Corporate Transaction 

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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The Emergence of Sustainability Agenda to Investment—ESG Investing

The effectiveness of COVID-19 vaccines and the control measures are still the key for the future movement of the Hong Kong office market. The policy shift with the advancement of the investors and the office operators play a role in supporting the office market and there is a growing demand for co-working office space in Greater Bay Area due to asset enhancement and strategic connectivity between cities.
 
Click <a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q4_2020_EN_e3f1cdd9df.pdf" target="_blank" rel="noopener">here</a> to read the insights.
 
<a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q4_2020_EN_e3f1cdd9df.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_en_a613654089.jpeg" width="600" height="852" /></a>

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COVID-19 Control Remains The Key of Market Recovery—AVISTA HK Office Market Insights (Feb 2021)

A growing attention to the Biotech sector has been shown in the accelerating investments by Venture Capital funds and IPOs, as well as the expectation of innovative therapies amidst Covid-19. This article, therefore, provides a guide on Biotech investment analysis with highlighting the “3H” characteristics of Biotech industry—High inputs in R&amp;D, High Rewards, and High Risks, and demonstrating related valuation approaches for quantitative analysis.
 
Click <a href="../../../../../uploads/Investing_in_Biotech_-_A_Guide_to_Risk-Return_Analysis_with_Valuation_Techniquesv2_d1bdf4f384.pdf" target="_blank" rel="noopener">here</a> to read the full article.
 
<a href="../../../../../uploads/Investing_in_Biotech_-_A_Guide_to_Risk-Return_Analysis_with_Valuation_Techniquesv2_d1bdf4f384.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_51fccbbb2f.jpeg" width="600" /></a>

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Investing in Biotech - A Guide to Risk-Return Analysis with Valuation Techniques

The new wave of Coronavirus infections and the political instability have posed uncertainties on the recovery pathway of Hong Kong office market. In this unprecedented time, the companies demonstrate their resilience by transforming their working and business model.
 
In this publication, AVISTA Research has covered the outlook of the Hong Kong office market and its Q3 2020’s performance in the unstable environments and insights on the tender cancellation of Tung Chung commercial site and the development of Tung Chung New Town Extension Project as well as the global co-working and remote working trends.
 
Please click <a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q3_2020_EN_bf0a780647.pdf" target="_blank" rel="noopener">here</a> to read the insights.
 
<a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_Q3_2020_EN_bf0a780647.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_en_aee8c08bd8.jpeg" width="600" /></a>

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Uncertainties Surrounding Office Market alongside Workplace Transformation —AVISTA HK Office Market Insights (Nov 2020)

The International Accounting Standards Board (“IASB”) has published the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment in March 2020 (the “Discussion Paper”). The Discussion Paper considers four major topics, including (1) improving disclosures about acquisitions, (2) improving effectiveness of impairment test, (3) simplifying the impairment test, and (4) changing the range of recognisable intangible assets. As an experienced valuation and financial advisory firm, AVISTA has outlined the key points in the Discussion Paper and potential impacts to valuation and corporate transactions.
 
Improving disclosures about acquisitions
 
In response to some investors’ concern on not having sufficient information for understanding the subsequent performance of an acquisition and achievement of the management’s objectives for the acquisition, the IASB believes that companies should disclose the strategic rationale and management’s objective for undertaking an acquisition, and the metrics for monitoring achievement of objectives at acquisition date. Subsequent to the acquisition date, disclosure regarding the information and metrics used by the management to monitor and measure the progress of objectives achievement should be required. The metrics to be disclosed could be financial (e.g. profitability) and/or non-financial (e.g. product launches).
 
Another suggested additional disclosure is the factors making up goodwill, such as nature, amount, and timing of, and related costs required for the synergies expected to be realised. The company is required to provide qualitative description of factors that make up the goodwill recognised and to quantify an estimate of expected synergies in determining and agreeing the acquisition price.
 
Improving effectiveness of impairment test
 
Under the current IAS 36 — Impairment of Assets requirement, companies have to test cash-generating units containing goodwill for impairment at least annually. The Discussion Paper has examined (1) ways to improve the effectiveness of impairment test at a reasonable cost; and (2) whether to reintroduce amortisation of goodwill.
 
Regarding the improvement on the effectiveness of impairment test at a reasonable cost, the Discussion Paper has preliminary concluded that it is not feasible to design a significantly more effective impairment test than the currently adopted one as required in IAS 36 — Impairment of Assets.
 
In the context of reintroducing amortisation of goodwill, the views among IASB members are controversial, with majority of them voting in favour of retaining the impairment-only model and not reintroducing amortisation of goodwill, as the determination of useful life of goodwill would be arbitrary and amortisation of goodwill could not be an effective measure of management’s accountability for acquisition decisions.
 
Simplifying the impairment test 
 
There are three reliefs proposed by the IASB to simplify the impairment test, including (1) removing the requirements for a company to perform annual impairment assessment for cash-generating units containing goodwill if there is no impairment indication, intangible assets with indefinite useful lives and intangible assets not yet available for use; (2) removing the restriction on including uncommitted restructuring and asset enhancement cash flows; and (3) removing the requirement to use pre-tax cash flows and pre-tax discount rates in estimating value in use.
 
The IASB is in the preliminary view that these measures could reduce the cost and complexity for performing impairment test.
 
Changing the range of recognisable intangible assets
 
The Discussion Paper has examined whether some intangible assets could be included in goodwill to reduce costs and complexity for companies in identifying and valuing particular intangible assets. Having considered varying views from stakeholders on this topic, the IASB concluded that there is no compelling evidence suggesting that a change in the range of recognisable intangible assets is favourable.
 
To read the full Discussion Paper released by IASB, please click <a href="https://cdn.ifrs.org/-/media/project/goodwill-and-impairment/goodwill-and-impairment-dp-march-2020.pdf">here</a>.
 
 
AVISTA’s Professional Services for Valuation and Corporate Transactions
 
AVISTA provides one-stop valuation and financial advisory services that help clients achieve additional growth and ensure their compliance with regulators’ stringent rules and disclosure requirements when implementing business decisions and strategies. 
 
<ul>
<li>Valuation Services for Transactions</li>
<li>Valuation Services for Financial Reporting</li>
</ul>
 
We are closely following up on the latest development of this accounting standard update. For further information or enquiry regarding the potential valuation impact of the Discussion Paper to you, please feel free to contact us.

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IASB Discussion Paper on  Business Combinations — Disclosures, Goodwill and Impairment

The Hong Kong SAR government has recently released a new round of economic data, predicting that Hong Kong's Gross Domestic Product (GDP) will contract by 3% in the Q4 of 2019 and contract by 1.3% for the whole year, and lowering Hong Kong's GDP growth forecast for 2020 to 0.7%.
 
It can be seen that there is an uncertainty in Hong Kong's economic prospects and hence some investors have stepped up their efforts to transfer funds to other countries and regions, including Southeast Asian countries. These countries are the members of the Belt and Road Initiative (BRI) that China has been actively promoting since 2013. With the continuous implementation of the BRI, China and Southeast Asian countries have developed much closer business relationships and trade ties.
 
In view of that, AVISTA has selected a number of the Belt and Road countries, mainly those in Southeast Asia, and conducted a comprehensive analysis of their real estate market.
 
The first country that we are looking at would be … Malaysia.
 
Please <a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener">click here</a> to read the full report (available in Chinese version only).
 
<a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/thumbnail_9d5a6ef6e3.png" alt="" width="630" height="888" /></a>