The Hong Kong Securities and Futures Commission (SFC) has recently published a review report dated July 2023 in relation to the performance of the Stock Exchange of Hong Kong Limited (“Exchange”) in its regulation of listing matters during 2021. We would like to highlight the first scope in the review, which comments on the Exchange’s review of business valuation in connection with major (or larger) acquisitions and disposals.
Currently, in any acquisitions and disposals of businesses, the listing rules do not specifically require the listed company to obtain an independent valuation of the target company. Nevertheless, the Exchange has required disclosure of the valuation if it was a primary factor forming the basis for the consideration of the transaction.
The SFC has reviewed the circular of 24 transactions with independent valuations disclosed as the basis of consideration, covering different valuation methodologies. The SFC found that a large proportion of cases did not provide sufficient disclosures of the business valuation. Below are the SFC’s findings by valuation approaches:
Income Approach
The disclosure of key quantitative inputs, specific assumptions of the target company, and the projections of 12 out of 14 cases are considered inadequate. The SFC recommends that the quantitative inputs and a clear presentation of how the projections and valuations were calculated should be disclosed clearly.
Market Approach
The SFC identified the main issue in the disclosure of market approach as the suitability of the comparable companies. In 3 out of 5 cases, the selection of comparable companies was questionable in terms of business location, market capitalization, and different business and product offerings compared to the target company. The SFC recommends that the listed company discloses sufficiently detailed information on the selection criteria of the comparable companies, including quantitative benchmarks such as the percentage of revenues or profits attributed to the business relevant to the target. They should also demonstrate that the selected comparables were appropriate and comprehensive. Additionally, the listed company should adequately explain the computation of the valuation, including any applicable adjustments.
Asset-based Approach or Cost Approach
In the cases conducted using the asset-based approach or cost approach, the SFC has also observed insufficient disclosure of quantitative inputs, specific assumptions, and the calculation process leading to the final valuation result. The recommendation is to adequately address these inputs and assumptions, as well as the computation process.
· What BonVision Can Help?
Following the review report issued by the SFC, we anticipate that the Exchange will likely implement stricter guidelines and governance to listed companies regarding their public disclosure concerning the basis of business valuation in relation to transactions of acquisition and disposal. With our commitment to quality and expertise, BonVision’s valuation team can provide you with professional valuation services that meet your needs while fulfilling the latest requirements of Exchange and the SFC. To learn more about how BonVision can assist you, please do not hesitate to contact us at (852)2916 2188 or info@bonvision.com.