Since revisiting Xinyuan Real Estate Co. Ltd. (XIN, Financial) at the end of May, the stock has dropped by almost a point and a half, which is a pretty significant move for a $5 stock.
At the same time, Xinyuan is now trading near a 52-week low, close to $4 a share, which makes it very intriguing, especially considering the dividend is north of 10% at this price.
The original thesis revolved around the company being a net current asset trade, having significant cash and real estate assets that dwarfed the total liabilities. In fact, by the end of 2014, the company’s balance sheet showed a net current asset value of $782 million. Compared to the market capitalization of $242 million, it presented very compelling upside potential below $3. At the time, the Oosten project in Brooklyn, New York was valued at more than the entire market cap of Xinyuan. Now, with more projects in place, the company has had to take on a lot more debt, pushing the enterprise value up.
While the market cap is roughly the same as it was four years ago, thanks to share buybacks, the stock price is higher. In that time, however, the company has cycled through three different chief financial officers and still hasn’t found a full-time replacement. This hasn’t put off the company’s largest investor, TPG Capital, however, which still owns over 8.8 million shares, or around 13.7% of the stock.
China, where Xinyuan has over a dozen projects, is experiencing a housing bubble with prices rising 31% to $202 per square foot in just the last few years, pushing prices far higher than the median price per square foot in the U.S., where per capita income is eight times higher than China. Developers are heavily burdened with debt, much of it short-term with interest rates of 7% to 8%. Real estate is a massive driver of the Chinese economy, accounting for as much as 30% of its gross domestic product and, despite government policies to curb the current bubble, it will eventually pop.
As for Xinyuan, it has north of $1 billion in cash and $4 billion in total debt. It generated $46 million in net income (42 cents per share) on $1.8 billion in sales over the last 12 months and paid out 40 cents as dividends. The new accounting rules will make the short-term more volatile, but over the next five years, the impact will likely be negligible, which is why Xinyuan is worth a flyer.
Disclosure: I am not long or short XIN.Ă‚
