Valuations Report 2007

T RANSACTION
A DVISORY S ERVICES
N OVEMBER 2 0 0 7
ERNST & Y O U N G
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2007 Economist Intelligence Unit and EYGM Limited.

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!@#
Guessing Game?
Valuation Challenges in Asia
Guessing game? Valuation Challenges in Asia
Contents
Executive summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1: Difficult, expensive and over-hyped? . . . . . . . . . . . . . . . . . . 7
WPP: Practice makes perfect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2: Methods of valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Deutsche Bank: High expectations. . . . . . . . . . . . . . . . . . . . . . . . . 11
3: Information and transparency. . . . . . . . . . . . . . . . . . . . . . . 12
West LB: Trust but verify. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4: Pricing in risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Anonymous: Remove the beam in thine own eye. . . . . . . . . . . . 17
5: Measuring intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Asia Netcom: Watch the government. . . . . . . . . . . . . . . . . . . . . . . 18
6: Where the value lies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Survey summary: Developed vs developing markets in Asia. . 23
Who took the survey?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Appendix: Survey results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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
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Economist Intelligence Unit and EYGM Limited.
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
Executive summary
ith 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 difficulties; the methods most commonly used and
their drawbacks; and how the always-problematic issues of
pricing in risk and valuing a companys intangible assets are
addressed. 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 onefifth 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 seem
prepared 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 and
developed 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
procedures for each market: half say their approach

varies depending on the country. Less than one-third of
respondents 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 soughtafter 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 disclosure
is 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 in
Malaysia 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 and
human 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.
Introduction
s the frenzy of mergers and acquisitions continues

across Asia, valuations have become an increasingly
important issue for multinationals in the region.
The aggregate value of M&A deals in Asia1 has
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. Target
companies 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
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 missing 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
Rank in Asia
Value
(US$m)
% share
Same period 2006
Number
of deals
Value
(US$m)
% share
Number
of deals
Value
(US$m)
% share
Number
of deals
China
52,513,50
20.9
1,821 29,192.10
19.3
1,410
79.9 46,593.10
21.2
1,980
South
Korea
49,840.00
19.8
442 16,625.70
11
208
199.8 24,438.80
11.1
273
India
36,692.60
14.6
822 31,604.90
20.8
974
16.1 34,988.80
15.9
1,174
Hong Kong
34,422.50
13.7
787 23,659.70
15.6
598
45.5 27,303.40
12.4
766
Malaysia
19,436.10
7.7
651 12,168.10
679
59.7 27,505.10
12.5
873
Singapore
18,495.60
7.4
397 10,202.80
6.7
385
81.3 16,289.20
7.4
472
Thailand
10,829.50
4.3
204
7,096.70
4.7
222
52.6
3.5
277
Taiwan
10,427.70
4.1
94 12,045.70
7.9
141
-13.4 17,609.00
178
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
1 Cross-border and domestic deals, excluding Japan and Australasia
Full year 2006

Yearon-year
growth
(%)
7,615.50
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
t 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 markets
and 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 are
harder. 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)
China 7.1
Valuations are easier than in developed markets

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

Dont know/Not applicable
90.0
2.9
Hong Kong 18.4
61.2
Malaysia 15.4
20.4
23.1
Singapore 18.2
61.5
68.2
13.6
11.1
South Korea 33.3

Taiwan 8.3
Vietnam 25.0
55.6
15.2
4.2
4.1
25.0
11.1
66.7
8.3
66.7
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
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 of
information 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
information, highlighting the countrys lack of transparency. A

large majority (70%) of respondents say a lack of information
is 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 expectations
are 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
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)
China
Hong Kong
Malaysia
Singapore
South Korea
70.0
12.2
Valuations are more likely to be affected by a lack of 47.5
information than in developed markets 10.4
50.0
58.3
64.3
65.7
38.8
27.5
Valuations are more sensitive to growth expectations 47.8
in the economy than in developed markets 60.0
33.3
35.7
28.6
46.9
52.5
Valuations are more likely to be affected by demand 52.2
for investment than in developed markets 20.0
25.0
35.7
2 Marc Goedhart, Timothy Koller and Nicolas C. Leung, The scrutable East, McKinsey on Finance, Autumn 2004.
Taiwan
Vietnam
satisfied with the valuations they have made in Malaysia.

Respondents ambivalence about China is mirrored in
Vietnam, another market that suffers from a lack of reliable
Lack of success
information. One-quarter of respondents say they have valued
Given the poor availability of information in many countries, and investments poorly in Vietnam, and another 8% say their
external factors such as growth expectations and investment
valuations are very poor. Strikingly, in South Korea, none of the
demand that can skew value perceptions, how successful do
respondents feel they have valued acquisitions well compared
companies feel they have been in valuing companies so far in
with other developed markets.
Asia? The answer, for the most part, is not very.
By contrast, respondents are relatively happy with their
In China, only about one-fifth of respondents feel they have valuation performance in Asias more developed markets,
been able to value companies well or very well, and an equal
evidence of the importance of transparency. In Hong Kong and
number feel they valued companies poorly compared to other Singapore, the percentage of respondents who say they have
markets. About one-half believe that their valuations in China been able to value companies well or very well is 63% and 61%
have been acceptable. A similar proportion of respondents are respectively.
in the economy affect valuations in Vietnam more than in
developed markets.
WPP: Practice makes perfect

In the last two years, global advertising and
marketing 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
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.
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.
2: Methods of valuation

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

procedures and methods for valuing assets in Asia
n 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 engage
external 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 market
transactions 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 common
reference 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 assets
being 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)
10
Our approach varies depending on the country/region
46.4
We engage external valuers with local market knowedge

to determine values
28.3
We have internal expertise with in-house valuation

models which we use across markets
20.3
No considered approach
2.9
2.2
27.3
2007 The Economist Intelligence Unit and EYGM Limited.
18.0
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)
US$500m or less
Over US$500m
Discounted free cash flows

Balance sheet values
Earnings multiples based on comparable

market transactions or listed companies
No particular method favoured



China 27.5
12.5
China 40.0
40.0
16.7
Malaysia 15.4
Malaysia 7.7
17.5
23.3
30.8
38.5
Vietnam 12.5
2.5
20.0
19.2
34.6
23.1
30.8
25.0
Vietnam 25.0
62.5
25.0
25.0
25.0
Deutsche Bank: High expectations

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

growing at double-digit rates, a relatively open
attitude toward most foreign investment, and
powerful, market-leading companies, China
attracted 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
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
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 more
abroad, 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.
What are the common valuation methods that are considered when valuing businesses in these markets?
Select the most preferred method only.
(% respondents)

China 32.9
14.3

20.0
31.4

1.4
11
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
he 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 to
compensate 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)
China
Internal due diligence/investigation
Hong Kong
Malaysia
77.1
71.4
67.5
53.7
80.0
66.7
71.4
65.7
63.3
45.0
Data subjected to financial and tax due diligence 55.2
80.0
66.7
57.1
54.3
77.6
55.0
Reported financial data 79.1
90.0
58.3
42.9
Authoritative market information
12
42.9
49.0
30.0
47.8
40.0
25.0
42.9
Singapore
South Korea
Taiwan
Vietnam
For unlisted companies in each market, do you consider the information in publicly available financial statements
adequate to determine valuations of businesses?
(% respondents)
China 4.3
Information in publicly available financial statements is sufficient for good valuation

Information in publicly available financial statements is sufficient for acceptable valuation
Information in publicly available financial statements is not sufficient for any reliable valuation
94.2
1.4
Hong Kong 10.4

Malaysia 7.7
54.2
31.3
23.1
66.7
Singapore 19.7
2.6
42.4
34.8
11.1
South Korea 40.0
3.0
4.2
40.0
20.0
15.2
Taiwan 16.7
Vietnam 15.4
4.2
16.7
4.1
58.3
8.3
76.9
7.7
For listed companies in each market, do you consider the information in publicly available financial statements
(% respondents)

China 2.9 22.1
69.1
5.9
Hong Kong 46.8

Malaysia 12.8
42.6
8.5
48.7
35.9
Singapore 45.5
South Korea 33.3
12.1
4.1
58.3
25.0
61.5
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

33.3
15.2
15.4
1.5
4.2
33.3
Taiwan 16.7
2.1
2.6
40.9
11.1
Vietnam 15.4
7.7
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
13
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: onethird 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 many
layers 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 companies
practice 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. Onethird of respondents would just like companies to comply with
existing accounting standards.
For Vietnam, an emerging market still hampered by a
West LB: Trust but verify

Charles Regan, Hong Kong-based managing director of the
capital 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
14
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 existing
cashflows as well as other comparable data.
lack of good information, four-fifths of the small sample of

respondents feel better accounting standards are called
for. 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 in
the 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)
China
Hong Kong
Malaysia
Singapore
South Korea
Taiwan
Vietnam
74.3
20.4
47.5
Better general accounting standards 26.9
40.0
33.3
78.6
70.0
61.2
77.5
Better disclosure of risk 65.7
90.0
50.0
64.3
More reliable or authoritative market information
68.6
36.7
50.0
37.3
50.0
58.3
71.4
15
4: Pricing in risk

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

companies off making deals
key 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 external
models, 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)
Country risk is a minor factor in valuations

Country risk is a major factor in valuations

Country risk is not a factor in valuations
China 62.3
Hong Kong 17.0
33.3
51.1
31.9
Malaysia 48.7
Singapore 21.5
41.0
10.3
43.1
Taiwan 27.3
30.0
40.0
45.5
Vietnam 69.2
16
1.5
33.8
11.1
South Korea 20.0
1.4 2.9
15.2
4.2
10.0
4.1
18.2
9.1
30.8
When making valuations, how does your company assess country risk in the markets concerned? Results split by annual
revenue of respondents companies.
(% respondents)
Less than US$5bn

US$5bn or over
We use external risk models/rankings

We do not include country risk premiums in our valuations
We use internal analysis



China 38.9
50.0
China 33.3
53.3
Hong Kong 35.0

Hong Kong 25.0
3.7
6.7
42.5
6.7
17.5
50.0
5.0
12.5
Malaysia 43.8
Malaysia 33.3
7.4
12.5
50.0
3.1 3.1
66.7
Singapore 58.0
26.0
Singapore 40.0
14.0
46.7
2.0
6.7
6.7
Anonymous: Remove the beam in thine own eye

Most executives involved in valuations in Asia
contend that while challenges abound, they are
mostly a reflection of local factors: differing
methodologies 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
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
local competitors that have driven down prices for

equipment.
He also argues that country risk is a factor
executives 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.
17
5: Measuring intangibles

Intangible assets are particularly hard to measureand in some cases

companies dont even try
central 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 on
intangible 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 marketsevidence, 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 onehalf 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 noncompete 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.
Asia Netcom: Watch the government

Bill Barney knows a few things about valuing
companies 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.
18
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 governmentissued licenses are essential and valuable assets.
A Chinese telecoms group, for example, might
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.
Measuring the value of intangibles is much easier

in Hong Kong, where between one-third and one-half of
respondents 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 measure
intangibles, 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.
Can be robustly measured
Can be measured but not in a systematic way
(% respondents)
Is estimated or appraised only in an informal or qualitative way
Workforce capabilities and experience 4.4 33.8

Patents/know-how 6.0
Research and development findings
48.5
26.9
23.2
10.1
Existing agreements made on favourable terms
14.5
Licenses/permits/rights
20.9
Non-compete agreements 5.8

Software 7.4
44.9
33.3
5.8
18.8
4.3
4.3
37.7
41.8
26.5
17.4
34.8
34.8
24.6
7.5
47.8
42.0
29.9
40.6
27.9
1.4
11.6
1.4
11.6
1.4
6.0
26.1
32.4
1.5
19.4
31.9 43.5
Brand/trademark 13.0
Customer relationship/list
11.8
40.3
1.4
Copyrights/intellectual property 8.7
Is not measured
1.5
2.9
5.9
19
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
cross 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 developing
markets, 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 professionalservices industries). Only 40% of respondents with experience
in Malaysia consider human capital a very important
component 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.
Very important
(% respondents)
Neither important nor unimportant

Not important
Tangible assets 74.4
62.2
51.3
44.7
25.6
35.1
46.2
52.6
42.1
47.4
36.8
42.1
20
5.3
44.7
Human capital 39.5
Software 17.9
2.6
50.0
2.7
57.9
61.5
13.2
7.9
18.4
13.2
21.1
18.4
15.4
5.1
For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Vietnam.
Very important
(number of respondents)
Not important
Tangible assets 10
Human capital 8
Brand/trademark 6
Patents/know-how 6
Copyrights/intellectual property 4
Non-compete agreements 4
Software 4
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)
Less than 10%

All tangible assets 1.5
17.6
10-29%
29.4
All intangible assets 23.2
50-69%
30-49%
70% or over
22.1
27.9
42.0
Human capital 26.1
1.5
27.5
36.2
Goodwill or synegies 30.4
21.7
36.2
1.4 4.3
1.4
1.4
5.8
8.7
13.0
10.1
4.3
5.8
In your experience, how much of the value of a typical business in Singapore do the following components represent?
(% respondents)
Less than 10%

13.8

Human capital 6.1
24.6
10-29%
50-69%
30-49%
70% or over
29.2

16.9
40.0
26.2
42.4
10.8
18.2
39.4
9.2
13.6
16.7
3.1
10.6
9.1
7.6
7.7
7.6
9.1
21
Conclusions
he 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 promise
of 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 due
diligence they may not recognise potential pitfalls and liabilities
that could turn an initially attractive acquisition into a millstone.
22
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, and
the 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 improve
transparency, making the process of appraising accurate values
easier.
Survey summary: Developed vs developing markets in Asia

(% respondents)
Average
Hong Kong
Singapore
Developing
Taiwan
South Korea
China
Malaysia
Developed
Developing
Developed
Developing
100
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
Companies have determined reasonable
values for businesses very well or well
0
(Q5)
Developing
Developed
Developing
100
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
Valuations are more likely to be affected by a
(Q3)
lack of information than elsewhere
0
Usage of earnings multiples for valuations
Developed
Developing
Developed
Developing
100
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
Better general accounting standards
are necessary
0
Better disclosure of risk is necessary
(Q9)
Developed
Developing
Developed
Developing
100
100
100
100
80
80
80
80
60
60
60
60
40
40
40
40
20
20
20
20
0
Less success in valuing intangible assets
than elsewhere
(Q12)
Vietnam
0
Valuations are higher than elsewhere
Developed
Developed
0
Human capital 30% or more of
typical business value
(Q2)
(Q6)
(Q9)
(Q15)
23
Who took the survey?

The survey sought opinions from 140 senior executives with
experience 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
24
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.
Appendix: Survey results

Note: Respondents were first asked whether they had knowledge or experience of valuing companies for corporate transactions
or 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)
Valuations are easier than in developed markets

Valuations are harder than in developed markets
China 7.1

90.0
2.9
Hong Kong 18.4
61.2
Malaysia 15.4
20.4
23.1
Singapore 18.2
61.5
68.2
13.6
11.1
South Korea 33.3

Taiwan 8.3
55.6
15.2
4.2
11.1
4.1
25.0
66.7
Vietnam 25.0
8.3
66.7
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)
Valuations are higher than in developed markets

Valuations are lower than in developed markets

China 64.3
1.4
Hong Kong 22.4

Malaysia 21.1
Singapore 18.5
59.2
10.2
15.8
63.1
8.2
15.4 3.1
40.0
15.2
Taiwan 41.7
Vietnam 36.4
5.7
60.5 2.6
11.1
South Korea 30.0
28.6
4.2
4.1
10.0
16.7
20.0
33.3
9.1
8.3
54.5
25

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)
Hong Kong
China
Malaysia
Singapore
South Korea
Taiwan
Vietnam
70.0
12.2
Valuations are more likely to be affected by a lack of 47.5
information than in developed markets 10.4
50.0
58.3
64.3
65.7
38.8
27.5
Valuations are more sensitive to growth expectations 47.8
in the economy than in developed markets 60.0
33.3
35.7
28.6
46.9
52.5
Valuations are more likely to be affected by demand 52.2
for investment than in developed markets 20.0
25.0
35.7
8.2
5.0
3.0
20.0
8.3
4. How does your company approach valuations?

Our approach varies depending on the country/region
46.4
We engage external valuers with local market knowedge

to determine values
28.3
We have internal expertise with in-house valuation

models which we use across markets
20.3
No considered approach
2.9
2.2
Base: 138 respondents
27.3
5. In your experience, how well has your company determined reasonable values for businesses in the following markets,
18.0
compared to valuations of similar businesses
in developed markets?
(% respondents)
China 5.7
8.0
Very well
14.3
52.9
Hong Kong 26.5

Malaysia 5.0
Acceptably
Poorly
Very poorly
18.6
4.3
36.7
30.0
5.0
37.9
South Korea 50.0
33.3
33.3
10.0
33.3
50.0
8.3
25.0
8.3
8.3
26
2.5 2.5
3.0 3.0
40.0
Taiwan 16.7
4.3
36.7
55.0
Singapore 22.7
Vietnam 8.3
Well
7.3
8.3

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)

China 32.9
14.3
Hong Kong 28.6

20.0
31.4
36.7
Malaysia 12.5

1.4
22.4
35.0
12.2
20.0
Singapore 34.8
32.5
42.4
South Korea 30.0
9.1
20.0
Taiwan 8.3
16.7
Vietnam 15.4
30.0
16.7
23.1
3.0
20.0
50.0
15.4
10.6
8.3
38.5
7.7
7. Which type of information do you rely on for valuations in each market? Select all that apply.
(% respondents)
China
Internal due diligence/investigation
Hong Kong
Malaysia
Singapore
South Korea
Taiwan
Vietnam
77.1
71.4
67.5
53.7
80.0
66.7
71.4
65.7
63.3
45.0
Data subjected to financial and tax due diligence 55.2
80.0
66.7
57.1
54.3
77.6
55.0
Reported financial data 79.1
90.0
58.3
42.9
Authoritative market information
42.9
49.0
30.0
47.8
40.0
25.0
42.9
7.1
6.1
Other
3.0
8.3
7.1
7.1
27

8a. For unlisted companies in each market, do you consider the information in publicly available financial statements
(% respondents)
China 4.3

94.2
1.4
Hong Kong 10.4

Malaysia 7.7
54.2
31.3
23.1
66.7
Singapore 19.7
2.6
42.4
34.8
11.1
South Korea 40.0
3.0
4.2
40.0
20.0
15.2
Taiwan 16.7
Vietnam 15.4
4.2
16.7
4.1
58.3
8.3
76.9
7.7
8b. For listed companies in each market, do you consider the information in publicly available financial statements
(% respondents)

China 2.9 22.1
69.1
5.9
Hong Kong 46.8

Malaysia 12.8
42.6
8.5
48.7
35.9
Singapore 45.5
South Korea 33.3
Vietnam 15.4
12.1
33.3
15.2
4.1
58.3
25.0
61.5
28
1.5
4.2
33.3
15.4
2.1
2.6
40.9
11.1
Taiwan 16.7
7.7

9. Which of the following improvements is most necessary or would be most helpful to making accurate valuations in
each market? Select all that apply.
(% respondents)
China
Hong Kong
Malaysia
Singapore
South Korea
Taiwan
Vietnam
74.3
20.4
47.5
Better general accounting standards 26.9
40.0
33.3
78.6
70.0
61.2
77.5
Better disclosure of risk 65.7
90.0
50.0
64.3
68.6
36.7
50.0
37.3
50.0
58.3
71.4
More reliable or authoritative market information
4.3
Other, please specify
7.1
14.3
2.5
9.0
10. Please assess how country risk affects valuations in the markets concerned.
(% respondents)
Country risk is a minor factor in valuations

Country risk is a major factor in valuations

Country risk is not a factor in valuations
China 62.3
Hong Kong 17.0
33.3
51.1
31.9
Malaysia 48.7
Singapore 21.5
41.0
10.3
43.1
Taiwan 27.3
1.5
33.8
11.1
South Korea 20.0
1.4 2.9
30.0
40.0
45.5
15.2
4.2
10.0
4.1
18.2
Vietnam 69.2
9.1
30.8
29

11. When making valuations, how does your company assess country risk in the markets concerned?
(% respondents)

China 37.7

50.7
Hong Kong 33.3
7.2
43.8
Malaysia 43.6
16.7
6.3
51.3
Singapore 55.4
2.6 2.6
29.2
12.3
11.1
South Korea 10.0
50.0
20.0
15.2
Taiwan 16.7
4.3
3.1
4.2
20.0
4.1
50.0
33.3
Vietnam 30.8
53.8
7.7
7.7
12. Has your company been more or less successful in placing values on intangible assets in these Asian economies,
compared with developed markets?
(% respondents)
China 7.2
Hong Kong 8.3
We have had more success in valuing intangible assets

We have had less success in valuing intangible assets
17.4
We have had the same success in valuing intangible assets

59.4
15.9
52.1
Malaysia 12.8
25.0
33.3
Singapore 19.7
14.6
46.2
7.7
43.9
South Korea 10.0
10.0
Taiwan 41.7
Vietnam 7.7
6.1
30.3
11.1
30.0
15.2
4.2
4.1
41.7
84.6
30
50.0
16.7
7.7

13a. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in China.
(% respondents)
Workforce capabilities and experience 4.4 33.8

48.5
26.9
23.2
10.1
14.5
20.9

Software 7.4
1.5
19.4
31.9 43.5
11.8
40.3
1.4
Is not measured
44.9
33.3
7.5
17.4
5.8
18.8
4.3
47.8
42.0
4.3
34.8
34.8
11.6
1.4
11.6
1.4
37.7
41.8
29.9
24.6
6.0
40.6
26.5
26.1
32.4
1.4
1.5
2.9
27.9
5.9
13b. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in Hong Kong.
(% respondents)
Workforce capabilities and experience 38.3
31.9
23.4
36.2
33.3
22.9
33.3
27.1
35.4
51.1
38.3
43.8
Software 19.1
27.1
51.1
2.1
4.3
2.1
4.2
6.3
19.1
2.1
6.3
27.1
25.5
2.1
14.6
20.8
33.3
4.3
14.9
37.5
Is not measured
19.1
35.4
10.4
19.1
6.4
2.1
2.1
2.1
2.1
2.1
2.1
4.3
31

13c. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in Malaysia.
(% respondents)
31.6
37.8
7.9

18.4
15.8
18.4

Software 15.8
Is not measured
52.6
5.3
43.2
36.8
5.4
2.7
50.0
27.0
5.3
40.5
18.9
39.5
34.2
36.8
15.8
31.6
42.1
39.5
21.1
13.2
36.8
5.3
26.3
15.8
42.1
13.2
26.3
50.0
18.4
2.6
13d. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in Singapore.
(% respondents)
Is not measured
35.4
16.9
26.2
51.6
25.8
34.4
3.1
14.1
3.1
13.6
3.0
12.5
1.6
3.1
36.9
40.0
18.5
1.5
3.1
36.9
40.0
16.9
3.1
3.1
52.3
27.7
24.6
Software 44.6
32
12.3
31.3
3.1
16.9
24.6
29.2
3.1
7.7
18.5
3.1
4.6
3.1

13e. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in South Korea.
Workforce capabilities and experience 2
Patents/know-how 3
Is not measured
1
Brand/trademark 2
Software 7
13f. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in Taiwan.
Patents/know-how 1
Is not measured
3
1
3
Brand/trademark 1
Software 3
6
6
5
2
4
5
6
1
3
2
1
33

13g. For each of the following intangibles, rate the extent to which in general it can be measured when valuing companies
in Vietnam.
11
Patents/know-how 3
Brand/trademark 4
Is not measured
7
1
2
7
Software 1
3
6
14a. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in China.
Very important
(% respondents)

Not important
18.8
73.5
20.6
5.9
72.5
23.2
4.3
Human capital 63.2
29.4
55.1
2.9
47.8
10.1
46.4
29.4
49.3
57.4
1.4
1.4
17.4
54.4

Software 19.1
8.8
40.6

7.4
32.4
34
1.4
13.2
2.9
21.7
1.4
20.6
2.9

14b. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Hong Kong.
Very important
(% respondents)

Not important
23.4
27.1
2.1
31.3
2.1
25.0
8.3
62.5
31.3
Human capital 56.3
6.3
37.5
4.2
2.1
54.2
39.6
6.3
54.2
43.8
2.1
50.0
47.9
2.1
50.0
Software 25.0
16.7
54.2
18.8
2.1
14c. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Malaysia.
Very important
(% respondents)

Not important
62.2
51.3
44.7
25.6
35.1
46.2
5.3
44.7
Human capital 39.5
52.6
42.1
47.4
36.8
42.1

Software 17.9
2.6
50.0
2.7
57.9
61.5
13.2
7.9
18.4
13.2
21.1
18.4
15.4
5.1
35

14d. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Singapore.
Very important
(% respondents)

Not important
18.2
Human capital 71.2
1.5 1.5
27.3
1.5
27.3
3.0
30.8
1.5 1.5
33.3
60.6
31.8
60.0
33.8
57.6
52.3
1.5
6.1
36.4
41.5
43.9
Software 36.9
1.5
1.5
4.6
1.5
4.5
1.5
4.6
1.5
9.1
50.8
1.5
9.2
3.1
14e. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in South Korea.
Very important

Not important
Tangible assets 8
Patents/know-how 6
Brand/trademark 5
Human capital 4
Software 3
36
1
1

14f. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Taiwan.
Very important

Not important
Tangible assets 8
Brand/trademark 6
Patents/know-how 5
Software 5
Human capital 4
1
2
14g. For each of the following components, rate its importance in general with regard to the overall valuation of companies
in Vietnam.
Very important
Not important
Tangible assets 10
Human capital 8
Brand/trademark 6
Patents/know-how 6
Software 4
37

15a. In your experience, how much of the value of a typical business in China do the following components represent?
(% respondents)
Less than 10%

17.6
10-29%
50-69%
30-49%
29.4
70% or over
22.1
27.9
42.0
Human capital 26.1
27.5
36.2
1.5
21.7
36.2
1.4 4.3
1.4
1.4
5.8
8.7
13.0
10.1
5.8
4.3
15b. In your experience, how much of the value of a typical business in Hong Kong do the following components represent?
(% respondents)
Less than 10%

25.0
10-29%
20.8
41.7
Human capital 12.5
50-69%
30-49%
70% or over
22.9
20.8
4.2
39.6
8.3
43.8
22.9
10.4
45.8
14.6
2.1
4.2
8.3
2.1
4.2
6.3
6.3
15c. In your experience, how much of the value of a typical business in Malaysia do the following components represent?
(% respondents)
Less than 10%

7.9
18.4
10-29%
50-69%
30-49%
26.3
70% or over
36.8
5.3
56.4
12.8
Human capital 28.9
36.8
10.5
25.6
20.5
5.1
10.3
7.9
15.8
7.7
15.4
15d. In your experience, how much of the value of a typical business in Singapore do the following components represent?
(% respondents)
Less than 10%

13.8

Human capital 6.1
24.6
10-29%
50-69%
30-49%
29.2

16.9
40.0
26.2
42.4
39.4
9.2
10.8
18.2
38
70% or over
13.6
16.7
3.1
10.6
9.1
7.6
7.7
7.6
9.1

15e. In your experience, how much of the value of a typical business in South Korea do the following components represent?
Less than 10%

All tangible assets 2
All intangible assets 2
50-69%
30-49%
10-29%
70% or over
1
4
Human capital 7
Goodwill or synegies 3
15f. In your experience, how much of the value of a typical business in Taiwan do the following components represent?
Less than 10%

Human capital 2
10-29%
2
50-69%
30-49%
70% or over
3
3
3
15g. In your experience, how much of the value of a typical business in Vietnam do the following components represent?
Less than 10%

10-29%
30-49%
4
4
Human capital 2
70% or over
2
50-69%
3
2

2
39

Demographic questions
In which country are you personally located?
(% respondents)
Singapore
18.6
India
17.9
Hong Kong
16.4
China
12.9
Australia
9.3
Japan
5.0
Malaysia
4.3
Indonesia
3.6
Taiwan
2.9
Pakistan
2.1
Philippines
2.1
Vietnam
2.1
Republic of Korea
1.4
Afghanistan
0.7
40

Where is your company headquartered?

(% respondents)
India
16.5
Hong Kong
14.4
US
10.1
Singapore
9.4
Australia
8.6
Japan
4.3
UK
4.3
Malaysia
3.6
Netherlands
2.9
Pakistan
2.9
Switzerland
2.9
Vietnam
2.9
Taiwan
2.9
China
2.2
Indonesia
2.2
Sweden
1.4
Afghanistan
0.7
Austria
0.7
British Virgin Islands
0.7
Denmark
0.7
41

What is your primary industry?
(% respondents)
Financial services
33.1
Professional services
15.1
Manufacturing
10.8
IT and technology
7.9
Healthcare, pharmaceuticals and biotechnology
5.0
Consumer goods
4.3
Energy and natural resources
3.6
Government/Public sector
2.9
Logistics and distribution
2.9
Transportation, travel and tourism
2.9
Automotive
2.2
Telecommunications
2.2
Construction and real estate
1.4
Education
1.4
Retailing
1.4
Aerospace/Defence
0.7
Agriculture and agribusiness
0.7
Chemicals
0.7
Entertainment, media and publishing
0.7
42

What are your company's annual global revenues in US dollars?

(% respondents)
$500m or less
55.1
$500m to $1bn
10.9
$1bn to $5bn
13.8
$5bn to $10bn
5.1
$10bn or more
15.2
27.3
18.0
8.0
What is your title?
7.3
(% respondents)
Board member
CEO/President/Managing director
5.0
25.9
CFO/Treasure/Comptroller
6.5
CIO/Technology director
1.4
Other C-level executive
8.6
SVP/VP/Director
10.1
Head of Business Unit
12.9
Head of Department
10.1
Manager
16.5
18.0
Other
2.9
8.0
7.3
43

44
T RANSACTION
A DVISORY S ERVICES
N OVEMBER 2 0 0 7
ERNST & Y O U N G
www.ey.com
2007 Economist Intelligence Unit and EYGM Limited.

About Ernst & Young
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highest levels of integrity, quality, and professionalism in providing a range of sophisticated services
centered on our core competencies of auditing, accounting, tax, and transactions. Further information about
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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of
which is a separate legal entity. Ernst & Young Global Limited does not provide services to clients.
This publication contains information in summary form and is therefore intended for general guidance only.
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publication. On any specific matter, reference should be made to the appropriate advisor.
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Guessing Game?
Valuation Challenges in Asia

Valuations Report 2007

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T RANSACTION

2007 Economist Intelligence Unit and EYGM Limited.

Guessing game? Valuation Challenges in Asia

Guessing game? Valuation Challenges in Asia

2007 Economist Intelligence Unit and EYGM Limited. All

Guessing game? Valuation Challenges in Asia

Guessing Game? Valuation Challenges in Asia is an Ernst &

Guessing game? Valuation Challenges in Asia

ith mergers & acquisitions activity in Asia showing

feel their companies have determined reasonable values

Guessing game? Valuation Challenges in Asia

procedures for each market: half say their approach

valuing companies in China and Vietnam, and just under

Guessing game? Valuation Challenges in Asia

s the frenzy of mergers and acquisitions continues

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

Mergers & acquisitions activity in Asia, 2006-07

Same period 2006

Source: Thomson Financial

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

Full year 2006

Guessing game? Valuation Challenges in Asia

1: Difficult, expensive and over-hyped?

t should come as no surprise that the executives surveyed

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

Valuations are easier than in developed markets

Valuations are the same as in developed markets

Hong Kong 18.4

South Korea 33.3

Guessing game? Valuation Challenges in Asia

information, highlighting the countrys lack of transparency. A

Guessing game? Valuation Challenges in Asia

satisfied with the valuations they have made in Malaysia.

WPP: Practice makes perfect

marketing group WPP has done 22 deals in Asia,

external accounting firm to do financial and tax

The team then examines potential targets

Guessing game? Valuation Challenges in Asia

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

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

South Korea use discounted cash flows in deals there.

How does your company approach valuations?

Our approach varies depending on the country/region

We engage external valuers with local market knowedge

We have internal expertise with in-house valuation

Dont know/Not applicable

Guessing game? Valuation Challenges in Asia

Discounted free cash flows

Earnings multiples based on comparable

No particular method favoured

Discounted free cash flows

Earnings multiples based on comparable

No particular method favoured

Balance sheet values

Deutsche Bank: High expectations

markets for executives today. With an economy

overseas, a role that involves navigating between

better than average, you should be growing at a higher

Discounted free cash flows

Earnings multiples based on comparable

No particular method favoured

Guessing game? Valuation Challenges in Asia

3: Information and transparency

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