Xinyuan Real Estate Co. Ltd. (XIN, Financial) is a Chinese real estate developer with multiple U.S. projects. I’ve written about the stock multiple times over the last several years at prices ranging from $3.21 to $4.73.
This morning, the company released earnings. While it used to look great from both a price multiple and net current asset standpoint, it’s time to sell.
Xinyuan Real Estate posted a loss per of 16 cents per share for the first quarter versus net earnings of 11 cents per share last year, mostly due to the new accounting standards rule. What worries me even more, however, is the total revenue was off 38% year over year, even though contract sales rose to $380.7 million from $305.4 million.
Even as the China trade has run its course, despite much adversity and blatant fraud, Xinyuan is a shining light. The company has done good work in the biggest real estate market in America - New York. It has grown significantly over the last several years, paying out a high dividend yield on solid earnings.
It’s true the company trades at a fraction of book value, but book value isn’t the reason to invest. Book value hasn’t grown that much over the past several years, with most of the working capital being taken out and replaced with a massive pile of debt. The company has close to $1 billion in cash and over $3.48 billion in debt. This may end up being a mistake, but when Xinyaun first came up on the stock radar, it was 2012 before it ramped up production and borrowing.
At the time, it was a little-known company with a $150 million market cap and close to $500 million in net current assets, mostly cash. The company continues to expand into the U.S. and the United Kingdom with impressive high-end projects like The Madison in London and Hudson Garden in New York. Each will bring in substantial revenue in the years to come.
The company also continues to grow its interest expense, which stands at 18.5% of the market cap, 329 times its equity and 52 times its net income. The debt isn’t cheap either and will weigh heavily on Xinyuan going forward, especially if it continues to add more projects in the face of uncertainty and slowing growth across China.
Jim Simons (Trades, Portfolio) is the only guru investor with a 2.6% stake, or 1.7 million shares; however, a total loss would mean little to the $84 billion fund.
Disclosure: I am not long or short XIN.
