Case Study: Shenzhen Development Bank

637 Words3 Pages
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,…show more content…
Thus, their better performance over SDB could still lead to overvaluation if we use the multiplier of 1.6 times here. And yet Newbridge would get effective control of SDB and, the right to appoint CEO and 8 out of 15 board members through the acquisition of 17.89% stake from state-own sellers. These terms largely increased the value of the deal because Newbridge now could steer SDB in the right direction. But it also had a setback. If SDB had to raise additional capital to meet the requirement of new regulation, the stake Newbridge owned would be inevitably diluted. In the end, despite the poor performance of SDB, the valuation of 1.6 times book value for the deal is still considered appropriate. As mentioned above, relative valuation method is not reliable to some extent, given the immature market in China. Although we may get an appropriate multiplier to calculate the consideration, we also have to take other many factors into consideration and make adjustments on the initial multiplier. In this case, we think it would be better to apply DCF valuation to get the price. Because SDB was listed on the Shenzhen Stock Exchange and thereby their financial position was available to the public. It is possible to get a reliable number by doing a reasonable projection on its future cash flow based on the disclosed data. Also, according to the Figure 1, we think the multiplier of 1.5-1.6 times is appropriate in calculating the deal price. So the
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