go private, I'd rather own your stock at this level and wait for it to appreciate. I think you guys are doing well under a difficult environment and thank you very much for maintaining the dividend, alright, I think that's very critical. But I would recommend that after your window reopens, and if the stock remains at this level, you should buy more aggressively because at this point the dividend is a lot higher than -- the interest rate on your outstanding dollar denominated debt which I want to ask. You've got a couple of hundred million in dollars denominated debt, and fortunately you have a lot of non-PRC currency projects which can support that, so it would seem to be that with the success of the London project, it seems to me that you're selling plenty of apartments upfront; and then of course the Brooklyn project in the Flushing and the Hudson yards, then you've got plenty of non-dollar denominated or other currency denominated projects to support rolling over that debt which I think is what has been pressuring your stock. Do you think that that's the reason why -- but your stock is at low and it seems as if there was real concerns about any company that's got a lot of dollar denominated debt; can you address that please?

Our overseas projects opted -- in America, in New York, the Hudson Project -- because the remaining units are larger in size, also the setting is lower. Our Manhattan and Flushing Projects just smaller and medium sized units, where I expected it to have much higher demand. We will also has done [indiscernible] in the fields of remaining units. The U.S. dollars to RMB exchange rates has increased 5% to 6.62 this quarter from 6.29 last quarter, but cumulatively we have exchanged $4 billion into RMB from the 2017 to 2018, $400 million has amounted put by 5% because through $21 million, this is how we approved the exchange loss in tax deposit [ph].

I can barely understand you but I can hear the -- it's not coming through very well clear to me. I'll go to the second question; the Brooklyn project which I'm -- I live nearby and it's a wonderful project, the sales have been kind of slower and even though it's a world-class project, is there a reason for that -- are you holding apartments off the market or -- I mean, I know that the market for apartments in general particularly in Brooklyn and elsewhere is pretty strong here in New York City, are you just being conservative in your selling posture, is that why you only sold a few apartments each quarter instead of just closing that project out which is a few years old now?

Just as I mentioned, as most of the remaining units have a larger impact, obviously it will take a longer time to set up. New York, U.S. market activity was cold in the second quarter, [indiscernible] we have lost considering including the flexion's of the economy affected by the regulation of China's foreign exchange off-draw [ph], Chinese bearers are temporarily lapsed. The trend of Q3 is also not very optimistic at this moment. Now that's the plan we as adjusted proceeding as we expected because we have protected number as of the beginning of this year and with just happening as we have the bidders [indiscernible].

Okay, thank you, I appreciate it. I'll just say keep up the good work in a difficult environment. Thanks very much, and I'll let somebody else ask a question.

Our next question comes from George [ph], a private investor.

This last quarter you have $300 million draft in balance sheet, the equity due to the coming change. How are you going to recapture that? Are you going to pay tax again or…

Can you repeat your question?

[Foreign Language]

[Foreign Language]

Mr.Xuefeng's answer to this question is, the Zhengzhou equity remains unchanged. So as the counter change you will see on the balance sheet is a result of the adoptions of new accounting policy after it gradually delivers a project, those equity stores will be recognized. We don't pay any tax on this.

I understand Xi [ph] is a New York listed company, it's very good when you make deals and make sales, but the stock cleaned out, it doesn't give confidence to house buyer or to your collaborator. I really believe it should -- you must spend lot of money to reproduce stock so that looks like the company is going up instead of going down. So what's the plan for this quarter and the next quarter; I'll be purchasing those stocks?

[Foreign Language]

And we do have additional questions in the queue, would you like to take those now?

In terms of the last participants question, make sure Xuefeng's answer is we have -- for those companies we do have repurchase plans, and on daily basis we have a capital amount in terms of how many shares do we plan to repurchase. [Foreign Language] So, our terms of purchase before each day is $30 million, that's the plan.

In total, $30 million.

Yes, aggregate amount that we use to repurchase. So, the aggregate amount of purchase is $30 million and we did wanted to on daily basis of $250,000. And that counts for 15% of the total amount.

And our next question comes from Franklin Morten [ph], private investor.

Could you talk about your tax rate; I see pretax in the quarter and also to the year as a whole -- your tax rate is more than 100%, if that keeps up you'll never make any money. So could you talk about what your long-term tax rate might be and why it is so high right now?

[Foreign Language] The main reason is that they could exchange loss of $20 million cannot be deducted before tax. Of the exchanged loss, we'll add it back income from operations before income taxes should be how being around $41 million. This is why we approved higher tax in the second quarter.

What is a good estimate of your long-term tax rate over the next few years; is it 20% or 40% or 50%, can you just give us some guidance there?

[Foreign Language] Yes, the tax rate is around 55% as in the following two years.

Second question, your guidance towards 2018 is for net income to grow by 15% to 20%, is that number based on what you reported for last year or based on the new accounting number for last year? You reported $80 million in net income but it was restated to about $5 million, which number is right?

[Foreign Language] Based on the projects as revenue [ph] of 2018 -- the number is for 2018, it's $80 million. [Foreign Language] Yes, after we adopted the ASC 606, the net income would be $80 million.

So are you saying that you're going to earn this year $80 million plus 15% to 20% or you're going to earn the $5 million restated plus 15% to 20%?

Yes, based on this number -- 15% to 20% number is around $92 million to $96 million.

So that would be -- you're saying you're going to earn $1.5 a share and the stock is trading at 2x earnings?

[Foreign Language] Sorry, can you repeat your question?

My question was, if you're going to earn $92 million to $96 million this year, that's about $1.30 to $1.40 a share and your stock is trading at 2x to 3x earnings; is that right?

[Foreign Language] Yes, you're right.

Could you update us on the CFO; what happened to the prior CFO and how are you doing in your search for a new CFO right now?

[Foreign Language] Our prior CFO resigned because of personal reasons. And I'm honored to be appointed the Interim CFO, and I challenge [ph] back to fulfill my duty and lead my team to accomplish our tax audit [ph] next year. About your question, I think it depends on the decision of the Board of Directors and the management.

Are you still looking for a permanent CFO or you -- have you become the permanent CFO?

[Foreign Language] So Xuefeng Li as the Interim CFO he is quite solid in his financial management skills and also operational skills. [Foreign Language] So there might be a little bit of a decision team having a culturally frequent conversation with our U.S. investors. [Foreign Language] So the whole team will be able to offer their help in terms of having a sufficient communication with our overseas investor. [Foreign Language] So the board members have been very active in offering their support to our financial team members, most [indiscernible] as well. [Foreign Language] So the board hopes that over the coming months there might be a substantial progress in Xuefeng and his teams work so that in a few months' time he may be qualified for a CFO's poodle [ph] in this position. And this is the Chairman, Mr. Zhang Yong speaking.

I just had one final comment; at the current stock price, I think both you and all your shareholders have better off with you buying back stock and building your land bank. You have the opportunity to buyback stock with a $10 book value with $3.5, that's a much higher return than any piece of real estate that you could buy for your land bank right now. And I would encourage you to take advantage of this opportunity aggressively.

[Foreign Language] I fully support you, and over the coming months we will be -- we have a firm corporate policy where we would go very actively in repurchasing both our stock portfolio and also our bond as well.

Our next question comes from Richard [ph].

First, I think all of the investors are saying it's remarkable how well you're doing but the stock price is so low. Now I assume one of the problems right now is -- maybe TPG is still liquidating which would pressure the stock price more, is that correct?

[Foreign Language] TPG's sale might be contributing to the current pressure on our stock price, it's highly possible but they are doing it in small quantities, I don't believe there is anything that is so overly substantive [ph].

Are they planning on liquidating their entire portfolio?

[Foreign Language] It's TPG's decision to make, we are not aware of it. [Foreign Language] So what we know and we currently do is that they have invested with us for quite a long time, and so it's probably coming to time that the portfolio or their private equity fund is actually coming to their domination [ph].

I understand. I've been with you guys since Tom Gurnee was the CFO; so I've been with you quite a while as well, and I'm still impressed by your ability to make money and do well in your environment. The next question I have is when will we see any movement on the -- I know you have a stock on -- I guess it's the Shanghai market or you know, the side parts of Xinyuan; when will we see that accretive to the shareholders of Xinyuan?

I'm sorry, did you talk about specific properties in Shanghai?

I'm sorry, say again.

Well, did you talk about the specific property in Shanghai?

No, no, not the property but the actual -- you have listed on the Shanghai stock market but it's not publicly traded yet.

You mean the subsidiary.

So I was just curious when do you plan on going public with that so that it will start to show up on a balance sheet or are you producing any revenue from your secondary projects of Xinyuan or departments?

Did you talk about specifically the block chain, the technology investment group because we actually have a subsidiary of Xinyuan Group that is listed in China's board [ph].

Yes, that's part of it, that's right. But also, you guys are doing a lot of development, you're doing a lot of financial perspective, you're doing design. Now when will that start to show up on the balance sheet as a revenue or profit?

[Foreign Language] So, I would like to mention that we have field affiliated businesses including the secondary business that you just now mentioned. So off-stock, by the period if business is especially developed, it has been contributing at a small level so seeing that balanced state as well as our entire net income as well starting from this year and maybe more next year. [Foreign Language] And so the real growth potential that you would see from these five affiliated business is probably going to adhere within the next 1, 2, 3 years.

And the last question I have is, you guys didn't discuss at all the Malacca, Malaysia Project; is that on hold now or is that -- are you doing the back landfilling now?

[Foreign Language] So the Malaysian Project is currently on-schedule, and so we are doing some basic groundwork to build the list [ph] and so that is ongoing at the moment.

Well, I wish you all well and I appreciate your comments and let's hope the share price goes up for all of us. Thank you very much.

That is all the time we have for questions today. At this point, I would like to turn the call back over to management for any closing remarks.

So, 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. Thank you, again.

And this concludes today's conference. Thank you for your participation. You may now disconnect.