A Case Analysis On Value Comparision Of China Merchants Bank And Shanghai Pudong Development Bank

Non-tradable share reform has been one of the most important events that have strong impacts on the development of China's security market. Despite its successful progresses, the controversy of share reform has not stopped. The Consideration payments is the core of Non-tradable share reform, and the Consideration payments is actually the real value of the company's assessment. To address the share reform controversy, a very useful approach is to study the content and substance of company stock through company valuation. Company valuation is the most important and critical aspect of the study of securities. Macro, trade and financial analysis all serve to provide a foundation for company valuation, and to give guidance for making investment decision. At present, typical methods for company valuation in security research filed are earnings ratio (PE) method, discounted cash flow (DCF) and economic value added (EVA) method.We chose two Chinese banks, China Merchants Bank and Shanghai Pudong Development Bank, as our target companies for the comparative analysis. In this thesis, from investors'perspective, using both macro-meso-micro and top-down methods and their combination as research method, we compared two listing banks on their intrinsic values and competitiveness. First, we carried out a background analysis for listing banks, provided details on two companies'financial industry background, status, trends. Through the analyses of macro-economics and current status of China's banking sector, we pointed out the opportunities and challenges two companies are facing. Then, a detailed comparative analysis was conducted by using qualitative and quantitative methods. Finally, values for those two banks were estimated by company valuation models, and the final conclusion was reached by comparing the estimated company value.Through analysis, we concluded that, in addition to the three core elements control resources, corporate image / brand and core products, the input rate of return (ROIC) and weighted cost of capital (WACC) are also important influence factors for the value of listed company. Because of the lower capital market risk premium in Hong Kong compared to mainland China, China Merchants Bank's weighted cost of capital (which is, the opportunity cost) is less than Shanghai Pudong Development Bank. In order to grow its company value, the rational strategy for Shanghai Pudong Development Bank should be increasing its ROIC and reducing its WACC. On the other hand, China capital market's transformation toward to more effective will very likely reduce the weighted capital cost for Shanghai Pudong Development Bank and thus enhance its competitiveness.