Introduction

Xinyuan (XIN) announced its third quarter results last week and they were not good. Following the announcement, some continue to support the company while some continue to support the company. To get a balanced and current view of the company, I read with care the earnings call transcript of its third quarter results as well as its latest SEC filing. Below, I present the bad news, some perspective, and the good news.

Bad News

There were two “Bad News” stories from the third quarter:

  • Sales continued their decline from the second quarter, down another 16% and down 31% from last year’s third quarter. The company conceded that sales were lower than they had anticipated.
  • XIN agreed to allow TPG Asia to redeem in full at the end of December its 5% senior secured convertible notes due in 2018. Overall, this will cost the company $86 million. And while the company has the money to pay this ($319 million in cash at the end of the third quarter), it did come as a surprise and the company it will consider other options to finance the redemption.
  • This redemption creates two immediate problems for shareholders: XIN will have $86 million less for dividends and share buybacks.

    XIN was quick to point out “TPG remains a strategic investor of Xinyuan, with 7.6% ownership of our outstanding shares and will continue to maintain its seat on our Board. But were the reasons for the redemption? XIN claims that both sides wanted it: XIN stated the redemption “…was mainly due to the restrictions of those covenants on the ability of financing for the company…. for a company at the size of Xinyuan it is critical to grow to certain level of operation so that we will be able to survive over the long term…. the restrictions, the covenants from TPGs convertible notes have put a tremendous pressure on the company in terms of financing for our growth.”

    Maybe so, but I doubt this was really the driving force. I worked on real estate development in Shanghai a decade back with the large Western financial houses – Carlyle, Merrill Lynch, Lehman, CS First Boston, Goldman Sachs, Morgan Stanley, JP Morgan, Fidelity Investments and GE Capital. They all had Asia real estate branches and they all wanted to be first out of all their investments. They would rarely touch anything that did not have a 70% return. They would then say “once we have our money back and an additional 40%, we will give other investors our remaining share of the profit if you let us get out early.

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