Xinyuan Real Estate posts Q4 net income of US$21.6M compared with net income of US$25.4M year-over-year, citing additional rounds of government real estate policy tightening in September and January
February 25, 2011
– Xinyuan Real Estate Co., Ltd. ("Xinyuan" or "the Company") (NYSE:XIN - News), a residential real estate developer with a focus on high growth, strategic Tier II cities in China, today announced its unaudited financial results for the fourth quarter and full year ended December 31, 2010.
Highlights for the Fourth Quarter 2010
* Total revenues were US$137.2 million, a 27.5% increase over US$107.6 million in the third quarter of 2010 and 5.5% above the high end of Company guidance range.
* Contract sales totaled US$194.1 million, a 28.5% increase over US$151.0 million in the third quarter of 2010 and 29.4% above the high end of Company guidance range.
* Total gross floor area ("GFA") sales were 173,200 square meters, 26.0% increase over 137,500 square meters in the third quarter of 2010 and 23.7% above the high end of Company guidance range.
* Selling, General, and Administrative ("SG&A") expenses as a percent of total revenue continued to decline to 6.7% compared to 6.9% in the third quarter of 2010.
* Net income was US$21.6 million, a 170.0% increase over US$8.0 million in the third quarter of 2010 and 35.0% over the high end of the Company guidance range.
* Diluted net earnings per share attributable to ordinary shareholders was US$0.14 equivalent to US$0.28 per American Depositary Share ("ADS"), compared to diluted net earnings per share of US$0.05 equivalent to US$0.10 per ADS in the third quarter of 2010.
* Cash and cash equivalents, including restricted cash, increased by US$32.1 million to US$295.6 million as of December 31, 2010 from US$263.5 million as of September 30, 2010. Short and long term debt decreased by US$46.4 million to US$295.9 million compared to US$342.3 million as of September 30, 2010.
* The Company's wholly owned subsidiary, Henan Xinyuan Real Estate Co., Ltd. ("Xinyuan China") completed the purchase of the remaining 55% equity interest in Zhengzhou Jiantou Xinyuan Real Estate Co. Ltd. ("Jiantou Xinyuan") in November 2010.
"We are pleased to report our best quarter of 2010 with GFA sold, contract sales, revenue, and net income all exceeding our guidance. Gross profit and operating income both set new quarter records despite more rounds of government real estate policy tightening issued in September 2010 and January 2011. Our three major projects introduced in 2010 in Zhengzhou, Xuzhou and Chengdu have switched into full gear and contributed approximately 80% of GFA sold in the fourth quarter. Average selling price ("ASP") of all the seven current active projects increased in the range of 1.3% to 8.0%. We also completed the share transfer of Jiantou Xinyuan in November which added approximately 200,000 square meters of sellable GFA to our land bank." said Mr. Yong Zhang, Xinyuan's Chairman and Chief Executive Officer.
"Though the repeated changes to government real estate policies continue to introduce uncertainties, we believe we will not be heavily impacted by the tightening since the majority of our customers are home occupiers in second tier cities and they have demonstrated that they have learned to cope with the policies. We continue to focus on affordable developments targeting homeowners in Tier II and Tier III cities, where speculation and price growth have been lower than larger cities and urbanization and migration patterns remain strong. We have a well-diversified project pipeline for 2011 and beyond as all 12 projects will be concurrently active in the second half of 2011."
Fourth Quarter 2010 Financial Results
Contract sales totaled US$194.1 million in the fourth quarter compared to US$151.0 million in the third quarter as the average selling price per square meter sold increased by 1.4% reaching RMB7,584 (US$1,120) versus RMB7,480 (US$1,099) in the third quarter of 2010. The Company's GFA sales were 173,200 square meters in the fourth quarter of 2010 versus 137,500 square meters in the third quarter of 2010 and 239,900 square meters in the fourth quarter of 2009.
The sequential contract sales growth was driven primarily by the strong sales of Chengdu Splendid II and Xuzhou Colorful Garden. Overall composite ASP drifted slightly higher than the third quarter of 2010. The Company has not lowered the price of any category of apartment in any project.
By project, sequential contract sales and ASP increased by 265.5% and 8.0% respectively at Chengdu Splendid II; 26.7% and 6.6% respectively at Xuzhou Colorful Garden. Average selling price for Zhengzhou Modern City also experienced a 5.0% sequential increase as the Company maintained stable GFA sold to ensure healthy and solid profit on this project.
Revenue under the Percentage of Completion Method
For the quarter ended December 31, 2010, the Company's total revenue using the percentage of completion method was US$137.2 million compared to US$107.6 million in the quarter ended September 30, 2010 and US$189.1 million in the fourth quarter of 2009.
In the fourth quarter of 2010, the Company recognized sales reversals of US$26.9 million related to sales contracts for Kunshan International City Garden raising the cumulative year-to-date total of sales reversals for that project to US$42.8 million related to 348 apartments. As of December 31, 2010, we had received just six formal deposit refund requests. During the fourth quarter of 2010, it has become clear that many of our contracted buyers will not be able to secure mortgages at terms and amounts foreseen at the time of contract execution. The ASP for these signed but open contracts is approximately RMB8,200 per square meter, and by December 31 2010, the ASP for the Kunshan project has exceeded RMB9,500 per square meter. Many buyers may choose to execute their existing contracts due to the price advantage and due to the projected delivery time approaching this year. However, it is not certain that each of these contracts will result in an ultimate sale due to the uncertainty of executing mortgages before the actual delivery. Thus, the Company has taken the position that contracts that are not clearly executable under prevailing government policies shall not be recognized as revenue under the percentage of completion method. The reversals, which represent 12.0% of all project-to-date contract sales for Kunshan, reduced revenue by US$20.7 million in the fourth quarter of 2010 and year-to-date by US$31.5 million under the percentage of completion method. In all of other projects throughout China, where over 90% of buyers are owner occupiers, there is no significant mortgage availability problem and, thus, no reversal has been recorded.
Gross profit for the fourth quarter of 2010 was US$41.4 million, or 30.2% of revenue, compared to gross profit of US$29.3 million, or 27.2% of revenue, in the third quarter of 2010 and a gross profit of US$41.2 million, or 21.8% of revenue, in the fourth quarter of 2009.
The Company revised total project cost and sales estimates for certain projects resulting in US$7.8 million of cumulative gross profit being recognized in the fourth quarter of 2010 under the percentage of completion method. In the third quarter of 2010 a similar revision had a US$2.9 million favorable impact on gross profit. The fourth quarter benefit was driven by several projects, the largest impact being Zhengzhou Modern City and Suzhou International City Garden. Modern City, a project which is 46.7% sold and 48.5% complete, received a US$5.5 million government cost subsidy in the fourth quarter which lowered total project cost estimates accordingly. In addition, total project sales estimates for Modern City were increased by $19.8 million on higher than expected demand and ASP's. The net cumulative gross margin impact for Modern City totaled US$4.4 million in the fourth quarter of 2010 under the percentage of completion method. Suzhou International City Garden, a project which is 45.9% sold and 86.6% complete, recorded a US$1.9 million gross profit change as our revised total project sales estimates reflected higher sustained ASP's despite our earlier expectation of some pricing softness.
Selling, General, and Administrative Expenses
SG&A expenses were US$9.1 million for the fourth quarter of 2010 compared to US$7.5 million for the third quarter of 2010 and US$12.6 million for the fourth quarter of 2009. The increase compared to the third quarter of 2010 was mainly due to sales commission to our agencies and bonuses to operating personnel as their performance exceeded the Company's targets. As a percentage of total revenue, SG&A expenses for the fourth quarter of 2010 were 6.7% compared to 6.9% in the third quarter of 2010 and 6.7% in the fourth quarter of 2009.
Share of Income from an Equity Investee and the Completion of Jiantou Xinyuan Joint Venture Share Transfer
In November 2010, the Company's wholly owned subsidiary, Xinyuan China, finalized the purchase of the remaining 55% equity interest in Jiantou Xinyuan, the Company's formerly-45%-owned equity investee, making the Company the sole owner. As part of the purchase of Jiantou Xinyuan, the Company recognized a gain on the remeasurement of our previously held 45% interest in Jiantou Xinyuan amounting to US$2.4 million.
In the fourth quarter of 2010, the Company recognized a loss of US$1.1 million from its 45% stake in Jiantou Xinyuan for the month ended October 31, 2010 before the completion of the purchase.
Net income for the fourth quarter of 2010 was US$21.6 million compared to US$8.0 million in the third quarter of 2010 and a net income of US$25.4 million for the same period in 2009. Diluted earnings per share for the fourth quarter of 2010 was US$0.14, equivalent to US$0.28 per ADS, compared to US$0.05, equivalent to US$0.10 per ADS, in the third quarter of 2010 and diluted earnings per share of US$0.16 per share, equivalent to US$0.32 per ADS for the same period in 2009.
Financial Results for the Full Year 2010
For the year ended December 31, 2010, total revenues were US$450.0 million compared to US$449.0 million in 2009. GFA sales were 523,800 square meters versus 600,000 square meters in 2009. Contract sales totaled US$588.3 million compared to US$536.5 million in 2009.
Gross profit was US$115.5 million, or 25.7% of revenue, for fiscal year 2010 compared to a gross profit of US$89.2 million, or of 19.9% of revenue, for fiscal year 2009. The increase of the gross profit for fiscal year 2010 was mainly attributed to the start up of the higher profit margin of Zhengzhou Modern City project in addition to ASP increases for all of our active projects.
SG&A expenses were US$32.9 million, or 7.3% of revenue, compared to US$33.7 million, or 7.5% of revenue in 2009. The year-over-year decrease is attributable primarily to the full year impact of a reduction of our in-house sales force as we outsourced the sales function to agencies during 2009.
Net income was US$51.1 million for fiscal year 2010, versus net income of US$42.4 million for fiscal year 2009. Diluted earnings per share were US$0.33, equivalent to US$0.66 per ADS in fiscal year 2010 compared to US$0.26, equivalent to US$0.52 per ADS in fiscal year 2009.
As of December 31, 2010, the Company reported US$295.6 million in cash and cash equivalents (including restricted cash) compared to US$263.5 million as of September 30, 2010. Total debt outstanding was US$295.9 million, a decrease of US$46.4 million compared to US$342.3 million at the end of the third quarter of 2010. Real estate property under development was US$710.6 million as of December 31, 2010 compared to US$646.9 million as of September 30, 2010 and US$560.6 million as of December 31, 2009.
Below is a summary table of projects that are active in 2010.
After a strong fourth quarter of 2010, GFA sales are expected to experience a sharp seasonal sequential decrease to approximately 95,000 square meters due to the Chinese Traditional New Year in the first quarter of 2011. Contract sales are expected to reach approximately US$115 million with average selling prices advancing selectively in first quarter of 2011.
First quarter 2011 revenue using the percentage of completion method is expected to total around US$120 million and net income is expected to be around US$13 million.
For the year the Company believes that with 12 concurrent active projects from the second quarter onwards it will achieve contract sales growth of more than 20% reaching approximately US$710 million in 2011 over 2010's total of US$588.3 million. Revenue under the percentage of completion method is expected to grow by 40% reaching approximately US$650 million for the year, as accelerated construction spending and higher percent completions will lead to higher revenue recognition under the percentage of completion method of accounting. Net income is expected to grow more than 45% reaching approximately US$75 million as gross margin improves year-on-year and operating expenses grow less than revenue.
Percentage of Completion Accounting
Xinyuan's projects recognize revenue under the percentage of completion method. This requires the Company to re-evaluate its estimates of future revenues and costs on a quarterly basis project by project.
Whenever Xinyuan makes changes to expected total project life profit margins, a "catch-up" adjustment must be made in the quarter of change to account for the difference between profits previously recognized using the previous profit margin estimate and the comparable profit using the new profit margin estimates. Further, if the updated profit margin indicates that the Company will have to sell units at a price less than its costs to develop them, it must recognize the full expected gross loss over the life of the project at that time regardless of whether the units have been sold. Additionally for such unprofitable projects the Company must also determine whether an impairment exists, and, if so, write down the cost to the fair value of the project which, in turn, may be less than the basis after recognizing the effect of future losses.
Conference Call Information
Xinyuan's management will host an earnings conference call on February 25, 2011 at 8:30 a.m. U.S. Eastern Time. Listeners may access the call by dialing 1-719-457-2731. A webcast will also be available through the Company's investor relations website at http://www.xyre.com. Listeners may access the replay by dialing 1-858-384-5517, access code: 8927066.
About Xinyuan Real Estate Co., Ltd.
Xinyuan Real Estate Co., Ltd. ("Xinyuan") (NYSE:XIN - News) is a developer of large scale, high quality residential real estate projects aimed at providing middle-income consumers with a comfortable and convenient community lifestyle. Xinyuan focuses on China's Tier II cities, characterized as larger, more developed urban areas with above average GDP and population growth rates. Xinyuan has expanded its network to cover a total population of over 44.7 million people in seven strategically selected Tier II cities, comprising Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou and Chengdu. Xinyuan is the first real estate developer from China to be listed on the New York Stock Exchange. For more information, please visit http://www.xyre.com.