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Company

Xinyuan Real Estate (NYSE: XIN)

Submitted by

TSIF

Member Rating

99.62

Submitted on

5/14/2010

Stock Price at Recommendation

$2.60

Xinyuan Real Estate Co. profile

Star Rating

****

Headquarters

Beijing, China

Industry

Real Estate Development

Market Cap

$197M

Cash/Debt

$262M / $297M

P/E

3.9

Management

Founder & CEO Yong Zhang (since 1997)
CFO Thomas H. R. Gurnee (since 2009)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch
I'm getting "burned" all over the place on my "value" China calls, but when another country is growing at 7% GDP and ours is bouncing 3%-5% a week in the markets, and Europe is going to he!! in a hand basket, (whatever that means), then by golly, I'll just take my chances in China!!! (Pardon me, it's been a tough week!) 

Xinyuan Real Estate is taking a beating because:
1. It's a China play, and the theory of a China Bubble about to burst is the hottest craze.
2. China is clamping down on Real Estate.
3. China is clamping down on Lending. This is the major factor of the recent 25% drop in Xinyuan's share price.

I can't do much about the "China Bubble," other than say, I'll take that 7% GDP over other choices. In regard to China's clamp down on Real Estate, investors would be better served reading the news, being ready for some volatility because other investors DON'T, and making a move within their risk/reward metrics.

China clamped down on "Tier 1" housing, which is expensive housing. Xinyuan deals in predominantly second, and lately sometimes third, homes. The Tier 2/3 Housing, (Mostly 2) that is showing extraordinary growth actually meets some of the goals of the Chinese Government. Xinyuan, however, DID take a hit in April that will drop Q2 results SUBSTANTIALLY as many regional banks froze lending while they sought to interpret the new government rules, and some banks may be slow to reopen the coffers. The region most affected by the new mandates has seen a freeze in housing sales the second half of April, and since it accounts for 63% of Xinyuan's sales, this clearly will have an impact.

"As the Kunshan project accounted for 63% of our contract sales in the first quarter of 2010, it is difficult for us to predict the sales trend for May and June."

Despite the strong Q1 results, the weak April/May they forecast while waiting for China to clarify its rules has beaten down Xinyuan. Q1 quarterly Earnings: 1st Quarter Revenue's 177% increases [YOY]; Gross Floor Area 169% increase and above guidance; net income $0.14 vs $0.01 a year ago. Cash is strong at $291 million. The houses are primarily built, and buyers are anxious. If the lending isn't resolved then yes, Xinyuan will need to do a balancing act. With its cash position and proven track record, I'm willing to give them some time at this price point, ($2.70) with a forward P/E of 2.7 AND a P/B of 0.50. (YES, less than half of book value).

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The Motley Fool is investors writing for investors. Motley Fool Analyst Dan Dzombak did not have a position in any of the companies mentioned in this article. All glory to The Hypno Toad! Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool has a disclosure policy.