Applied Valuation in Hong Kong and Asia Capital Markets

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Applied Valuation in Hong Kong and Asia Capital Markets

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Valuation is perhaps the least known among the established profession and academic discipline. While valuation is involved in every facet of the capital markets and real estate markets, most other practitioners and the general public might have difficulty describing what valuers are responsible for other than “to come with a valuer for an asset” and it is even more rare that any of them could describe why and through what means valuers come up with such values.

In everyday life, whenever a person would like to acquire or dispose of some assets, he or she usually have some idea about how much the asset is worth and so he or she will have some expectation on the price he or she is ready to accept (in a sale) or to pay (in a purchase). If no other people in the market share a similar view with him or her, the deal will fail, i.e. he or she could not have the asset sold or purchased, and he or she will either have to revise his or her view on the value as opined by other market participants, or to give up the deal altogether. It does not appear that a “professional opinion of the value” (whatever it means) is required.

The raison d'être of valuation is that it is required for any developed capital markets to function. Valuation, in its essence, aims to provide objective opinion on a well-defined asset at a definite date. Such opinion is important for a wide variety of functions of the society. For example, when a business or property owner is seeking business loans or mortgages respectively, the banker must have a good idea on the values of the assets such as the business or the real estate. Further, when a company, public or private, decides to issue to shares, the shareholders should have an independent opinion on the values of such new issues in order to set the price thereon. The values of these assets are often challenging to arrive at for a variety of reasons. For example, well-functioned market for the asset might not exist, the future benefit of the asset is difficult to forecast, or that the bundle of rights and liability associated with the asset is complicated. Valuation, as a practical and academic discipline, exists for providing sound opinions on real and intangible or financial assets, including of course those that are highly challenging to deal with.

More challenging the valuations, more innovations and creativities are required from the valuers. It is often said that valuation is both a science and an art—a science because it is, or ought to be, based on sound principles from economics and finance, among others; and an art because, throughout the valuation process, from preliminary research through choosing appropriate valuation approaches to deciding on applicable parameters, inevitably subjective judgments from the valuers are involved that depends on his or her intuition and experience.

Such is the nature of valuation. One consequence is that the basic machineries of valuations are easy enough to be readily used by an average undergraduate to tackle the simplest kind of problems, giving the students a compliancy that valuation will, or supposed to, give definite answers via a set of formulae; and yet, should they choose to embark their career as a valuer, they will come to their horror that not nearly nothing is definite for a realistic valuation assignment, as every single choice made during the valuation process requires some justification. As a competent valuer, we are not merely responsible for producing the valuation, but also be ready to explain and defend it upon inquiry from an external professional (such as an auditor) or a client without any technical expertise.
As our capital and real estate markets becomes ever more complex and innovative, aided by Fintech and Proptech, to name a few, valuers must be ready to tackle new and novel valuations, and this cannot be done without sound understanding of the underpinning theories. At the same time, because valuation is an applied discipline, it must be done in view of the applicable valuation codes and financial reporting standards, for example. We endeavor to present to the readers both the theoretical and practical sides and the intricacies involved.

Valuation is perhaps the least known among the established profession in the capital market. It is required for any developed capital markets to function, but its principles and methodologies are not sufficiently understood by allied professionals such as auditors and bankers. As a practical and academic discipline, valuation exists for providing sound opinions on real and intangible or financial assets, and many of those are highly challenging to deal with.

Being both a science and an art, valuation is hitherto shrouded in mystery—until now. Applied Valuation in Hong Kong and Asia Capital Markets is written specifically from the viewpoint of Hong Kong practitioners and systematically expose valuation, based on sound principles from economics and finance, guiding the readers through the valuation process, from preliminary research through choosing appropriate valuation approaches to deciding on applicable parameters.

The authors of this book have rich experiences in valuation, ranging from more than fifteen to twenty years in delivering valuations for listed and private companies as well as individual clients, covering assets operating or real estates located in the Greater China, Southeast Asia, Europe, North America, Oceania, Pacific Islands, Korea and Japan. Among the assignments, many are highly complex and challenging, and others involve very high stakes due to their potentially high capital worth. Applied Valuation in Hong Kong and Asia Capital Markets could aid budding valuation students and young practitioners to laid firm foundations in this discipline, and also help our allied professionals in accounting, auditing, and finance to gain insights into our works.
Chapter 1: Basic Valuation Theory
- ¶1-100 Fundamental Principles of Valuation
- ¶1-200 Valuation Analysis
- ¶1-300 Valuation Report
- ¶1-400 Income Approach
- ¶1-500 Market Approach
- ¶1-600 Asset Approach
- ¶1-700 Valuation Premium and Discount
- ¶1-800 Valuation Subject and Valuation Purposes
Chapter 2: Valuation Related Accounting Standards
- ¶2-100 IFRS 2 – Share-based Payment
- ¶2-200 IFRS 3 – Business Combinations
- ¶2-300 IFRS 13 – Fair Value Measurement
- ¶2-400 IAS 38 – Intangible Assets
- ¶2-500 IAS 40 – Investment Property
- ¶2-600 IAS 41 – Agriculture
- ¶2-700 IFRS 9 – Financial Instruments
Chapter 3: Valuation for Intangible Assets
- ¶3-100 Valuation for Intangible Assets – Introduction
- ¶3-200 Intangible Assets Valuation Approaches
- ¶3-300 Relief from Royalty Method
- ¶3-400 Multi Period Excess Earning Method (the “MPEEM”)
Chapter 4: Valuation for Real Estate Holding Companies
- ¶4-100 Type of Real Estate held by a Company
- ¶4-200 Valuation Approaches for Real Estate
- ¶4-300 Balance Sheet Adjustments for a Company
Chapter 5: Valuation for Other Assets
- ¶5-100 Valuation for Mining Companies
- ¶5-200 Valuation for Share Options
- ¶5-300 Valuation for Convertible Bonds
- ¶5-400 Valuation for Biotechnology Companies
Chapter 6: New Challenges and Opportunities for Valuation
- ¶6-100 Expected Credit Loss Valuation Under COVID-19
- ¶6-200 Sharing Economy on Real Estate
- ¶6-300 Home Economy
Chapter 7: An Introduction and Valuation of Special Purpose Acquisition Companies
- ¶7-100 What is SPAC and SPAC History
- ¶7-200 SPAC’s Characteristics
- ¶7-300 SPAC Valuation Discussion
- ¶7-400 SPAC Trend
Leo Ming-Yan Lo, Mecon Bsc (Surveying) MRICS MHKIS RPS (GP), a surveyor-turned-serial entrepreneur, he is the CEO of Fonto Holdings, which is an integrated corporate based in Hong Kong, dedicated to real estate investment, development, financing and advisory with property technology innovations with futuristic and entrepreneurial views. Fonto delivers solutions in the Asia-Pacific Region for real estate and infrastructure asset projects financing, investment, valuation and asset management.

Leo has been an Estate Surveyor and possesses for over 17 years’ experience in the real estate and capital market industry. With branch offices in the Mainland China, Singapore and San Francisco, Fonto has extensive footprint in the Asia-Pacific Region. By leveraging Fonto’s digital assets and investment in industry-leading portfolio of companies, Leo is developing real estate as a futurist.

He is also a founder of a real estate technology company (PropBLK) which is working on the A.I. and blockchain applications in the real estate sector, with solutions in AVM and tech-enabled real estate analysis. He is a trailblazer in the PropTech industry and actively forges partnerships with PropTech companies in the globe and building up the ecosystem: Asia PropTech, synergizing the forces and knowledge from PropTech startups, real estate players and investors to co-create ideas and solutions.

Leo is in high demand as a speaker for his thought leadership at different conferences and summits across the globe, he attended over 40 PropTech/ real estate conferences as speaker in over 20 countries in the past 2 to 3 years. He is keen to deliver collaborative innovation to the real estate industry.

Leo is the RICS (Royal Institution of Chartered Surveyors) Excellent Young Achiever of the Year 2016 and he is also well connected in the society by being a Chairman Member (PropTech and Blockchain) of Guangdong-Hong Kong- Macao-Bay Area Economic and Trade Association, Executive Committee Member of Shanghai-Hong Kong Coalition of Professionals, Founding member of Hong Kong-ASEAN Economic Cooperation Foundation, etc.

Stella KY Law, Msc (Finance Analysis) MRICS ASA, Executive Director of CHFT Advisory Appraisal Limited is the Entrepreneur In Residence (E.I.R.) at CHFT Advisory & Appraisal Ltd headquartered in Hong Kong. She is currently the Executive Director of CHFT who runs the valuation business of the firm. Her role is to drive the initiatives to support the firm’s goal of bringing the power of technology to valuation and fueling the expansion of the global valuation business of CHFT. She specializes in providing consultancy and valuation with over 15 years’ experience in the industry, and she has extensive experience in all phase of M&A activities, from pre- Deal analysis to due diligence during the negotiation process, as well as financial reporting purpose upon deal completion, which covers wide range of industries.

Stella often works with client’s advisors such as financial advisors, sponsors, lawyers and auditors to develop optimal client solutions. Currently, her primary focus is on the preparation of valuations in compliance with the listing rule of Hong Kong and Singapore, as well as for international financial reporting purpose. In 2019, Stella was selected as a rising star by the Rising Star Committee of American Society of Appraisers. This award honors the brightest young valuation professionals who under 40 years-old have demonstrate success throughout the fiscal year.

Prior founding her own company, she was leading the business valuation department of an S&P 500 company and also founded the valuation department for a Top-10 international audit firm. Her expertise is on valuation of intangible assets especially on trademarks and patents. She provides valuation services which covers wide range of industries including construction, apparel, food & beverage, property, hotel and leisure, infrastructure, environmental protection, construction, manufacturing, etc. She is particularly familiar with the capital market of Hong Kong, China and Singapore.

She is also frequently be invited as speaker for various events such as the largest intellectual property business forum in Asia named BIP Asia, business valuation conference organized by the Royal Institute of Chartered Surveyors (RICS). Not to mention various continues profession development seminar organized by the Hong Kong Institute of Certified Public Accountants (HKICPA), Association of Chartered Certified Accountants (ACCA), CPA Australia etc. Stella is also a part-time lecturer for the University of Hong Kong, School of Professional and Continuing Education teaching various courses in relation to business valuation.

Alex PW Leung BSc (Surveying) MRICS MHKIS RPS (GP), Senior Director of CHFT Advisory Appraisal Limited. Alex has handled various types of property valuation including the retail portfolio of the Link REIT, en-bloc buildings and development sites for various banks, hotel properties for owners as well as special properties like telephone exchanges and petrol filling stations. He is also well experienced in provide consulting services on redevelopment projects for affected parties, negotiation of rents on behalf of the private parties, presenting evidence to the Land Tribunal and the Lands Department of HKSAR. Prior joining CHFT, Alex worked in the valuation department of CBRE (and former Richard Ellis) for 20 years. He was promoted to a director’s grade since 2001 and was the head of Hong Kong Team since January 2012 until he left the company in February 2015.

Ross XH Wang, BBAF CFA, Director of CHFT Advisory Appraisal Limited. Ross Ross has over 10 years of experience in providing business valuation services to companies ranging from multinationals, public listed companies and government institutions. He has been providing business valuation services for wide range of purposes, including financial reporting, pre IPO investment, transaction pricing, as well as due diligence. Ross started his career in providing audit & assurance services in Ernst & Young in 2008, and subsequently joined the business valuation department of CBRE

Ross has abundant practical experience in helping client dealing with regulatory bodies. He has specialized knowledge of accounting standards such as IFRS, US GAAP, as well as Listing Rules issued by Stock Exchange and Takeovers Code issued by SFC. Ross works with business owners’ advisors such as financial advisors, sponsors, lawyers and auditors to develop valuation services which of including construction, which covers wide range of industries including construction, infrastructure, property, financial technology, biological technology, agriculture, etc.