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SRE Group (1207 HK) is the property developer as well as investor which focus on the Shanghai property market. The company has been diversifying into Shenyang as well as Hainan. As of the end of 2008, the group’s was engaged in development of at least ten real estate projects with cumulative floor area of some 5.0m².

As of the end of December 2008, SRE Group’s book value per share on fully diluted basis was about HK$2.07 per share (based on net equity of HK$6,472.6m and fully diluted number of shares of 3,129.8m). At the current price of HK$0.67, the share is trading at 67.6% discount to its book value and less than 4.1x of projected EPS for FY09F.

The company issued a HK$165.0m, 5-year term CB with the conversion price of HK$0.55 per share and annual interest rate of 2.5% to CITIC Capital at the end of 2008. Under the terms of the CBs, the CB holders can redeem their CB at Early Redemption Amount instead of Maturity Redemption Amount, should:

1) The company’s sales in any of FY09 to FY12 falls below the corresponding target sales of HK$4,600m, with an annual increase of 25% for each subsequent year.

2) The company’s net profits in any of FY09 to FY12 falls below the corresponding target net income of HK$540m for FY09, with an annual increase of 15% for each subsequent year.

The company’s net earnings dropped 75.6% YoY to HK$247.9m. Consensus forecasts put the group’s earnings for FY09F at HK$432.0m, representing an annual growth rate of 74.2% YoY. Again, under the condition of the CBs, the target net earnings of the group for FY09F is set at HK$540.0m.

Contributor: Andes Cheng, VP Institutional Sales, SBI E2-Capital