Company valuation

Group, Company, Shareholding

Circular:

According to HKEx Listing Rule, fair value of acquisition consideration is required before / when the following transactions happen: 1) Major Transaction or 2) Very Substantial Transaction or 3) Connected Transaction or 4) Reverse Takeover

According to HKEx Listing Rule chapter 14.67 and 14.69, a circular issued for Major Transaction or Very Substantial Acquisition or Very Substantial Disposal circulars or Reverse Takeover on an acquisition or disposal of any revenue-generating assets must contain a Valuation Report. Valuation Report must be reviewed by the auditors or reporting accountants to ensure that such information has been properly compiled and derived from the underlying books and records. Valuation report regarding infrastructure project or an infrastructure or project company (s) must clearly set out: (1) all fundamental underlying assumptions including discount rate or growth rate used; and (2) a sensitivity analysis based on the various discount rates and growth rates.

Accounting:

Company shareholding related investment asset or short-term investment

According to International Accounting Standard, fair value of company shareholding related investment asset or short-term investment need to be recorded on balance sheet of financial statement.

Tax declaration:

Gift Tax, Estate Duty, Shareholding Transfer…etc.

Internal Reference:

Merger and Acquisition, Loan Mortgage, Fund Raising, Restructuring, Investment Decision, Strategic Planning…etc.

Market Approach(Preferred):

A company being valued is compared with similar company that have been transacted in the market or that are listed on stock exchange, with appropriate adjustment to reflect different characteristics, control or liquidity.

The market approach measures the value of a company by comparing recent sales or offerings of similar or substitute company and related market data to the business being valued. The two primary market approaches are the ‘Guideline Company Multiples Method’ and the ‘Similar Transactions Method’. The Guideline Company Multiples Method focuses on comparing the subject company to guideline similar, publicly traded, companies. In applying this method, valuation multiples such as P/B, P/E, P/S, P/EBITA are derived from historic, though sometimes from forecast, operating data of guideline companies. The Similar Transactions Method uses valuation multiples such as P/B, P/E, P/S, P/EBITA based on historical change of control transactions that have occurred in the subject company’s direct or related industries. These derived multiples are then adjusted and applied to the appropriate operating data of the subject asset to arrive at an indication of value.

Income Approach:

Income approach is based on the cashflow that a company is likely to generate in the future. This estimation is determined by reference to both historic performance and forecasts. Company value is often derived by capitalising cash flows (before costs of servicing debt) using a discount rate that is the weighted average cost of capital (WACC) of a comparable mix of debt and equity.

The equity value is the enterprise value less the market value of the net debt, but can be established by measuring the equity cash flow itself.

Asset Approach:

Sum of the fair value of all tangible and intangible assets and liabilities of a company.

Tangible assets include cash, accounts receivable, inventory, fixed assets, etc. Intangible assets include goodwill, patent and brand name, customer relations, software, etc. Liabilities include accounts payable, short-term loans, long-term loans, warranty liability, etc. Different assets and liabilities need to be separately valued by different approaches. For example, Income Approach for customer relations; Market Approach for fixed assets; and Cost Approach for software.

Company value:

Company value can be regarded as the cost of acquiring a company, which reflects the market value of the company.

Fair value:

Fair Value is defined as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”.

Transaction:

Transaction means acquisition or disposal.

Assets ratio:

The total assets which are the subject of the transaction divided by the total assets of the listed issuer.

Profits ratio:

The profits attributable to the assets which are the subject of the transaction divided by the profits of the listed issuer.

Revenue ratio:

The revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer.

Consideration ratio:

The consideration divided by the total market capitalisation of the listed issuer.

Equity capital ratio:

The nominal value of the listed issuer’s equity capital issued as consideration divided by the nominal value of the listed issuer’s issued equity capital immediately before the transaction.

Ratio Test:

Assets Ratio Test, Consideration Ratio Test, Profits Ratio Test, Revenue Ratio Test, or Equity Capital Ratio Test.

Major Transaction - acquisition:

25% or more but less than 100% in Ratio Test

Very Substantial Transaction - acquisition:

100% or more in Ratio Test

Major Transaction - disposal:

25% or more but less than 75% in Ratio Test (Note: Not applicable to Equity capital ratio)

Very Substantial Transaction - disposal:

75% or more in Ratio Test (Note: Not applicable to Equity capital ratio)