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NOVEMBER2007

Guessing Game?

Valuation Challenges in Asia


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2007 The Economist Intelligence Unit and EYGM Limited. All Rights Reserved. 1

Guessing game? Valuation Challenges in Asia

Contents

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1: Difficult, expensive and over-hyped? . . . . . . . . . . . . . . . . . 7WPP: Practice makes perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2: Methods of valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Deutsche Bank: High expectations . . . . . . . . . . . . . . . . . . . . . . . . .11

3: Information and transparency . . . . . . . . . . . . . . . . . . . . . . . 12West LB: Trust but verify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

4: Pricing in risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Anonymous: Remove the beam in thine own eye . . . . . . . . . . . .17

5: Measuring intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Asia Netcom: Watch the government . . . . . . . . . . . . . . . . . . . . . . .18

6: Where the value lies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Survey summary: Developed vs developing markets in Asia . .23

Who took the survey? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Appendix: Survey results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25


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2 2007 The Economist Intelligence Unit and EYGM Limited. All Rights Reserved.


2007 Economist Intelligence Unit and EYGM Limited. All

Rights Reserved. While every effort has been taken to verify

the accuracy of this information, neither The Economist

Intelligence Unit Ltd, EYGM Limited nor their affiliates can

accept any responsibility or liability for reliance by any person

on this information.

Neither this publication nor any part of it may be

reproduced, stored in a retrieval system or transmitted in anyform or by any means, electronic, mechanical, photocopying,

recording or otherwise, without the prior permission of the

Economist Intelligence Unit and EYGM Limited.


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Preface

Guessing Game? Valuation Challenges in Asia is an Ernst &

Young briefing paper, researched and written by the Economist

Intelligence Unit. The Economist Intelligence Units editorial

team prepared and executed the survey, conducted the

interviews and wrote the report. Alexandra Harney was the

author of the report and David Line was the editor. Our thanks

are due to all survey respondents and interviewees for their

time and insights.

November 2007


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Executive summary

With mergers & acquisitions activity in Asia showing

no sign of slowing (some 5,700 deals were done

across the region in the year to October 17th,

compared to 6,400 in all of 2006), the need for

companies to make accurate valuations of their acquisition

targets is as pressing as it has ever beenand as difficult.

Although in developed markets like Hong Kong and Singapore

it might be possible for would-be acquirers to rely on published

financial data to inform their decisions, in many of Asias

hottest developing markets (China and Vietnam, for example)more thorough and painstaking investigation is required. The

question in these markets, however, is whether the strategic

price paid for holding off while the homework is done is higher

than the premium paid for a quick sale. Few companies can

afford to get it wrong often, if ever.

This new study, conducted by the Economist Intelligence

Unit for Ernst & Young Transactions Limited, examines

the difficulties facing executives in appraising the value

of companies across Asia, primarily in China, Hong Kong,

Malaysia, Singapore, South Korea, Taiwan and Vietnam. It is

based on a survey that was conducted in September 2007

of 138 senior executives with knowledge or experience of

valuing companies in those markets, from companies in

various sectors and of various sizes across the Asia-Pacific

region.

The objective of the study was to learn, from the

perspective of those closest to making valuations in these

markets, the common difficulties faced and the reasons for

these difficult ies; the methods most commonly used and

their drawbacks; and how the always-problematic issues of

pricing in risk and valuing a companys intangible assets areaddressed. Overall , the study shows that executives in Asia

are not confident that they are making accurate valuations,

and that almost all the problems associated with appraising

asset value can be linked to a lack of reliable information.

It also shows that many acquirers are sometimes prepared

to forego accurate valuations in the interests of making a

strategically vital purchase.

Among the key findings of the study are:

Companies find it easier to value companies in Asias

developed markets than in developing ones.Only one-

fifth of respondents with knowledge of valuing companies

in China, one-quarter in Vietnam and one-third in Malaysia

feel their companies have determined reasonable values

for businesses well or very well in these markets. In

the more developed markets of Hong Kong and Singapore

two-thirds are happy with their valuation approach,

illustrating the disparity between Asias developed and

developing markets in the information available to make

accurate valuations.

Valuations tend to be higher in China.Such is the rush for

exposure in the fast-growing China market, acquirers seemprepared to pay over the odds for targets in that country:

two-thirds of respondents to the survey say valuations are

higher in China than elsewhere. This links to the fact that

high growth expectations often skew valuations: acquirers

might be more eager to get a foot in the door than to

spend time doing the homework necessary to get an

accurate valuation. In other developing markets (Malaysia

and Vietnam) valuations are perceived to be lower than in

developed markets.

Lack of information is the biggest drawback to making

accurate valuations.Far fewer companies in Asias

developing markets rely on reported financial data than rely

on due diligence investigations when valuing a company.

Trust in publicly available information is low, even for listed

companies in some markets: few respondents feel financial

statements for companies in developing markets are

sufficient for a good valuation. Higher rates of trust in Hong

Kong and Singapore show the benefits of transparency.

Valuation metrics differ between Asias developing anddeveloped markets.While large numbers of companies in

Western developed marketsand in Hong Kong, Singapore

and Taiwanuse earnings multiples to determine value,

such metrics are not used routinely across Asia. In China

only 14% of respondents say they use earnings multiples.

In China and other developing markets net asset values are

often favoured by governmentswhile multinationals prefer

discounted cash flow. Discrepancies between the two can

lead to inaccurate valuations.

There are few set procedures for valuing companies in

Asia.With a lack of information in developing markets,

potential acquirers are forced to adapt valuation


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procedures for each market: half say their approach

varies depending on the country. Less than one-third ofrespondents engage external valuers with local market

knowledge, and only one in five say they have internal

expertise and models used across markets. This makes it

difficult to compare values accurately between countries.

Better accounting and risk disclosure are most sought-

after improvements.Where reliable financial information

is scarce it is not surprising that executives want better

accounting standards to help with valuations: in China

three-quarters of respondents feel this is necessary and

in Vietnam four-fifths do. Elsewhere, better risk disclosureis the top priority, cited by nine out of the ten respondents

with knowledge of South Korea and majorities in Malaysia,

Singapore and Hong Kong.

In Asias developing markets some intangible assets

are too hard to measure.Majorities with experience of

valuing companies in China and Vietnam, and just under

half of respondents with knowledge of valuations inMalaysia and Taiwan, say they have been less successful in

valuing intangibles than in developed markets elsewhere.

Sometimes companies dont bother to try: in China

significant minorities report that even important factors

like non-compete agreements, copyrights and intellectual

property are not factored into valuations at all .

The greatest value is seen in customer lists and licences.

Where companies see the value in their acquisitions

depends on the market: customer relationships and

licences take priority over intellectual property andhuman capital in developing markets, possibly reflecting

acquirers strategic interests in getting a foot in the door

and the importance of having local knowledge of complex

regulatory issues. Apart from in Singapore, where it ranks

second only to tangible assets, human capital seems not

to be regarded highly when valuing companies in Asia.


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Introduction

As the frenzy of mergers and acquisitions continues

across Asia, valuations have become an increasingly

important issue for multinationals in the region.

in China, progress is not as fast as some would like to see.

And despite improvements there, the challenge of making

accurate valuations is commonplace across Asia.

The survey conducted by the Economist Intelligence Unit

for this report shows that good information is a crucial factor

in valuations. The results also suggest that when it comes

to asset appraisal, the region can be divided into two broad

groups: more developed, mature markets, represented in

the survey by Hong Kong and Singapore, and less-developed

markets such as China, Malaysia and Vietnam.In the developed markets, information is generally easier

to come by, which makes assessing value easier and leads

to more reasonable valuations. But in some less developed

markets, notably China, the lack of information, coupled with

excitement about investment opportunities, contributes

to higher valuations than elsewhere. In other words, some

investors are concluding that the risk of miss ing out on the

extraordinary growth is greater than the risk of paying too

much for a strategic acquisition. Concerns about country

risk also lead to undervaluation in some emerging markets,

perhaps reflecting investors greater caution.

Mergers & acquisitions activity in Asia, 2006-07

Year to October 17th 2007 Same period 2006 Full year 2006

Rank in AsiaValue

(US$m) % shareNumberof deals

Value(US$m) % share

Numberof deals

Year-on-year

growth(%)

Value(US$m) % share

Numberof deals

1 China 52,513,50 20.9 1,821 29,192.10 19.3 1,410 79.9 46,593.10 21.2 1,980

2SouthKorea

49,840.00 19.8 442 16,625.70 11 208 199.8 24,438.80 11.1 273

3 India 36,692.60 14.6 822 31,604.90 20.8 974 16.1 34,988.80 15.9 1,174

4 Hong Kong 34,422.50 13.7 787 23,659.70 15.6 598 45.5 27,303.40 12.4 766

5 Malaysia 19,436.10 7.7 651 12,168.10 8 679 59.7 27,505.10 12.5 873

6 Singapore 18,495.60 7.4 397 10,202.80 6.7 385 81.3 16,289.20 7.4 472

7 Thailand 10,829.50 4.3 204 7,096.70 4.7 222 52.6 7,615.50 3.5 277

8 Taiwan 10,427.70 4.1 94 12,045.70 7.9 141 -13.4 17,609.00 8 178

9 Indonesia 4,755.10 1.9 125 3,251.60 2.1 89 46.2 3,492.20 1.6 116

10 Philippines 4,001.10 1.6 143 1,969.60 1.3 98 103.1 7,815.10 3.6 132

13 Vietnam 1,351.70 0.5 71 155.8 0.1 18 767.6 245.2 0.1 32

Source: Thomson Financial

The aggregate value of M&A deals in Asia1has

risen to record levels, climbing to over US$250bn in the year

to October 17th, according to Thomson Financial, a financial

information provider. That compares to US$219bn for the

whole of 2006.

Yet Asia continues to present unique challenges to

investors. Information is not always easy to obtain. Targetcompanies dont necessarily follow international financial

reporting norms. Governments, which in many Asian

countries own the most attractive potential acquisition

targets (and must rationalise and defend their sale),

sometimes prefer their assets to be valued using different

methods from those favoured by multinationals.

Nowhere are these issues more evident than in China, the

regions hottest M&A market. China accounted for about 20%

of total deal value in Asia in the first nine months of 2007

and around one-third of the total number of deals, according

to Thomson Financial. Although executives and advisors

report a trend toward greater transparency in valuations

1Cross-border and domestic deals, excluding Japan and Australasia


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1: Difficult, expensive and over-hyped?

Valuations in Asia are difficult to get right, but acquirers may be prepared to

pay a premium to get exposure in high-growth markets

It should come as no surprise that the executives surveyed

for this report, on the whole, found valuing companies

in Asia to be more difficult than doing so in developed

markets, and that these difficulties have led to inaccurate

valuations. Perhaps more of a surprise was that companies

seem prepared to pay over the odds in high-growth marketsand China in particularrather than risk missing out on sharing

in that growth.

China, the largest market in Asia for M&A, leads the region

in terms of difficulty of valuation, with 90% of respondents

reporting that it is harder to make valuations there than in

developed markets. Malaysia, Asias fifth-largest M&A market

this year by deal value, also presents challenges: 62% of

executives surveyed say it is harder to value assets there than

in developed markets.

Hong Kong and Singapore, by comparison, offer a

more predictable environment to investors. Some 61% of

respondents in the survey say making valuations in Hong

Kong is comparable in difficulty to other developed markets.

Singapore is even easier, with 68% of respondents reporting

valuations are about as easy to conduct there as in other

developed markets.

Because the number of respondents with experience in

South Korea, Taiwan and Vietnam was smaller than for the

other countries, it is difficult to draw firm conclusions from

the data. But it is intriguing to note that as Vietnam steps

up its efforts to attract foreign investment, one-quarter of

respondents say they find valuations there easier than in

developed markets. South Korea remains somewhere in the

middle: one-third of respondents say valuations are the same

as in developed markets while just over one-half think they areharder. In Taiwan, two-thirds report that valuations are harder.

With difficulty comes inaccuracy. If valuations in Western

developed markets (with freer flows of information) are on

average accurate, historically speaking valuations in Asia have

generally been believed to be lower than in Western countries.

But this survey indicates that this is no longer the case in

every market.

In China, 64% of respondents say valuations are higher

than in developed markets. Nearly one-half of those surveyed

in Taiwan (albeit from a smaller sample) also think valuations

are higher. In Malaysia, by contrast, 61% of respondents report

the valuations they see are lower than in developed markets.

A similar phenomenon exists in Vietnam, where 55% of those

surveyed report lower valuations.

Why is there a divergence across these markets? Malaysia

and Vietnam are certainly less active M&A markets than China,

and while they are increasingly attractive to investors, they do

not have the economic potential that China boasts.

Executives and advisors say multinationals are so keen to

How difficult are valuations in the following markets compared to valuations of similar businesses in developed markets?(% respondents)

7.1 90.0 2.9

18.4 61.2 20.4

15.4 23.1 61.5

18.2 68.2 13.6

8.3 25.0 66.7

25.0 8.3 66.7

33.3 55.6 11.1

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore

Valuations are easier than in developed markets Valuations are the same as in developed markets

Valuations are harder than in developed markets Dont know/Not applicable


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get a foot in the door in China that they will pay a premium to

do so. As Marc Goedhart, Timothy Koller and Nicolas C Leung,consultants at McKinsey, have written, [F]or many sectors,

such as high technology and manufacturing, the advantages

of going to Asia, particularly China, have so changed the

competitive dynamics that theres little choice but to join the

information, highlighting the countrys lack of transparency. A

large majority (70%) of respondents say a lack of informationis more likely to affect valuations in China than in developed

markets.

In other economies, the picture changes dramatically. In

Hong Kong and Singapore, about one-half of respondents cite

demand for investment as the most important external factor

affecting valuations. Interestingly, however, an almost equal

proportion (48%) of respondents says expectations of growth

affect valuations in Singapore more than in other developed

markets (and six out of ten with knowledge of valuations in

South Korea say the same).

Surprisingly for an emerging market, growth expectationsare much less important in valuations in Malaysia. Only 26%

of respondents say valuations are more sensitive to growth

expectations in the economy than in developed markets. As

in Hong Kong and Singapore, about half of respondents say

demand for investment distorts valuations in Malaysia.

While it is more difficult to draw definite conclusions about

Vietnam, it is worth noting that lack of information does appear

to affect valuations there. Nearly two-thirds of the respondents

say a lack of information affects valuations in Vietnamalmost

as many as in China. However, perhaps showing that the rush

to get in on the market has not reached the same level as that

seen in China, only one-third think that growth expectations

rush.2

External factors

The survey results illustrate how external factors affect

valuations across Asias diverse markets. Unsurprisingly,

valuation is easier in markets that offer investors greater

transparency in terms of corporate disclosure. A dearth ofinformation affects executives ability to make reasonable

valuations in every market surveyed except Hong Kong

and Singapore, where only 12% and 10% of respondents,

respectively, cite this as an issue.

Also unsurprisingly, given investors current excitement

about the Chinese market, expectations of growth play a

large role in determining values in China in particular. About

two-thirds of respondents say growth expectations affect

their ability to make reasonable valuations there more than

in developed marketsa finding that underscores the desire

by many multinationals to get into the China market to tap

into its rapid growth. Equally important, however, is a lack of

Which of the following statements are closest to your experience in determining reasonable values for businesses in

each market compared to valuations of similar businesses in developed markets? Select all that apply.(% respondents)

70.0

10.4

50.0

47.5

12.2

64.358.3

65.7

47.8

60.0

27.5

38.8

35.7

33.3

28.6

52.2

20.0

52.5

46.9

35.7

25.0

Valuations are more sensitive to growth expectations

in the economy than in developed markets

Valuations are more likely to be affected by a lack of

information than in developed markets

Valuations are more likely to be affected by demand

for investment than in developed markets

China Hong Kong Malaysia Singapore South Korea Taiwan Vietnam

2Marc Goedhart, Timothy Koller and Nicolas C. Leung, The scrutable East, McKinsey on Finance, Autumn 2004.


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external accounting firm to do financial and tax

diligence thereafter.

The commercial due diligence process focuses

on building a picture of where profits come from in

the targets business, the depth of its talent base

and its customer relationships. Human capital

and customer relationships are key factors in the

advertising business. WPP also has its advisors

explore possible tax issues and conduct background

checks on the target and its vendors to ascertain its

probity.

This process can be expensive. And it can take

months, particularly as some of the companies WPP

invests in are small, owner-managed operations.

Sometimes we have to work with them over a

period of time if the business controls are not so

developed, Mr Neish says.

In the last two years, global advertising andmarketing group WPP has done 22 deals in Asia,

not including the local companies it has folded

into its network as part of an international group

purchased elsewhere. Valuations are therefore

integral to WPPs strategy. Were very disciplined

in our approach, says Stuart Neish, the groups

regional director for the Asia Pacific region. We

pretty much have to be, due to the volume of

targets at all stages of our M&A process, from

targeting to completion.

WPP employs a team on three continentsAsia,

Europe and North Americadevoted to M&A. Once

a memorandum of understanding has been signed

with a potential target, WPP does commercial

due diligence themselves, prior to signing a

memorandum of understanding, and turns to an

The team then examines potential targets

earnings multiples based on a figure Mr Neish calls

operational profit after tax. Well take the local profit

number, he says, and well make certain adjustments

to get it onto our accounting basis.

Better accounting standards would make Mr

Neishs job easier. Some companies do not seem

to follow any standard. Equally, he believes better

corporate governance practices, including stamping

out corruption, would be helpful.

Generally, though, Mr Neish believes WPPs

strong brands and long history in the region give

it an advantage over its rivals in the valuation and

acquisition process. The in-house team provides

another edge in valuations because they bring

industry expertise. In addition, having a good roster

of advisors is really important, he says.

WPP: Practice makes perfect

in the economy affect valuations in Vietnam more than in

developed markets.

Lack of success

Given the poor availability of information in many countries, and

external factors such as growth expectations and investment

demand that can skew value perceptions, how successful do

companies feel they have been in valuing companies so far in

Asia? The answer, for the most part, is not very.

In China, only about one-fifth of respondents feel they have

been able to value companies well or very well, and an equal

number feel they valued companies poorly compared to other

markets. About one-half believe that their valuations in Chinahave been acceptable. A similar proportion of respondents are

satisfied with the valuations they have made in Malaysia.

Respondents ambivalence about China is mirrored inVietnam, another market that suffers from a lack of reliable

information. One-quarter of respondents say they have valued

investments poorly in Vietnam, and another 8% say their

valuations are very poor. Strikingly, in South Korea, none of the

respondents feel they have valued acquisitions well compared

with other developed markets.

By contrast, respondents are relatively happy with their

valuation performance in Asias more developed markets,

evidence of the importance of transparency. In Hong Kong and

Singapore, the percentage of respondents who say they have

been able to value companies well or very well is 63% and 61%respectively.


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2: Methods of valuation

With differing levels of available information, acquirers use a variety of

procedures and methods for valuing assets in Asia

In markets as diverse and distinct as those in Asia, it is not

surprising that nearly one-half of respondents say their

approach to valuations varies by country or region. Only a

minority has set approaches or methods, making it difficult

to compare the accuracy of valuations between regions.

Less than one-third of all respondents say they engageexternal valuers with local market knowledge to assess value.

And only 20% regularly turn to internal staff that use in-house

valuation models. Global marketing and advertising group

WPP is among this minority. Whether its a large or small

acquisition, we go through the same process, says Stuart

Neish, WPPs regional director for Asia Pacific.

WPP also appears to be in a minority with regard to the

metrics it uses. Although earnings multiples are commonly

used in the US and Europe, no single valuation method is

significantly more popular than others in Asia. This is not

surprising, in one sense, since using different methods

provides a means for potential acquirers to cross-check

valuesa process that becomes especially important when

accurate information is scarce. Differences between the

methods used in Asias developing and developed markets

tend to correlate with the availability of information.

In the developed markets surveyed, executives use

earnings multiples more than any other method. About 37% of

respondents with knowledge of valuations in Hong Kong and

42% of respondents with knowledge of valuations in Singapore

use earnings multiples based on comparable markettransactions or listed companies. In these more mature

markets, using discounted cash flows is another common

approach. Nearly 29% of respondents in Hong Kong and

35% in Singapore favour discounted cash flows as a metric.

Interestingly, three of the ten respondents with experience in

South Korea use discounted cash flows in deals there.

In less developed markets, executives rely on a mixed

bag of methods, perhaps because of the variable quality of

information and the need to cross-check. In China, one-third

of respondents use discounted cash flow, while only 14% use

earnings multiples. Balance sheet values are a more commonreference in China, where 20% of respondents refer to them

in making valuations, and in Taiwan, where one-half of the

executives surveyed do. Compare that to Singapore, where only

9% of respondents use balance sheet values.

In certain countries, such as China, Vietnam and Malaysia,

around one-third of executives say they do not prefer any

particular method. This trend is particularly pronounced among

respondents from companies with annual revenues below

US$500mwhich are presumably involved in fewer deals.

The lack of consistency overall may reflect the fact that

companies and government officials often use net asset value

to determine the valuation of a businessnot always foreign

investors favorite approach. What we find in Asia is that many

times, the local companies that are putting themselves up for

sale are very focused on what their net asset value is, says

Bob Partridge, managing partner of Ernst & Youngs Transaction

Advisory Services.

The problem is compounded if state-owned enterprises

are not valued as private investors expect. Governments, after

all, must justify to the public the sale of valuable assets in

readily understandable terms that reflect the physical assetsbeing divestedwhich often means relying on net asset value.

But this causes problems. As long as governments do not

recognise that their own approval methods normally do not

reflect what sophisticated investors look at, its going to be

hard to change, says Mr Partridge.

How does your company approach valuations?(% respondents)

46.4

28.3

20.3

2.9

2.2

27.3

Our approach varies depending on the country/region

We engage external valuers with local market knowedge

to determine values

We have internal expertise with in-house valuationmodels which we use across markets

No considered approach

Dont know/Not applicable


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What are the common valuation methods that are considered when valuing businesses in these markets?

Select the most preferred method only. Results split by annual revenue of respondents companies.(% respondents)

27.5 12.5 17.5 40.0 2.5

40.0 16.7 23.3 20.0

15.4 30.8 19.2 34.6

12.5 25.0 62.5

7.7 38.5 23.1 30.8

25.0 25.0 25.0 25.0

China

Malaysia

Vietnam

China

Malaysia

Vietnam

Discounted free cash flowsUS$500m or less

Earnings multiples based on comparablemarket transactions or listed companiesBalance sheet values

No particular method favoured


Discounted free cash flowsOver US$500m

Earnings multiples based on comparablemarket transactions or listed companiesBalance sheet values



overseas, a role that involves navigating between

different approaches to valuation. Like other

governments in the region, Beijing has used net asset

value to appraise the value of enterprises that are

up for sale to foreign investors. Multinationals, on the

other hand, prefer to use discounted cash flow (DCF)

or comparable transactions, Ms Wang says.

Although the Chinese government increasingly

considers valuations produced by DCF analysis

(and the survey suggests it is now among the most

popular metrics across all types of transaction),

old habits die hard. Net asset value remains an

important consideration in deals in Chinanot least

because officials must remain accountable for

maximising the proceeds from the sale of assets

that public money has built.Chinas extraordinary economic growth plays a

large role in valuations there. Because the economy

is growing so fast, even an average company can

be expected to increase revenues in line with gross

domestic product, Ms Wang says. If youre any

China is one of the most promising but challengingmarkets for executives today. With an economy

growing at double-digit rates, a relatively open

attitude toward most foreign investment, and

powerful, market-leading companies, Chinaattracted US$78bn worth of foreign direct

investment in 2006 and is forecast to attract

US$85bn in 2007.

But the markets allure can be dimmed by the

poor quality of local companies bookkeeping and

the uncertainty of future regulatory arrangements.

(Indeed, Beijing has been increasing its scrutiny of

foreign investments in recent years, insisting, for

example, on reviewing transactions in areas deemed

important to national security.)

In the middle of these transactions are advisors

like Ying Wang, Hong Kong-based vice president in

the mergers and acquisitions advisory practice at

Deutsche Bank. Ms Wang advises multinationals

on investments and acquisitions in China and

Chinese companies on investments and acquisitions

better than average, you should be growing at a higher

rate, and thats already very good.

And yet, in such a rapidly developing market, due

diligence can be harrowing. Chinese companies often

lack necessary business permits or even contracts

for their employees. These issues are most common

among private companies, although they also occur

within state-owned enterprises. You just have to deal

with the risk, says Ms Wang. Its never going to be

watertight.

Generally, however, multinationals are aware of

these risks and would not be considering a substantial

investment in China if they were dissuaded by them,

Ms Wang says. They want to do something in China

because they know that there is the potential for a

huge upside. And as Chinese companies invest moreabroad, they are becoming more aware of the need for

different methods of valuation and more transparency.

Both of these trends should make the negotiation

process easier in coming years.

Deutsche Bank: High expectations

What are the common valuation methods that are considered when valuing businesses in these markets?

Select the most preferred method only.(% respondents)

32.9 14.3 20.0 31.4 1.4China

Discounted free cash flows Earnings multiples based on comparablemarket transactions or listed companiesBalance sheet values




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3: Information and transparency

In developing markets in the region, acquirers must rely on their own

investigations to assess value; reported data is often inadequate

The survey results suggest that investors adjust their

information-gathering techniques according to local

market conditions, as the availability of accurate and

reliable information varies. While they can access

reported financial data in more developed areas, they are

forced to rely more on due diligence in the less-developed

markets.In China, more than three-quarters (77%) of respondents

rely on commercial due diligence and investigations of target

businesses. Due diligence is particularly important in terms of

a companys tax records in China, where companies often have

hidden tax obligations, says one executive. Youve got a culture

of secrecy in China, says another. A lot of the information

that state-owned enterprises have is totally irrelevant to

foreign investors, he adds.

Similarly, 68% of respondents in Malaysia and nearly

three-quarters of those with experience in Vietnam do

their homework with investigations. Confidence in market

information in these countries is low, with only 43% of

respondents in China and Vietnam saying they could depend

on this kind of information. Respondents give Malaysia even

lower marks: only 30% of respondents feel they can rely on

market information there.

Companies are doing commercial due diligence in order tocompensate for the shortage of reliable information in these

markets. One executive says he looks for hidden liabilities

that, he argues, local regulatory officials might overlook in a

local company but would single out if the business were a joint

venture or foreign-owned group. Others use market research,

including comparisons to other companies in the region, and

competitive intelligence.

It is far easier to get accurate information in places like

Hong Kong and Singapore, where nearly 80% of respondents

say they can rely on reported financial data. Even in these

Which type of information do you rely on for valuations in each market? Select all that apply.(% respondents)

77.1

53.780.0

67.5

71.4

71.4

66.7

65.7

55.280.0

45.0

63.3

57.1

66.7

54.3

79.190.0

55.0

77.6

42.9

58.3

42.9

47.8

40.0

30.0

49.0

42.9

25.0

Internal due diligence/investigation

Data subjected to financial and tax due diligence

Reported financial data

Authoritative market information



15/48



markets, however, most companies still do their own

investigation. Some 71% of respondents also rely on internal

due diligence in Hong Kong, compared with 54% in Singapore.

Listed and unlisted

No executives surveyed trust public information about

unlisted companies in China enough to make it the basis of

a good valuation, although a minority (4%) say it is sufficient

for acceptable valuation. Some 94% of respondents say the

information in public financial statements in China is not

sufficient for any reliable valuation of unlisted companies.

Often, the data doesnt exist, says one executive. Or, he

says, the data isnt sufficient to make a decision. Theyve

brought in a [local] accounting firm and theyve pulled together

the financials from the last two years, but theres not enough

depth to it.

Respondents are similarly cynical about Vietnam, where

three-quarters of the executives surveyed say they would not

be able to make a reliable valuation based on public financial

statements, and Malaysia, where two-thirds do not trust the

public figures enough to use them in valuations of unlisted

companies.

That contrasts with the 62% of respondents in Singapore

and 65% of respondents in Hong Kong who feel they can make

either a good or an acceptable valuation of an unlisted

company based on publicly available statements. Again, the

For unlisted companies in each market, do you consider the information in publicly available financial statements

adequate to determine valuations of businesses?(% respondents)

4.3 94.2 1.4

10.4 54.2 4.2

7.7 23.1 2.6

19.7 42.4 3.0

16.7 16.7 8.3

31.3

66.7

34.8

58.3

15.4 76.9 7.7

40.0 40.0 20.0

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore

Information in publicly available financial statements is sufficient for good valuation

Information in publicly available financial statements is not sufficient for any reliable valuation

Information in publicly available financial statements is sufficient for acceptable valuation


For listed companies in each market, do you consider the information in publicly available financial statements

adequate to determine valuations of businesses?(% respondents)

2.9 22.1 69.1 5.9

46.8 2.1

12.8 48.7 2.6

45.5 40.9 1.5

16.7 58.3 25.0

8.542.6

35.9

12.1

15.4 15.4 61.5 7.7

33.3 33.3 33.3

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore






16/48



more developed the market, the easier it is to get information

and the greater the likelihood of an accurate valuation.In theory, accounting regulations and stock market rules in

these markets should improve the availability of information

about public companies. And in some markets, it does. Nearly

one-half of respondents give Hong Kong and Singapore a

thumbs up for public disclosure. About 86% of respondents

are confident they could make either a good or an acceptable

valuation based on publicly available financial statements in

Singapore, and 89% could do the same in Hong Kong.

South Korea and Taiwan have developed capital markets,

but respondents are more circumspect about trusting

information about listed companies in these markets: one-third of respondents with valuation experience in South Korea

and one-quarter of those with knowledge in Taiwan do not

think information in publicly available financial statements

is sufficient for any valuation (although reference should be

made to the comparatively small sample sizes).

There are also problems with information in China. A large

majority of respondents do not depend on publicly available

financial information to make reliable valuations of listed

companies in China. Only 3% feel comfortable using financial

statements to make a good valuation of a listed mainland

Chinese company, and only one-fifth thinks such information is

sufficient for an acceptable valuation.

Among the executives surveyed with experience in

acquisitions in Vietnam, faith in that countrys public

information is also low: two-thirds would not feel comfortable

making a reliable valuation of a listed company using public

financial statements. In Vietnam, one telecoms executive says,

You have good visibility from the representative organisation

that youre dealing with, but the real decisions are made manylayers back.

Room for improvement

There is clearly room for improvement in the flow of

information around the region, despite efforts in various

countries to raise standards to internationally acceptable

levels. In China, three-quarters of respondents would like to

see the application of better accounting standards, while 70%

believe better disclosure of risk is key and 69% would like

more reliable or authoritative market information.

Some executives are concerned about local companiespractice of keeping several sets of accounts, particularly

in China. One respondent to the survey felt strongly enough

about this matter to mention it in a write-in response to the

question that asked which improvements would be most

necessary to increase the accuracy of valuations.

Transparency is an issue throughout the region. In

Malaysia, South Korea, Singapore and Hong Kong, respondents

rank better disclosure of risk as their top priority. Some nine

out of 10 respondents with experience in South Korea believe

companies there need to better disclose risk to investors. One

respondent wants companies to bring the skeletons out of

their closets by fully disclosing all of their shareholdings. Yet

another feels that documentation of assets, particularly those

that have to meet regulatory requirements, is insufficient. One-

third of respondents would just like companies to comply with

existing accounting standards.

For Vietnam, an emerging market still hampered by a

large multinationals evaluating private, unlisted companies for

acquisition in less developed markets in Asia. Some countries,

like China, pose unique challenges. For example, there can be

uncertainty about potential changes in government regulations

that would affect the future value of a business.

In these cases, West LB draws on data about comparable

transactions or companies in other Asian countries. Mature

markets like Singapore are more transparent. Measuring

intangible assets such as intellectual property is a difficult part

of the process, says Mr Regan, but can be achieved indirectly

by measuring certain elements of the assets such as existingcashflows as well as other comparable data.

Charles Regan, Hong Kong-based managing di rector of thecapital markets practice at West LB, uses a rule of thumb

when valuing companies in the region: trust but verify. Mr

Regan, who advises clients in the energy, telecommunications,

infrastructure, and hospitality sectors, relies on a combination

of available data and knowledge of the region to assess value.

Its really a case of poring through the data and trying

to test for reasonableness, he says. West LB uses financial

information procured from target companies and then draws

from its own database, deepened through past transactions,

on companies around the region.Still, Mr Regan concedes it is easier to do this in some

markets than others. West LB often acts as an advisor to

West LB: Trust but verify


17/48



lack of good information, four-fifths of the small sample of

respondents feel better accounting standards are calledfor. Similarly, 71% of respondents would benefit from more

reliable market data in Vietnam.

Even developed Asian markets could raise their game. A

surprisingly high proportion of respondents would like to see

better accounting standards in the most mature markets inthe survey: one in five respondents believes Hong Kong needs

to reinforce this area, while just over a quarter (27%) believe

Singapore could improve its rules.

Which of the following improvements is most necessary or would be most helpful to making accurate valuations?

Select all that apply.(% respondents)

74.3

26.9

40.0

47.5

20.4

78.6

33.3

70.0

65.790.0

77.5

61.2

64.3

50.0

68.6

37.350.0

50.0

36.7

71.4

58.3

Better general accounting standards

Better disclosure of risk

More reliable or authoritative market information



18/48



4: Pricing in risk

Country risk is a factor in valuations across Asia, but it is not putting

companies off making deals

Akey factor in many valuations is the assessment of

country risk. This overall judgment can weigh heavily

on valuation decisions, according to the survey

respondents and the experts interviewed for this

report. Yet the perception that country risk is a major factor in

valuations doesnt necessarily indicate lower deal volume.

Of the four markets with the most responses in the survey,country risk was perceived to be the highest in China, with

62% citing it as a major factor in valuationsan interesting

contrast to the high volume of deals, and a testament to the

countrys attractiveness as an investment destination. This

could be changing, according to Bob Partridge at Ernst & Young.

What we see in general as companies become a lot more

experienced at looking at deals in China, they become a lot

more comfortable in accepting risksimilar to the process in

developed markets, he says.

Nearly one-half of respondents consider country risk a

major factor in valuations in Malaysia. Of those with knowledge

or experience of valuations in Vietnam, nearly two-thirds say

country risk is a major factor in the valuation process.

However, respondents indicate that country risk plays a

role even in stable, developed markets like Hong Kong and

Singapore. About one-fifth of respondents say country risk

is a major factor in valuations in these marketsthe same

proportion as in South Korea. This suggests that multinationals

might simply be less comfortable making valuations in Asia

than in Europe or the US, as even somewhere as secure as

Hong Kong can fall foul of crises like the SARS virus.

How is risk included in valuation appraisals? As with

the overall valuation process, there does not appear to be

a consistent method. More respondents use external risk

models and rankings in Malaysia and Singapore than in China

and Hong Kong. In Singapore, more than one-half use externalmodels, while in Malaysia the figure is just over 40%. In China

and Malaysia, about one-half of respondents rely on internal

analysis. And more than one-half the respondents use internal

analysis to determine country risk in Vietnam.

Interestingly, the largest companies surveyed tend to use

internal analysis rather than relying on external models or

rankings. Between one-half and two-thirds of respondents

from companies with revenues of over US$5bn per year

use internal analysis to determine country risk. This could

reflect that larger multinationals tend to have larger business

development teams.

What is also striking about these figures is the heavy

reliance on internal analysis in the same countries where

executives report the most difficulty in establishing

valuations, suggesting there is room for improvement in this

process. This result raises the question: how can companies

be certain they are paying the right price for the businesses

they buy in these markets?

Please assess how country risk affects valuations in the markets concerned.(% respondents)

62.3 1.433.3 2.9

17.0 51.1

48.7 41.0

21.5 43.1 1.5

27.3 45.5 9.1

31.9

10.3

33.8

18.2

69.2 30.8

20.0 30.0 40.0 10.0

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore

Country risk is a major factor in valuations Country risk is a minor factor in valuations

Country risk is not a factor in valuations Dont know/Not applicable


19/48



too heavily on models drawn up by people who do

not understand the region. Valuations are put in the

hands of MBAs. Theyre young, theyre inexperienced,and theyve got total confidence, he says.

These MBAs create models to appraise assets

that completely miss the point, he continues. The

model can be elegant, but if the assumptions are

wrong, the whole thing is wrong. There are very

few people that understand Asia well enough to

successfully work with the inputs of the model.

In the telecoms sector, the executive contends,

companies commonly underestimate the impact

of industry growth. He cites as an example the fact

that many executives failed to predict the rapid

growth in mobile-phone usage in China. Others

overlooked the emergence and influence of low-cost

Most executives involved in valuations in Asiacontend that while challenges abound, they are

mostly a reflection of local factors: differingmethodologies or standards of accounting and

government supervision, for example.

One international telecommunications

executive takes a contrarian view: he blames the

multinationals. His comments are so critical that he

insisted on anonymity, because his views would not

reflect well on his company.

Most multinational companies, he contends,

do not understand Asia well enough to accurately

assess the value of assets in the region. Senior

executives from multinationals either disregard

valuation models, preferring to snap up an asset

quickly without sufficient consideration, or focus

local competitors that have driven down prices for

equipment.

He also argues that country risk is a factorexecutives use for tactical advantage, rather than to

inform their decisions during the valuation process.

When people dont want a deal done, they bring up

country risk. When they do want it done, they ignore it,

he says. Its a fig leaf.

A common problem, this executive observes,

is that the people involved in making valuations

for an acquisition in Asia are often flown in from

elsewhere, have little contact with the local staff of

the multinational, and even less understanding of the

region. Better to leave the work to professionals who

have been working in Asia for years and understand

the industry, he contends.

Anonymous: Remove the beam in thine own eye

When making valuations, how does your company assess country risk in the markets concerned? Results split by annual

revenue of respondents companies.

(% respondents)

38.9 50.0 7.4 3.7

35.0 42.5 17.5 5.0

43.8 50.0 3.1 3.1

58.0 26.0 14.0 2.0

33.3 53.3 6.7 6.7

25.0 50.0

33.3 66.7

12.5 12.5

40.0 46.7 6.7 6.7

China

Malaysia

China

Hong Kong

Hong Kong

Singapore

Singapore

Malaysia

We use external risk models/rankingsLess than US$5bn

We use internal analysis

We do not include country risk premiums in our valuations Dont know/Not applicable

We use external risk models/rankingsUS$5bn or over

We use internal analysis

We do not include country risk premiums in our valuations Dont know/Not applicable


20/48



5: Measuring intangibles

Intangible assets are particularly hard to measureand in some cases

companies dont even try

Acentral challenge in the valuation process is

appraising intangible assets. This is never easy in

any transaction, but the survey suggests companies

have less success in putting a value on a wide

range of intangible factors in Asia than in developed markets

elsewhere. Respondents have the most trouble in China, with

59% of respondents reporting less success placing a value onintangible assets there than in developed markets. Similarly,

46% say they are less effective valuing intangible assets in

Malaysia than in developed markets.

Executives are more satisfied with their attempts to

value intangibles in Asias developed markets, underscoring

the better flow of information and greater transparency in

these areas. Of the survey respondents, 52% have been

as successful as in other developed markets in valuing

intangible assets in Hong Kong, and 44% can say the same

in Singapore. Interestingly, 20% of respondents have had

more success valuing intangible assets in Singapore than in

other developed markets evidence, perhaps, of the citys

vaunted rule of law and close protection of intellectual

property rights.

By contrast, and unsurprisingly, none of the respondents

feel they have had more success in Vietnam than in

developed markets . However, the split between developing

markets and developed is less clear than in other factors

relating to valuation. In South Korea fully half of the small

sample of respondents report less success in valuing

intangible assets there than in developed markets

elsewhere.

Hard to measure

Which intangibles are hardest to measure? In China,respondents say that very little can be measured

robustlyeven factors potentially crucial to the profitability

of an enterprise such as intellectual property, licences,

workforce skills and brands or trademarks. For every

category of intangible asset, between one-third and one-

half of respondents reports that they can measure them

only informally. Indeed, appraising the value of intangibles in

China is so hard that between one-fifth and one-quarter of

respondents say they do not even bother to evaluate several

key categories, including crucial elements such as non-

compete agreements (26%), patents/know-how (19%) and

intellectual property (19%).

Malaysia presents a similar picture. In almost every

category, between one-quarter and one-half of respondents

say they can only measure the value of intangibles

informally. About one-quarter say they do not even attempt

to evaluate non-compete agreements and one-fifth do not

bother with copyrights or intellectual property.

Accounting standards and corporate governance

can be less stringent than in Western markets. In

addition, many businesses, particularly in countries

like the Philippines, Hong Kong, Singapore and

Indonesia, are family owned.

Like other executives, he believes government

policy toward target companies can be a crucial

factor in determining their value. This is particularly

true in the telecoms sector, where government-

issued licenses are essential and valuable assets.

A Chinese telecoms group, for example, might

Bill Barney knows a few things about valuingcompanies in Asia. A telecommunications industry

veteran who has been chief executive of Asia

Netcom, the Hong Kong-based telecoms group, since

November 2005, Mr Barney has participated in a wave

of deals in recent years. Most recently, he oversaw the

acquisition of Pacific Internet by its parent company,

Connect Holdings, in September 2007.

Transparency is a major issue in acquisitions

in the region, Mr Barney says, in terms of

understanding how these companies function.

be able to operate without a licence while it remains

a purely domestic company, but it may attract the

attention of regulators once foreign investors take a

stake. In the telecoms industry, there are very few

markets where the licensing is black and white, he

says. Its always shades of grey.

The uncertainty can drive down valuations by

making it hard to understand the potential future

value in a business. Still, Mr Barney is confident that

the situation is improving. I think standards are

getting better everywhere, he says.

Asia Netcom: Watch the government


21/48



Measuring the value of intangibles is much easier

in Hong Kong, where between one-third and one-half ofrespondents say robust measurement is possible in nearly

every categoryexcept for non-compete agreements, which

35% of executives say they can only appraise informally or

qualitatively. And as expected, respondents have the most

confidence in valuing intangibles in Singapore. Nearly 60%

of executives say they can make robust measurements of

copyrights , patents and intellectual property.

In South Korea, respondents say they can measureintangibles, but not systematically. Taiwan presents a similar

challenge: respondents can measure the value of most

assets, but can do so neither systematically nor formally.

Respondents were even more pessimistic about Vietnam,

where a majority can only measure intangibles in many

categories informally.

For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies

in China.(% respondents)

4.4 33.8 48.5 11.8 1.5

10.1 42.0 34.8 1.411.6

13.0 33.3 47.8 4.3 1.4

8.7 44.923.2 18.8 4.3

1.4 31.9 43.5 17.4 5.8

6.0 26.9 40.3 19.4 7.5

Workforce capabilities and experience

Patents/know-how

Research and development findings

Brand/trademark

Customer relationship/list

14.5 34.8 37.7 1.411.6

20.9 41.8 29.9 1.56.0

5.8 24.6 40.6 2.926.1

7.4 26.5 32.4 5.927.9

Existing agreements made on favourable terms

Licenses/permits/rights

Non-compete agreements

Software

Copyrights/intellectual property

Can be robustly measured Can be measured but not in a systematic way

Is not measuredIs estimated or appraised only in an informal or qualitative way



22/48



6: Where the value lies

Where the highest value is perceived depends on the type of market: in

developing markets, customer relationships and licences take priority over

intellectual property and human capital

Across the region, tangible assets are the most

important factor in valuations. Behind this, however,

there is considerable discrepancy in which parts of

a company are typically valued most highly. Again

there is a broad correlation with the type of market: tangible

assets and customer lists are prioritised in developingmarkets, while brands and intellectual property play a smaller

role. Human capital, it seems, is fairly far down the list of

factors weighed up in considering a companys value.

In China, respondents consider tangible assets, customer

relationships and licences the most important factors

when valuing companiesa logical conclusion given the

governments emphasis on net asset value and the complex

and fluid regulatory issues involved. In Hong Kong, after

tangible assets, respondents consider copyrights, patents

and brands the most valuable components of an acquisition

target. Human capital, however, ranks fifth in the hierarchy

of importance. In Singapore, however, human capital finishes

second in importance after tangible assets, followed by

patents and brands. This could well reflect the high quality of

the talent pool in Singapore.

In Malaysia, customer relationships are most important

after tangible assets, and licences are similarly important

(a result which could reflect the fact that many of the

respondents were in the financial-services and professional-

services industries). Only 40% of respondents with experience

in Malaysia consider human capital a very importantcomponent of a valuation, on par with patents and copyrights.

In Taiwan, only one-third of respondents think human capital

is very important. But in Vietnam, human capital was very

important to two-thirds of respondents, perhaps reflecting

the high regard given its industrious and capable workforce.

Customer relationships came in second in importance in

Vietnam to tangible assets.

The survey results suggest that the less developed the

market, the more important tangible assets become. In

Malaysia, 63% of respondents think tangible assets account

for at least one-half of the value of the business. In China, this

ratio falls to one-half, and continues to fall in Singapore and

Hong Kong, where 46% and 44% respectively think tangible

assets represent at least one-half of the value of a business.

For each of the following components, rate its importance in general with regard to the overall valuation of companies

in Malaysia.(% respondents)

74.4 25.6

42.1 44.7 13.2

39.5 47.4 13.2

36.8 42.1 21.1

39.5 42.1 18.4

39.5 52.6 7.9

Tangible assets

Human capital

Patents/know-how


Brand/trademark

62.2 35.1 2.7

44.7 50.0 5.3

51.3 46.2 2.6

23.7 57.9 18.4

17.9 61.5 15.4 5.1





Software


Very important Neither important nor unimportant

Not important Dont know/Not applicable


23/48



For each of the following components, rate its importance in general with regard to the overall valuation of companies

in Vietnam.

(number of respondents)

10 2 1

6 4 2

4 5 4

3 6 4

6 4 3

8 5

Tangible assets

Human capital

Patents/know-how


Brand/trademark

9 4

8 4 1

8 3 2

4 6 3

4 4 5





Software


Very important Neither important nor unimportant Not important

The picture is more varied on intangible assets. In Hong

Kong, a slight majority think intangible assets are worth more

than 30% of the value of the business. But in China, Singapore

and Malaysia, a majority in each believe intangible assets are

worth less than 30% of the business.

The survey responses suggest that, on average, human

capital is generally not highly valued in Asiaan intriguing

insight into the attitude of acquirers in the region. In Malaysia,

two-thirds of respondents say human capital is worth less

than 30% of the business. A similar proportion agree in China

and Hong Kong. The exception is Singapore, where 40% of

respondents say human capital is worth more than 50% of the

value of a business.

Goodwill and synergies are apparently not important in

most markets. Only about one-quarter of respondents believe

these components represent more than 30% of the value of

a business in China and Hong Kong. The figure rises to 32% in

Singapore and 36% in Malaysia.

In your experience, how much of the value of a typical business in China do the following components represent?(% respondents)

1.5 17.6 29.4 22.1 27.9 1.5

23.2 42.0 1.4

26.1 36.2 5.8

30.4 36.2 5.8

27.5 1.4 4.3

21.7 8.7 1.4

13.0 10.1 4.3

All tangible assets

All intangible assets

Human capital

Goodwill or synegies

Less than 10% 50-69%30-49% Dont know/Not applicable70% or over10-29%

In your experience, how much of the value of a typical business in Singapore do the following components represent?(% respondents)

6.2 13.8 24.6 29.2 16.9 9.2

12.3 40.0 7.7

6.1 42.4 10.6

19.7 39.4 9.1

26.2 10.8 3.1

18.2 13.6 9.1

16.7 7.6 7.6

All tangible assets

All intangible assets

Human capital

Goodwill or synegies

Less than 10% 50-69%30-49%10-29% Dont know/Not applicable70% or over


24/48



Conclusions

The story of valuations in Asia is a story of gapsgaps

between countries in levels of regulatory oversight

and transparency, gaps between governments and

multinationals in terms of valuation methodology,

and finally gaps between what a buyer is prepared to pay for

an enterprise and what it ends up being worth. These gaps

continue to pose challenges for even the savviest investors.

Gaps in information and methodology have a profound

effect on the valuation process, lowering valuations where

uncertainty is too great and raising them where the promiseof growth is too tempting for investors to pass up. Information

gaps can prolong the time it takes to complete deals, as

investors have to work harder to get accurate data.

There is no quick fix. Many of the issues in the valuation

process are matters of government policy, the rule of law and

corporate governance. Some markets are farther along in the

process of addressing these problems than others. This split

is most obvious between Asias developed and developing

economies, as the latter are still a distance from international

standards of accounting and transparency, despite efforts to

close this gap. Executives are less comfortable about their

valuation accuracy in these markets as a result, and companies

looking to make acquisitions in China, Vietnam and (to a lesser

extent) Malaysia should be aware of the potential pitfalls.

On average, valuations tend to be higher in China than

elsewherereflecting the premium many multinationals are

willing to pay for exposure to its high growth level. In Malaysia

and Vietnam valuations may be lower, but they are equally

likely to be affected by a lack of information and country risk,

meaning potential acquirers may not be aware of genuine

opportunities. Equally, without thorough commercial duediligence they may not recognise potential pitfalls and liabilities

that could turn an initially attractive acquisition into a millstone.

Even for listed companies in developing markets publicly

available information is often insufficient to make a reasonable

valuation.

Differing sources of data make cross-checks with

developed markets more taxing: for example, local trends in

developing countries still compel many investors to use net

asset valueno longer commonly used in the US and Europe

as the key metric for valuations. When targeting a company in

a developing market potential acquirers should also be aware

of the much greater difficulty of valuing intangible assets, andthe hidden value that may reside in intellectual property and

human capital. (See the chart on page 23 for a summary of the

key survey findings between Asia's developed and developing

economies.)

Because of the variation in levels of transparency, many

companies are not yet taking a systematic approach to

valuation in the region and are instead relying on a blend of

techniques and resources, both internal and external, to get

the job done. Mixing methods gives an acquirer the potential

means to double-check reasonable values, but means the

process takes longer and is difficult to standardise internally.

Companies that do have standardised approaches should

ensure that they are applicable for particular markets and do

not fall into the trap of using inappropriate models for valuing

potential targets.

In general the process is likely to get easier, and the gaps

already marginal for some thingsare likely to get narrower. As

the volume of mergers and acquisitions in the region continues

to rise, advisors and executives say their access to good

information is gradually improving. Their search will continue

to push governments and companies in the region to improvetransparency, making the process of appraising accurate values

easier.


25/48



(% respondents)

Developed

Companies have determined reasonable

values for businesses very well or well

Hong Kong Singapore

Developed

South Korea Taiwan

Developing

Average

0

20

40

60

80

100

0

20

40

60

80

100

Developing Developed

Valuations are higher than elsewhere0

20

40

60

80

100

0

20

40

60

80

100

Developing

Developed

Valuations are more likely to be affected by a

lack of information than elsewhere

0

20

40

60

80

100

0

20

40

60

80

100

Developing

China Malaysia Vietnam

Developed

Usage of earnings multiples for valuations

0

20

40

60

80

100

0

20

40

60

80

100

Developing

Developed

Better general accounting standards

are necessary

0

20

40

60

80

100

0

20

40

60

80

100

Developing

Developed

Less success in valuing intangible assets

than elsewhere

0

20

40

60

80

100

0

20

40

60

80

100

Developing Developed

Human capital 30% or more of

typical business value

0

20

40

60

80

100

0

20

40

60

80

100

Developing

Developed

Better disclosure of risk is necessary

0

20

40

60

80

100

0

20

40

60

80

100

Developing

(Q5)

(Q2)

(Q3)

(Q6)

(Q9)

(Q9)

(Q12) (Q15)

Survey summary: Developed vs developing markets in Asia


26/48



China. Respondents come from a variety of industry sectors,

with financial and professional services, manufacturing, IT

and technology, and healthcare the best-represented sectors,

together accounting for 72% of respondents.

Respondents companies vary in size, with 45% having

annual global revenues of over US$1bn and 15% having

revenues over US$10bn. Respondents company headquarters

are spread across the world, with just under a quarter from Hong

Kong and Singapore and many from the US and western Europe.

The respondents are all senior decision-makers within their

companies: 26% are CEOs or managing directors and 17% hold

other C-level titles. Some 20% are either heads of departments

or senior vice-president/vice-presidents/directors, while 13%

are heads of their business units.

The survey sought opinions from 140 senior executives withexperience valuing companies for corporate transactions or

financial reporting purposes in any of seven Asian markets,

including five of the top six in terms of aggregate M&A deal

value so far this year (China, South Korea, Hong Kong, Malaysia

and Singapore) as well as Taiwan and Vietnam. The survey was

designed to capture responses from people knowledgeable

about the countries specified, not necessarily from people

located in these countriesin recognition of the fact that

senior executives move frequently and people based at

multinational companies headquarters in one place may have

responsibility for other countries.

The respondents are based across the Asia-Pacific

region, with just under half based in Singapore, Hong Kong and

Who took the survey?


27/48



Appendix: Survey results

Note: Respondents were first asked whether they had knowledge or experience of valuing companies for corporate transactionsor financial reporting purposes in any of seven markets in Asia (China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and

Vietnam). Their responses for the survey were then restricted to those countries about which they indicated they had knowledge

or experience. Some respondents answered about multiple countries. Percentage totals may not sum to 100 due to rounding.

1. How difficult are valuations in the following markets compared to valuations of similar businesses in developed markets?

Select only the statement you consider to be true for the markets about which you have experience or knowledge. (% respondents)

7.1 90.0 2.9

18.4 61.2 20.4

15.4 23.1 61.5

18.2 68.2 13.6

8.3 25.0 66.7

25.0 8.3 66.7

33.3 55.6 11.1

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore

Valuations are easier than in developed markets Valuations are the same as in developed markets

Valuations are harder than in developed markets Dont know/Not applicable

Base: China 70 respondents; Hong Kong 44 respondents; Malaysia 39 respondents; Singapore 66 respondents; South Korea 9 respondents; Taiwan 12 respondents;

Vietnam 12 respondents

2. Which of the following statements are closest to your experience in determining reasonable values for businesses in the

following markets compared to valuations of similar businesses in developed markets? Select only the statement you

consider to be true for the markets about which you have experience or knowledge. (% respondents)

64.3 28.61.4 5.7

22.4 59.2 8.2

21.1 15.8 2.6

18.5 63.1 3.1

41.7 16.7 8.3

10.2

60.5

15.4

33.3

36.4 9.1 54.5

30.0 40.0 10.0 20.0

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore

Valuations are higher than in developed markets Valuations are the same as in developed markets

Valuations are lower than in developed markets Dont know/Not applicable




28/48




4. How does your company approach valuations?

46.4

28.3

20.3

2.9

2.2

27.3

Our approach varies depending on the country/region

We engage external valuers with local market knowedge

to determine values

We have internal expertise with in-house valuation

models which we use across markets

No considered approach


Base: 138 respondents

5. In your experience, how well has your company determined reasonable values for businesses in the following markets,compared to valuations of similar businesses in developed markets?(% respondents)

5.7 14.3 52.9 18.6 4.3 4.3

16.7 33.3 33.3 8.3 8.3

50.0 40.0 10.0

22.7 37.9 33.3 3.0 3.0

5.0 30.0 55.0 5.0 2.52.5

26.5 36.7 36.7

China

Hong Kong

Malaysia

South Korea

Taiwan

8.3 50.0 25.0 8.3 8.3Vietnam

Singapore

Very well Well Acceptably Poorly Very poorly Dont know/Not applicable



3. Which of the following statements are closest to your experience in determining reasonable values for businesses in

each market compared to valuations of similar businesses in developed markets? Select all that apply.

(% respondents)

70.0

10.4

50.0

47.5

12.2

64.3

58.3

65.7

47.8

60.0

27.5

38.8

35.7

33.3

28.6

52.2

20.0

52.5

46.9

35.7

25.0

3.0

20.0

5.0

8.2

8.3

Valuations are more sensitive to growth expectations

in the economy than in developed markets

Valuations are more likely to be affected by a lack of

information than in developed markets

Valuations are more likely to be affected by demand

for investment than in developed markets






29/48



Guesing game? Valuation Challenges in Asia

6. What are the common valuation methods that are considered when valuing businesses in these markets?

Select the most preferred method only.(% respondents)

32.9 14.3 20.0 31.4 1.4

8.3 16.7 50.0 16.7 8.3

30.0 20.0 30.0 20.0

34.8 42.4 9.1 10.6 3.0

12.5 35.0 20.0 32.5

28.6 36.7 22.4 12.2

China

Hong Kong

Malaysia

South Korea

Taiwan

15.4 15.4 23.1 38.5 7.7Vietnam

Singapore

Discounted free cash flows Earnings multiples based on comparablemarket transactions or listed companiesBalance sheet values



Base: China 70 respondents; Hong Kong 49 respondents; Malaysia 40 r espondents; Singapore 66 respondents; South Korea 10 respondents; Taiwan 12 respondents;


7. Which type of information do you rely on for valuations in each market? Select all that apply.(% respondents)

77.1

53.780.0

67.5

71.4

71.4

66.7

65.7

55.280.0

45.0

63.3

57.1

66.7

54.3

79.190.0

55.0

77.6

42.9

58.3

42.9

47.840.0

30.049.0

42.9

25.0

7.1

3.0

6.1

7.1

7.1

8.3

Internal due diligence/investigation

Data subjected to financial and tax due diligence

Reported financial data

Authoritative market information

Other






30/48




8a. For unlisted companies in each market, do you consider the information in publicly available financial statements

adequate to determine valuations of businesses?

(% respondents)



4.3 94.2 1.4

10.4 54.2 4.2

7.7 23.1 2.6

19.7 42.4 3.0

16.7 16.7 8.3

31.3

66.7

34.8

58.3

15.4 76.9 7.7

40.0 40.0 20.0

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore





8b. For listed companies in each market, do you consider the information in publicly available financial statements

adequate to determine valuations of businesses? (% respondents)

Base: China 68 respondents; Hong Kong 47 respondents; Malaysia 39 respondents; Singapore 66 respondents; South Korea 9 respondents; Taiwan 12 respondents;Vietnam 13 respondents

2.9 22.1 69.1 5.9

46.8 2.1

12.8 48.7 2.6

45.5 40.9 1.5

16.7 58.3 25.0

8.542.6

35.9

12.1

15.4 15.4 61.5 7.7

33.3 33.3 33.3

15.2 4.1

11.1 4.2

China

Hong Kong

Malaysia

South Korea

Taiwan

Vietnam

Singapore



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valuations report 2007

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