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Xinyuan Real Estate: Expect A Dividend Cut (And Possibly Default)

Published Wed, 25 Mar 2020 15:55:45 -0400 on Seeking Alpha

Chinese real estate has been in a speculative bubble for the better part of a decade; the government has now played all possible cards to prolong it.
With a 20% vacancy rate and 70% of new home buyers purchasing their second or third home, a toxic situation has brewed for Chinese developers.
While Xinyuan Real Estate has a "P/E" of 1X, it has failed to generate positive cash flow and has seen an extreme buildup in accounts receivable.
Xinyuan is entirely dependent on increasing leverage and constant refinancing its $1B+ in short-term debt in order to meet dividend payments (and creditor obligations).
Fitch recently mentioned that Xinyuan has low refinancing risk due to cash from expected pre-sales in New York and London. With COVID forcing 'stay-and-home' orders in those cities, this reason no longer applies and default is possible (if not likely).
There is no doubt that I'm bearish on the Chinese property market. I began writing about the country's extreme property bubble nearly two years ago in "The $42 Trillion Bubble" and, since then, have seen an extreme bubble grow much larger. On January 28th of this year (well before equities peaked and most understood the severity of the Coronavirus), I covered the bubble again in "Coronavirus May Be The Catalyst That Will Pop China's Massive Property Bubble".
The fact is that the Chinese economy is far too reliant on property development and has caused home valuations to reach unheard-of levels. Most homes in China cost 20-40 years' worth of income. Despite that, the country has one of the world's highest homeownership rates. Today, at least 20% of homes in China are vacant and will likely remain vacant for decades given China's population growth rate.
Because China's banking system is dependent upon home asset prices and most Chinese wealth is tied up in the country's property market, the government will do everything in its power to prolong the bubble's inevitable pop. Whenever... Read more