Xinyuan Real Estate, a very attractive stock

The company

Xinyuan real estate (NYSE: XIN) is a Chinese company specialised in residential real estate. It develops and manages real estate in China and abroad. The company is in business since 2006. As of today, the stock price of the company is at $ 4.66 per share. The market seems to ignore the stock because Chinese companies listed in the NYSE usually have a reputation of being fraudulent. A lot of investors lost huge amount of money because of that. 

However, Xinyuan is different. It doesn't seem that the company is fraudulent. Several reasons lead us to think that. First of all, the company is giving dividends since 2011 and buys back its shares. It is a clear signal of confidence sent to investors. Usually, fraudulent companies do not give dividends. Also, the company is being audited by Ernst & Young Hua Ming LLP which is a member firm of Ernst & Young, China. This shows that the financial data provided by the firm is correct and that investors can be confident with their financial analysis. Finally, the company is being led by very smart managers. Among them, Thomas Gurnee - formerly CFO of Sohu.com (NASDAQ: SOHU) and member of the board of directors of Xinyuan - obtained his bachelors degree from Stanford University.

The industry

It is mainly said that there is a bubble about to burst in the Chinese real estate industry. It is maybe right when we speak about the first tier of the main cities because they saw their prices quadruple. But Xinyuan is protected from that because the company mainly invests in the suburbs of the towns. They build and manage residential properties for middle class workers in second tier areas. Also, the company started diversifying their locations because it recently invested in the New-York (Brooklyn) area. 

After all, we've all heard our parents telling us that land and stone are the best investments because they are not risky. 

The valuation

Why is the stock undervalued? 

Regarding the Tangible Book Value, the company has $900M in total equity, nothing in intangibles and nothing in preferred stock. The number of shares outstanding being equal to 69M, we get a tangible book value of $13.04 per share.

If we value the company using the Net Current Asset Value, we find that Xinyuan has $3931M in current assets, $3320M in total liabilities, no preferred stock and 69M shares outstanding. We get then a value of $8.85 per share.

Now, if we try to value the firm based on the Graham Number, we need too important data used by Ben Graham in his book "Security Analysis". First, the tangible book value per share that equals $13.04 as calculated earlier and the earnings per share (EPS) that equals $1.06 in December 2016. We end up with a value of $17,63.

The Dividend Discount Model (DDM) confirms that the stock is undervalued. As stated before, the dividend per share in 2016 was $1.06. Since 2011, the dividend increased on average by 27%. However, we assumed in our calculations that for the next years, we will see an increase of only 7%. For a discount rate of 15% we get a value of $13.25 per share while we get an amazing value of 35.33 if we use a discount rate of 10%.

Furthermore, the Discounted Cash Flow (DCF) method suggests that the company has a value situated somewhere between $9 per share (for a discount rate of 15%) and $15 per share (for a discount rate of 10%). We think that the capital expenditures will decrease over the next years because the company wants to strengthen its balance sheet by reducing its debt. We did not include the change in working capital in our DCF because we considered that it was not necessary because the change in working capital has not impact on the capacity of the company to keep its competitive advantage (while the capex does). 

At the end, we clearly see that the stock is way undervalued. We estimate its value to be between $8 and $17 per share. Also, with a p/e of 4.5, a current ratio near 2X, a very good price to book ratio and an attractive yield, we estimate the stock to be of good value.

Please make your own research, and do not take this article as being an investment recommendation.