How Should You Think About Xinyuan Real Estate Co Ltd’s (NYSE:XIN) Risks?

For Xinyuan Real Estate Co Ltd’s (NYSE:XIN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of XIN. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Different characteristics of a stock expose it to various levels of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

View out our latest analysis for Xinyuan Real Estate

What is XIN’s market risk?

With a beta of 1.74, Xinyuan Real Estate is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, XIN will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

NYSE:XIN Income Statement July 13th 18
NYSE:XIN Income Statement July 13th 18

How does XIN’s size and industry impact its risk?

XIN, with its market capitalisation of US$310.69m, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the real estate industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of XIN’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can XIN’s asset-composition point to a higher beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test XIN’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, XIN seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. Thus, we can expect XIN to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, XIN’s beta value conveys the same message.

What this means for you:

You could benefit from higher returns from XIN during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. What I have not mentioned in my article here are important company-specific fundamentals such as Xinyuan Real Estate’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for XIN’s future growth? Take a look at our free research report of analyst consensus for XIN’s outlook.
  2. Past Track Record: Has XIN been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of XIN’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.