1.0 Abstract
This report aims to provide an analysis of a proposed investment in Shenzhen Development Bank (SDB) by Newbridge in 2002 and assess whether the P/B ratio of 1.6 for Newbridge to pay for its 18% stake in SDB is appropriate. The analysis of Newbridge’s acquisition of SDB’s stocks is based on several aspects of SDB’s asset quality, earnings capability and capital adequacy. According to price-to-book ratio of SDB’s industry peers and some acquisition precedents by foreign investors, Newbridge made a correct decision that it paid 1.6 times book value of SDB’s stake on a basis of SDB’s performance. This is because of SDB’s high P/B ratio and low ROE indicating that SDB’s share price was overvalued; therefore, Newbridge’s
Therefore, from the situation of SBD’s declining CAR, SDB suffered in substantial loan quality troubles caused by its poor credit management.
3.4 Price-to-book ratio
It would be appropriate for Newbridge to pay 1.6 times book value to get 18% stocks of SDB. There were some precedent that foreign banks and financial investors acquired domestic banks’ minority-stake from 1999 to 2001. For example, IFC acquired Bank of Shanghai 5% stake at a price-to-book ratio of 1.5 in September of 1999; and acquired 15% stake of Nanjing City Commercial Bank at a price-to-book ratio of 1.2 in November 2001. Even if Newbridge’s acquisition of SDB’s stake at the price-to-book ratio of 1.6 is higher than IFC’s; however, it was still lower than the average ratio of other three domestic listed banks. Significantly, the price-to-book ratio of SDB was around 5.5 to 5.9 from 2002 to 2003; and at the same, the other three bank’s average price-to-book ratio was 3.1 to 2.2. Hence, the appropriate valuation range should be below 2.2 for Newbridge’s acquisition. As we can calculate that the ROE of SDB was decreasing from 12.07% to 9.02% from 2000 to 2002. P/B provides a valuable reality inspection for investors seeking growth at a reasonable price. Large differences between P/B and ROE, a key growth indicator could sometimes send up a red flag on companies. As a result. SDB’s low ROE and high P/B ratio indicate that SDB’s shares were overvalued at that time. If a company’s ROE is