Which multiples can be used to value SDB?
In this case, we mainly used price to book ratio, price to earnings ratio and price to pre-provision profit ratio to value SDB. We calculated market value based on these three multiples, a 18% stake in SDB is worth $427.6528 million, $428.7035 million and $523.296 million respectively. Nevertheless, these prices are believed to be overvalued by three reasons. To start with, stock valuation is China on a growth basis were in general significantly higher than those in the same sector in more mature market, mainly because a huge demand from local retail investors. Moreover, stock price tends to be fluctuated before or after a big announcement, therefore it would be overvalued the SDB by using year-end stock price. Thirdly, price to pre-provision profit ratio largely overvalued SDB for the reason that pre-provision profit fail to take into account an amount of NPLs.
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Instead of using market price valuation, transaction multiple valuation can solve this problem properly. New Bridge Capital will have an effective control through 18% stake in SDB. Therefore, a control premium has to be added to valuation. In addition, 18% stake of SDB is non-tradable within 5 years, so, New Bridge Capital will have liquidity risk and some discount should be imposed on the SDB valuation. The form of discount could be lower price to book ratio. Overall, SDB did not perform well compared to its competitors. For example, the exhibit four showed SDB has the lowest assets value, gross loan and market share among its competitors, such as Bank of Communications and Shanghai PuDong Development Bank. Whereas SDB has very high NPL ratio in bank industry, its NPL ratio is as high as 11.6% which is above the industry average of 7.3%. Many foreign institutional investors acquired those bank’s stake at a price to book ratio of range of 1.2x to 1.5x. However, a valuation of 1.6x book value which is slightly higher than SDB’s competitors, because acquirers possibly have taken into account its control premium, but the price to book ratio of 1.6x is still much lower than that of market estimated of 5.5x.