PROSPECTUS SUMMARY

This summary highlights selected information about us and the ADSs that we are offering. It may not contain all of the information that may be important to you. Before investing in the ADSs, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our audited consolidated financial statements and the related notes, and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

Our Business

We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost control. We commenced operations in 1997 in Zhengzhou, the provincial capital of Henan Province, and were ranked No. 1 among all property developers in Zhengzhou in terms of contracted sales of residential units for the years 2004, 2005 and 2006, according to statistics prepared by the Bureau of Real Estate Management in Zhengzhou. Since 2006, we have expanded into strategically selected Tier II cities around the country and expect to benefit from the rising residential housing demand in these markets resulting from increasing income levels of consumers and growing populations in these cities. We currently have operations in five Tier II cities, including Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, Suzhou in Jiangsu Province and Zhengzhou in Henan Province.

We focus on developing large scale quality residential projects, which typically consist of multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Several of our projects include auxiliary services and amenities such as retail outlets, leisure and health facilities, kindergartens and schools. We also develop small scale residential properties. Our developments aim at providing middle-income consumers with a comfortable and convenient community life. In addition, we provide property management services for our developments and other real estate-related services to our customers. We acquire our development sites primarily through public auctions of government land involving a transparent bidding process. This acquisition method allows us to obtain unencumbered land use rights to unoccupied land which can be immediately developed without the need for additional demolition, re-settlement or protracted legal processes to obtain title. As a result, we are able to commence construction relatively quickly after we acquire a site for development.

We have expanded our business and operations significantly during the past three years. The number of projects we had under construction increased from three projects with a total gross floor area, or GFA, of 278,868 square meters as of December 31, 2004, to seven projects with a total GFA of 770,781 square meters as of September 30, 2007. We have seven additional projects with total GFA of 1,282,498 square meters under planning as of September 30, 2007. As of September 30, 2007, we have completed 13 projects with total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. For each of the three years ended December 31, 2004, 2005 and 2006, our revenues were US$35.6 million, US$61.9 million and US$142.4 million, respectively, representing a compounded annual growth rate, or CAGR, of 99.9%. Our net income for each of those three years was US$3.9 million, US$9.6 million and US$16.1 million, respectively, representing a CAGR of 102.2%. For the nine months ended September 30, 2006 and 2007, our revenue was US$99.7 million and US$218.3 million, respectively. Our net income for the nine months ended September 30, 2006 and 2007 was US$12.5 million and US$36.0 million, respectively.

We intend to continue our expansion into additional strategically selected Tier II cities as suitable opportunities arise.

 

Our Competitive Strengths

We believe the following strengths allow us to compete effectively in the real estate development industry:

Well Positioned to Capture Attractive Growth Opportunities in Tier II Cities.    Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China. Since 1997, we have been building large communities of modern, mid-sized residential properties for this market segment and have accumulated substantial knowledge and experience about the residential preferences and demands of these customers.

Standardized and Scalable Business Model.    Our business model focuses on a standardized property development process designed for rapid asset turnover. We segment the process into well-defined stages and closely monitor our costs and development schedules through each stage. We commence our pre-planning and budgeting prior to land acquisition, which enables us to acquire land at costs that meet our pre-set investment target and to quickly begin the development process upon acquisition. We believe that our standardized practices and methodologies, together with our systematic approach to the development process, can be replicated in strategically selected Tier II cities. Since 2006, we have expanded from one to a total of five Tier II cities in China, and from December 31, 2004 to September 30, 2007, our total GFA for projects under construction has grown 176.4%.

Proven Ability to Provide Large Scale Quality Housing for Middle-Income Consumers.    We have a clear focus on China’s emerging middle-income consumers and provide standardized mid-sized units at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles. We have a proven track record of building large-scale quality residential communities that appeal to middle-income customers, as demonstrated by the sale of more than 99% of units in our completed projects and the growth in our revenue at a CAGR of 99.9% from 2004 to 2006.

Ability to Generate Attractive Investment Returns.    Our standardized processes that emphasize rapid asset turnover allow us to efficiently use capital and generate attractive returns on our investments. We typically acquire land that is ready for development through the government auction system. We do not tie up our capital in idle land banks but instead begin development relatively quickly after land acquisition. We use our working capital efficiently by actively managing and coordinating receivables and expenditures across various projects. We believe that the velocity of our development cycle and our ability to efficiently manage our capital and maintain strict cost control at each stage of development enable us to generate attractive returns on our projects.

Experienced Management Team Supported by Trained and Motivated Workforce.    Our senior managers, most of whom have been working with our company for over five years, have on average over 10 years of experience in the PRC real estate industry and considerable strategic planning and business management expertise. Our Chairman and founder, Mr. Yong Zhang, has more than 20 years of experience in developing residential housing in China. Mr. Zhang was elected in 2004 as one of the Top Ten Rising Entrepreneurs in China’s Real Estate Industry by the China International Real Estate & Archi-tech Fair, or CIHAF. Our management and work force are well trained and motivated. To promote effective recruitment, retention and advancement, we provide our management with training and incentive programs that include subsidizing our management’s pursuit of post-secondary degrees and programs.

Relationships with Our Institutional Shareholders.    In 2006, Blue Ridge China Partners, L.P., or Blue Ridge China, and EI Fund II China, LLC, or Equity International, invested in our company. Blue Ridge China is a China-focused private equity fund and Equity International is a privately-held investment company specializing in real estate investments outside the United States founded and led by Samuel Zell and Gary Garrabrant. Equity

 

International’s portfolio companies include Homex in Mexico and Gafisa in Brazil, both of which are publicly traded in the United States. Both of these shareholders (through their designees on the board of directors) are active in major board-level decisions and contribute their expertise in corporate governance best practices, financial management and accessing global capital.

Our Strategies

Our goal is to become the leading residential property developer focused on China’s Tier II cities by implementing the following strategies:

Continue Expanding in Selected Tier II Cities.    We believe that Tier II cities present development opportunities that are well suited for our scalable business model of rapid asset turnover. Many Tier II cities offer a large supply of potential development sites that meet the criteria of our internal pre-set investment target. Furthermore, Tier II cities currently tend to be in an early stage of market maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier II cities, as compared to Tier I cities, offer opportunities for us to generate attractive margins and believe that our experience in and strategic focus on Tier II cities afford us the opportunity to emerge as a leading developer in these markets. We plan to enter into additional Tier II cities that have increasing population, growing consumer disposable income and sustainable land supply for future developments.

Capitalize on Growth of Middle-Income Population.    The growing middle-income consumer market in China presents an attractive opportunity to continue our business expansion at a rapid pace. We will target this market by continuing to provide quality mid-sized modern residential units in large community developments for middle-income consumers. Our strategy is also consistent with the housing policy of relevant PRC governmental authorities in the context of rising incomes and rapid urbanization to promote the development of more low- and mid-priced housing in China.

Focus on Efficient Land Acquisition.    We constantly seek and assess land acquisition opportunities in selected Tier II cities through the governmental land auction system. To achieve our land acquisition targets, we have established a centralized and efficient system to research land acquisition opportunities. We monitor, plan and budget development costs for potential development sites. We bid for the site through the auction process, if the development opportunity meets our pre-set investment target. We believe that beginning with efficient land acquisition and following through with well-executed development will allow us to expand into Tier II cities successfully and provide sustainable growth for our business.

Maintain Strict Cost Control.    We plan to continue to closely monitor our capital and cash positions and carefully manage our land use rights costs, construction costs and operating expenses. We believe that by adhering to prudent cost management we will be able to more efficiently use our working capital, which will help to maintain our profit margins.

Strengthen our “Xinyuan” Brand.    We intend to promote our “Xinyuan” brand in our selected Tier II cities by delivering high quality products and attentive real estate-related services to our customers. At the same time, we will continue to actively promote the “Xinyuan” brand through marketing initiatives in our targeted markets.

 

Risks Related to Our Business

Our Challenges

We believe that the following are some of the major risks and uncertainties that may materially affect us:

 

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ability to successfully manage our expansion into other Tier II cities;

 

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availability of capital resources to fund our land use rights acquisition and property developments;

 

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difficulties in acquiring desired development sites at commercially reasonable costs;

 

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financial and operating covenants contained in our current debt indentures that restrict our ability to pay dividends, raise further debt and take other corporate actions;

 

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risks associated with the guarantees we provide for the mortgage loans of our customers;

 

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further measures which the PRC government may adopt to curtail the overheating of the property sector; and

 

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dependence on the performance of the residential property market in China.

Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these risks and uncertainties.

Recent Development

On December 4, 2007, we won a governmental auction for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters. We will pay RMB1,103 million for the land use right over this parcel of land, and we intend to execute the related land use rights grant contract by December 11, 2007.

 

Our Corporate History and Structure

We are a Cayman Islands holding company and conduct substantially all of our business through our operating subsidiary in the PRC, Xinyuan (China) Real Estate, Ltd., or Xinyuan China. We own 100% of Xinyuan Real Estate, Ltd., or Xinyuan Ltd., a Cayman Islands holding company, which owns 100% of Xinyuan China. Xinyuan China has 11 wholly-owned subsidiaries in the PRC and holds a 45% minority interest in Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd., or Jiantou Xinyuan. The following diagram illustrates our corporate structure as of the date of this prospectus:

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(1)

The other shareholders of Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. are Zhengzhou General Construction Investment Company (50%) and Zhengzhou Jiantou Project Consulting Co., Ltd. (5%).

We commenced our operations in May 1997 through Henan Xinyuan Real Estate Co., Ltd., one of our wholly-owned subsidiaries in the PRC. We completed a restructuring in April 2007 under which we established our current corporate structure by completing a share exchange in which the existing shareholders of Xinyuan Ltd., our then holding company, exchanged their respective shares for an equivalent number of our shares of the same class.

In April 2007, we issued the following equity and debt securities:

 

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In connection with the restructuring referred to above and in exchange for Series A preference shares of Xinyuan Ltd. that were issued in August 2006 for cash proceeds of US$25 million, or US$0.81155 per share, we issued an aggregate of 30,805,400 Series A convertible redeemable preference shares, or Series A preference shares, to Blue Ridge China and Equity International, together with certain warrants. If our cumulative net income for the two years ending December 31, 2008 is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum of 3,987,009 additional Series A preference shares at an exercise price of US$0.01 per share. If our cumulative net income for such period equals or exceeds US$80 million, or if we consummate a qualified initial public offering prior to March 31, 2008, then these warrants will expire without being exercised. The

 

fair value assigned to the warrants as at the date of issuance was US$496,000. We expect these warrants to expire without being exercised upon the completion of this offering. In addition, the terms of our Series A preference shares contain a contingent conversion option which Blue Ridge China and Equity International waived in November 2007. As a result of the waiver, we will recognize a deemed dividend of US$182.2 million to the holders of our Series A preference shares, representing the difference between the fair value of the Series A preference shares immediately after the waiver and the carrying value of the Series A preference shares immediately prior to the waiver. This deemed dividend will not affect our net income or cash flows. It will reduce our net income attributable to ordinary shareholders and retained earnings for the year ending December 31, 2007. We will review the final offering price of our ADSs (taking into account the ADS to common share ratio) and account for the fair value of the Series A preference shares accordingly in our financial statements for the year ending December 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Recent Development.” Using an assumed initial offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, we estimate a fair value of US$6.72 for each Series A preference share. At this estimated fair value, we will record the modified Series A preference shares at an amount of US$207.0 million and the deemed dividend to the Series A preference shareholders at US$182.2 million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$182.2 million for the year ending December 31, 2007. Moreover, this deemed dividend will eliminate the accumulated profits of US$57.5 million as at September 30, 2007. Our statutory reserves are not distributable as cash dividends.

 

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In connection with the restructuring referred to above and in exchange for warrants of Xinyuan Ltd. that were issued in August 2006 in consideration of financial advisory and investment banking services rendered, we issued warrants to Burnham Securities Inc. and Joel B. Gardner, or Burnham warrants, for the issuance of 1,853,172 fully paid common shares at an exercise price of US$0.81155 per share, which may be settled by cash or common shares. We assigned a fair value of US$55,595 to these warrants, which was recorded as paid-in capital. The holders of Burnham warrants will exercise all of their warrants on a net exercise basis upon completion of this offering, which will result in the issuance of 1,638,323 common shares.

 

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In connection with the restructuring referred to above and in exchange for common shares of Xinyuan Ltd. that were issued in November 2006 for an aggregate consideration of US$15 million, or US$0.9551 per share, we issued 15,704,379 common shares to Blue Ridge China and Equity International.

 

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We issued US$75 million principal amount of units, each unit comprising US$100,000 principal amount of secured senior floating rate notes due 2010, or the floating rate notes, and one warrant to subscribe for our common shares. Each warrant entitles the holder to subscribe at the warrant exercise price for the number of common shares equal to the quotient obtained by dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from the offering of the ADSs. The fair value assigned to the warrants as at the date of issuance was US$7.36 million.

 

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We issued US$25 million principal amount of convertible subordinated notes due 2012, or convertible notes. The convertible notes are convertible into common shares at the rate of 38,388 common shares per US$100,000 principal amount of convertible notes, or a total of 9,597,120 common shares.

See “Description of Share Capital—History of Share Issuances” with respect to the original issuances of such securities by Xinyuan Ltd.

 

Mr. Yong Zhang and Ms. Yuyan Yang collectively own 56.33% of our outstanding share capital as of the date of this prospectus and will own approximately 42.11% of our outstanding share capital upon completion of this offering. Blue Ridge China owns 26.20% of our outstanding share capital as of the date of this prospectus and will own approximately 19.39% of our outstanding share capital upon completion of this offering. Equity International owns 17.47% of our outstanding share capital as of the date of this prospectus and will own approximately 12.92% of our outstanding share capital upon completion of this offering.

Corporate Information

Our registered address is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Our principal executive offices are located at No. 18 Xinyuan Road, Zhengzhou, Henan 450011, People’s Republic of China. Our telephone number at this address is (86) 371 6565 1600 and our fax number is (86) 371 6565 1686.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.xyre.com. The information contained on our website does not form part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011.

Conventions Used in this Prospectus

Unless the context otherwise requires, in this prospectus:

 

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“we,” “us,” “our company,” “our” and “Xinyuan” refer to Xinyuan Real Estate Co., Ltd., its predecessor entities and its subsidiaries;

 

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“shares” or “common shares” refers to our common shares, par value US$0.0001 per share;

 

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“ADSs” refers to our American depositary shares, each of which represents two common shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs;

 

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“China” or “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, Hong Kong and Macau; and

 

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“RMB” or “Renminbi” refers to the legal currency of China and “US$” or “U.S. dollars” refers to the legal currency of the United States.

At present, there is no uniform standard to categorize the different types and sizes of cities in China. In this prospectus, we refer to certain larger and more developed cities as Tier I and Tier II cities based on the categorization used by the CIHAF Valuation Report on Real Estate Investment in PRC Cities published by China Real Estate Business, or CREB, an authoritative real estate publication in China, YUBO Media and Institute of Finance and Trade Economics of Chinese Academy of Social Sciences. Based on this approach, there are currently four Tier I cities and 35 Tier II cities in China.

 

THE OFFERING

Unless otherwise indicated, information in this prospectus assumes that the underwriters’ over-allotment option is not exercised.

 

Offering price per ADS

We currently estimate that the initial public offering price will be between US$13.00 and US$15.00 per ADS.

 

ADSs offered by us

17,500,000 ADSs

 

Common shares outstanding after the offering

143,950,074 common shares.

 

The ADSs

Each ADS represents two common shares, par value $0.0001 per share.

 

The depositary will be the holder of the common shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.

 

You may surrender your ADSs to the depositary to withdraw the common shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

To understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately US$224.9 million from this offering, assuming an initial public offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use approximately 95% of the net proceeds, or US$213.7 million of the approximated net proceeds, to acquire land use rights for future property development projects and to use the remaining net proceeds, or US$11.2 million of the approximated net proceeds, for working capital and other general corporate purposes. See “Use of Proceeds” for additional information.

 

Depositary

JPMorgan Chase Bank, N.A.

 

Option to purchase additional ADSs

We have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 2,625,000 additional ADSs to cover over-allotments.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs.

 

Lock-up

We, and our officers, directors and other shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, common shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”

 

Listing

Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “XIN.” Our common shares will not be listed or quoted for trading on any stock exchange or any automated quotation system.

Throughout this prospectus, the number of our common shares outstanding after this offering includes:

 

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the 30,805,400 common shares issuable upon the conversion of all of our outstanding Series A preference shares, which will occur at the completion of this offering;

 

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the 1,638,323 common shares issuable upon the exercise of the Burnham warrants, which we expect to be exercised prior to the completion of this offering; and

 

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the 801,972 restricted shares granted on August 11, 2007, which will vest upon the completion of this offering.

Unless otherwise indicated, the information in this prospectus does not reflect:

 

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6,000,523 common shares underlying options and restricted share awards granted on August 11, 2007;

 

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2,441,844 common shares underlying the options granted on November 5, 2007;

 

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9,597,120 common shares issuable upon the conversion of the convertible notes; and

 

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the estimated 5,357,143 common shares underlying the warrants issued to the holders of our floating rate notes, assuming an initial public offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, and taking into account the ADS to common share ratio. The number of common shares underlying these warrants depends on the per common share equivalent of the final offering price of our ADSs, which will be determined at pricing. See “Description of Debt and Equity-Linked Securities—Floating Rate Notes and Warrants.”

 

 OUR SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of operations and other consolidated financial data for the years ended December 31, 2004, 2005 and 2006, other than the earnings per ADS data, and the consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP, and have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The summary consolidated statements of operations data for the nine months ended September 30, 2006 and 2007 and the consolidated balance sheet data as of September 30, 2007 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated statements of operations data and the consolidated balance sheet data as of and for the years ended December 31, 2002 and 2003 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus. Our consolidated financial statements have been prepared as if our current corporate structure had been in existence throughout the relevant periods.

You should read the summary consolidated financial data in conjunction with our consolidated financial statements and related notes, “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results do not necessarily indicate our expected results for any future periods.

 

		Year Ended December 31,															Nine Months Ended September 30,
		2002			2003			2004			2005			2006			2006			2007
		US$			US$			US$			US$			US$			US$			US$
		(unaudited)															(unaudited)
		(in thousands, except share, per share and per ADS data)
Consolidated Statements of Operations Data(1)
Total revenues		12,807			16,746			35,632			61,942			142,367			99,655			218,301
Total costs of revenues		(11,875	)		(11,978	)		(26,376	)		(42,632	)		(108,196	)		(75,613	)		(146,990	)
Selling and distribution expenses		(493	)		(1,319	)		(1,604	)		(2,175	)		(2,996	)		(1,876	)		(5,957	)
General and administrative expenses		(537	)		(939	)		(1,004	)		(1,696	)		(3,626	)		(2,095	)		(7,736	)
Operating income		(99	)		2,510			6,648			15,439			27,549			20,071			57,618
Net income before minority interest		(471	)		1,067			3,943			9,548			16,120			12,493			35,965
Net income		(471	)		1,067			3,943			9,563			16,123			12,495			35,965
Earnings per share
- Basic		(0.01	)		0.02			0.07			0.16			0.21			0.19			0.32
- Diluted		—			—			0.07			0.16			0.21			0.19			0.30
Shares used in computation
- Basic		60,000,000			60,000,000			60,000,000			60,000,000			72,694,467			63,038,341			106,509,779
- Diluted		60,000,000			60,000,000			60,000,000			60,000,000			72,694,467