________________________________________________________________________________________________________________ Professors Li Jin and Yuhai Xuan and X.B. (Xiao-Bing) Bai (MBA 2008) prepared this case. This case was developed from published sources. All company specific financial data have been disguised to prevent proprietary information from being disclosed. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
L I J I N Y U H A I X U A N X . B . ( X I A O - B I N G ) B A I
Shenzhen Development Bank
Once you have experienced hardship—starvation is the worst—you don’t think anything is hard anymore. You learn patience.1
— Weijian Shan, Managing Partner, Newbridge Capital
On the morning of Monday, May 12, 2003, the board of Shenzhen Development Bank (SDB), a domestically listed mid-sized commercial bank in China, made a public announcement that sent shock waves through the Chinese banking industry as well as the international business community. In the announcement, the board said that the transitional management committee consisting of eight personnel appointed by TPG Newbridge Capital (Newbridge) and charged with advising SDB management was dissolved, and the negotiation on Newbridge’s potential investment into SDB failed. As the deal break-off loomed in the past weeks, Weijian Shan, a Managing Partner of Newbridge in Hong Kong, had been traveling intensively in China to meet with SDB’s board members, government officers, and banking regulators in an attempt to save the deal on the verge of falling-out.2 Now, it seemed that all his last efforts were in vain.
Less than a year ago, in June 2002, following initial due diligence and negotiations, Newbridge signed a binding framework agreement with four state-owned sellers of SDB for an approximate 18% stake.3 As part of the agreement, Newbridge formed a transitional committee of eight Newbridge-appointed members to manage the operation of SDB during the transitional period. In September, SDB made a public announcement that Newbridge and SDB were working on the final negotiation and definitive agreement pertaining to the government stake sell-down. The deal received immediate coverage in both domestic and foreign media, and was heralded as a milestone transaction in China’s banking sector. Newbridge and Weijian Shan soon became well-known names in China’s emerging private equity market. However, given the latest development, the deal was now treated as a living example of how foreign private equity investment failed in China.
China's Banking Sector
Sector Growth
Over the past decade, China’s banking sector has experienced tremendous growth, driven by a strong underlying economy with an average annual GDP growth of 8.1% from 1996 to 2002. Within the same period, total loans and total deposits in the banking industry grew approximately 13.6% and 16.4% per annum, respectively (see Exhibit 1 for loan and deposit growths in China’s banking sector).4 From 1999 to 2002, Asian banks had an average loan growth at a compounded annual growth rate (CAGR) of 9.6% while China banks grew at 14.9%.a5 Such a fast growth in China’s banking sector was also attributed to the country’s imbalanced credit markets that were dominated by bank financing. As domestic corporate stock and bond markets remained considerably under-developed, banks have long assumed the role as the primary source of financing for most large Chinese companies. At the same time, due to high instability in the domestic stock market and restricted access to broad investment products, demand and time deposits at banks remained the primary investment vehicles for both corporate and retail customers. By the end of 2002, total deposits with financial institutions amounted to RMB17.1Tr (US$2.1Tr), dominating both the bond market outstanding balance (RMB2.9Tr or US$338Bn) and the stock market capitalization (RMB3.8Tr or US$459Bn) seem minuscule by comparison.b6
In particular, the retail banking segment, driven by a strong growth in personal disposal income, presented the most impressive opportunities. The consumer loan market, initiated in the mid 1990s, had a robust growth momentum at a CAGR of 129% from 1997 to 2002, significantly higher than the commercial loan growth rate of 12% within the same period. Mortgage loans were the main impetus behind China’s exploding consumer credit market, accounting for approximately 80% of the consumer credit market in China from 1997 to 2002. This consumer credit market boom afforded China’s middle classes an escalation in wealth, enabling them to upgrade their homes and speculate in real estate.7 In 2002, the private mortgage loan market in China remained relatively small compared to other Asian markets (see Exhibit 2 for mortgage as a percentage of GDP and total loans in Asian countries). Other loan segments considered to have high growth potentials were auto loans and credit cards. China’s private automobile ownership increased at a CAGR of 22.3% from 5.3 million units in 1999 to 9.7 million units in 2002. From 2000 to 2002, China’s auto loan market mushroomed from US$2.3Bn to US$13.9Bn, with an impressive CAGR of 146%. While credit card loans in China only had an approximate market size of US$0.1Bn in 2002, that market was anticipated to see the greatest future growth momentum, to eventually arrive at US$16Bn in 2010.8
Regulatory Framework
Before April 2003, all banking institutions were regulated by China’s central bank, the People’s Bank of China (PBOC). The China Banking Regulatory Commission (CBRC) was established in April 2003 with the primary responsibility to regulate domestic banking institutions. PBOC’s duty was to devise and implement monetary policies. CBRC focused on developing a reliable supervisory and regulatory foundation, fortifying risk-based management of the banking sector, improving the corporate governance of domestic banks, as well as executing policies in accordance with the
a Asian banks include banks from Hong Kong, Singapore, Thailand, Malaysia, Philippines, Australia, South Korea, India, Taiwan, and China.
requirements of the World Trade Organization (WTO) that would aid access to the domestic banking sector. PBOC and CBRC are ministerial level agencies under the State Council, the most authoritative executive body in the Chinese government (see Exhibit 3 for the structure of China’s banking system).9
China’s banking industry was dominated by four large state-owned commercial banks (the “Big Four”): Agriculture Bank of China (ABC), Bank of China (BOC), China Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC). The Big Four had significant advantages in their size, scale, and branch network, with approximately 99,000 branches at the end of 2002, covering about 91% of the total branch network in China.10 Also, as there was no formal government deposit insurance program at the time, most depositors felt that state banks were inherently safer than joint-stock banks. Their vast branch networks and the perceived deposit safety aided the Big Four to receive low-cost funding from retail and corporate customers alike.
The government response was a general trend of deregulating the industry and affording individual banks greater autonomy to facilitate their operating more independently. For example, PBOC’s relaxed restrictions on acceptable rates enabled bank lending rates to become more market-driven.c Furthermore, in 2004, oversight of new products was transitioned from PBOC to the more flexible CBRC, whereas prior to 2002, any new financial product or service required approval from the central bank. Deregulation was further evidenced as an increasing number of new product launches received approval just by notifying authorities as opposed to the rigmaroles involved in the original official notification process. In addition, the government was encouraging more transparency and accuracy in bank filings, pushing non-performing loan (NPL) disclosure and classification to be more in accordance with international practices. In 2002, PBOC had mandated every bank to adopt the international five-grade classification standard (normal, special mention, substandard, doubtful, loss), as opposed to the less transparent four-grade system (pass, overdue, idle, and bad loan) previously used in China. More stringent rules were also adopted for calculating risk-weighted assets.11
Competitive Landscape
China’s banking authorities imposed clear geographical and operational restrictions for financial institutions, and enforced even stricter restrictions on foreign institutions. In terms of geographic scope, both state banks and joint-stock banks were permitted to operate on a nationwide basis. In contrast, city commercial banks and credit cooperatives were generally limited to the city, town or village with which they had an affiliation. No one individual financial institution was allowed to offer a host of financial services across banking, asset management, securities, trust or insurance.d
As of May 2003, 4 of the 11 joint-stock banks were listed in China’s domestic stock market (see Exhibit 4 for some operating and financial statistics of selected joint-stock banks in China). In addition to SDB, the other three were China Merchants Bank (CMB), China Minsheng Banking Corp. (Minsheng), and Shanghai Pudong Development Bank (SPDB). CMB is the most retail-oriented among the joint-stock banks and was founded in Shenzhen. Minsheng is the first and the only bank in China controlled by non-government domestic companies. SPDB was initially established by the Shanghai government for the purpose of financing the economic development of the Pudong
cPBOC used to set reference rates for deposits and loans based on loan type and maturity, allowing banks to charge interest rates only within a specified band of the reference rates. The restrictions had been gradually eased since 2002, and were removed altogether in 2005.
Development Area in Shanghai, and is closely partnered with Citibank. Bank of Communications (BoCom), headquartered in Shanghai, is the largest joint-stock bank in China in terms of total assets, gross loans, and deposits. In 2003, none of the Big Four state-owned banks was listed. They were undergoing significant restructuring efforts, and were considered for huge capital injections from the central government.
Meanwhile, foreign banks could only operate in major cities designated by the regulators, and were not permitted to offer RMB-denominated retail banking services to Chinese citizens. Yet, the overall industry trend was veering toward a gradual opening to foreign direct investment. As a result of WTO’s mandate to liberalize the economy, China lifted all restrictions on foreign banks’ involvement in foreign-currency business in China upon its accession to the WTO. Furthermore, after China’s accession to WTO, each year foreign banks would be granted access to new cities or provinces in which they would be allowed to conduct RMB business. As of December 2006, there would be no geographic constraints imposed on foreign banks to engage in RMB business.12
Urgent Challenges
China’s banking sector had long been plagued by poor corporate governance and risk management. Most banks weren’t sufficiently independent, and therefore, under the instructions from the central or local government, granted an enormous amount of policy loans to under-performing state-owned enterprises. Provincial bank branches operated on a quasi-standalone basis with close ties to local governments, resulting in weak head office control. Credit officers didn’t have clear authorization and credit limits. Frequently, one local credit officer can grant a large loan to his or her favored customer without internal check and balance. Moreover, state-owned banks had poor incentive systems. There were significant constraints in implementing compensation arrangements with greater flexibility and competitiveness, thereby diminishing employee motivation and potentially prompting inappropriate or even illegal behaviors, e.g., lending to non-qualified borrowers with poor creditworthiness for personal rewards. Consequently, Chinese banks amassed an exorbitant amount of NPLs. In 2002, Standard & Poor’s (S&P) estimated the NPL to gross loan ratio of China’s banking system at 50%, which more than doubled the ratio of 24% reported by the government.13
In contrast to banks in developed markets, Chinese banks were not strictly regulated by capital adequacy requirements. They were used to setting their own targets of loan amount based on how much deposit was available without measuring their bank assets’ risks. Capital adequacy was never a hard constraint on their operations. If NPLs were stringently assessed and properly written-off, many state-owned Chinese banks would have been theoretically bankrupt and severely under-capitalized. Simultaneously, due to their rapid loan growth in the booming economy and low profitability, Chinese banks could not yield adequate internal capital to fortify their balance sheets and were in dire need of new capital to be compliant with increasingly rigorous capital adequacy mandates newly imposed by the regulators. Even based on the less demanding capital adequacy standards at the time, domestic banks only had an average total capital adequacy ratio (CAR) of 8.2%, significantly lower than the average CAR of their Asian peers (see Exhibit 5 for capital adequacy comparison across Asian countries).14
recovery of collateral, adequate standards of disclosure, and the protection of creditor rights in the case of bankruptcy. Banks had high operating expenses, largely due to staffing and over-extended branch networks. The lack of sound credit risk management and credit monitoring systems contributed to high credit costs. As a result, Chinese banks had poor profitability and low return on assets (ROA). In 2002, the average ROA for the five publicly listed Chinese banks was only 0.47%, significantly lower than the average of 1.32% in US and 1.22% in Hong Kong.15
In light of the challenges in China’s banking sector, in the late 1990s, the central government initiated an overhaul of state banks to resolve specific legacy issues. The central government injected a very substantial amount of new capital into the state banks to write off NPLs and buttress their balance sheets. For example, in 2003, Bank of China (BOC) and China Construction Bank (CCB) received an infusion of US$45Bn to enhance their capital adequacy. In addition, asset management companies were set up to purchase problematic assets from state banks and to sell the re-packaged deficient loans at a discount to domestic and foreign investors. The responsibility of making policy loans was transferred from state banks to three policy banks.16
Shenzhen Development Bank
SDB was China’s fifteenth largest commercial bank, and had a nationwide banking license. It was founded in 1987 through the combination of local credit cooperatives, and started business in Shenzhen, a special economic zone in the southern province of Guangdong. SDB expanded its banking franchise over the years to the rest of Guangdong as well as other developed coastal regions. In 1991, SDB became the first publicly listed bank in China, trading on the Shenzhen Stock Exchange. As of December 31, 2002, SDB had total assets of RMB165Bn (US$20Bn), gross loans outstanding of RMB84Bn (US$10Bn), and a network consisting of 225 branches nationwide (see Exhibit 6 for SDB’s selected historical financials).17
SDB was involved in the traditional commercial and retail banking businesses mostly in the more developed coastal regions of China. SDB had a notably strong presence in the Pearl River Delta region of the Guangdong province, arguably the most dynamic regional economy in China. From 1980 to 2000, the average real GDP growth in the region was approximately 18%, well above the national average. The abundance of employment opportunities produced a large number of wealthy, middle-income, professional consumers. In 2000, the average GDP per capita in the region was approximately US$3,277, which was 3.8 times the national average of US$856. Although the region encompassed only 0.4% of the land and 1.3% of the population in China in 2000, it accounted for 5.1% of GDP, 33.0% of total trade, and 6.8% of fixed asset investment in 2000.18
As of December 31, 2002, SDB had a per share price of RMB10.32 and market cap of US$2,465MM. About 72.4% of SDB’s shares outstanding were traded shares held by the public, and the remaining 27.6% were held by other government controlled entities in the form of “legal person shares” or state-owned shares, which cannot be traded on the exchange (see Exhibit 7 for the shareholding structure of SDB).e
TPG Newbridge Capital
Pioneer in Asia Private Equity
Founded in 1994 by the Texas Pacific Group (TPG) and Blum Capital Partners, Newbridge was among the first private equity firms dedicated to Asian investments. David Bonderman, founder of TPG, and Richard Blum, founder of Blum Capital, both served on the seven-member Asian investment group of Newbridge.19
Newbridge started slowly in China in the mid 1990s. At the time, it was impossible to buy out Chinese state-owned companies as the government was wary of yielding control of economic resources in the country. Instead, the government encouraged state-owned enterprises to list overseas as a more politically suitable method through which to partially privatize these companies. The private sector was in its very initial development stage, and most private companies were still managed by the first-generation founders rather than by professional management. The founders were typically far less agreeable to selling control of the companies they built from scratch. Therefore, a standard control-type of buyout deal was very atypical in the Chinese market at that time. The activity of venture capital and growth capital for minority-stake investments exceeded that of buyout firms. Realizing the local context, Newbridge started a series of investment in the more traditional industries in China, gaining partial controls of North Dragon Iron & Steel Group, Xuzhou VV Food & Beverage, and Guan Sheng Yuan, a candy-maker.
By the end of the decade, Newbridge had established three offices in Asia including Hong Kong, Shanghai, and Singapore. At the end of 1999, Newbridge purchased a 51% stake in Korea First Bank (KFB) and became the first foreign owner of a South Korean bank. After the acquisition led by Weijian Shan, Newbridge reshuffled KFB’s management team, restructured its balance sheet, and significantly improved the quality of its loan portfolio and its operating performance. With its successful experience in KFB and its strong expertise in financial institutions, Newbridge was actively looking for other investment opportunities in the banking sector in the region.20
Weijian Shan
Weijian Shan, a Beijing native, is known for his tenacity and perseverance, attributes which helped him succeed in turning around his personal life and building a formidable professional career. During the Cultural Revolution in China in the 1960s, Shan was banished to the Gobi Desert at the age of fifteen. For the next six years, he performed hard manual labor on a farm during the day and studied on his own at night. Reflecting upon the experience in the desert, Shan remarks, “When you have a job in the Gobi with absolutely no hope and no future, you learn to be patient.”21
With patience, Shan persisted and persevered. After the Culture Revolution, he went to college and studied English, and eventually came to America to pursue graduate studies. After earning his Ph.D. degree in economics from the University of California, Berkeley, Shan taught at the Wharton School at the University of Pennsylvania, and worked at the World Bank and J.P. Morgan before joining Newbridge’s Hong Kong office in 1998.22
SDB at a Crossroad
SDB was among China’s eleven joint-stock banks with national banking licenses and one of the four listed commercial banks in the Chinese stock market in 2002. Located in the Pearl River Delta, one of China’s most dynamic economic regions, SDB had experienced fast loan growth driven by the region’s economic boom. However, SDB was a government-controlled bank and therefore had the same legacy issues as other state-owned banks. The bank 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 an effort to reform the bank, the Shenzhen government indicated in 2000 that it would sell down its stake in the bank, and incorporate foreign capital and professional management. In 2001, the mayor of Shenzhen submitted a report to the State Council seeking support for the sale of the stakes controlled by the government-affiliated entities. The State Council responded favorably to the idea. In the same year, the Shenzhen government decided to sell to foreign strategic investors the shares held by Shenzhen City Investment Management Co., Shenzhen International Trust & Investment Co., Shenzhen Labor and Social Security Bureau, and Shenzhen City Construction Development (Group) Co. The four sellers jointly held an 18.2% stake of SDB in the form of non-tradable legal person shares.24
A Valued Franchise
25At the end of 2002, SDB had total gross loans of US$10.2Bn and total deposits of US$13.7Bn. The loan portfolio consisted of corporate loans (73.4%), discounted bills (23.5%), and retail loans (3.1%). As for the deposit base, 85.5% were corporate deposits and the remaining 14.5% were retail deposits. The corporate banking division, which mainly covered the southern and eastern regions in China, accounted for the lion’s share of SDB’s business. Bill discounting is a flexible form of short-term financing for trading transactions. SDB discounted bills endorsed by other banks or major companies that met certain credit criteria. SDB’s retail banking efforts were quite limited and lagged behind other joint-stock banks in terms of both size and growth. The bulk of SDB’s retail banking business was in residential mortgages. Its other retail banking businesses included auto financing and credit cards. Among the 14 joint-stock banks in China in 2002, SDB was ranked 10th and 14th in terms of
market share in the loan and deposit markets, respectively.
SDB’s reach is far, with 198 branches in 17 cities nationwide. Almost half of the branches were in Shenzhen. The remaining branches were primarily located in the Pearl River Delta region and several other provincial capital cities. Such a large national network affords an important competitive advantage in attracting low cost funding for commercial banks in China. At the end of 2002, SDB had 5,030 employees in total. SDB had a 14-member board of directors with three members serving as independent directors. A seven-member board of supervisors was also established to monitor and supervise the performance of the directors. The Shenzhen government appointed all the directors and supervisors, who were either government officers or senior executives of other state-owned enterprises.
value of the collateral, the length of overdue payments, and the creditworthiness of the guarantor. A loan can be upgraded or downgraded from one category to another based on the change in its credit risk, and the reserve ratio is adjusted accordingly. The annual increase in total loan reserves is categorized as loan provisions or credit costs in the income statement to be deducted from operating profits. Two important asset quality measures that bank managers and analysts pay close attention to are the NPL ratio (NPL/Gross Loan) and the NPL coverage ratio (LLR/NPL). A lower NPL ratio indicates a better quality of the loan portfolio, while a higher NPL coverage ratio suggests more conservative provisioning for potential credit losses.
A Falling Angel
Credit risk management had always been the most critical challenge for SDB’s entire risk management system, which directly impacted its business portfolio, operating performance, and operational efficiency.26 The lack of a systematic credit policy and a well-defined authorization and approval mechanism, coupled with a poor organizational design of the credit functions, had resulted in ineffectiveness in credit monitoring and control and slow responsiveness to the market conditions. In addition, SDB’s affiliation with the Shenzhen government meant that SDB was often obligated to provide financing for a range of municipal projects, and many of SDB’s major shareholders were also its own borrowers. These conflicts of interests further hampered independent management and decision-making, and exacerbated asset quality problems at SDB.27
As a owned bank, SDB also suffered from governance problems that plagued the state-owned banks in China at the time.28 The compensation of the management team was not closely tied to performance, and most board members were ex-government officers or existing management executives at the bank, who did not have much incentive to discipline the current management team or perform fiduciary duty to push forward changes in the interest of the dispersed shareholders. Moreover, the management team did not have discretion in making some critical operation decisions due to government regulations. For example, China’s commercial banks did not have sufficient flexibilities in setting the interest rates of their deposits and loans, thus facing difficulty in properly pricing the credit risk in the lending business. According to the central bank’s regulations, lending rates were capped at 10%-30% above and limited to at most 10% below the corresponding benchmark lending rates, which were published and modified by the central bank from time to time.29 A commercial bank’s deposit rates had to be the same as the required benchmark deposit rates. Therefore, banks like SDB sometimes had to charge lower than appropriate lending rates for high credit-risk loans, particularly those to government-affiliated entities, resulting in lower risk-adjusted profitability.
new equity in order to maintain the appropriate financial leverage and meet capital adequacy requirements. Fee income from transactions such as international settlement, credit card, asset management, and mutual fund and insurance products leverages a bank’s branch network and customer relationships and doesn’t require additional capital. Therefore, fee income businesses can have a significantly higher return on capital than traditional lending operations. Compared with SDB’s ratio of fee income over total operating income in 2002 (2.1%), U.S. and Hong Kong banks on average had fee income ratios of 40.9% and 26.0%, respectively, during the same period.34
SDB’s poor credit management resulted in substantial loan quality troubles. Simultaneously, the bank didn’t generate sufficient retained earnings from the low-profitability lending operations. Consequently, SDB had a severely under-capitalized balance sheet while experiencing aggressive loan growth at a 53% CAGR from 2000 to 2002. The bank had an equity-to-asset ratio of 2.6% as of December 2002, a capitalization level substantially lower than those of international peers.35 In commercial banking, regulators and managers use the capital adequacy ratio (CAR) to monitor a bank’s capitalization. CAR is calculated as total capital over risk-weighted assets of the bank. Total capital is the sum of tier 1 capital (equity and retained earnings) and tier 2 capital (subordinated debt and reserves). Risk-weighted assets are total assets of the bank net of possible losses based on the quality of different types of assets. Banks have to manage their CARs above the minimum level required by the government to ensure sufficient solvency. SDB’s official CAR declined from 10.6% in December 2001 to 9.5% in December 2002, still above the Chinese regulatory floor of 8%. But if CBRC were to promulgate new guidelines on capital adequacy in the next few years and impose more stringent requirements on the calculation of capital adequacy for domestic banking institutions in agreement with the Basel Accord, an international standard for capital adequacy of commercial banks, then SDB’s tier 1 and total CAR ratios might potentially be significantly lower than the new regulatory floors. In such a case, SDB would have to raise a large amount of capital to meet the new regulatory requirements. As a consequence, any stake Newbridge has in SDB might potentially be diluted by large capital infusions.
Seal the Deal
A Disfavored Sale
Initial market reaction to the potential government stake sell-down at SDB was lukewarm. Aiming to bring to SDB the best management practices and expertise in banking, the Shenzhen government was primarily looking for long-term foreign strategic investors.36 While a few foreign financial institutions realized the growth potential in China’s banking sector by investing in joint-stock and city commercial banks since 2001, most foreign financial entities still viewed the China banking industry as a high-risk market for strategic investment due to its rampant legacy NPLs, large equity holes, and significantly unstable regulatory system. As summarized by Moody’s and Fitch, most investors argued that the positions of Chinese banks were far more precarious than the government’s official statistics and audited company financials revealed.37
system, reshuffle the management team, or make any critical turnaround decisions. The size of the potential SDB stake sale by the Shenzhen government was up to 18.2% from the four government-affiliated sellers, leaving the next largest shareholder with only 3.2% stake. If the Shenzhen government were willing to sell the entire potential 18.2% stake to one strategic investor, which was below the 20% upper limit set for the stake of any single foreign investor in a Chinese commercial bank, the strategic investor might become the single largest investor in SDB, thereby obtaining effective control of the bank given SDB’s well-dispersed shareholder base.38 However, at the time it would have been very politically controversial to sell any control rights of a domestic bank to a foreign strategic investor. The Shenzhen government intended to bring in management expertise from a strategic investor to SDB but was highly cautious of any political backlash that would result from the sale of control to a foreign competitor.39
Another type of potential buyers for SDB’s stake were financial investors. Generally, financial investors care more about liquidity issues than do strategic buyers. Although SDB was one of four listed banks in the domestic stock market, the non-tradable nature of SDB’s stake for sale could be a big concern for financial investors. In particular, there was no specific timetable to convert non-tradable shares into non-tradable ones. In addition, financial investors typically pay more attention to the financial performance of their investment targets. In comparing SDB with other listed and private joint-stock banks based on historical financial benchmarks, SDB was not considered a financially sound investment candidate.40 In fact, SDB was rated among the lowest in all public Chinese banks on almost all measures of operating performance and financial strength by China Chengxin International Credit Rating Co. (CCXI) 41 (see Exhibit 9 for SDB’s selected historical financial ratios and Exhibit 10 for benchmarking SDB against other listed and private joint-stock banks).
Values in Disguise
Back to 2001, private equity was still a rare concept in China, and no private equity investment had yet been made in the highly regulated banking sector. Most completed private equity deals in China were small in size and of growth capital investment in nature as opposed to the big control-type buyouts. However, with successful turnaround experience in KFB in South Korea and some of the other transactions completed in China at the time, Weijian Shan and Newbridge were actively seeking investment opportunities in China’s emerging private equity market.42
SDB’s nationwide commercial banking license and extensive branch network in the affluent regions represented huge franchise value for any foreign bank that plans to enter and expand in the heavily regulated Chinese banking industry.43 To Shan, who understood the deep structural and political reasons for the formation of huge historical NPLs in the state-owned banks and who has had extensive experience in the banking industry in Asia and worldwide, the Chinese market would be challenging yet with great potential.44 Moreover, his first-hand investment and turnaround experience in KFB taught him that a capable management team and a sound risk management system are critical success factors for a banking franchise.45 A highly leveraged banking business can lose its equity value rapidly and become insolvent via big losses in a slow-down economy or during a financial crisis. The chronic non-performing asset problem cannot be fundamentally resolved without modifying a bank’s weak credit control culture and poor corporate governance.
However, the potential state-stake sell-down would be a highly politicized transaction with inherent conflicts of interest between the owner, the Shenzhen government, and the existing managing team consisting of government-appointed officers. On one hand, the Shenzhen government was deeply concerned with the deteriorating performance of SDB, a banking franchise regarded as critical for the development of local economy.48 The Pearl River Delta region and Shenzhen in particular are among the largest and most important manufacturing bases in China, having the largest number of local export-oriented manufacturers that heavily rely on SDB’s financing. With more rigorous regulations from CBRC, the de facto insolvency of SDB would incur sizeable restrictions on the bank’s business scale and scope, thereby severely constraining the financing for local companies and potentially slowing down the local economy. On the other hand, the existing management team was deeply entrenched in the bank. The senior executives came from different departments of the Shenzhen government or local state-owned companies. They had intricate and powerful political connections within the Shenzhen government, and gave greater considerations to job security than would foreign investors that would provide capital infusions and operational assistance.49
After many rounds of meetings and extensive consultations, the Shenzhen government was convinced that Shan and Newbridge could bring in the same professional management and operational expertise as any foreign commercial bank could, if not better. Furthermore, Newbridge’s aptitudes and turnaround experience in the Korean banking sector combined with Shan’s experience and connections in China particularly appealed to the government officials.50 Unlike foreign commercial banks which might have had a conflict of interests between their potential stake in SDB and their future franchise development in China, Newbridge did not pose any competitive threats to SDB. To further alleviate the potential concern commonly associated with the short-term nature of investments from financial investors, Newbridge also promised to lock up its stake in SDB for at least five years. With its investment, Newbridge would also effectively obtain the right to appoint the CEO and obtain 8 out of a total of 15 board seats.51
With support from the Shenzhen government, Shan and his team initiated a process of due diligence at SDB in May 2002 by identifying the key value-add areas and devising a comprehensive turnaround strategy.52 Shan regarded strong leadership and sound corporate governance as the foundation for any turnaround.53 In conjunction with the process of due diligence, Newbridge was leveraging its connections to actively seek the right candidates for SDB’s future management team and board members.54 For the CEO position, Newbridge identified Jeffrey Williams, who was CEO of Standard Chartered Bank in Taiwan at the time. Williams, an American fluent in Chinese Mandarin and a Harvard Business School graduate, had over twenty years of professional experience in financial services within greater China. In regard to board members, Newbridge selected Frank Newman, who served as Chairman and CEO of Bankers Trust, as well as the U.S. Deputy Secretary of the Treasury. Other potential board members included Newbridge associates and senior executives in international financial institutions (see Exhibit 11 for the profiles of CEO and board member candidates).55
Pay the Right Price
SDB was one of four listed banks in the domestic stock market. All the four banking stocks had outperformed the market index in the past two years, likely due to the popularity of the growth story in the banking sector (see Exhibit 12 for banking stock performance against market performance and Exhibit 13 for comparable company valuations). The price of SDB’s tradable shares in the public stock market can be a starting point for the bank’s valuation. However, Newbridge must take into consideration some other factors when valuing the SDB stake on sale. First, compared with stock markets in developed countries, the Chinese stock market was considered an immature emerging market, consisting largely of unsophisticated retail investors. The domestic stock market was highly speculative and volatile. Stock valuations in China on a growth-adjusted basis were in general significantly higher than those in the same sector in more mature markets, largely because the limited supplies of listed companies cannot meet the huge demand for stock investments from local retail investors who were eager to switch their bank savings to the stock market for higher returns. Second, the SDB stake from the four sellers consisted of non-tradable legal person shares, which did not have a liquid public market for share transfer. The government planned to permit the conversion of legal person shares into tradable shares but did not launch any timetable for the conversion plan yet. At exit, Newbridge would have to sell its legal person stake to a buyer through the private market, subject to government approval. In addition, Newbridge agreed with the Shenzhen government for a five-year lock-up period after the purchase of the stake. Finally, the 18% stake on sale can make Newbridge the single largest shareholder of SDB and provide Newbridge effective control of the bank. Newbridge can appoint 8 out of the 15 board seats and install new management team. A significant control premium in the valuation would be justified because it was almost impossible for any foreign investor to own over 20% stake in a Chinese bank.
At the same time, foreign banks and financial investors had completed some minority-stake investments in China’s banking sector since 1999. Chinese banks that received foreign investments at the time included Bank of Shanghai, Nanjing City Commercial Bank, and Shanghai Pudong Development Bank. International Finance Corporation (IFC) was one of the first foreign investors in domestic banks in China. In September of 1999, IFC made a US$22MM equity investment in Bank of Shanghai, acquiring a 5% stake at a price-to-book ratio of 1.5.f In November 2001, IFC became the third largest shareholder of Nanjing City Commercial Bank by investing US$27MM for a 15% stake at a price-to-book ratio of 1.2.56 At the end of 2001, a 11% stake in Bank of Shanghai was acquired by HSBC (8%) and Shanghai Commercial Bank (3%), for a total of RMB712MM (US$86MM) at a price-to-book ratio of 1.2, making it the first foreign investment in the Chinese banking sector since China’s entry to WTO in December 2001.57 In December 2002, Citibank agreed to purchase a 5% stake in Pudong Development Bank at a price-to-book ratio of approximately 1.4 to 1.5 for a total estimated amount of RMB600M (US$73MM).58 The valuations in these precedent transactions could serve as another good reference point.
In June 2002, Newbridge and SDB signed a binding framework agreement. The four state-owned shareholders agreed to sell a 17.89% stake of legal person shares to Newbridge for a valuation of 1.6 times book value based on latest internationally audited financial. Newbridge would form a transitional management committee consisting of eight Newbridge-appointed personnel to advise the management team on operations and report to the board of SDB.59 Both parties would engage in exclusive discussion to finalize the terms of the definitive agreement.60 The deal closing was subject
to the approval of all relevant government entities. If successful, Newbridge’s investment in SDB would be the first foreign-control investment in China’s banking sector and private equity market.
A Tough Call
After the deal was announced in September 2002, the transitional management committee was soon established and started working with the existing management team at SDB. Now, eight months later, SDB, in a surprise move, unilaterally renounced the management contract and dissolved the management committee. Speculation over the reason for the public falling-out soon ran rampant. It was suggested that since SDB’s share price had gone up significantly after the Newbridge deal was announced, the current management team argued that SDB was highly undervalued by the “greedy” Newbridge investors and pointed out that there were other parties willing to pay more.61 Moreover, some entrenched managers acting on personal considerations might have resisted the deal and sought other potential bidders who were more likely to keep the existing management team.62 Indeed, Chinatrust Commercial Bank, one of the largest commercial banks in Taiwan, emerged as a potential bidder with a higher offer.63 Lastly, top government officials who were key backers of the deal might have been replaced, adding to the uncertainty.64
Exhibit 1 China Banking Loan and Deposit Growths
Source: Adapted from China Statistical Yearbook, 1997-2003, National Bureau of Statistics of China.
Exhibit 2 Mortgage Penetration in Asian Countries (2002)
Source: China Banks, Goldman Sachs Research, September 15, 2004. 739
1,045 1,132
1,200
1,356
1,586
1,156
1,314
1,495
1,735
2,064
905 995
828
1996 1997 1998 1999 2000 2001 2002
Total Deposits (US$ Bn)
Total Loans (US$ Bn)
65%
51%
38%
35%
30%
7% 8%
49%
35%
45%
29%
21%
8%
6% 50%
30%
Singapore Hong Kong Australia Korea Taiwan Malaysia Thailand China
Exhibit 3 China Banking System (2002)
Source: China Banking Regulatory Commission.
State Council
Central Bank: People’s Bank of China
(PBOC)
Banking Regulator: China Banking Regulatory
Commission (CBRC)
Policy Banks •Agricultural Development Bank
of China
•China Development Bank
•Export-Import Bank of China
State Banks •Agricultural Bank of China
•Bank of China
•China Construction Bank
•Industrial and Commercial Bank of China
Joint-Stock Banks • Bank of Communications
• China Everbright Bank
• China Merchants Bank
• China Minsheng Bank
• CITIC Industrial Bank
• Evergrowing Bank
• Guangdong Development Bank
• Huaxia Bank
• Industrial Bank
• Shanghai Pudong Development Bank
• Shenzhen Development Bank
Others
• Commercial banks (urban and rural)
• Credit cooperatives (urban and rural)
• Finance, lease, trust and investment companies
• Foreign financial institutions Commercial Banks
•State banks (4)
•Joint-stock banks (11)
•Commercial banks
•Credit cooperatives
Exhibit 4 Operating and Financial Statistics of Selected Joint-Stock Banks in China (2002)
Source: Compiled from company annual reports; Goldman Sachs Research, October 6, 2004, January 5, May 28, July 29, 2005; Morgan Stanley Research, August 16, September 30, 2004; UBS Equity Research, May 23, 2003, August 11, 2004, March 17, 2005.
Exhibit 5 Capital Adequacy in Banking Sectors Across Asian Countries (2002)
Source: China Banking, CICC Research, March 4, 2004.
21.5%
Exhibit 6 SDB Historical Financial Information (Figures in US$ MM)
2000A 2001A 2002A
Income Statement
Total Operating Income 217 313 442
Net Interest Income 209 293 400
Net Fee Income 5 8 9
Other Income 3 13 32
Operating Expense (142) (206) (258)
Pre-Provision Profit 74 108 184
Provisions (14) (40) (116)
PBT 61 67 68
Tax (5) (22) (21)
Net Profit 56 46 47
Balance Sheet
Gross Loans 4,331 6,457 10,159
Reserves (305) (306) (391)
Net Loans 4,025 6,151 9,768
Other Interest-earning Assets 3,497 7,870 9,636
Total Interest-earning Assets 7,522 14,021 19,403
Total Assets 7,522 14,509 19,900
Customer Deposits 6,264 10,442 13,674
Other Interest-earning Liabilities 0 3,200 5,325
Total Interest-earning Liabilities 6,264 13,642 18,998
Total Liabilities 7,058 13,999 19,378
Equity 464 510 521
Exhibit 7 SDB Shareholding Structure (2002)
Rank Shareholders
Tradable Shares
Non-tradable
Shares Total %
1 Shenzhen City Investment Management 6,132,473
131,705,685 137,838,158 7.1%
2 Shenzhen International Trust & Investment -
112,301,783 112,301,783 5.8%
3 Shenzhen Labor and Social Security Bureau - 78,338,617 78,338,617 4.0%
4 Shenzhen China Electronics Investment - 62,246,616 62,246,616 3.2%
5 Shen Yin Wan Guo Securities 30,510,699 30,510,699 61,021,398 3.1%
6 Haitong Securities 3 33,924,469 33,924,472 1.7%
7 Shenzhen City Construction Development - 25,757,220 25,757,220 1.3%
8 Delong International Strategic Investment - 25,000,000 25,000,000 1.3%
9 Shanghai Guozhi Property Development 11,017,393 11,017,393 22,034,786 1.1%
10 Agricultural Bank of China 240 15,567,528 15,567,768 0.8%
11 Others
1,361,701,157 10,090,174 1,371,791,331 70.5%
Total
1,409,361,965
536,460,184 1,945,822,149 100%
% Total 72.4% 27.6% 100%
Source: SDB annual report, 2002.
Exhibit 8 SDB Historical Loan Breakdown and Reserves
2000A 2001A 2002A
Gross Loans (US$ MM) 4,331 6,457 10,159
Normal 2,915 5,184 8,611
Special Mention 432 285 369
Substandard 338 401 400
Doubtful 627 571 740
Loss 19 17 40
Reserve Ratio Guideline
Normal 0% 1% 1%
Special Mention 0% 2% 2%
Substandard 2% 25% 25%
Doubtful 20% 50% 50%
Loss 100% 100% 100%
Actual LLRs (US$
MM) 305 306 391
Exhibit 9 Selected SDB Historical Financial Ratios
2000A 2001A 2002A
Asset Quality
NPL/Gross Loans 22.7% 15.3% 11.6%
LLR/Gross Loans 7.1% 4.7% 3.9%
LLR/NPL 31.0% 30.9% 33.2%
Capital Adequacy
Tier 1 CAR N/A N/A 5.2%
Total CAR N/A 10.6% 9.5%
Equity/Gross Loans 10.7% 7.9% 5.1%
Equity/Total Assets 6.2% 3.5% 2.6%
Earning Capability
Net Interest Margina 3.5% 2.8% 2.4%
Non-Interest Income/Operating Income 3.4% 6.5% 9.5%
Operating Expense/Operating Income 65.6% 65.6% 58.3%
ROAAb 0.9% 0.4% 0.3%
ROAEc 22.4% 9.4% 9.1%
Growth
Gross Loan 17.7% 49.1% 57.3%
Total Asset 45.8% 92.9% 37.2%
Customer Deposit 42.1% 66.7% 30.9%
Net Interest Income 37.6% 40.1% 36.5%
Non-Interest Income -23.8% 171.7% 106.7%
Pre-Provision Profit 67.0% 44.9% 70.8%
Net Profit 246.6% -17.8% 1.8%
Liquidity
Gross Loans/Deposits 69.1% 61.8% 74.3%
Avg. Gross Loans/Avg. Interest-Earning Assets 67.5% 51.1% 49.7%
Source: Compiled from SDB annual reports.
a Net Interest Margin = Net Interest Income / Average Interest-Earning Assets
b ROAA = Net Income / Average Total Assets
Exhibit 10 Benchmarking SDB Against Other Joint-Stock Banks (2002)
Bank
NPL/ Loans
LLR/ Loans
LLR/ NPL
Tier 1 CAR
Total CAR
Equity/ Loans
Equity/ Assets
BoCom 16.7% 7.4% 44.5% 6.2% 8.8% 2.2% 2.0%
CMB 6.0% 3.3% 55.0% 8.4% 12.6% 8.1% 3.7%
Huaxia 6.0% 3.3% 56.0% 3.6% 8.5% 4.1% 2.1%
Minsheng 3.4% 1.9% 56.8% 6.8% 8.0% 5.4% 2.9%
SPDB 4.4% 2.8% 64.0% 5.0% 6.2% 4.8% 3.0%
Average 7.3% 3.8% 55.3% 6.0% 8.8% 4.9% 2.7%
SDB 11.6% 3.9% 33.2% 5.2% 9.5% 5.1% 2.6%
Bank
Net Int. Margin
Non-Int. Inc. /Op. Inc.
Op. Exp./
Op. Inc. ROAA ROAE
Loans/ Deposits
Loans/ Earning
Assets
BoCom 2.3% 8.6% 55.5% 0.7% 59.2% 62.2% 55.6%
CMB 2.5% 7.7% 53.6% 0.6% 17.0% 68.0% 55.6%
Huaxia 2.5% 5.9% 59.2% 0.5% 27.8% 59.3% 50.2%
Minsheng 2.1% 7.1% 56.8% 0.5% 14.2% 66.9% 52.6%
SPDB 2.4% 12.8% 51.5% 0.6% 15.9% 66.6% 60.1%
Average 2.3% 8.4% 55.3% 0.6% 26.8% 64.6% 54.8%
SDB 2.4% 9.5% 58.3% 0.3% 9.1% 74.3% 49.7%
Exhibit 11 Profiles of CEO and Board Member Candidates
Name Position Background
Jeffrey R. Williams CEO Mr. Williams was the first Chief Executive of a U.S. bank in China when he first helped Citibank establish its first branch in Shenzhen in 1988. In the late 1980s, he also spent three years with Citibank in Hong Kong and China. He served as Country Chief Executive of Taiwan at Standard Chartered in 1999-2002. Prior to that, Mr. Williams was the Taiwan country manager for American Express's Travel Related Services for five years. He holds a BA degree from Harvard College and an MBA degree from Harvard Business School. Mr. Williams is a fluent Mandarin speaker.
John D. Langlois Chairman Dr. John D. Langlois, Jr. is the Chairman of Morgan Stanley Properties China. He joined Morgan Stanley in September 2002. Since 2002 he has been a director of the Bank of Shanghai, Shanghai, China, and was a director of the Nanjing City Commercial Bank, Nanjing, China. From 1999-2001, he taught at Princeton University. From 1982-1999, he worked at J.P. Morgan & Co. Incorporated, New York. His most recent assignment there was chief representative and managing director, Beijing Representative Office. He held previous assignments in New York, Tokyo, Hong Kong, and London. Dr. Langlois received his Ph.D. in East Asian Studies from Princeton University in 1974. He also received an MBA degree from New York University in 1986, a Master of Arts degree from Harvard University in 1966, and a Bachelor's degree from Princeton University in 1964.
John T. Olds Vice Chairman Mr. Olds is currently a senior advisor of Newbridge Capital. He was CEO of DBS from August 1998 until January 2001, and Vice Chairman from August 1998 until May 2001. He has 35 years of experience as a career banker, 24 of which were spent with J.P. Morgan.
Daniel A. Carroll Director Mr. Carroll is co-Managing Partner of Newbridge Capital. He joined Newbridge Capital in 1995. Prior to 1995, Mr. Carroll spent nine years with Hambrecht & Quist Group. He had also worked at Morgan Stanley. Mr. Carroll holds a BA in Economics from Harvard University, and an MBA from the Graduate School of Business at Stanford University.
Timothy D. Dattels Director Mr. Dattels is a Managing Director of Newbridge Capital. Mr. Dattels retired as Managing Director at Goldman Sachs in January 2003. He has held various management positions at Goldman Sachs since joining the firm from First Boston in 1990. He was elected Partner in 1996 and also served on the firm's Management Committee in Asia. He holds a BA from University of Western Ontario and an MBA from Harvard Business School.
Au Ngai Director Mr. Ngai is a Managing Director of Newbridge Capital. He has primary responsibility for managing Newbridge's investments in China, Hong Kong, and Taiwan. Prior to joining Newbridge Capital in 1995, Mr. Ngai had worked at Bankers Trust in Hong Kong as well as A.T. Kearney. Mr. Ngai received a BA in Economics from Concordia University and an MBA from McGill University.
Weijian Shan Director Mr. Shan is co-Managing Partner of Newbridge Capital. Prior to joining Newbridge, he had worked at J.P. Morgan, the Wharton School of University of Pennsylvania, and the World Bank.
Frank N. Newman Independent Director
Mr. Newman is the Chairman Emeritus of Bankers Trust Corporation. He is also a member of the Board of Trustees of the Carnegie Hall Society and a member of the Board of Overseers of Cornell University Weill Medical College. Mr. Newman was formerly the Chairman, President and CEO of Bankers Trust. Prior to joining Bankers Trust, Mr. Newman served as the Deputy Secretary of the United States Department of the Treasury. Previously, he was the Vice Chairman and CFO at Bank of America for 6 years, and the CFO in Wells Fargo Bank for 5 years.
Michael O'Hanlon Independent Director
Mr. O'Hanlon is a Managing Director and Head of the Financial Sponsors Group at Lehman Brothers Japan, Inc. He has been with Lehman Brothers and its affiliates since 1980. Previous positions at Lehman Brothers have included Head of the Global Financial Institutions Group and Head of the Real Estate and Mortgage Industries Group.
210-020 -23-
Exhibit 13 Comparable Company Valuation
Market Cap.a
Book Value Per Share
(RMB)
Earnings Per Share (EPS)
(RMB)
Pre-Provision Profit (PPP)
(US$ MM)
Price to Book (P/B)
Price to Earnings (P/E)
Price to PPP (P/PPP) Bank (US$ MM) 2002A 2003E 2002A 2003E 2002A 2002A 2003E 2002A 2003E 2002A
CMB 8,032 2.50 3.20 0.29 0.39 457 2.3 x 1.8 x 19.6 x 14.6 x 17.6 x Minsheng 4,338 1.52 2.66 0.19 0.38 216 2.2 x 1.2 x 17.5 x 8.7 x 20.1 x SPDB 5,610 2.25 3.07 0.34 0.40 355 4.9 x 3.6 x 32.7 x 27.8 x 15.8 x
Average 3.1 x 2.2 x 23.3 x 17.0 x 17.8 x
SDB 2,921 2.22 2.06 0.20 0.23 184 5.5 x 5.9 x 61.2 x 53.2 x 15.8 x
Source: Compiled from China Stock Market & Accounting Research Database (CSMAR); Goldman Sachs Research, October 6, 2004, January 5, 2005; Morgan Stanley Research August 16, September 30, 2004; CICC Research, March 4, 2004.
a Based on average daily market value in April 2003.
iz
ed f
or use only in 15-16
T2B Pr
iv
ate Equity and
V
enture Capital In
v
esting b
y Lim Meng Ann, Singapore Management Univ
Endnotes
1 “China’s Patient Crusader,” The Economist, May 14, 2005, http://www.economist.com/printedition/
displayStory.cfm?story_id=3960876, accessed on August 11, 2009.
2 Yue, Bingqing, “Newbridge Acquiring Shenzhen Development Bank” (in Chinese), Sohu Business at Sohu.com, September 25, 2003, http://business.sohu.com/55/96/article213639655.shtml, accessed on August 11, 2009.
3 Newbridge press release, May 12, 2003; Clifford, Mark L., “Banking’s Great Wall,” BusinessWeek, June 2, 2003, http://www.businessweek.com/magazine/content/03_22/b3835160_mz033.htm, accessed on August 11, 2009; Sender, Henry, “Horseman at the Gates,” Far Eastern Economic Review, June 12, 2003.
4 National Bureau of Statistics of China, China Statistical Yearbook, 1997-2003.
5 Fox-Pitt, Kelton, Asian Banks 2005 Outlook, January 2005.
6 National Bureau of Statistics of China, China Statistical Yearbook, 2003.
7 Goldman Sachs Research, China Banks, September 15, 2004.
8 China Automotive Research Center, China Automotive Industry Yearbook, 2003; Goldman Sachs Research, China Banks, June 5, 2003, September 15, 2004.
9 China Banking Regulatory Commission, http://www.cbrc.gov.cn/chinese/info/yjhjj/index.jsp, accessed on August 14, 2009.
10 National Bureau of Statistics of China, China Statistical Yearbook, 2003.
11“The People’s Bank of China Draws up the Guidance on Provisioning for Loan Losses,” April 25, 2002, http://www.pbc.gov.cn/english//detail.asp?col=6800&ID=43, accessed on August 14, 2009.
12 Goldstein, Brian L., “Realistic Exuberance,” China Business Review, Volume 29, Issue 3, May 1, 2002. 13 UBS, China’s Financial Sector Roadmap, November 5, 2004.
14 CICC Research, China Banking, March 4, 2004. 15 Ibid.
16 Ibid.
17 SDB annual report 2002.
18 National Bureau of Statistics of China, China Statistical Yearbook, 2003-2006.
19 TPG and Newbridge press releases; BusinessWeek private company information.
20 TPG and Newbridge press releases; He Shanshan, “Shenzhen Development Bank and Newbridge Capital: Acquisition of Chinese Banks by Foreign Capital?” (in Chinese), San Lian Life Week, November 4, 2002, http://business.sohu.com/14/55/article204115514.shtml, accessed on August 11, 2009; Jia, Yubao, “New
Bridge’s $840M Investment in Taishin Bank” (in Chinese), 21st Century Business Herald, February 7, 2006, http://finance.sina.com.cn/money/bank/ bank_hydt/20060207/14492322784.shtml, accessed on August 11, 2009.
21 Schuman, Michael, “‘Barefoot’ Banker Strikes Gold,” Time, May 28, 2005, http://www.time.com/time/ magazine/article/0,9171,1039731,00.html, accessed on August 10, 2009.
23 Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking Industry” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009.
24 He, Shanshan, “Shenzhen Development Bank and Newbridge Capital: Acquisition of Chinese Banks by Foreign Capital?” (in Chinese), San Lian Life Week, November 4, 2002, http://business.sohu.com/14/55/ article204115514.shtml, accessed on August 11, 2009; “Where is Shenzhen Development Bank Headed?” (in Chinese), China Entrepreneur, September 2006, http://finance.sina.com.cn/money/bank/bank_yhpl/20060919/ 17382928761.shtml, accessed on August 11, 2009.
25 Data in this section is compiled from the SDB annual report 2002.
26 Zhang, Nianqing, “Months Later: Setback in Newbridge’s Investment in Shenzhen Development Bank” (in Chinese), Beijing Youth Daily, February 14, 2003, http://news.xinhuanet.com/stock/2003-02/14/content_ 728899.htm, accessed on August 11, 2009; Li, Liming, “Ranked Last Among Public Banks: Who Will Save
Shenzhen Development Bank” (in Chinese), People’s Daily, May 26, 2004, http://data.book.hexun.com/ 661093.shtml, accessed on August 11, 2009.
27 Sender, Henry, “Horseman at the Gates,” Far Eastern Economic Review, June 12, 2003; Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking Industry,” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009.
28 Ba, Shusong, Confronting the Sophistication and Naivety of the Finance Industry, Guangdong Economics Publishing, 2004.
29 China Banking Regulatory Commission. 30 SDB annual report 2002.
31 Shen, Han, “Behind the Scene of Newbridge’sParting from Shenzhen Development Bank” (in Chinese), 21st Century Business Herald, May 15, 2003, http://www.21cbh.com/HTML/2003-5-15/9756.html, accessed on January 28, 2011.
32 CICC Research, China Banking, March 4, 2004. 33 SDB annual report 2002.
34 CICC Research, China Banking, March 4, 2004. 35 SDB annual reports 2000, 2001, and 2002.
36 Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking Industry,” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009.
37 Ba, Shusong, Confronting the Sophistication and Naivety of the Finance Industry, Guangdong Economics Publishing, 2004.
38 Liu, Caina, “What Went Wrong at Shenzhen Development Bank” (in Chinese), China Business Times, January 28, 2003, http://news.xinhuanet.com/fortune/2003-01/28/content_710939.htm, access on August 11,
2009; “China Finance: Newbridge to the Mainland,” The Economist, June 4, 2004, http://www.economist.com/ finance/displaystory.cfm?story_id =E1_NSPSDPP, accessed on August 11, 2009.
39 Sender, Henry, “Pulling the Plug,” Far Eastern Economic Review, June 12, 2003; “A Great Big Banking
Gamble: China’s Banking Industry,” The Economist, October 29, 2005, http://www.economist.com/printedition/
40 Liang, Kezhi, “Shenzhen Development Bank: A Publicized Acquisition,” 21st Century Business Herald, January 2009, http://bank.jrj.com.cn/2009/01/0602183242958.shtml, accessed on August 11, 2009.
41 Li, Liming, “Ranked Last Among Public Banks: Who Will Save Shenzhen Development Bank” (in Chinese), People’s Daily, May 26, 2004, http://data.book.hexun.com/661093.shtml, accessed on August 11, 2009.
42 Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking Industry” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009.
43 He, Shanshan, “Shenzhen Development Bank and Newbridge Capital: Acquisition of Chinese Banks by Foreign Capital?” (in Chinese), San Lian Life Week, November 4, 2002, http://business.sohu.com/14/55/ article204115514.shtml, accessed on August 11, 2009.
44 Chan, Christine, “Who Do You Think You Are? Shan Weijian Newbridge Chief Confident as Firm Takes
on China,” South China Morning Post, January 2, 2003. 45 Ibid.
46Ibid.; Wenjun Liu, “Newbridge Stuck at Shenzhen Development Bank” (in Chinese), Securities Markets
Weekly, September 12, 2006, http://www.p5w.cn/stock/news/gsxw/200609/t514491.htm, accessed on August 11, 2009; Sender, Henry, “Newbridge Tries Golden Touch at Chinese Bank,” The Asian Wall Street Journal, May 16, 2005.
47 He Shanshan, “Shenzhen Development Bank and Newbridge Capital: Acquisition of Chinese Banks by
Foreign Capital?” (in Chinese), San Lian Life Week, November 4, 2002, http://business.sohu.com/14/55/ article204115514.shtml, accessed on August 11, 2009.
48 Zhang, Nianqing, “Months Later: Setback in Newbridge’s Investment in Shenzhen Development Bank” (in Chinese), Beijing Youth Daily, February 14, 2003, http://news.xinhuanet.com/stock/2003-02/14/ content_728899.htm, accessed on August 11, 2009; Li, Liming, “Ranked Last Among Public Banks: Who Will Save Shenzhen Development Bank” (in Chinese), People’s Daily, May 26, 2004, http://data.book.hexun.com/ 661093.shtml, accessed on August 11, 2009.
49 Chan, Edwin, “China Bank Ousts U.S. Manager in Acquisition Setback,” Reuters News, May 12, 2003. 50 Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking Industry” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009; He, Shanshan, “Shenzhen Development Bank and Newbridge
Capital: Acquisition of Chinese Banks by Foreign Capital?” (in Chinese), San Lian Life Week, November 4, 2002, http://business.sohu.com/14/55/ article204115514.shtml, accessed on August 11, 2009.
51 SDB public filing, June 1, 2004.
52 Li, Liming, “Ranked Last Among Public Banks: Who Will Save Shenzhen Development Bank” (in Chinese), People’s Daily, May 26, 2004, http://data.book.hexun.com/661093.shtml, accessed on August 11, 2009; Dong, Xiaochang, “A Great Step for Shenzhen Development Bank” (in Chinese), China Internet Week, January 2005, http://qkzz.net/magazine/1007-9769/2005/01/7324.htm, accessed on August 11, 2009.
53 Chan, Christine, “Who Do You Think You Are? Shan Weijian Newbridge Chief Confident as Firm Takes
on China,” South China Morning Post, January 2, 2003.
54 Li, Liming, Yanchun Wang, and Chaoge Shi, “Banking Tycoon Weijian Shan Enters the Chinese Banking
Industry” (in Chinese), The Economic Observer, December 30, 2002, http://finance.sina.com.cn/roll/20021230/ 1114296285.shtml, accessed on August 11, 2009; Zhang, Nianqing, “The Reunion of Newbridge and Shenzhen
