 Good day fellow investors. Xinyuan real estate is a Chinese American UK real estate developer. So they build those great big buildings. Now it is extremely cheap and I have recommended this talk about a year ago when it was trading about four or five something and it went up to seven. I sold there so that's what I do sometimes I trade but not that much anymore as we are building a long term portfolio and in this video I will explain why Xinyuan with a dividend yield close to 10% with a price forward price earnings ratio of three and the price to book value of 0.4 is an expensive stock. Just a quick company overview so they are building big let's say affordable apartments across China. They also have a track record in New York City, Brooklyn, Manhattan, Queens. They are building something in Irvine so building across the world and they are also building the medicine tower in Canary Wharf. However let's look at the fundamentals. If you look at this you would say oh my god this is extremely cheap so what is behind this? What we're going to discuss today is really an in-depth analysis of Xinyuan so if you have been eyeing the stock it's crucial to go through this. The new accounting policies implementing ASC 606 management 90 million profit expectation for 2018. Business is going as usual they are selling they are improving what they are doing so the accounting is just accounting. The notes my notes from the Q2 conference call we are going to dissect Xinyuan's debt because the devil lies in the details and you will also see how I go into details when I look for something to invest in. Something you might not know TPG asset management converted its 2013 convertible bond got to the stock and has been dumping the stock on the market which put a lot of pressure on the stock price. We're going to compare it with other property developers and then give long-term outlook on the finances. How the margins move fast? So let's start with the fundamentals. Due to a shift in accounting policies to ASC 606 Xinyuan will now recognize revenue and thus profits at a later stage. So first they were recognizing revenue when they would think okay it will be sold but now or how they were building it and then due to customer deficits they knew it will be sold. Now they have to recognize revenue only when it's actually transferred to the customer. In parts but it's usually not in parts it's at the end delivered so a lot of revenue that will be recognized only in the future so 2018 much lower revenue. This is you can see here the comparison for 2017 the revenue was 1.9 billion but if it is with the new accounting rules it drops to 1.5 billion and the net profit goes from 80 million to just 4.5 billion million for 2017. That's a huge difference but that's a cycle that you have to await so the management expects big profits when they book all the revenues that they didn't book in the end towards the end of 2018 as they deliver the projects. Due to the new accounting rules the new results look very bad six months big decline in revenue from 768 million to 534 million also from a profit of 26 cents per share to a loss of 27 cents per share. The number of shares diluted is still stable there as the company is doing some buybacks. Just to note 0.1 quarterly dividend 9.29.3 dividend yield at the moment. The book value is also high 10.83 per share but was much higher in 2017 as the company removed 350 million in profits from adjusting past accounts to the current new accounting rule because they haven't yet booked those sales. Very important adjustment and the equity went from 1.5 billion to 679 billion. Now if you look at other changes so they were booking revenues so you can see customer deposits went from 438 million to 2.5 billion 2.6 billion as they rebooked those as not sold they usually would book them as sold apartments so now they have liability big liability in the form of customer deposits total liabilities went up 2.2 billion which is in line with the customer deposits that went up. And of course on the asset side the real estate properties under development went up from 2 billion to 3.7 billion so not those were already sold now they have to be held until they are really transferred to the customer. However business is going as usually if you look at the gross floor area sold to date it went from 3.2 million square meters to 3.7 million square meters on 4.3 and 4.4 respectively of inventory so they're doing good they are selling in the normal way of accounting just to note very important as it is all about location location location when it comes to real estate they are focused on Zhengzhou and Chengdu mostly on Zhengzhou and Zhengzhou probably pronounced it wrong is the focus also for their future projects. On top of that they have three projects in the US the Brooklyn East Riverside the Austin project the Manhattan Hell's Kitchen and the Queens Flashing project I think in flashing they expect about a million in revenues from that something is already sold from the Brooklyn project. Another one project that they are doing in a little bit risky in light of the Brexit where they will say sell iconic design luxury apartments near to Canary Wharf they paid 41 million for this project in March already 30% of it is sold to affordable housing so affordable and luxury all right they are trying to sell the rest of the luxury things but this is really a little bit risky with the Brexit and everything going down normal profit upside for a lot a lot of downside I see that nevertheless business is growing their contracted sales are doing good everything looks good on the surface but let's dig into Q2 that will make things look even better and then we'll go on to the risks my notes average price sales went up but they are selling more commercial properties so that's a big differentiation they are not selling those where the price and the margins are low the company acquired six parcels of land so they are really enlarging what they are doing which means more building from four point something million square meters the land bank now goes to six million square meters they are continuing with the Madison project in London cash and cash equivalents went up from 1.2 billion to 1.5 billion dollars on contract sales and debt of 3.5 billion net debt excluding the customer deposit liabilities properties under development are 3.5 billion so let's dissect the risks it's all about the debt the short-term bank loans are 247 million from 2017 so it's a little bit less now but it's a good indication of what's going on 512 another long-term bank loans then most of the debt is due in 2021 with an average interest rate in renminbi of 7.67 percent now if we look at the total corporate debt we see a lot of notes there about what one billion in us dollars and the rest corporate bonds of collateralized loans is in renminbi so they have about a billion of exposure to the us dollar which is related to the plans in the us and in London which is then again in pounds so that's another risk they are running a big big currency risks if the yuan devaluates and then we are in trouble because you have to pay the us denominated debt now when i sum up all the debt i come to 3.6 billion at an average interest rate of 8 percent i come up well 209 around 300 million just in interest payments per year 300 million compared that to the market cap so they are almost paying their market capitalization in interest per year you don't see that on the income statement because that interest is capitalized into the building process that's how you account for that so nevertheless they are paying that interest on their debt and that is for me something huge because every little small change selling a little bit late due to government constraints lower prices in china real estate and then you have bam bam you can you have to pay the debt constantly but you don't get the cash the customer deposit you can't use those to pay that so you might be in trouble very very quickly if something happens and that's why Xinyuan is cheap it's extremely leverage and we will compare it to others you will see how extremely it is leverage and how it's not really much cheaper than the competitors a very important point tpg is dumping stocks on the market which put pressure on the stocks they really i don't know how much they sold but they had about 10 to 15 percent of the company and they have been selling it during this year they have converted that six when the price was above six so maybe Xinyuan pushed the price back then when i sold but thank you for that this is important also look always at convertible notes when you are investing in a stock why is Xinyuan is expensive look at this so china property developers average price to earnings ratio seven for the large caps average for the mid cap is 6.2 average for the small caps is 5.6 if you look at the list a lot of them with 3.6 4.6 4.5 3.1 so nothing special with Xinyuan's valuation the small caps are in trouble they are being taken over they cannot finance their things if things go bad the big ones are a much better risk situation and that's why the price earnings ratio is a little bit higher but not much higher so keep in mind this other risks of course rising interest rates Xinyuan borrows at 8.5 9% competitors small cap competitors borrow at 7% you'll see that more in the next video that i'll do about three competitors refinancing issues regulation from china that prohibit refinancing or borrowing in u.s. dollars and then real estate prices in china have declined also changes in new york or london prices could be a double whammy from xinyuan prices in china have been declining this is from guazu properties and you can see how the prices are significantly lower than what they were a year ago we don't know if xinyuan has already accounted for that okay long-term same story with all the chinese developers huge growth but xinyuan due to the high interest rate and affordable buildings they are building they have a lower gross margin which makes them more vulnerable to fluctuation in prices and increases in interest rates if we compare it to others the margins is the lower with xinyuan the price earnings ratio is there the dividend yield is there the debt to equity is huge compared to se or yuzhou so those are bigger companies better diversified less debt so for the same valuation so if you want to be exposed to a chinese real estate by in hong kong by not xinyuan so this is just an example of how deep i go when i analyze a company xinyuan was always tempting i traded it a few times so i wanted to see am i going to expose my long-term model portfolio for my stock market platform to it and the answer is no because if margins get smaller if prices just stagnate for a year or two that pe of free goes into a negative if interest rates go up and they have trouble because of the brexit selling luxury apartments in canary wharf then a lot a lot of trouble might happen and i don't see xinyuan it might happen but i don't see here is a total loss for a 10 percent dividend yield if i get free dividends of 10 percent and it goes bankrupt in three years then i didn't make a great investment and as you can see price earnings valuations will never go to 1015 because the average is much lower it's around five four property developers in china because of the risks thank you for watching check my next video immediately after this about another free chinese property developers that i just mentioned