Bill Zima - ICR Lizhou Zhang - Chief Executive Officer Xuefeng Li - Interim Chief Financial Officer

Matthew Larson - National Securities

Good day, everyone, and welcome to the Xinyuan Real Estate Company, Third 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 third quarter 2018 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 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. Following the management's prepared remarks, we will open up the call to questions Now with that said, I would 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 third quarter 2018 earnings conference call. We'll continue to advise the companies on multiple projects via driving positive results for our customers and shareholders in the challenging environment. As we reported in our earnings release today, we delivered significant increase to boost our top and bottom lines compared to the same period over last year. We also made notable improvements to our margins increasing gross margin to 25.1% and operating margin to 17%. As we entered into the second half of 2018, the global economy has shown sign of softing. Multi sectors were affected by low consumer confidence and decreased spending, especially those companies that are high on sales of discretionary items. As a primary property development in China, we felt the impact of the slowing economy on our contract sales and the sales price. However, we were able to ensure our leading position in the existing cities to achieve continued growth momentum through one of the unique project portfolio geared towards no luxury residential housing for Chinese growth in middle-class; two, our growth in portfolio of acting projects that create a meaningful sales pipeline for years to come; and three, our prudent capital supply and location planning. We remain focused on our primary strategy of developing domestic real estate projects as overall housing demand trades by Chinese system to remain relatively consistent. During the third quarter, we commenced pre-sales of four projects, including Changsha Furong Thriving Family, Chengdu Xinyuan City, Kunshan Xinyu Jiayuan and Xingyang Splendid IV. We also added to our land bank with new acquisition of Dalian International Health Technology Town, stepping into the Northeast real estate market of China. Overseas, our projects are progressing as planned and continue to meet their prospects, development and goals. Overall, our ongoing focus of -- enhance of the strength of our core real estate business ensures our ability to achieve positive operating performance. As we generate profits, we are pleased to deliver value to our shareholders by continuing our quarterly dividends payment program as announced early today. 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 third 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 remainder of this year. To comply with SEC's and the Financial Accounting Standards Board's requirements, we adopted ASC 606: Revenue from Contracts with Customers, on January 1, 2018. We adopted ASC 606 on an overtime basis, while the cost input method and applied standards only to 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 our completion method. Our third quarter results reflect the adoption of ASC 606, especially with regards to revenues and net income and may not be directly comparable to the same period last year. All references below are in U.S. dollar terms unless otherwise stated. Third quarter contract sales were $571.3 million in the third quarter of 2018 compared to $604.5 million in the third quarter of 2017, and $633.9 million in the second quarter of 2018. Total GFA sales in China were about 277,500 square meters in the second quarter compared to 369,500 square meters in the same quarter last year, and 282,900 square meters in the last quarter. Total revenue increased 23.4% to $595.5 million from $482.4 million in the third quarter of 2017, and increased 67.4% from $355.8 million in the second quarter of 2018. The increase was mainly due to the successful delivery ofJinan Royal Palace and Zhengzhou Fancy City II South and presales of four projects in third quarter of 2018. The average selling price per square meter sold in China was around RMB13,000 in the third quarter of 2018 compared to about RMB14,000 in last quarter and about RMB11,000 in the third quarter of 2017. SG&A expenses, as a percentage of total revenue, decreased to 8% from 10.6% in the third quarter of 2017 and decreased from 13.2% in the last quarter. This was due to the increased revenue and the reduced marketing expenses. Interest expenses this quarter was about $21.8 million compared to about $24.7 million last quarter and $11.4 million in the same quarter last year. The year-over-year increase was caused by our higher debt balance at the end of third quarter of 2018. Due to foreign exchange fluctuations, exchange loss in this quarter was about $16.5 million compared to about $22.5 million exchange loss last quarter. Net income for the third quarter increased to $23.9 million of 2018 compared to $16.5 million net earnings for the third quarter of 2017. Diluted net earnings per ADS attributable to shareholders were $0.31 compared to $0.22 net earnings per ADS in the third quarter of 2017. The company repurchased $1.7 million ADS in the third quarter of 2018. Balance sheet, as of September 30, 2018, the company's cash and cash equivalents, including restricted cash, was $1.4 million compared to $1.5 million as of June 30, 2018. .: Project updates. As of September 30, 2018, our total unsold land bank was 5.9 million square meters, including one project accounting the third quarter, which provides a strong foundation for our developments in the future years. U.S. project updates. As of September 30, 2018, our Oosten project in Brooklyn, New York has recognized total revenue of about $259.3 million from the sales of 176 units out of 215 total units, representing approximately 81.5% of the total units sold. Our Hudson Garden project in Manhattan, New York, completed excavation and foundation work, a total of 29,000 square feet out of the 38,000 square foot of retail/commercial space has been leased to the U.S. department store retailer, Target, with a 20-year lease. A soft launch of the sales is scheduled to begin in the fourth quarter of 2018. We continue to execute on the planning, governmental approvals, and pre-development of our ground-up development project in Flushing, New York. Up to the Landmark Protection Committee's approval on our landmark protection plan where we awarded with a Certificate of Appropriateness. We began protecting, maturing more and removing artifacts in the first half of 2018. Transfer work is near to be completed by the end of 2018. Offsite restoration work will follow at a later date. UK project update. In the third quarter of 2018, we added another 11 floors to the structural core of the building with only 19 floors left to finish for a 53-story building for our completion package in 2020. By the end of the third quarter of 2018, all of the 104 Affordable Housing apartments of the 423 units in The Madison project have been presold. Of the remaining 319 apartments, 131 apartments have been sold, representing 41.1% of number of units. Dividend, we announced our cash dividend for the third quarter of 2018 of $0.10 per ADS, which will be paid before December 12, 2018 to shareholders of record as of November 25, 2018. And finally, on to our full year 2018 financial forecast. For the fourth quarter of 2018, we expect contract sales to be approximately $1,158. For 2018, we expect an increase in contract sales of about 10% and an increase in consolidated net income of 15% to 20% over 2017. This guidance excludes any potential foreign currency translation impact. This concludes my prepared remarks for today's call. Operator, we are now ready to take some questions.

Thank you. [Operator instructions] We’ll now take our first question from Matthew Larson from National Securities. Your line is open. Please go ahead.

I have been a long-term investor in your company’s stock. And I have appreciated, operationally you all continued to build out the business. I live in New York, so I am familiar with the projects that you have going on here. And I like the fact that you’ve continued to pay the dividend, which validates your business, first of all the U.S. investors and it's -- while we wait for the stock to appreciate, which has been a long wait unfortunately. We’re getting paid while we wait. So thank you. Just a couple of quick questions. During the quarter or since if you can discuss that, have you been able to repurchase any of your debt securities? They are trading at a discount. You had made an announcement that you are looking to buy back 50 million roughly? And number two, did you buyback any stock in the quarter?

Well, thanks for the question. And that we --actually, we see -- we keep on the implementation according to the Board decisions. And for the third and first season, we'll keep the decision from the board for the repurchasing of our debt.

Okay. So you haven't bought any yet even though they're trading at a discount. Is it that what you're saying, at this point, the board is considering it, but it hasn't been completed?

Well, up to latest statistics for Xinyuan, up to now in sum, in 2018, the repurchasing volume reached about $17.2 million.

,:

Thanks for the question. Actually in the question you mentioned about Oosten project in Brooklyn. Actually, up to now, we have subleaseof about 30 units of the project. All of them -- most of them now belong to this kind of large area types over the department. As -- we wish are the main reasons to -- for this selling to be so slow. And it is planned now in the first half of 2019 where we sell most of the existing units, and also we're considering about plan for renting -- to rent these kind of apartments.

I'm sorry. I didn't catch the last part. You expect to sell them in the first half of 2019. And then you had a plan -- I didn't catch the rest of the answer.

I think that we will finish the selling in the plan, in the first half of 2019. And also we -- we are also in plan about parts of this project to be rented.

Oh, to be rented. I see. Okay. All right. And is that going to be a profitable project at the end of the day?

Yes, sure for that, from our estimation, it will be profitable.

Okay, great. And I am trying to think if there’s anything else. You know what, listen, keep up the good work. I don’t know how difficult it is in the PRC in China to get projects completed and sold because of the government's attempt to random speculation and their overall interest in reducing leverage. I know that getting financing is difficult, and that there are certain restrictions on selling residential properties. You have been working in a difficult environment, and even though I haven’t really made any money holding your stock over the years, it seems like you’re working very hard. I have one last question. I am sorry. Then I’ll let somebody else ask. You have a land management subsidiary as well as a reasonably large investment in blockchain to, I guess, facilitate property sales and things like that. Can you discuss your blockchain initiative and whether or not you’ll flow your property management subsidiary to realize value?

Well, sensible question. And actually for blockchain to acknowledge Xinyuan, the very early - actually we're seeing a launch of this kind of exploration many years ago. But now it's still early phases for this kind of technology in Xinyuan. And we estimated that after our accumulations for certain years to get in fact make more effective. It will be more effective in future days.

I mean you might find out that your early investments in blockchain as it relates to your real estate business could be worse more than the value of the equity in your whole company. So don’t take your eye of the ball there. And then again the second part of my question was, in the past, I've either red or you have said on conference calls that you might float your property management subsidiary on exchange there in the PRC, which would unlock the value of it. Is there any plan to do so?

Well thanks for the question. Actually for Xinyuan property business and now it is still in phase of the feasibility research before the formal disclosure and we're still investigating and making a lot of surveys on this plant. And when it is finished, we will give our formal disclosure.

Indeed we did have the plan for our property plans to co-listed in Hong Kong.

Okay. Listen, thank you very much. I would recommend that you put out a news release highlighting that fact, and maybe putting out some estimated value of it, number one, as well as, what you feel the blockchain initiative is work. Thank you.

Thank you. We will now take our next question from [indiscernible]

Well, one more to add the information about your question. As for your question about our property business, we continuously are evaluating ways to maximize our stature of our business. At this time, there have been no decisions made out in a potential standout. Should there be any development in the future, we will simply make our stakeholders aware, okay?

We will now take our next question from [John Shelie], a private investor. Your line is open. Please go ahead.

Hello, everybody. Thank you for taking my call. Now first, I would like to ask about housing market conditions. Have you seen any evidence of price declines or discounting or also easing of government regulations in your markets?

Well, only speaking, this kind of limitations of regulations began to have some impact in the early phase of 2017. And there's no big change in these kind of policies and no picking pattern seen as well. And we will try every effort to guarantee and ensure to sell in the whole year. It' been of some challenge to us, but we have the confidence that we will finish our sales targeting in this year.

And have you seen any evidence of price declines in your markets?

Well thanks for the question. For Zhengzhou, there is no -- any signal for us or impact to getting this kind of discount in price, no discounting that we're seeing on this.

That’s great. Thank you. And can you comment on the status of your technology count developments?

Well, thanks for your question. Actually for these plants of Xinyuan is one of our five auxiliary businesses. And from this year, we have acquired two projects, one in Tianjin, northeast of China, very important quarter in China, and another is in the center of Central China, Zhengzhou where the Tianjin originated. And important, we have acquired about over 20 -- we have over -- we have got this kind of effective cooperation with the government, and we have total land area of 440 mous in Chinese units.

As for Qingdao project, we have already began our sales. And for Dalian project, at the end of 2018, we will also plan to begin ourselves.

Okay. And my last question, have senior management and directors purchased any shares? Or do they have any plan to purchase shares?

Well, a sensible question. The decision of purchasing plan, to repurchase shares are always following the board meeting decision, and it will be implemented in certain range according to the board meeting decision.

We will now take our next question from Michael Prouting from 10K Capital. Your line is open, please go ahead.

Good morning or good evening. Thanks for taking my questions. So most of my questions have been asked and answered. But I just quickly, on blockchain initiative, I've heard news recently where a unit of overstock.com announced a blockchain real estate initiative in Rwanda. And I am just wondering if the company has any plans to take its blockchain imitative to Africa, particularly given the commercial relationships that Chinese companies generally have in Africa or for that matter any other overseas markets? Thank you.

Up to now there is no plan to cooperate with Africa in the area of blockchain for the knowledge.

[Operator Instructions] We will now take our next question from [George Zhou] Private Investor. Your line is open. Please go ahead.

I have a question about your tax rate calculation. So it looks like the tax rate varies from quarter-to-quarter. Is that correct that you calculate about a 65% of tax rate value minus the currency fluctuation and of the interest rate?

Well, sensible question. All the calculation for Xinyuan was under the tax policies and there's no problem for that. The reason why the -- the reason for the question is mainly because of loss of the foreign exchange. And all the taxes we have -- losses will be removed from the foreign exchange loses here.

Okay. Thanks. Also that, your prediction for Q4 sales is very accurate. And it's very big over a beating U.S. dollar. How are you so sure?

Well, thanks for the question. Actually, well, we get our plan in very scientific way in the very early phase of the year. So this is not a temporary forecasting we overlook. And also for two reasons, we have avid confidence for ourselves to be accomplishing this year. On the one hand, it's our existing project in 2018. Most of them will contribute or repeat in the fourth quarter season. And the second way, on the other hand, for the newly or pending project in the end of 2017, it will also give the project and pre-phase at the end of 2018. Based on the analysis, we have the confidence that we would accomplish the whole year and estimation in 2018.

We will now take our next question from [Harman Tae], Private Investor. Your line is open. Please go ahead.

Thanks for taking my call. It was indeed the government has a policy to -- they have start to rule out a policy to ban pre-sales on seven cities. They haven’t started in your cities, yet, I think, it's ready to get there. Are you going to lower your land expansion plan, lower your growth and lower your debt ratio? Thank you.

No. Up till now, there is no such coming back of these policies for the cities we have projects, no coming back, no Tongzhou Xinyuan nowadays.

So you’re not going to lower your debt ratio in the near term? Is there no plan time for it?

Well, we get our control in the second quarter of the season 2018. And now it is of the plan that whole year of debt ratio, you will -- we'll make it controllable less than the same level what we have in year-over-year for the whole year. This is our target to control it in a certain point.

It appears there are no further questions at this time. I’d now like to turn the conference back over to management for any additional or closing remarks.

Okay. 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. Thank you everybody.

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