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analysis of SDB
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 acquisition of SDB’s stocks was appropriate with a P/B ratio of 1.6. Finally, this report provide a reasonable recommendation for investors to make a correct acquisition decision in terms of real profitability of acquisition targets.

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2.0 Introduction
Four Chinese banks had begun to accept investments from foreign banks or financial investors since 1999. As a listed bank with huge developing potentials, SDB was mismanaged by government officers and encumbered by massive low-quality loans which resulted in high NPLs, an under-capitalized balance sheet and disappointing profitability. In order to bring to SDB the best management practices and expertise in banking, the Shenzhen government was primarily seeking long-term foreign strategic investors. Therefore, SDB decided to sell its four joint shareholders’ 18% non-tradable legal person stake of SDB. At the same time, Newbridge’s successful experience in South Korean bank and its strong expertise in financial institution significantly enhanced the quality of its loan portfolio and its operating performance. Then, Newbridge was actively acquiring SDB’s 18% stake in order to improve SDB’s bad

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