Case Study: Shenzhen Development Bank

Is Newbridge paying the right price?

What valuation method should it use?

What is the appropriate valuation range?

For the rationality of the price paid by Newbridge, we should focus on the price-to-book multiple, which is 1.6 times here.

To begin with, the valuation of 1.6 times book value seems quite low because of the multiplier of 5.5 times given in Exhibit 13. But obviously, the given multiplier should be inappropriate and exorbitant due to the overall overvaluation of limited listed companies in China’s banking sector. The China’s stock market full of unsophisticated retail investors was highly immature and speculative, compared to the mature markets in developed countries. Supply of tradable shares fell short of demand, leading to higher market capitalization of public companies. Based on these concerns, we could not use the multiplier of 5.5 times to calculate the final consideration of this deal.

In such a case, we should refer to other price-to-book multiples of similar deals over that period. According to the data given in the case (as shown in Figure 1), these China banks had also received foreign investment and their deals had multipliers of 1.2-1.5 times. Given their similarity, the multiplier of 1.6 times is appropriate for the SDB deal.

Figure 1

Date | Foreign Investor | China Bank | % Stake invested | Purchase P/B |

Sep-99 | International Finance Corporation | Bank of Shanghai | 5% | 1.5x |

Nov-01 | International Finance Corporation | Nanjing City Commercial Bank | 15% | 1.2x |

Dec-01 | HSBC | Bank of Shanghai | 8% | 1.2x |

Dec-02 | Citibank | Pudong Development Bank | 5% | 1.4-1.5x |

However, we can see from Exhibit 13 that CMB, Mingsheng and SPDB, the similar players in the market, held multiplier of 2.3, 2.2 and 4.9 times respectively. All of those banks were preforming better than SDB at that point. Financially speaking, given in Exhibit 10, CMB, Mingsheng and SPDB had much lower NPL ratios and, higher ROAA and...