Monday, January 29, 2007
China Housing & Land (CHLN)
prospectus. This is a housing builder (apartments) in the ancient western city of Xi'an, the historic capital of China and eastern end of the Silk Road. It's a big tourist destination (terra cotta warriors and other stuff). This is far from Shanghai and the other booming areas. The average housing space per person in the city is around 157 square feet and this is increasing, plus the population is slowly increasing. Thus, the need for lots of new housing.
The balance sheet is about what you'd expect for a builder. About 1/3 equity. Most of the assets are in the properties under construction. The biggest liability is a mortgage loan secured by the various properties under development. One customer accounted for 24% of revenue for the last 9 months.
The Chinese government has enacted laws to slow down the booming construction, which has slowed CHLN's business. Customers are looking for a decline in prices.
20.6 million shares on Oct 23, 2006. 310K warrants outstanding, all underwater.
In Q3 2006, they had $14 million in revenues from sale of properties. 22% operating margin. 14% net margin. Reasonable taxes paid.
Fully diluted earnings per share for 9 months is 42.4 cents. I figure they might be worth $10 a share if everything checks out. The stock is selling for about $2.50.
Based on this Wikipedia entry, Xi'an consists of these county level divisions. "D" means district, "C" means county.
Counties (mutually exclusive from districts):
Filed on Aug 23, 2006. Nevada corp. Located in Xi'An, Shaanxi Province. This is for re-selling existing (presumably unregistered) shares.
20,928,835 shares outstanding.
April 21, 2006: acquired Xian Tsining Housing Development Co., PRC. Cost was 16 million unregistered shares. Two officers of CHLN returned 4 million CHLN shares each, which were cancelled. No compensation.
June 28, 2006: sold 331K shares of stock and 99K warrants (3 years, $3.60 strike, restricting to owning less than 10% of the total stock) for $1.1 million. 10% plus 66K warrants placement fee paid by CHLN.
July 7, 2006: sold 38K shares of stock and 12K warrants (same terms as June 28) for $125K. Similar fee.
Aug 21, 2006: sold 250K shares, 75K warrants (same terms) for $813K. Similar fee.
Revenue is recognized when a sale is consummated, and only after a project is completed.
Three months ended June 30, 2006 (31.5% increase from same period in 2005):
Tsining JunjingYuan project: $11.4 million
Tsining-24G project: $6.5 million
Tsining Gangwan project: $176K
Other projects: $230K
Six months ended June 30, 2006 (25.1% increase from same period in 2005):
Tsining JunjingYuan project: $29.2 million
Tsining-24G project: $6.5 million (all in the last 3 months)
Tsining Gangwan project: $176K (all in the last 3 months)
Other projects: $7.0 million (most in the first 3 months)
SG&A increased 57.6% (to $1.8 million) over prior year. No explanation other than the expenses are for office rent, management and staff salaries, general insurance, accounting, and legal.
We staff our sales department at fixed levels. As one project approaches the end of the sales cycle, the sales staff is shifted to the next project.Ok, so then why did the total expense increase by 57.6%? They give the same missing explanation in the 6 month results section. Between full year 2004 and 2005, SG&A increased only 7.7% to $3.6 million.
Most of the interest expense was capitalized. This seems correct.
Here's their description of the government changes affecting the housing market:
This increase in sales was, however, lower than we expected due to several new regulatory policies governing the real estate market issued by the Chinese government recent tow year. For example, the People's Bank of China raised mortgage interest rates on March 16, 2005, thereby increasing the cost of acquiring a residence. In addition, "Further Strengthen the Macro Controlling on Real Estate Market" and "The Notice of Stabilizing House Price and Adjust Supply Structure of house" issued by the State Council on April 27, 2005 and May 29, 2006, respectively, negatively impacted our revenues because potential buyers, whose expectations of housing prices were affected by these reports, are delaying purchases in anticipation of a decline in housing prices.This caused the increase in revenues to be less than expected during 2006.
2005 full year revenues were 50.1% greater than 2004
The increase in revenue was due to the completion of construction and near sell out of two projects, and the sale of apartments from our inventory of completed projects. Our Tsining Gangwan project was completed, and we sold approximately 465 apartments, from the start of construction through the completion of the project, accounting for revenue of approximately $15.9 million. The completion the first phase of Junjing Garden and the sales of apartments from that project generated sales of $11.2 million. The balance of our revenue for year end 2005 was from the sale of apartments from our previously completed projects, approximately $5 million. The majority of our revenues in year end 2004 were from the sales of nearly all of the apartments of the Tsining Hanyuan project, approximately $13.4 million. Tsining Home IN contributed $3.5million during 2004, and construction was completed in December 2003. The balance of the revenues during 2004, $4.1million, was from various completed projects.
$22 million in mortgage debt with a rate of 0.725% per month, payable quarterly.
$876K matured in April 2006
$5.6 million was to mature in July 2006, renegotiated to July 2007
$2.5 million matured in Dec 2006
$4.2 million matures in May 2007
$2.5 million matures in July 2007
$6.3 million matures in Dec 2007 (they had just obtained this one in Jan 2006)
Properties under construction increased by $8.8 million during the first half of 2006.
They may need to raise more cash in the future for additional projects.
Offices are 2,600 sq ft.
53 employees: 5 management, 7 admin, 14 operations, 9 sales, 10 planning, 8 finance. All get incentive based compensation. Sales people get a company car after $25K in sales.
Families will normally pay 20% down payment (the PRC requirement was lowered from 30% to 20% in 1999 and maximum term extended to 30 years) and the rest is covered by a mortgage.
On a local basis, the Xian Bureau of Statistics indicates that, from 2001 to 2004, demand for residential housing in Xian increased from 37.6 million square feet to 61.1 million square feet. During the same period, the average price per square foot increased from US$23.23 to US$37.88.While that's a notable increase, it seems far from being a housing bubble, given the changes in China during that time.
The population of Xian exceeds seven million. The average living area in Xian is about 157 square feet per person, significantly less than the national average. The Xian government expects the local average to reach 269 square feet of living area per person by the year 2020, at which time the population is expected to be ten million. This will necessitate the construction of 1.259 billion square feet of housing, an annual increase of 78.7 million square feet.
As the local economy has developed under Beijing's "Go West" policy, personal incomes have grown, driving the demand for better housing. The residential real estate market in Xian is currently expanding in a balanced fashion. The vacancy rate for new housing is approximately 15%, the lowest in five years.
Page 21 says they use local TV, billboards, internet, and radio to advertise both residential and commercial property. They have a sales force (9 employees) to handle inquiries.
CHLN acquires land (remember, this is land use rights for a limited time, typically 30 years) by three ways: 1) purchase at public auction from Land Consolidation and Rehab Center, 2) purchase by auction from bankruptcy, 3) mergers and acquisitions.
I read somewhere recently (I think it was related to CXTI) where China has been getting better at being fair and open with these kinds of deals, especially in big Eastern cities like Shanghai.
CHLN has all the licenses required by China. "Qualification Certificate for Real Estate Development" authorized by Shaanxi Construction Bureau (Aug 2003 to Aug 2006... hopefully renewed!). "License for Construction Area Planning" and "License for Construction Project Planning", authorized by Xian Bureau of Municipal Design. Also building permits authorized by the Committee of Municipal and Rural Construction. After construction, the project needs a validation certificate with various standards applying, regulated by the Local Ministry of Construction Bureau.
There are 4 levels of certification for builders.
Level 1: requires $6.25 million in registered capital, 5 years experience, 3.2 million sq ft developed.
Level 2: requires $2.5 million in registered capital, 3 years experience, 1.6 million sq ft developed.
Level 3: required $1 million in registered capital, 2 years experience, 538K sq ft developed.
Level 4: requires $125K in registered capital, 1 year experience, no previous development required.
In addition, All of these levels require no severe accidents and it takes 20 days to level up. To develop in multiple regions, you need a Level 1 status.
CHLN has reached Level 2 status. In Xi'an, there is a Level 1 developer (Xian Hi-Tech Industrial District Real Estate Development Co.) who is in the top five in Northwest China. They're listed on the Shanghai Exchange. They're state owned and normally do larger developments than CHLN. By the end of 2005, they had done 10 products on 988 acres with 21.6 million square feet. They were currently working on 4 projects in Xi'an of 14.5 million sq ft.
There are apparently two privately owned direct competitors to CHLN [the ambiguity is in the original text].
Competitor 1: Xian Yahe Real Estate Development Co. Level 2. Est. 1993. Six projects, 5.3 million sq ft. Mostly in northern Xi'an, a less desirable area with lower selling prices (while costs are the same). I'm thinking this gives them motivation to go after CHLN's area.
Competitor 2: Xi'an Yanta District Rural & Urban Construction Development Co. Level 2. State owned [this makes their claim about two privately owned competitors suspicious] and controlled by the Xi'an Yanta District Government. Because of this, most of their developments are municipal reform projects in the Yanta District (see the list of districts and counties above).. Est. 1985. Five projects, 7.2 million sq ft. Two projects under construction of 1.3 million sq ft.
CHLN is the third-ranked housing and land development company in the entire Shaanxi Province (much bigger than just Xi'an city) based on the 2005 ranking by China Enterprise Confederation and China Enterprise Directors' Association. They are also a "AAA Enterprise in the Shaaanxi Construction Industry" based on the Shaanxi Province Enterprise Credit Association (Note that the CHLN CEO is a member of that group!).
These are in downtown Xi'an, and were priced above the regional average. They included secured parking, cable TV, hot water, heating, and natural gas.
1) Tsining Mingyuan: 8 East Youyi Rd. 474K sq ft. 303 apartments (2-4 bdrm). 950 to 1,800 sq ft per apartment. Construction started March 1998, finished April 2000. $19.7 million in revenues. Sold at $41.65 per sq ft.
2) Lidu Mingyuan: 25 East Mutoushi. Prime commercial area near the touristy bell tower. 1.3 acres. 86K sq ft. 56 apartments (2-4 bdrm). Started Oct 2000, finished Nov 2001. $4.07 million in revenues. Sold at $47.25 per sq ft.
3) Tsining Hanyuan: 6 East Youri Rd. Near schools/universities. 347K sq ft. 238 apartments (2-3 bdrm). 1,140 to 1,800 sq ft per apartment. Started Feb 2002, finished Dec 2003. $14 million in revenues. Sold at $40.53 per sq ft.
4) Tsining Home IN: 88 North Xingqing Rd. Near city center. Western style apartments. 248K sq ft. 215 apartments (2-3 bdrm). 1,120 to 1,920 sq ft per apartment. Started ?, finished Dec 2003. $12 million in revenues. Sold at $49.64 per sq ft.
5) Tsining Gangwen: 123 Laodong Rd. Less than 1 mile from technology industrial zone. 3 acres, 8 buildings. 511K sq ft. 466 apartments (1-3 bdrm). 430 to 1,430 sq ft per apartment. Started April 2003, finished Dec 2004. $16 million in revenues. Sold at $31.14 per sq ft.
Projects Under Development:
Expanding to include some office/retail space.
1) Tsining 24G: 133 Changle Rd. Redeveloped 25 floor building in the commercial center. Housing and retail. 296K sq ft. 372 apartments (1-3 bdrm). 387 to 1,936 sq ft per apartment. Secured parking, cable TV, hot water, air cond, gas, internet, exercise facilities. Also 199K sq ft retail (135K to be sold, 64K to be rented). Started June 2005, ending June 2006.
2) Tsining Junjing Garden I: 396 North Jinhua Rd. 15 buildings. 1,230 apartments (1-5 bdrm). 1.5 million sq ft residential, 200K sq ft commercial (58K to be sold off). 505 to 3,787 sq ft per apartment. Secured parking, cable, hot water, heating, gas. $11 million revenue in 2005. Also a commercial area for small businesses targeted to residents and surrounding area. Completion June 2006.
Two parcels of land requiring development financing and permits.
1) Junjing Garden II: 38 East Hujiamiao, near Junjing Garden I. 18 acres. Expecting 1.8 million sq ft. Expecting $39 per sq ft. Planning starts July 2006. North American style apartements (a first for Xi'an). Secured parking, cable, hot water, heat, gas. Planning starts July 2006. Pre-sales starts Nov 2006.
2) Yijing Garden: 14 Jiangong Rd. 15 acres. Expecting 2.3 million sq ft. Expecting 1,500 apartments (2-4 bdrm). Secured parking, cable, hot water, heat, gas. Construction starts Oct 2007, finishing Dec 2010. Expecting $39 per sq ft.
Nov 2005, signed non-binding letter of intent to buy a 51% interest in Xian Xindadi Technology Development Co. ("XIAN"). They hold an agreement with Baqiao District Government for the development of a "Hi-Tec Industrial Zone". Price is $5.1 million. Expected to close by the end of 2006. Supported by the Shaanxi [Province] National Development & Reform Commission. Also Ministries of Land & Natural Resources, Agriculture, Science & Technology, and Commerce.
This includes installing and maintaining basic infrastructure: water, electricity, gas, sewer. Afterwards, the land will be registered at Xian Land Consolidation & Rehab Center for public auction. After the land is sold, XIAN will be reimbursed for costs. After costs are paid, XIAN receives 76% of all profits from the land sales plus 40% of the tax paid by the occupying enterprises to the Baiao Government. This continues for the life of the land use permit.
XIAN will need financing for this.
CHLN entered into a nonbinding letter of intent to buy 100% of Xian Sodi Land Development Company for $3.7 million. They own 174 acres in Kang Canyon. This was expected to close in Oct 2006. CHLN intends to develop a villa resort with 260 units (215K sq ft total) to be marketed toward tourists.
CHLN will need financing.
Lu Pingji 55 Chairman of the Board and Chief Executive OfficerLu Pingji joined in 1999. Founder of Lanbo Financial Investment Company (Chairman and CEO) concurrent with being Chairman and CEO of CHLN (I've seen this a few times in Chinese companies). Was in the Chinese military from 1968 to 1999, up to Senior Colonel, graduated from Xi'an Army College with a major in architectural engineering. Member of Enterprise Credit Association.
Xiao Genxiang 43 Chief Administrative Officer and Director
Feng Xiaohong 41 Chief Operating Officer and Director
Wan Yulong 43 Chief Financial Officer
Shi Zhiyong 45 Vice President, Chief Legal Counsel and Director
Xiao Genziang joined in 1999. Also came from Lanbo. Also concurrent with CHLN. MBA from Xi'an Jiaotong University in 2001.
Feng Xiaohong joined in 2003. Also came from Lanbo, also concurrent with CHLN. Director of Xian Newstar Real Estate Development Co. GM and president of Xi'an Honghua Industry Inc. Member of China Architecture Association. VP of Shaanxi Providence Real Estate Association. Vice Director of Xi'an Decoration Association. MS of Architecture Science from Xi'an Architecture & Technology University in 1990.
Wan Yulong joined in 2003. Also from Lanbo, also concurrent with CHLN. CFO of Xi'an Royal Hotel.
Why did these people all bail out of Lanbo (LNBO) on Dec 21, 2005? Well, on Dec 15, 2005...
On December 15, 2005, the Xi'an Providence and Foreign Trade & Economic Cooperation Bureau, a Chinese government agency that approves the registration of businesses involving foreign shareholders, notified Xi'an Xinxing Real Estate Development, Inc. ("Newstar" or "Xinxing"), currently the registrant's operating subsidiary, that it did not approve a requested extension for the payment of $5,760,000 required to be paid by the registrant's subsidiary, Lanbo Financial Investment Company Group Limited ("LFIC"), to Newstar to complete the transfer of Newstar's equity to LFIC and Newstar's privatization. The Company believes that this declaration is irreversible and will terminate the Company's ownership of Newstar in the very near future.Ok, so Lanbo agreed to buy this company, but didn't pay. They extended the agreement, but still never paid. Then suddenly they stopped filing SEC financial reports. The stock has deflated to just about zero. Meanwhile, the top management bails out and suddenly appears in this new company, China Housing & Land (CHLN). Like Yogi Berra said, it's like deja vu all over again. Shades of ETLT.
I'll pass on this one