Jing Lu Director of IR, China Housing Land Develpoment, In
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Latest Comments10 Comments
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
Unfortunately we have not provided quarterly projections or formal guidance to investors so I cannot comment on our future quarterly projections. However, you bring up an extremely important point that I would like to address with investors. Inherently, the land development business is lumpy and does not lend itself favorably both on the upside and downside to quarterly year over year comparisons as during any given quarter we may be developing projects while then focusing on sales the next. We believe the best way to look at our business currently is to focus on annual results. As I have mentioned in a previous response China Housing has shown the ability to put up substantial year over year annual growth in terms of both revenue and net income since the business was privatized in 1999. So we are certainly confident we can grow in the future. As it relates to our results for 2007, conceptually speaking the first half of this year we will be focusing on developing and preparing for our next two major projects being Baqiao and Junjing Garden II while selling off the remaining minority portions of our completed Junjing Garden I and 24G projects. We intend on breaking ground on the Junjing Garden II project in the second half of 2007 while engaging in the first 45 acres of land sales for Baqiao during the fourth quarter of 2007. We anticipate having Junjing Garden II complete by the second half of 2008 and we believe it will be a significant contributor to our results later that year. As it relates to Baqiao, we anticipate beginning the necessary infrastructure construction in the near term. This will facilitate the sale of the first piece later this year and is expected to be a significant contributor to our 2007 results.
As I mention previously, there is huge potential in Xián real estate market. In 2006, xián ‘s population is over 8 million, and average living area per person is 157 sq.ft , compared to 268 sq.ft national average. And local government targets in 2020 the population will reach to 10 million, and average living area will reach to 269 sq.ft. that will be 1.26 billion sq.ft new development needed to be created by 2020. these demand will drive property appreciated in next 10 years. In 2006 housing price in XIán is 50% or 75% cheaper than Beijing and Shanghai respectively. There still is further room for housing appreciated. Additional Land appreciation in Xi’an we remain quite bullish on the market. The Xi’an market has increased about 50% over the last several years but we believe based on factors discussed previously that there is still further room for appreciation. And also according to local government “xián 10 years development plan”, in next ten years the Baqiao area will be main middle and upper-middle residential area of xián city. The government will invest 50 billion RMB to improve the infrastructure of this area in next ten year. The land appreciation in this area will very fast in the next four years.
Regards
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
We do employ subcontractors for work but based on our experience and readily available access to labor we do not feel that this is a risk at the present time.
Regards
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
For the first part of your question related to timing of Baqiao land sales please refer to the response I provided for RUF. If you need further elaboration please don’t hesitate to ask another question.
As it relates to property rights the Chinese Government owns all the land in China. However beginning in 1992 major Chinese cities began selling state-owned housing causing a structural shift in demand from state-owned private homes. Later in 1998 the Government abolished the policy of state allocation of housing. The situation currently is that residential owners will purchase a property and now have ownership for 70 years. The current issue that the Central Government is dealing with is in regards to the transfer of those rights of ownerships to related family members upon death of the owner. Recently, in the convening of the National People’s Congress in March 2007 the Government discussed enhanced protection and transfer of these rights for property owners and buyers. While no definitive rules have been set most are operating with the understanding the Government will be setting fourth new rules that clearly articulate individual’s property rights and the facilitation of the transfer of these assets in the near future.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
As you mentioned and as part of our May 2007 private placement management of China Housing put 510,000 of their personal shares into escrow as it relates to a “make good” net income target for 2007 and 2008. These “make good” targets have called for the Company to achieve net income of $16.3 million and $35.8 million for 2007 and 2008 respectively. If these targets are not met for each fiscal year, management of China Housing would forfeit the shares in escrow to participants in the private placement. At this point I believe it is worthwhile to share our previous financial results to provide investors with a perspective as to how we plan on achieving these numbers.
Since 1999, when the Company was privatized by current management we have increased sales from approximately $2.4 million to $54.01 million in 2006 with net income increasing from a loss in 1999 to over a $9 million in 2006. In 2006 total revenue increased 65% to $54.01 million with net income increasing 91% to $9.1 million and earnings per weighted average fully diluted share increasing 88% to $0.45.
We have been able to grow the business to date with very little external financing and as you can see we have a definitive track record of profitable growth. As it relates to results this year, the proceeds of our private placement have been used to acquire 487 acres of land within the Baqiao Hi-Tech Zone. This is part of a larger 2,224 acre Xian-based development which will include residential housing, retail and light commercial space, aerospace research and a logistical center. This area has been designated by Xian government to be the new satellite city and the government will invest over $7 billion USD over the next ten years for infrastructure development such as roads and a planned subway to connect the center of Xi’an to this new area.
Additionally, according to the governments 10 year development plan, the government will move approximately 600,000 citizens from the center of the city out to this new area, bringing the total population to approximately 900,000. We have now acquired the exclusive rights to develop 487 acres of some of the most attractive portions of the total property for residential development. Our plan is to invest the necessary capital expenditures for electricity and water to prepare the area to be sold as raw land beginning in the fourth quarter of 2007. Our plan is to have discussions with major international developers to sell approximately the first 45 acres this year and another subsequent 128 acres in 2008. We have stated that in total our 487 acres we believe will generate approximately $500 million in revenue for China Housing over the next four years.
The “make good” net income targets previously mentioned were predicated on these high margin land sales in addition to the development of our Junjing Garden II project. As a matter of reference and in addition to Baqiao we are optimistic on the prospects for Junjing Garden II based on our favorable experience developing Junjing Garden I. Junjing Garden II is expected to be a 1,500 unit complex encompassing over 2.5 million in total square feet and we believe will command higher prices than that of Junjing Garden I. We anticipate that both Baqiao and Junjing Garden II will substantially contribute to our 2007 and 2008 results and will help us to achieve our “make good” targets.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
As you mentioned and as part of our May 2007 private placement management of China Housing put 510,000 of their personal shares into escrow as it relates to a “make good” net income target for 2007 and 2008. These “make good” targets have called for the Company to achieve net income of $16.3 million and $35.8 million for 2007 and 2008 respectively. If these targets are not met for each fiscal year, management of China Housing would forfeit the shares in escrow to participants in the private placement. At this point I believe it is worthwhile to share our previous financial results to provide investors with a perspective as to how we plan on achieving these numbers.
Since 1999, when the Company was privatized by current management we have increased sales from approximately $2.4 million to $54.01 million in 2006 with net income increasing from a loss in 1999 to over a $9 million in 2006. In 2006 total revenue increased 65% to $54.01 million with net income increasing 91% to $9.1 million and earnings per weighted average fully diluted share increasing 88% to $0.45. We have been able to grow the business to date with very little external financing and as you can see we have a definitive track record of profitable growth. As it relates to results this year, the proceeds of our private placement have been used to acquire 487 acres of land within the Baqiao Hi-Tech Zone. This is part of a larger 2,224 acre Xian-based development which will include residential housing, retail and light commercial space, aerospace research and a logistical center. This area has been designated by Xian government to be the new satellite city and the government will invest over $7 billion USD over the next ten years for infrastructure development such as roads and a planned subway to connect the center of Xi’an to this new area.
Additionally, according to the governments 10 year development plan, the government will move approximately 600,000 citizens from the center of the city out to this new area, bringing the total population to approximately 900,000. We have now acquired the exclusive rights to develop 487 acres of some of the most attractive portions of the total property for residential development. Our plan is to invest the necessary capital expenditures for electricity and water to prepare the area to be sold as raw land beginning in the fourth quarter of 2007. Our plan is to have discussions with major international developers to sell approximately the first 45 acres this year and another subsequent 128 acres in 2008. We have stated that in total our 487 acres we believe will generate approximately $500 million in revenue for China Housing over the next four years.
The “make good” net income targets previously mentioned were predicated on these high margin land sales in addition to the development of our Junjing Garden II project. As a matter of reference and in addition to Baqiao we are optimistic on the prospects for Junjing Garden II based on our favorable experience developing Junjing Garden I. Junjing Garden II is expected to be a 1,500 unit complex encompassing over 2.5 million in total square feet and we believe will command higher prices than that of Junjing Garden I. We anticipate that both Baqiao and Junjing Garden II will substantially contribute to our 2007 and 2008 results and will help us to achieve our “make good” targets.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
As it relates to our listing on the OTCBB we made the decision to enter the U.S markets in April 2006 as we felt it would provide us with the best opportunity to create long term sustainable shareholder value. This is a decision that many other Chinese companies have made with many of them being extremely successful moving from the OTCBB to national exchanges such as the AMEX, NASDAQ and NYSE. The process of listing in China is still complicated and often results in a long and complex process. We are committed to moving to a national exchange within the next year as we begin to achieve many of the necessary listing requirements. China Housing is not trading on any other exchanges.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
We completed a $25 million private placement in May with institutional and accredited investors. The proceeds from the placement are primarily being used to acquire the Baqiao project and for working capital purposes. We have stated that that Baqiao project is 487 acres land development business, and could generate substantive revenue for China Housing and also support our long-term development. We anticipate beginning to conduct raw land sales for Baqiao beginning in the last quarter of 2007 and then more significantly in 2008. With the proceeds from the private placement and the establishment of bank debt we feel very comfortable we can complete the first sales of Baqiao. Once the first sales are complete given the high margin nature of this transaction we feel comfortable that these initial proceeds will be adequate to fund our development pipeline for the foreseeable future.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
You are correct that markets such as Beijing, Shanghai and Guangzhou have experienced significant appreciation in real estate values. Before I address the Xi’an market let offer up a few data points that could help explain some of the recent rise in real estate values across China.
First, there are a limited amount of assets in which Chinese citizens can invest their new found disposable income. The tremendous upward moves of the Shanghai and Shenzhen domestic markets have been well documented so I won’t address them here but this clearly represents one asset class. What is not as well known is that the average citizen will earn only approximately 3% interest for deposits into a traditional savings account. That is below the current inflation rate of approximately 3.4% reported by the government in May. This has led to a sharp decrease in the notoriously high savings rate of the typical Chinese consumer and an influx of money into assets such as real estate and stocks. With China’s GDP of over 11% in the first quarter of 2007, a further reduction in the savings rate for Chinese consumers and an increasing migration of the over 800 million rural farmers to cities, the long term secular theme for real estate we believe remains favorable as an asset class.
As it relates to Xi’an we feel we are in a very unique position. Xi’an is the capital of the Shaanxi Province and is located 600 miles southwest of Beijing. Xi’an has a population of approximately 8.0 million and is a popular tourist destination for attractions such as the Terra Cotta Warriors and the Old Walled City of Xi’an. It is one of the top ten largest cities in China and is well known for its high density of hi-tech, military, aeronautic and pharmaceutical manufacturing companies in addition to many well-known universities. The GDP of Xi’an has actually been stronger than that of greater China at approximately 15% per annum over the past several years. Part of this growth is related to Beijing’s “Go West” strategy which is encouraging citizens to migrate towards interior parts of China. This has led Xi’an to have a population CAGR of over 5%. Most importantly, despite the strong demographic trends, Xi’an real estate is at a significant price discount to other major metropolitan areas such as Beijing, Shanghai and Guangzhou. We estimate that the cost of home ownership is approximately 50% and 75% cheaper than Beijing, Shanghai and Guangzhou respectively. For example in our one of our more recent developments, called Junjing Garden I, this complex had approximately 1,230 apartments. For a brand new, highly upgraded 1,000 square foot unit, buyers paid approximately $50,000 USD. We feel this is very affordable for the traditional Chinese family.
In conclusion, based on the strong growth within Xi’an and the relative discount to other major cities we believe the region is poised for further significant appreciation.
Jing
Interactive Q&A: Jing Lu, Investor Relations Director of China Housing and Land Development, Inc. (CHLN.OB)
1. By way of background, let me provide you with a little more information on our Company. China Housing is the largest private real estate developer in Xi’an and the third largest in the region, with the two larger developers being state owned enterprises. China Housing has been named a “AAA Enterprise in the Shaanxi Construction Industry” as recognized by the China Enterprise Confederation and China Directors Association while also obtaining “Level 1” development status under the China Ministry of Construction licensing policy. This is the highest level awarded by the government and allows the Company to develop small to large sized projects. When looking at our competitive advantages in the market I believe our established track record, management experience and strong financial position act as differentiators. Let me address each of these.
First, by having begun operations in Xi’an in 1992, first as state owned enterprise then later as a private Company we have an established a track record with both the local government and consumers based on our high quality developments. As mentioned this has garnered us significant designations and licenses to develop some of the largest and most important projects in the region. This is something that cannot be quickly replicated by a competitor. In fact if a new competitor were to enter the market they would have to begin at a “Level 5” status. This would allow them to only develop very small projects and based on the current rules and regulations, a developer may not move up more than one level per year, even under the best of terms. So from this standpoint we feel like we are well insulated from competition.
Second the experience of our management, operations and legal team has been a tremendous asset in identifying, securing and profitably developing projects. For example, our CEO, Mr. Lu Pingji has over 30 years experience in housing development, management and construction and has been with China Housing since its initial inception. As a result, we have never had an unprofitable project and in fact our average IRR on our completed projects is 140%.
Finally, while there are several local competitors they are limited to the size and scope of projects they can develop based on not only their development status but also their financial position. Currently, there is very little access to capital for small private Chinese companies. China Housing, by being a US publicly traded Company and by having a strong track record of profitability has the unique opportunity to secure capital under favorable terms and capitalize on opportunities. This is something that other companies in the region just don’t simply possess. As it relates to international competition, Xi’an based on its favorable demographics and relative pricing is certainly gaining more attention from the global marketplace. However, with the access to new development projects based on negotiations with the local government we feel it would be very difficult for these companies to enter the market alone. Rather, we believe the entrance of new developers through joint ventures actually holds significantly positive implications for both Xi’an and China Housing in the future.
2. We have four new projects in our development pipeline: Baqiao, Junjing Garden II, Kang Canyon and Yijing Yuan. We are very optimistic on these projects as they are in highly desirable areas within Xi’an and believe over the next four years these projects could generate approximately $750 million in potential revenue. Baqiao, is a 487 acre plot of land that we expect to engage in raw land sales during the second half of 2007 and then continuing for the next three years thereafter. The other projects we anticipate developing .
3. The government has can influence market prices in a number of different ways. First, interest rate changes which impact borrowing costs and overall pricing for real estate throughout China. Second, the government has the ability to increase or decrease taxes on real estate developers. Third, since the government essentially owns all the land in China companies must negotiate with the local government for the land use rights. With the government determining the cost of the land they can have an impact on the overall market.