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shining star by the magic touch of Newbridges secrect formula? Can SDB can be
converted into a healthy lending institution from its current state? These among other
questions were being raised in the mayhem of making this deal finalized.
Valuation of SDB
Valuation range can only be determined during book building process, whereby investors
will indicate their interest and demand for the shares of the listed company, and the
optimum valuation is the compromise between promotors ideal valuation and a realistic
price expectation by investor in todays uncertain market, amid an improving outlook.
SDB needs to decide the selling of its legal person shares to Newbridge that can help SDB
turnaround.
The process of valuation of SDB was not simple, various problems emerged including
appropriate valuation and related risk analysis.
Dual Track system in China is big attractant for foreign institutional investors leads to
heavy reliance on bank loans as the capital resources leading to both popularity and
profitability of the banking system
SDB is already a publicly listed company which has been able to attract lot of public funds
1) Promising future in banking industry 5th largest commercial bank and has
nationwide banking license. Right to scale up. Poor governance and capital
structure exist.
2) SDB involved in traditional commercial and retail banking in more developed
coastal region and leading role in pearl river delta. Fast loan growth due to regions
economic growth. Public offerings give opportunities and capital turnover.
3) Dispersed ownership can lead to control of the company easily. Low acquiring
cost, geographic advantage and huge potential is biggest up-side for this deal
Risks
1) Poor credit risk management lack of systematic credit policy and well authorized
approval mechanism coupled with poor organizational design. Poor asset structure
and risk control. Non-performing loans are the largest proportion of total loans. The
default loan results in great loss of SDB and such a risky assets seems to be
continuous.
2) Relationship with government Control with Shenzhen government so often
provide loan for municipal projects Major shareholders also the borrowers.
3) Conflicts worsen SDB situation lack of independent management and asset
quality problems.
4) Compensation plan not tied to performance & most board members are not
obliged to perform fiduciary duties to push forward changes in the interest of
dispersed shareholders.
5) Distrust from foreign investor. Such a control transfer may lead to loose of
business clients.
How to maintain current investors and exploit market is the biggest issues.
Advt.
1) Timing Shenzhen Bank govt. controlled bank with same legacy issues as state-
owned bank leading to undercapitalized balance sheet and low profitability
2) Rich experience Newbridge prior investment in Chinese companies. Aware of local
context. Successful turnaround of KFB
3) Shan extensive business relationship and proven track record international
reputation
4) No threat
5) Local advt. Hong Kong office
6) Competitive pricing 1.6 is actually good
Value Added
1) Operational efficiency Debt management Newbridge wont agree who are not
qualified but have petticoat influence.
2) Efficient management suffered from governance problems. Compensation not
attached to performance. New appointees are very experienced with Asian banking
system.
3) Good Market response the shares jumped after the announcement that foreign
investor buying huge stake in SDB. Newbridge could enjoy rising equity value
4) Agent cost savings Disperse equity structure. Management and ownership was
separated. The manager of SDB may sacrifice shareholder wealth for personal
benefits. If newbridge can also be the largest equity holder, this help in aligning
shareholder interest first.
Things to consider before valuation for SDB -
1) Price of SDBs tradable share in Chinese stock market
Immature emerging market Stock valuations in china on a growth adjusted
method were generally significantly higher than mature market (coz of limited
investors who were eagerly interested to switch their bank savings to stock markets
for higher returns.
2) SDB stake from 4 sellers were under non-tradable legal person share the govt.
planned to permit the conversion of legal person shares but did not launch the
conversion timetable
3) 5 year lock up period
4) Newbridge would be effective control of the company can appoint 8 board
members
5) Decreasing CAR just above the 8% level required for China Banking Regulatory
policy, it was probable that SDB would have to raise large amount of capital. This
would lead to dilution of Newbridge shares due to large capital infusion and
ultimately losing its status of being largest stake holder.
Key Lessons
1) Dont take too much time to close the deal Since the announcement, it was
already 8 months. As lot of stakeholders eyeing on the deal which also included
traditional powerful politicians, this deal has to be executed quickly.
2) Newbridge could raise the bidding price The heating market reaction of the SDB
share price was potentially a prime reason that why shareholders might be
dissatisfied of what being paid off for SDB valuation.
3) Misappropriate potential offer my Chinatrust bank as the agreement had the
signature from leaders of SDB, no external party can interject the deal in that
situation. A no-talk clause can be exploit by Newbridge.
4) May have launched golden parachute The key leaders who might be replaced
from the board, can be paid a good satisfactory compensation to leave SDB