XIN: Xinyuan Real Estate, a developer of large-scale residential projects in China, benefits from China’s growing economy and positive demographic trends

By Steven Ralston, CFA

NYSE:XIN

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Xinyuan Real Estate (NYSE:XIN) develops and sells real estate properties, primarily large-scale, high quality, multi-family residential projects in strategically selected high growth cities (Tier 1 and Tier 2) in China. In China, the company acquires land for development, primarily through public auctions of government land and negotiated land sales. Furthermore, Xinyuan develops and retains commercial properties (shopping malls, supermarkets, hotels etc.) and offers other real estate-related services, such as property management and technology-based platforms for financing, sales and smart home products.

Xinyuan has a strong project pipeline. In China, the company benefits from two macro-economic trends: a growing middle class and an increasing degree of urbanization. Management has developed a successful standardized and scalable business model.

The company has expanded internationally with projects in the New York City area (Brooklyn, Manhattan and Queens) and London (Canary Wharf). In Malaysia, Xinyuan Real Estate owns offshore landfill development rights).

History

Founded in 1997 by Yong Zhang, Xinyuan Real Estate commenced operations in Zhengzhou (pronounced jung jō), the provincial capital of Henan Province. In late-2000, the company completed its first project, Zhengzhou Longhai Star Garden, a 239-unit residential community with multi-layer, sub-high-rise and high-rise buildings with a central garden. By 2003, the company had completed a total of three projects, which combined comprised of 1,327 units with gross floor area (GFA) of 142.6 square meters (m2). Having gained several years of operating experience, management had developed a standardized and scalable business model that provides high quality, multi-family residential properties to the burgeoning middle-class in growing urban areas of China.

By 2003, management had developed a standardized and scalable business model that targets middle-income consumers in strategically-selected, high-growth Tier 2 cities in China. The company has developed a portfolio of architectural plans and designs for multi-family residential projects ranging from 1,000 to 5,000 units. In addition, the plans include ancillary community facilities, such as clubhouses, retail shops and schools, in order to offer residents a lifestyle replete with conveniences. Xinyuan’s standardized mid-sized units typically range from 80 to160 square meters in gross floor area (GFA) and are affordable for middle-income consumers.

Xinyuan also standardized the property development process so as to enable rapid asset turnover, efficient capital management and strict cost control. The development process is segmented into well-defined stages: land identification; pre-planning and budgeting; land acquisition; project design; construction management; marketing and sales; and post-sales service.

Starting in 2004 and continuing to benefit from governmental policies that encouraged the development of mid-priced residential housing for middle-income consumers, Xinyuan embarked on an aggressive construction plan. Between 2004 and 2006, the company became the fastest growing residential property developer in Zhengzhou in terms of contracted sales by completing an additional eight projects, which were comprised of 3,898 units with 441.6 m2 GFA. Importantly, during this time, Xinyuan Real Estate began developing and gaining experience with larger projects (over 1,600 units with over 110,000 GFA), demonstrating the company’s ability to construct larger scale residential housing in China’s real estate development market.

Since 2006, Xinyuan Real Estate has expanded geographically into strategically-selected, high-growth Tier 2 cities within China, initially in Chengdu, Jinan and Suzhou and later in Xi’an, Kunshan, Changsha, Suzhou, Qingdao, Beijing, Tianjin and Dalian, along with a few Tier 3 and Tier 4 cities (Xuzhou, Foshan, Sanya and Huzhou). Xinyuan also has projects in the Tier 1 cities of Beijing and Shanghai.

Management continues to focus on multi-family residential real estate projects in the high growth cities in China. Each targeted city has relatively distinctive local regulations, market conditions and customer requirements. In addition, Xinyuan Real Estate has been able to establish its brand in each of these new municipal markets.

Starting in 2012, Xinyuan has acquired and developed a series of boutique projects outside of China. In 2012, the company expanded into the U.S. market by acquiring a condominium project in Irvine, California; a project portfolio near Reno and land parcel of land in Brooklyn. Then, in 2016, Xinyuan acquired sites in Manhattan and Queens for the development of the Hudson Garden Project and Flushing Project, respectively.

In 2014, Xinyuan acquired 100% of a Malaysian company, which owns the offshore landfill development rights for 170 acres in Klebang, a coastal town in Malaysia. As of December 31, 2019, approximately 90.9 acres (or 53% of the land) has been reclaimed.

Cumulatively, Xinyuan Real Estate has an impressive project construction record.

Real Estate Verticals

Over the years, Xinyuan has developed verticals in an array of ancillary real estate-related businesses. Complementing its core multi-family residential real estate development operations, the company has established real estate-related businesses in property management services, landscaping engineering and management, real estate consulting and marketing services, leasing management, industrial real estate operations, financing and construction services and especially technology services, particularly in home-based smart technology and the development of a blockchain-based real estate financial services platform.

In 2017, management transformed Xinyuan by establishing a new platform that integrated the company’s verticals to create a network. The formerly peripheral businesses were unified under a reframed corporate culture dubbed “Symbiosis, Win-Win, Cooperation and Sharing.”

Xinyuan’s Property Management Service

Considering the of the success and high growth characteristics of the company’s property management services business, management decided to list the subsidiary on the Hong Kong Stock Exchange. On October 11, 2019, 125,000,000 shares of Xinyuan Property Management Service (Cayman) Ltd. were issued to new investors at an initial public offering (IPO) price of HK$2.08 per share. The equity security is listed under code 1895.

On July 15, 2020, 50,000,000 new shares of Xinyuan Property Management Service were issued at a price of HK$2.60 per share. Net proceeds of both offerings were used to support and expand the property management services business through operational enhancements, strategic investments and for general corporate purposes. Xinyuan Real Estate remains the largest shareholder of Xinyuan Property Management Service, holding 300,000,000 shares (approximately 54.5% of the 550,000,000 shares outstanding).

Technology

In March 2018, Xinyuan and Tencent announced the signing of a cross-industry cooperation agreement. By both parties amalgamating their data, technology and internet efforts, the companies plan to develop projects such as a smart sales platform that will enhance the self-service marketing attributes of the company’s website, along with smart home applications that will improve people’s lifestyles, increase efficiencies of real estate operations and lower costs.

High Quality Residential Real Estate Projects

Management often describes its buildings as high quality residential projects. However, that portrayal does not sufficiently convey the attributes of each project or the careful selection of each location. The corporate mantra is to provide the four dimensions of quality: “construction quality, service quality, technology quality and life quality.”

The selected locations provide services and conveniences that give the residents “the comfort of living in the middle of the city and enjoying vacation life.” Generally, sites are centrally located in attractive urban neighborhoods with close and easy access to public transportation and often near high-end office buildings and financial institutions. Consideration is given to attractive school districts and medical facilities. In addition, shopping centers are often very nearby. On seven occasions, Xinyuan has constructed shopping centers in close proximity of the building in order to provide a supermarket, retail stores, restaurants, entertainment (e.g. a movie theater) and other ancillary services to the building’s residents. The exterior of the buildings tend to be striking with modern, sleek designs. Many of the company’s buildings have been honored with building awards.

Residents have access to an array of amenities in many common areas. Starting with the hotel-style lobby, not only is there an attractive lounge area, but almost all are serviced by a 24-hour/7-day concierge. An attentive customer service center organizes community activities, such as summer movies, children’s programs and other activities for residents. A children’s playroom, fully equipped fitness center, screening room and business meeting rooms are common amenities, and often, there is a landscaped rooftop, sometimes with a swimming pool. There may also be a residents’ spa facility with a sauna and steam room.

Property services at many projects is provided by Xinyuan’s former Property Service subsidiary, which now trades on the Hong Kong exchange and in which Xinyuan holds a 54% equity interest. The services provided include maintenance, gardening, cleaning and sanitation, safety and security, internet & smart technology installation and support, among others. Xinyuan has a major corporate effort to offer leading smart technologies in their real estate projects.

Most, if not all, of the company’s projects feature an area to escape from the day-to-day routine in order to enrich the spiritual life of the owners with a serene environment. This amenity varies from a landscaped garden/interior courtyard to a residents’ lounge, from spa facility/swimming pool to an adjacent peaceful park with shade trees.

Xinyuan strives to provide refined, yet comfortable residential units to middle-class consumers. The interior design of the residences is contemporary. Typically, residential units feature floor-to-ceiling glass windows that provide impressive views and deliver plenty of natural light. Generally with high ceilings, subtle textures and quality fixtures & appliances, the modern interior design of the units instill a calm ambience and provide a refined living environment.

Near-term Pipeline of Residential Projects in China

The company has a strong pipeline of residential construction projects. At least 10 are in the planning and design stage and 28 were in the construction phase as of December 31, 2019. Under the company’s standardized development cycle, after construction commences certain milestones are usually reached within 3-to-4 months that enable Xinyuan to begin pre-selling units. During the 12-to-18 month construction period, the company generally pre-sells approximately 95% of the residential units.

Recent Initiation of Pre-sales

July 2020 — Qingdao Lingshan Bay Project – plot C1 (Shandong Province)

August 2020 — Chengdu Xinyuan City – plot 9 (Sichuan

Province)

October 2020 — Tongzhou Xinyuan Royal Palace (Beijing)

Located in Tongzhou District of Beijing, Tongzhou Xinyuan Royal Palace is an 110,000 square-meter urban project designed to be a gathering area for international organizations. The units will provide comfortable living with intelligent technology and excellent service.

Chengdu Xinyuan City covers ​​301 acres with approximately 610,000 square meters of planned residential buildings equipped with smart home systems, which are connected to air floor heating, central air conditioning and water purification system. There will be four large multi-dimensional landscaped atriums. In addition, there will be 87,000 square meters of office space, 49,000 square meters of shops and 180,000 square meters of commercial shopping. The complex is close to the future Hepingjie Station of Metro Line 6 and within 800 meters of the Modi River, a Municipal Park, Knowledge Park, Rhododendron Park and Chuangzhi Park.

Qingdao Lingshan Bay is a 600,000 square-meter project with 183-to-284 square meter villas facing the ocean and 112-to-188 square meter apartments in the high-rise towers that overlook the sea. The community is near to 6 km of pristine coastline and close to Eastern Film and Television Industrial Park, a world-class film and television production center.

Share Repurchase Programs

Since 2011, Xinyuan Real Estate has been very shareholder friendly in terms of both major forms of payouts to shareholders: cash dividends and share repurchases. These dividends and share repurchases are being funded by the company’s operations, which generate substantial excess cash that can be returned to shareholders.

After the company’s IPO of ADSs on the NYSE in December 2007, there were approximately 146.8 million shares outstanding. After a few years, the share count had risen to 153.2 million due to the exercise of option and the conversion of warrants. Then, in May 2011, the Board of Directors authorized the company’s first share repurchase program. Over the ensuing years, the Board of Directors authorized continuous share repurchase plans according to the chronological authorizations listed below.

May 26, 2011 — US$10 million share repurchase plan valid through May 2012

June 19, 2012 — US$20 million share repurchase plan valid through June 2014

July 12, 2013 — US$60 million share repurchase program valid through July 5, 2015

December 28, 2015 — US$40 million share repurchase program valid through December 2017

March 21, 2017 — US$40 million share repurchase program valid through December 2019

August 14, 2018 — US$50 million share repurchase program valid through December 2019

May 20, 2019 — US$50 million share repurchase program valid through December 2021

Consequently, shares outstanding have decreased 29.6% since 2010 to only 107.9 million shares as of December 31, 2019.

Valuation

The P/B valuation range for comparable property development companies in China is between 0.18 and 1.23. Utilizing comparable analysis, the target price for Xinyuan Real Estate is $6.90 per ADS, which is based on an expected price-to-book multiple of 0.65.

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