Coupled with rising concerns of climate change and governments’ commitment to carbon neutrality, it is an irreversible trend of electric vehicles increasingly being adopted, with China and Europe being the key markets. This phenomenon has unsurprisingly brought investment attractiveness in the financial market. The electric vehicle-related Exchange Traded Funds (ETF) notably outperformed the general market in both the United States and China over the previous year, which was contributed by the companies in the value chain of industry, ranging from lithium &amp; battery to vehicle manufacturing.
 
Click <a href="../../../../../uploads/New_Energy_Vehicle_Sector_Update_July_2021_1b542f4196.pdf" target="_blank" rel="noopener">here</a> to download the full report. 
 
<a href="../../../../../uploads/New_Energy_Vehicle_Sector_Update_July_2021_1b542f4196.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/EV_cover_en_1039de1b40.JPG" width="600" /></a>

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Electric Vehicle Sector Update - July 2021

The Securities and Futures Commission (“SFC”) issued a circular providing guidance to management companies of SFC-authorized unit trusts and mutual funds on enhanced disclosures for funds that incorporate environmental, social and governance (“ESG”) factors into their key investment focus (“ESG funds”) on 29 June 2021.
 
As a replacement for the previous version released in 2019, the circular includes an additional requirement that ESG funds should conduct and disclose periodic assessments concerning how ESG factors are integrated and provide guidance for climate-oriented ESG funds.
 
According to SFC, the number of ESG funds offered to the public in Hong Kong has more than doubled since 2019. Increasing awareness regarding ESG investing has led to a need for asset managers to clearly explain their ESG focus, helping investors determine if the products meet their investment goals.
 
The circular outlines the requirements for ESG funds to disclose in their offering documents, including a description of the ESG focus and a list of ESG criteria used to measure the fund’s ESG focus, such as filters, indicators, ratings, third party certificates, etc. ESG funds should also disclose their investment strategies, asset allocations, benchmarks and risks associated with their ESG focus. Furthermore, there are new requirements outlined in the updated circular, requiring ESG funds to make periodic assessments and reports on attaining the ESG focus, and specific guidance for ESG funds that focus on climate change.
 
"Making sustainability-related disclosures more transparent, comparable and consistent will help investors identify suitable ESG funds and reduce opportunities for greenwashing," said Mr Ashley Alder, the SFC's Chief Executive Officer. “Hong Kong’s financial market is where global capital connects with Mainland enterprises, so what we do here can have an outsized influence on global developments in green and sustainable finance.”
 
Currently, there are about 60 SFC-authorised funds with an investment focus on climate change, green, ESG or sustainable development in the SFC database on authorised ESG funds. To enhance transparency for these funds, their key features will also be listed in the database after the new circular takes effect on 1 January 2022.
 
As the ESG landscape is still developing rapidly, the SFC will continue to monitor the market developments and may provide further guidance or impose additional requirements for ESG funds, where appropriate.
 
Click <a href="https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&amp;refNo=21EC27" target="_blank" rel="noopener">here</a> to read the full circular.
 
<a href="https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&amp;refNo=21EC27" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_en_a007a82352.JPG" width="250" /></a>

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SFC Issues Updated Disclosure Guidance for ESG Funds

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HKEX Consultation Conclusions on The Main Board Profit Requirement and Review of Listing Rules Relating to Disciplinary Powers and Sanctions

The spread of COVID-19 has markedly impacted and changed the Hong Kong office market, particularly the leasing market, alongside the emergence of work-from-home arrangements. In the meantime, the roll-out of the vaccination program and the closer connection with the Mainland China economy will be reshaping the Hong Kong office market.
 
In this publication, AVISTA Property Valuation team discussed the performance of the HK office market in 2021 Q1 and its possible development in the post-pandemic world.
 
Click <a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q1_2021_EN_117536c9ef.pdf" target="_blank" rel="noopener">here</a> to read the insights. 
<a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q1_2021_EN_117536c9ef.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/thumbnail_en_d666899d16.JPG" width="600" /></a>

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Gloomy Market Sentiment with Emerging Recovery Ahead—AVISTA HK Office Market Insights (Apr 2021)

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HKEX Consultation Paper on ‘Review of Corporate Governance Code and Related Listing Rules’

With reference to a guidance document issued by the China Appraisal Society (“CAS”) in relation to discount rate calculation, the China Securities Regulatory Commission (“CSRC”) launched the Regulatory Guidance - Valuation (the “Guidance”) in January 2021 to standardize the parameters of discount rate calculation in the income approach.
 
The Guidance provides specific requirements for the parameters in Capital Asset Pricing Model (“CAPM”) and Weighted Average Cost of Capital (“WACC”), including risk-free rate, market risk premium, beta, capital structure, specific risk premium and expected return of debt.
 
With AVISTA’s experience in business valuation, the key points of the Guidance for the discount rate calculation are outlined below.
 
Background and Objective 
 
The discrepancies for the current valuation practices in the income approach have been prevailing among valuation entities (“Entities”), ranging from sample selection, parameters’ determination and calculation methodology. Meanwhile, the valuation process may also be influenced by complicated and subjective judgment, which would impact the reliability of company’s financial data and valuation result.
 
Accordingly, the CSRC formulates the Guidance in order to standardize the discount rate calculation, thereby enhancing the regulations in the valuation industry.
 
Fundamental Requirements 
 
The Guidance enumerates 3 fundamental requirements to the Entities highlighting the consistency and reasonableness in the discount rate calculation.
 
<ol>
<li>The Entities must formulate a set of consistent principles and methods for discount rate calculation. Upon formulation, the principles and methods could not be revised at discretion afterward to ensure the consistency of valuation projects. </li>
<li>The Entities must ensure the reasonableness of discount rate calculation on multiple valuation dates. The Entities should clarify any significant changes of parameters from the previous valuation date in the valuation report. </li>
<li>The Entities must ensure the alignment between discount rate and expected return, which requires CAPM in line with the Free Cash Flow to the Equity (“FCFE”) and WACC in line with the Free Cash Flow to the Firm (“FCFF”). </li>
</ol>
Instructions on Parameters
 
The Guidance provides instructions for 6 parameters typically used in the discount rate calculation. In general, the Guidance requires the Entities to disclose parameter-related methods, analytical processes and data sources in the valuation reports. The details of the instructions to each parameter are specified below.
 
<ol>
<li>Risk-free rate
<ul style="list-style-type: square;">
<li>China 10-year or above government bond and its yield to maturity should be adopted under the assumption of going concern. </li>
</ul>
</li>
<li>Market risk premium
<ul style="list-style-type: square;">
<li>If the primary business of the target company to be valued (the “Target”) is within China’s territory, the historical risk premium data of China Securities Market index should be adopted as a priority. </li>
</ul>
</li>
<li>Beta
<ul style="list-style-type: square;">
<li>The Entities should take into account the enterprise size, profitability, growth, etc. in their consideration of comparability of comparable company to determine the beta, as well as select the beta with the appropriate time horizon. </li>
</ul>
</li>
<li> Capital structure 
<ul style="list-style-type: square;">
<li>The Entities must conduct analysis for the discrepancies between the Target and comparable company as well as the development stage of the Target with reference to the adopted capital structure, alongside disclosure and clarification. </li>
<li>The debt-to-equity ratio should be measured by market value. Clarification should be provided in the valuation report if book value is used. </li>
</ul>
</li>
<li>Specific risk premium 
<ul style="list-style-type: square;">
<li>The Entities must evaluate the Target’s risk characteristics, enterprise size, core competitiveness, etc. when determining the specific risk premium. </li>
</ul>
</li>
<li>Expected return of debt 
<ul style="list-style-type: square;">
<li>The Entities must assess the Target’s operating performance, capital structure, credit risk, etc. if Loan Prime Rate (“LPR”) is taken as reference. </li>
<li>The Entities must assess the Target’s financing options, cost of debt, solvency, etc. if non-market interest rates are adopted. </li>
</ul>
</li>
</ol>
To read the full Regulatory Guidance released by CSRC, please click <a href="http://www.csrc.gov.cn/pub/newsite/ztzl/jggzsyzy/202101/t20210122_391113.html" target="_blank" rel="noopener">here</a>. (Available in Chinese version only) 
AVISTA’s Professional Services for Business Valuation
 
As a professional valuation and financial advisory firm, AVISTA provides reliable business valuation services and accommodates the valuation needs in various transactions, including merger and restructuring. Our valuation experts are ready to advise you on asset valuation in compliance with the latest regulatory guidance.
 
For further information or enquiries regarding the potential valuation impact of the CSRC’s regulatory guidance on discount rate calculation, please feel free to contact us.

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CSRC Regulatory Guidance on Discount Rate Calculation in Income Approach

A growing concern of sustainability has been emerging in the investment community over the past decade. It was an old thought that considering sustainability for society implied sacrificing financial returns of investment. The development of Environmental, Social, Governance (ESG) investing, however, has demonstrated a different story.
 
This publication introduces the engagement of PRI from investor community, various ESG assessments in capital market such as MSCI ESG Ratings, the shift in focus on ESG issues due to the preferences of younger generation’s investors and COVID-19, and also the prevalence of green investment in the global investment community.
 
Please <a href="../../../../../uploads/The_Emergence_of_Sustainability_Agenda_to_Investment_ESG_Investing_a014243ea9.pdf" target="_blank" rel="noopener">click here</a> to read the full publication.
 
<a href="../../../../../uploads/The_Emergence_of_Sustainability_Agenda_to_Investment_ESG_Investing_a014243ea9.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_dea6ff8687.JPG" width="600" /></a>

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