Circular No. 122/2017/TT-BTC dated November 15, 2017 of the Ministry of Finance on promulgating Vietnamese Valuation Standard 12

THE MINISTRY OF FINANCE

Circular No. 122/2017/TT-BTC dated November 15, 2017 of the Ministry of Finance onpromulgating Vietnamese Valuation Standard 12

Pursuant to the Law on Prices No. 11/2012/QH13 dated June 20, 2012;

Pursuant to the Government s Decree No. 89/2013/ND-CP dated August 6, 2013 on guidelines for the Law on Prices in terms of valuation;

Pursuant to Government s Decree No. 87/2017/ND-CP dated July 26, 2017 on functions, tasks, powers and organizational structure of the Ministry of Finance;

At the request of the Director of Department of Price management,

The Minister of Finance promulgates a Circular promulgating Vietnamese Valuation Standard 12

Article 1.Vietnamese Valuation Standard 12 – Business Valuation Standard is issued with this Circular.

Article 2. Implementationorganization

1. This Circular takes effect on January 01, 2018.

2. Department of Price Management takes charge and cooperates with relevant agencies in directing and provides guidelines and inspecting the implementation of Valuation Standard issued herewith and relevant legitimate documents.

3. Any difficulties arising in the course of implementation of this Circular should be reported to the Ministry of Finance for consideration./.

For the Minister

The Deputy Minister

Tran Van Hieu

VIETNAMESE VALUATION STANDARD SYSTEM

Vietnamese Valuation Standard 12

Business Valuation

(Symbol: TDGVN 12)

(Issued together with Circular No. 122/2017/TT-BTC dated November 15, 2017 of the Ministry of Finance)

I. GENERAL PROVISIONS

1. Scope: This Standard sets forth business valuation.

2.Regulated entities:Price valuer (hereinafter referred to as valuer), valuation companies, other entities doing valuation business as prescribed in the Law on Price and other relevant law provisions.

3.Subject company and a third party using valuation results (if any) as specified in the valuation contract must have necessary knowledge about this Standard to cooperate with the valuation company during the course of valuation.

4.Interpretation of terms

“operating assets”means those assets acquired for use in the conduct of the ongoing operations of a business, which contributes to generate revenue and provide service or reduce overhead expenses of the business.

“non-operating assets”means those assets not used in the day-to-day operations of a business, including: investments in other companies (except that the subject company is a financial investment company) not contributing to generate sales and provide service or reduce overhead expenses of the subject company; short-term investments; cash and cash equivalents; assets under ownership and right to use of the company not contributing to generate revenue but valuable (unutilized assets, unused patents vacant land use right and land lease, etc.); assets under ownership and right to use of the company contributing to generate revenue but not generate sales and provide service or reduce overhead expenses of the subject company (land use right and land lease are inconsistent with line of business of the company, etc.) and other non-operating assets. When valuing a business using income approach, the value of non-operating assets at the valuation time needs to be included to the value of discounted cash flow of operating assets at the valuation time. With regard to discounted dividend, the non-operating assets being cash and cash equivalents shall not be included.

“going concern value”means the value of an ongoing operation company under the assumption that it will continue to operate after the valuation time.

“limited-time value”means the value of an ongoing operation company under the assumption that the lifetime of the company is limited that the company is compelled to go out of business after a certain time in the future.

“liquidation value”means the value of a company under the assumption that the assets are to be disposed of individually and the company will soon go out of business after the valuation time.

II. CONTENTS

1. Selection of premises of value and use of financial statements in business valuation

1.1. Premises of value in business valuation

Premise of business value is fair market value or non-fair market value. The premise of business value is determined according to purposes of valuation, characteristics of legal, economic and technical aspects and market of thesubject company, requirements of subject company specified in the valuation contract (if consistent with the purposes of valuation) and relevant law provisions.Other matters shall be done in accordance with the Vietnamese Valuation Standard 2 and 3.

According to practical prospects of the company, business market, purposes of valuation and laws and regulations, the valuer offers opinions about operation, transactions (in practice or assumption) of the subject company after the valuation time. Normally, the value of business is going concern value. If the valuer considers that the company will go out of business after the valuation time, the value of business is limited or liquidation value.

Which business valuation method applies will depend on the premises of business value and opinions of the valuer about operation of the company at and after the valuation time.

1.2. Use of financial statements in business valuation

a) Financial statements to be used in business valuation

Financial statements to be used in business valuation include: annual financial statements, audited annual financial statements, interim financial statements, reviewed interim financial statements, audited financial statements at the valuation time. In which, regarding the same data and item, the order of precedence is below:

- Data and item of the latest financial statement made closely to the valuation time shall be given priority.

- At the same time, data and items of the audited or reviewed financial statement shall be given priority.

If the subject company is a parent company and has a consolidated financial statement at the valuation time, the valuer needs to review both consolidated financial statement and separate financial statement of the parent company and subsidiary company in conformity with the selected valuation approaches and methods, separate financial statement shall be given priority.

b) Notes of using financial statement

- The valuer should collate and verify if the financial statement is accurate to ensure the reliability; in necessary circumstance, the valuer shall require the company to adjust the financial statement and accounting records before being analyzed, applying certain valuation approaches and methods. If the subject company does not adjust it, the valuer may determine the difference and clarify the bases for difference and specify it in the valuation report.

- When data of financial statement that has not been audited or reviewed is used without any collation or verification for accuracy, the valuer must state this limitation in the limitation section of the certification of value and valuation report for valuation clients and valuation users.

- Regarding income approach: When using data of financial statement of the subject company or comparable company to calculate the following: Earning Per Share (EPS), Earnings Before Interest, Taxes, Depreciation and Amortization in calculating market value ratio for valuation purpose, the valuer needs to consider eliminating income and expenses of non-operating assets, irregular and long-term income and expenses.

- Regarding cost approach or income approach: When using profit data from the latest annual financial statements of the subject company aimed at forecasting the annual cash flow of the subject company, the valuer needs to consider eliminating income and expenses of non-operating assets, irregular and long-term income and expenses.

- Long-term expenses and profits include: expenses associated with restructuring of company; credit and debit recorded when selling assets; change of accounting rules; recording of stock discount; goodwill impairment; writing-off; losses or interests from court decisions and other long-term profits and expenses. When the above items are adjusted, impact of corporate income tax (if any) should be taken into account.

2. Business valuation approaches and methods

Business valuation approaches consist of: market approach, cost approach and income approach. The valuation company may apply all of approaches for the business valuation purpose.

- In the market approach, the business value shall be determined through value of a company similar or identical to the subject company in terms of following factors: primary lines of the business; clients and consumption market; financial ratios or successful transaction prices of the subject company. In the market approach, average ratio and trading price methods shall apply to calculate the business value.

- In the cost approach, the business value shall be calculated through value of business assets. The cost approach shall be applied.

- In the income approach, the business value shall be calculated through conversion of net premium income flow to be earned in the future to the current value. Methods to be used in income approach are free cash flow to firm (FCFF), dividend discount model (DDM) and free cash flow to equity (FCFE).

3. Average ratio method

3.1. The average ratio method estimates value of the subject company through average market value ratio of comparable companies.

Comparable company is a business meeting the following conditions:

- Similar to the subject company in terms of following factors: primary lines of the business; clients and consumption market; financial ratios.

- Its shares have been traded successfully on the market at the valuation time or close to the valuation time but within 1 year until the valuation time.

Market value ratios being used in the average ratio include: price/earnings ratio (P/E), price/sales ratio (P/S), price/book ratio (P/B), enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA).

3.2. Application of average ratio method

There are at least 3 comparable companies. Comparable companies being listed companies or unlisted public companies shall be given priority.

3.3. Principles

- The method of determining financial ratios and market value ratios must be consistent with all of comparable companies and the subject company.

- Financial ratios and market value ratios of comparable companies collected from various sources shall be reviewed and adjusted to ensure the consistency in terms of determination method before being used.

3.4. Steps to value business

- Step 1: Evaluate and select comparable companies.

- Step 2: Determine market value ratios to be used to estimate the value of the subject company.

- Step 3: Estimate the value of the subject company.

3.5. Evaluate and select comparable companies

Criteria for evaluating and selecting comparable companies:

(ii) the comparable companies must be similar to the subject company in terms of following factors: primary lines of the business; groups of clients and consumption market. In many circumstances, similar companies to the subject company in terms of the above factors may be selected from competitors of the subject company.

(ii) the comparable companies must be similar to the subject company in terms of financial ratios, including:

- Ratios reflecting scale of the company: charter capital, revenues, gross margin of sales and services.

- Ratios reflecting growth capacity of the company: growth of average after corporate income tax profits within last 3 years.

- Ratios reflecting effectiveness of the company: return on equity (ROE), return on asset (ROA).

The valuer shall evaluate the abovementioned criteria to select at least 3 comparable companies. Market value ratios of these comparable companies shall be used to estimate the value of the subject company. The more number of comparable companies, the more reliable market value ratios are.

3.6. Determine market value ratios to be used to estimate the value of the subject company.

The valuer shall determine market value ratios of comparable companies, including: P/E, P/B, P/S, EV/EBITDA.When valuing a financial company or bank, the valuer shall not be required to determine the P/S ratio.

Notes:

- Share price of the comparable company is the closing price in the latest trading day of the share on the securities market at the valuation time. If the share of the comparable company is unlisted or it not registered on the unlisted public company market, the share price of the comparable company is the price that has been traded successfully on the market closely to the valuation time but within 1 year until the valuation time.

- The book value of share in P/B ratio shall be deducted from the book value of intangible fixed assets (excluding land use right, property on land exploitation right) to prevent regulations on accounting associated with intangible fixed assets from deviating valuation result in a case where comparable companies and/or the subject company have/has intangible fixed assets in the balance sheet. If the book value of intangible fixed assets is not deducted, explanation shall be provided.

- Enterprise value (EV) in EV/EBITDA shall be calculated as follows:

Where:

+ Debts, preference shares, interests of shareholders not holding control right, cash and cash equivalents shall be determined according to book value.

+ If the company has issued convertible shares, options, the valuer shall consider converting these shares to ordinary shares if appropriate when determining capitalization of the company.

- EBITDA of the comparable companies excludes revenues earned from cash and cash equivalents.

3.7. Estimate the value of the subject company

a) Determine average market value ratio for every market value ratio:

Average market value ratio may be determined by calculating arithmetic mean of market value ratio of comparable companies or weighted average of market value ratio of comparable companies. Weighing factor of market value ratio of each comparable company shall be determined according to analysis of industry development and company development.

b) Determine value of subject company according to every average market value ratio:

- Determine value of subject company according to EV/EBITDA:

Where EBITDA of the subject company exclude revenues earned from cash and cash equivalents.

- Determine value of subject company according to P/E, P/B, P/S:

+ Determine value of subject company according to P/E:

+ Determine value of subject company according to P/B:

+ Determine value of subject company according to P/S:

+ Value of subject company shall be calculated as follows:

Where: Value of debts of subject company shall be determined according to the market value with available market evidence, if not, the book value shall prevail.

c) Estimate value of subject company applying average ratio method

The value of subject company according to average ratio method may be determined by calculating arithmetic mean of market value ratio or weighted average of market value ratio. Weighing factor of each market value ratio may be determined according to the similarity between comparable companies with the principle that The more similar market value ratio between comparable companies, the higher weighting factor that ratio is

4. Trading price method

4.1. The trading price method estimates value of subject company through successful price of transfer of capital holding or shares on the market of the subject company.

4.2. Application of trading price method

The subject company has at least 3 successful transfers of capital holding or shares on the market, and concurrently, the transaction time is within 1 year until the valuation time.

4.3. Rules for application

The valuer shall consider adjusting the prices of successful transfers in conformity with the valuation time as deemed appropriate.

4.4. Estimate the value of the subject company

The value of the subject company shall be determined using the formula of market value as follows:

Where:

+ Market value of subject company’s equity is calculated according to the average prices according to transfer volume of at least latest 3 successful transfers of capital holding or shares to the valuation time.

With regard to a subject company being a listed company or unlisted public company, the share price on which the market value of equity is based to calculate is the average closing price according to trading volume of the last 15 trading days before the valuation time. If transactions before the valuation time show signs of irregularity, the valuer may consider all of latest 15 trading days after the valuation time.

+ Value of debts of subject company shall be determined according to the market value with available market evidence, if not, the book value shall prevail.

5. Asset-based method

5.1. Asset-based method is a method estimating value ofsubject company by calculating total market value of assets under ownership rights and right to use of the subject company.

5.2. Principles:

- Assets to be considered in the course of valuation are all of company s assets, including operating assets and non-operating assets.

- When valuing business according to premise of market value, value of assets is considered as market value of such asset at the valuation time. Assets in the accounting records need to be valued according to premise of market value, certain particular circumstances are done in accordance with Section 5.4.

- Other valuation methods shall apply when valuing intangible assets not meeting conditions for being recorded in accounting records (trade name, brand name, patents, industrial designs) and other equivalent assets.

- Regarding assets to be recorded in foreign currencies: Foreign exchange rates shall be determined according to buy rate quoted by commercial bank which the company has entered into the largest foreign currency transaction at the valuation time. If the subject company has no foreign currency transaction at the valuation time, the central rate of the State Bank announced shall apply at the valuation time.

5.3. Steps

- Step 1: Estimate total value of tangible assets and financial assets of the subject company.

- Step 2: Estimate total value of intangible assets of the subject company.

- Step 3: Estimate value of the subject company.

5.4. Estimate total value of tangible assets and financial assets of the subject company

Total tangible asset and financial asset value of subject company shall be considered as total value of subject company’s tangible assets and financial assets.

The estimate of market value of company’s tangible assets and financial assets shall be applied in accordance with Vietnamese valuation standards in terms of market approach, cost approach, income approach, and real estate valuation standards. In addition, the valuer may follow the guidelines below:

a) Determine value of tangible fixed assets:

- In case of tangible fixed assets being buildings, structures, investment real estate:

+ Regarding a work with scope and unit price or investment rate that is identifiable: to be identified according to reproduction cost approach as prescribed in Vietnamese valuation standards in terms of cost approach.

+ In case of a work that has been completed within 3 years before the valuation time, the final account value approved by the competent authority. If the final account value has not been determined, provisional price on the accounting records shall be used, and such a limitation shall be specified in the certification of value and valuation report.

+ Regarding a work with scope and unit price or investment rate that is unidentifiable: to be identified according to original cost in accounting records taking accounting of cost escalation factor minus (-) depreciation value at the valuation time.

- In case of immovable property being machinery, means of transport, transmission equipment, administration tools:

+ Regarding special assets without similar assets on the market, without investment and engineering documents and they have been no longer manufactured: value of these assets is determined according to original cost of accounting records minus (-) depreciation value at the valuation time.

b) Determine value of tools and instruments:

- Value of tools and instruments may be determined according to value stated in accounting records or determined as follows:

The value of tools and instruments shall be determined according to the market prices of comparable assets; where market prices of comparable assets cannot be identified, the prices of new tools or tools of the same type or equivalent or at the original prices tracked on the accounting books shall be determined minus the depreciation value at the valuation time.

- Where the value of tools and instruments is determined according to the value in the accounting books, the valuer must clearly state this limitation in the equivalent section of the certification of value and valuation report.

c) Determining the value of costs associated with operation in progress, materials/supplies, raw materials and inventories:

- Costs associated with operation in progress are determined according to accrual expenses incurred in accounting books. In case costs associated with capital construction in progress are related to the creation of off-the-plan real estate, it shall be re-determined in accordance with Vietnamese valuation standards in terms of market approach and/or cost approach and/or income approach and/or real estate valuation standards.

- Materials/supplies, inventory

+ Inventory goods, materials/supplies, tools and instruments in stock serving the ordinary course of business or in circulation are determined by accrual expenses incurred in the accounting books.

+ Where the inventories are goods and real estate finished products, the value of this real estate can be determined according to Vietnamese valuation standards market approach, cost approach, income approach, real estate valuation.

+ In case where inventories, raw materials and tools remaining in stock for a long time due to production defects or unfinished products, which cannot be sold because of changes in products, etc. leading to poor quality that the company needs classify them for evaluation according to the recovery value on the principle of best and most effective use.

d) Determining the value of assets in cash:

- Cash shall be determined according to the fund s minutes of subject company.

- Deposits shall be determined according to the balances already verified with bank statements of the bank where the subject company opens the deposit account at the valuation time.

- Cash and deposit in foreign currencies are determined in accordance with the principle in Section 5.2 of this Standard.

dd) Determining the value of amounts receivable and amounts payable:

- The value of amounts receivable are determined according to the actual balance on the accounting book. For irrecoverable amounts receivable, the valuer must clearly state these items together with the irrecoverable reasons in the limitation section of certification of value and valuation report.

- Where there is no debt reconciliation, the valuer must clearly state in the limitation section of the certification of value and the valuation report so that the intended users of valuation report can consider when using it.

e) Determining the value of the investment:

Investments of company should be determined at market price at the valuation time as follows:

- Where a company (from which subject company contributes capital or purchases shares) has successfully transacted capital or shares on the market, the value of its investments in capital contribution or share purchase is determined according to the market value of the subject company s equity, in which the market value of the subject company’s equity is determined in accordance with Section 2 of this Standard or determined as follows:

+ In cases where the shares of companies have not yet been listed on the stock exchange or have not been registered for trading on the UPCoM, and successful transfers of capital or shares on the market satisfy both conditions: (i) more than 51% of the company’s equity is transferred in total transfers; (ii) the time of transfers is within one year until the valuation time; the value of the investments of the subject company may be determined according to the average transfer price according to the volume of the latest transfers before the valuation time.

+ With regard to investments being shares of listed companies that have not yet been listed on the stock exchange or have registered for trading on UPCoM, the share price on which the market value of equity is based to calculate is the average closing price according to trading volume of the last 15 trading days before the valuation time. If transfers before the valuation time show signs of irregularity, the valuer may consider all of latest 15 trading days after the valuation time.

- Where a company (from which subject company contributes capital or purchases shares) has not successfully transacted capital or shares on the market, the value of its investments in capital contribution or share purchase is determined as follows:

+Where a subject company holds 100% of the capital of the company from which it contributes capital or purchases shares or capital contribution: the value of the investment shall be determined according to the value of the company and determined according to the methods mentioned in Section 2 of this Standard.

+Where a subject company holds from 51% to under 100% of the capital of certain companies from which it contributes capital or purchases shares or capital contribution: the value of the investment shall be determined according to the market value of these companies and determined according to the methods mentioned in Section 2 of this Standard.

(i) Regarding discounted equity net cash flow: The cost of equity can be estimated on the basis of the average return on equity over the last five years, the equity net cash flow can be estimated on the basis of profits for owners, the rate of return on equity over the last five years.

(ii) Regarding P/B or P/E ratio: the average P/B or P/E ratio can be estimated on the basis of the ratio of at least three firms in the same production and business sector.

(iii) Where the ratio cannot be determined in two methods above, the value of the investment can be determined on the basis of: the ratio of the investment capital of the subject company to its chartered capital or total net capital contribution to other companies and the value of equity in other companies according to the audited financial statements. If the financial statement has not been audited, the value of the equity according to the latest financial statement of such company shall be based on for determination.

+Where a subject company holds less than 51% of the capital of the company from which it contributes capital or purchases shares or capital contribution: the value of the investment may be determined according guidelines in Point (iii), and to be specified in the limitation section in certification of value and valuation report. However, valuers are recommended to determine it according to the methods mentioned in Section 2 of this Standard or guidelines in Point (i) and (ii).

g) Determining costs associated with capital construction in progress, short-term and long-term deposits in accordance with accounting books.

h) The value of financial assets in the form of a contract will be prioritized for income flow discount in the future.

5.5. Estimate total value of intangible assets of the subject company

Intangible assets of the subject company include intangible fixed assets already recorded in accounting books and other intangible assets determined that satisfy the conditions specified at Point 3.1, Section 3 of the Intangible Assets Valuation Standards.

Total value of intangible assets of the subject company shall be determined using one of the following methods:

a) Method 1: Estimating the total value of intangible assets of a subject company by estimating the value of each intangible fixed asset that is identifiable and the value of each intangible fixed asset that is unidentifiable (remaining intangible assets).

The value of an intangible asset of a subject company shall be calculated as the total value of identifiable intangible fixed assets and unidentifiable intangible fixed assets.

Valuer shall determine the value of each intangible asset which can be identified according to Vietnamese Valuation Standard No. 13. The value of the land use right or land rent shall be determined in accordance with Vietnamese valuation standards in terms of market approach, income approach, and real estate valuation.

The valuer determines the value of unidentifiable intangible assets (remaining intangible assets) through the following steps:

Step 1: Estimate the total market value of the tangible and intangible assets identified to be involved in the generation of income for the subject company. The market value of these assets is determined in accordance with Section 5.4 of this Standard and the guidance in the Vietnam Valuation Standards System.

Step 2: Estimating amount of annual income that the subject company may earn. This income amount is the level of income in the ordinary course of business of the subject company, which is estimated on the basis of the results obtained by the subject company in the last three years, taking into account the potential development of the company after excluding the abnormal factors affecting the income such as increased or decreased income from liquidation of fixed assets, revaluation of financial assets, exchange rate risks, etc.

Step 3: Estimate the appropriate return rate on identifiable tangible and intangible assets of the subject company. The return of this tangible asset must not exceed the weighted average cost of capital of the subject company. The return rate of these tangible assets must not exceed the weighted average cost of capital of the subject company. The weighted average cost of capital of the subject company shall be determined according to the formula prescribed in Section 6.4 of this Standard; where: the ratio of debt to total value of the subject company is determined according to the capital structure of the subject company, the long-term debt cost shall be determined on the basis of the weighted average of interest of long-term debts of the subject company.

Step 4: Estimate annual income that the subject company earns from identifiable tangible and intangible assets by calculating the value of tangible and intangible as specified in assets step 1 multiplied by (x) the corresponding return rate determined in step 3.

Step 5: Estimate income that subject company earns from unidentifiable intangible assets shall be calculated as income which the company may earn at step 2 minus (-) income that the company earned from identifiable tangible and intangible assets at the step 4.

Step 6: Estimate capitalization rate consistent with income that the subject company may earn from unidentifiable intangible assets. This capitalization rate must be at least equal to the cost of equity of the subject company. The determination of the cost of equity of the subject company shall be done in accordance with Point d, Section 6.4 of this Standard.

Step 7: Estimating the total value of unidentifiable intangible assets of the subject company by capitalizing the income generated by these intangible assets for the subject company.

b) Method 2: Estimating the total value of intangible assets of the subject company by capitalizing the income flow generated by these intangible assets for the subject company.

Step 1: Estimate the total market value of the tangible assets to be involved in the generation of income for the subject company. The market value of these assets is determined in accordance with Section 5.4 of this Standard.

Step 2: Estimate amount of annual income that the subject company may earn. This income amount is the level of income in the ordinary course of business of the subject company, which is estimated on the basis of the results obtained by the subject company in the last three years, taking into account the potential development of the company after excluding the abnormal factors affecting the income such as increased or decreased income from liquidation of fixed assets, revaluation of financial assets, exchange rate risks, etc.

Step 3: Estimate the appropriate return on tangible assets of the subject company. The return rate of this tangible asset must not exceed the weighted average cost of capital of the subject company. The weighted average cost of capital of the subject company shall be determined according to the formula prescribed in Section 6.4 of this Standard; where: the ratio of debt to total value of the subject company is determined according to the capital structure of the subject company, the long-term debt cost shall be determined on the basis of the weighted average of interest of long-term debts of the subject company.

Step 4: Estimate annual income of the subject company earned from tangible assets by identifying the total value of tangible assets as specified in step 1 multiplied by (x) the corresponding return rate determined in step 3.

Step 5: Estimate income that subject company earns from all intangible assets shall be calculated as income which the company may earn at step 2 minus (-) income that the company earned from tangible assets at the step 4.

Step 6: Estimate capitalization rate consistent with income that the subject company may earn from all intangible assets. This capitalization rate must be at least equal to the cost of equity of the subject company. The cost of equity shall be determined as prescribed in Point d, Section 6.4 of this Standard.

Step 7: Estimating the total value of intangible assets of the subject company by the capitalizing the income generated by these intangible assets for the subject company.

5.6. Estimate value of the subject company

Where it is necessary to determine the value of equity from the market value of the subject company determined according to this method, the value of equity shall be determined according to the following formula:

Where: Value of debts of subject company shall be determined according to the market value with available market evidence, if not, the book value shall prevail.

6. Discounted free cash flow for the firm

6.1. The discounted free cash flow to equity determines the value of the subject company through estimating total value of the discounted free cash flow of the subject company to at the valuation time. Where the subject company is a joint-stock company, the discounted free cash flow for the firm shall be used with the assumption that the preferred shares of the subject company as ordinary shares. This assumption should be clearly stated in the limitation section of the certification of value and valuation report.

6.2. Steps to value business:

- Step 1: Forecast free cash flow of the subject company.

- Step 2: Estimate the weighted average cost of capital of the subject company.

- Step 3: Estimate the terminal value.

- Step 4: Estimate the value of the subject company.

6.3. Forecast free cash flow of the subject company:

Valuer should estimate the cash flow forecast period. For companies that have grown steadily, the cash flow forecast period is usually five years. For newly-corporate or fast-growing companies, the cash flow forecast period can last for more than five years until the companies enter the period of steady growth. For companies with limited operation, the cash flow forecast period shall be determined according to the company’s lifetime.

Formula of annual free cash flow to firm:

FCFF = earnings before interest and after taxes (EBIAT) + depreciation and amortization - capital expenditures - working capital expenditures and short-term non-operating asset (net operating capital difference)

earnings before interest and after taxes (EBIAT) are earnings before interest and after taxes minus revenues and non-operating expenses.

Formula of earnings before interest and after taxes:

EBIAT = EBIT x (1-t)

Where:

t: corporate income tax rate

capital expenditures include: money that a company spends to invest fixed assets and other long-term assets; invest operating assets stated in the debt instruments of other entities and investments in equity of other entities (if any).

- Formula of non-cash working capital and short-term non-operating assets:

non-cash working capital and short-term non-operating asset = (short-term receivables + inventory + other short-term assets) – short-term liabilities excluding short-term loans

6.4. Estimate the weighted average cost of capital of the subject company

The valuer estimates the weighted average cost of capital of the subject company according to the formula:

WACC = R_d× F_d× (1 - t) + R_e× F_e

Where:

WACC: weighted average cost of capital

R_d: the required return of the firm’s debt financing

F_d: the ratio of debt to total value

t: corporate income tax rate

R_e: cost of equity

F_e: the ratio of equity to total value

a) Estimating the ratio of debt to total value of the subject company:

the ratio of debt to total value of subject company is determined according to the ratio of borrowed capital in the same industry with the subject company. If the ratio is not determined according to the above guidance, it is may determined according to the ratio of debt to total value in the latest years of the subject company taking into account long-term capital structure in the future.

b) Estimate long-term the required return of the firm’s debt financing of subject company

The long-term the required return of the firm’s debt financing is determined according to interest rate of long-term loans of the subject company. In case where the capital structure of a subject company has no long-term loans, the interest rate of long-term loans is the expected interest rate on the basis of assessing the negotiation capability of the subject company with credit providers, long-term interest rates of companies in the same industry with the subject company. Where a company borrows from multiple sources with different interest rates, the required return of the firm’s debt financing is determined by the weighted average interest rate on long-term debt.

c) Estimate the ratio of equity to total value of subject company:

the ratio of equity to total value of subject company is calculated as follows: F_e= (1 − F_d)

d) Estimate cost of equity of subject company (R_e)

cost of equity of subject company is calculated as follows:

d1) Method 1: having at least 03 companies in the same industry with the subject company having listed or registered for trading on the Vietnam securities market.

cost of equity of subject company is calculated as follows:

R_e= R_f+b_L× (R_m– R_f)

- The risk-free rate of return is estimated based on the 10-year government bond yield or the longest maturity date closely to the valuation time.

- The risk premium of market assets over risk free assets (R_m– R_f) is estimated as expected rate of return on investment in the stock market (R_m) minus (-) risk-free rate of return (R_f). The expected rate of return on investment in Vietnam s stock market is estimated by the valuer according to VN-INDEX statistical method during the last five years of the valuation time. The VN-INDEX is listed on a monthly basis, namely closing ratios of the last trading session of the month.

- The sensitivity to market risk for the security (b_L) of subject company is estimated through the risk coefficient of the shares of the same companies in the same industry with the subject company on the stock market.

The valuer needs to select at least 03 companies in the same industry with the subject company and determine the coefficientb_Lof these companies.

The determination of the coefficientb_Lis done by the method of regressing price movements of stocks with price fluctuations of the market according to the formula:

Where price fluctuations are determined by month and at least 5 years (for companies which do not have data for full 5 years, commencing from the date the company is listed or registered for trading), market income is calculated based on the VN-INDEX. The valuer can take the coefficientb_Lpublished in terms of calculations done the same way as above.

Because there may be differences in the capital structure between the subject company and companies in the same industry, the valuer should adjust the risk coefficient of companies in the same industry according to the capital structure of the subject company following the steps below:

+ Step 1: Eliminate the effect of capital structure on the risk factor according to the formula:

b_U=

Where:

b_{U :}non-leverage risk factor

: The ratio of debt to equity of the companies in the same industry with the subject company

t: corporate income tax rate

+ Step 2: Calculate the average non-leverage risk of companies having the same industry with the subject company.

+ Step 3: Estimating the risk factor taking into account the effect of the capital structure (b_L) of the subject company according to the formula

assessedb_L= averageb_U×

Where:

assessedb_L: The risk factor taking into account the effect of the capital structure of the subject company

averageb_U: average non-leverage risk factor

: The ratio of equity to total value of subject company

t: corporate income tax rate

D2) Method 2: There are not enough 03 companies in the same industry with the subject company having shares listed and traded on the Vietnam stock market but information on the premium expected for risk is collected according to the international premium for risk index.

cost of equity of subject company is calculated as follows:

R_e= R_f+ R_p

- The risk-free rate of return is estimated based on the 10-year government bond yield or the longest maturity date at the valuation time.

- Premium expected for risk (R_p) is determined according to the international risk index published by international financial advisory organizations. The valuer should consider the arguments and adjust them to suit the reality of the subject company.

d3) Method 3: There are not enough 03 companies in the same industry withsubject company that have shares listed and traded stocks on the Vietnamese stock market but have information on the risk coefficient of companies in the same industry with the subject company on the US market.

cost of equity of subject company is calculated as follows:

R_e= R_f+b× (R_m– R_f) + national risk + exchange rate risk (if any)

- Risk free rate of return (R_f) is estimated based on the 10-year US Government bond yield.

- The risk premium of market assets over risk free assets (R_m– R_f) is estimated as expected rate of return on investment in the US stock market (R_m) minus (-) risk-free rate of return (R_f).

-b:risk coefficient of companies in the same industry with the subject company in the US market. Where the risk coefficient is affected by the capital structure, it shall be adjusted in accordance with the steps in point 1 of this point.

6.5. Estimate the terminal value

- Case 1: cash flow after the forecasting period is unfinished and infinite cash flow.

Formula of terminal value:

V_n=

Where:

FCFF_n+1: free cash flow year n+1

- Case 2: cash flow after the forecasting period is the cash flow that grows steadily each and extends indefinitely.

Formula of terminal value:

V_n=

Where:

g: growth rate of cash flow

The growth rate of cash flow is determined by the growth rate of profit. The growth rate of profit is forecasted on the basis of business development prospects, past profit growth rate of companies, business plan, profit after tax retained to add capital and return on total capital.

- Case 3: the company goes out of business at the end of the forecasting period. Terminal value is determined according to the liquidation value of the subject company.

6.6. Estimate the value of the subject company

- Calculates the net present value of the free cash flow and terminal value after discounting the free cash flow of the company and terminal value of the company at the discount rate is the weighted average capital cost of the company.

V₀=+

- Estimate the value of non-operating assets of the company.

- Estimate the value of subject company by adding the net present value of the free cash flow of the company and the terminal value with the value of the non-operating assets of the subject company.

7. Dividend discount model (DDM)

7.1. The dividend discount model determines the value of the subject company’s equity based on the total estimate of the dividend discount value of the subject company. Where the subject company is a joint-stock company, the dividend discount model for the firm shall be used with the assumption that the preferred shares of the subject company as ordinary shares. This assumption should be clearly stated in the limitation section of the certification of value and valuation report.

The value of the subject company shall be determined using the formula as follows:

Where:

Value of debts of subject company shall be determined according to the market value with available market evidence, if not, the book value shall prevail.

7.2. Steps to determine the value of equity

a) Step 1: Forecast dividend flow of the subject company. The valuer should forecast the dividend rate and dividend growth rate of the subject company. For companies that have grown steadily, the dividend distribution rate or dividend growth rate forecast period is usually five years. For newly-corporate or fast-growing companies, the dividend distribution rate or dividend growth rate forecast period can last for more than five years or longer until the companies enter the period of steady growth with constant dividend rates or dividend growth. For companies with limited operation, the dividend flow forecast period shall be determined according to the company’s lifetime.

b) Step 2: estimate the cost of equity as guided at Point d, Section 6.4 of this Standard.

c) Step 3: estimate the terminal value of equity as follows:

- Case 1: dividend flow after the forecast period (D_n) is a cash flow that does not grow and lasts indefinitely. Formula of terminal value:

V_n=

- Case 2: dividend flow after the forecasting period is the cash flow that grows steadily each and extends indefinitely. Formula of terminal value:

V_n=

Where:

_Dn+1:dividend flow of company of year n + 1

g: growth rate of dividend flow

The growth rate of the dividend flow is forecasted on the basis of the after-tax profit margin to supplement capital, return on equity.

- Case 3: the company goes out of business at the end of the forecast period, the terminal value is determined according to the liquidation value of the subject company.

d) Step 4: Estimate value of the subject company’s equity:

- Calculates the net present value of the dividend flow and terminal equity value after discounting the dividend flow of the company and terminal equity value of the company at the discount rate is the cost of equity.

V₀=+

- Estimate the value of non-operating assets of the company.

- Estimate the value of equity’s subject company by adding the net present value of the dividend flow of the company and the terminal equity value with the value of the non-operating assets of the subject company (excluding cash and cash equivalents).

8. Discounted Equity Net Cash Flow

8.1. The discounted equity net cash flow determines the value of the subject company’s equity based on the total estimate of the total dividend discount equity value of the subject company. Where the subject company is a joint-stock company, the discounted equity net cash flow for the firm shall be used with the assumption that the preferred shares of the subject company as ordinary shares. This assumption should be clearly stated in the limitation section of the certification of value and valuation report.

The value of the subject company shall be determined using the formula as follows:

Where:

Value of debts of subject company shall be determined according to the market value with available market evidence, if not, the book value shall prevail.

8.2 Steps to determine the value of equity

a) Step 1: Forecast equity net cash flow of the subject company. Valuer should estimate the cash flow forecast period. For businesses that have grown steadily, the cash flow forecast period is usually five years. For newly-corporate or fast-growing companies, the cash flow forecast period can last for more than five years until the companies enter the period of steady growth. For companies with limited operation, the cash flow forecast period shall be determined according to the company’s lifetime.

Formula of equity net cash flow for the firm:

FCFE = earnings after taxes + depreciation and amortization - capital expenditures - working capital expenditures and short-term non-operating assets (net operating capital difference) – principal repayments + newly-issued debts

Earnings after taxes are the after-tax profits excluding revenues and expenses from non-operating assets.

capital expenditures include: money that a company spends to invest fixed assets and other long-term assets; invest operating assets stated in the debt instruments of other entities and investments in equity of other entities (if any).

Formula of non-cash working capital and short-term non-operating assets:

non-cash working capital and short-term non-operating asset = (short-term receivables + inventory + other short-term assets) - short-term liabilities excluding short-term loans

b) Step 2: estimate the cost of equity of the subject company as guided at Point d, Section 6.4 of this Standard.

c) Step 3: estimate the terminal value of equity

- Case 1: cash flow after the forecasting period is unfinished and infinite cash flow. Formula of terminal value:

V_n=

Where:

FCFE_n+1: Cash flow of equity of year n + 1

- Case 2: cash flow after the forecasting period is the cash flow that grows steadily each and extends indefinitely. Formula of terminal value:

V_n=

Where:

g: growth rate of equity cash flow

The growth rate of cash flow is forecasted on the basis of business development prospects, past cash flow growth rate of companies, business plan, profit after tax retained to add capital and return on equity.

- Case 3: the company goes out of business at the end of the forecast period, the terminal value is determined according to the liquidation value of the subject company.

d) Step 4: Estimate value of the subject company’s equity:

- Calculates the net present value of the equity net cash flow and terminal equity value after discounting the equity net cash flow of the company and terminal equity value of the company at the discount rate is the cost of equity.

V₀=+

- Estimate the value of non-operating assets of the company.

- Estimate the value of equity of the subject company by adding the net present value of the equity net cash flow and the terminal equity value with the value of the non-operating assets of the subject company.

8.3. For matters not yet specified in this Valuation Standard, the valuer should base themselves on additional guidance on the application of the discounted cash flow method specified in the Vietnamese valuation standards in terms of income approach.

9. Conclusion on the value of the enterprise

The final business value can be determined by the weighted average of the results of the applied valuation methods. The weighing factor for each approach is based on the reliability of each method, input data, valuation purposes, etc., which are suitable for the market./.

APPENDIX

ILLUSTRATIVE EXAMPLES
(Issued together with Vietnamese valuation standard 12)

The examples are simplified and for illustrative purposes only.

1. Example 1: apply the average indicator method to identify the business value

When assessing a company operating in the sector of real estate. Information about subject company:

- Financial ratios:

- earnings after taxes of the last 4 quarters: VND 458.08 billion

- Net revenue of the last 4 quarters: VND 3.395 billion

- EPS: VND 1.017,96 per share

- EBITDA (excluding revenues earned from cash and cash equivalents): VND 1.155 billion

- Latest book value of subject company’s equity : VND 6.544 billion

- Payables: VND 4.908 billion

- At the valuation time, value of cash and cash equivalents is zero.

Answer:

After obtaining information, the valuer knows that the subject company has 5 competitors in the field of real estate. These companies have shares listed and traded on the stock market.

The valuer considers that these companies as competitors to the subject company, and therefore, they have many similarities with the subject company in terms of key lines of the business, client groups, and consumption market. These companies have shares listed and traded on the stock market. Accordingly, the valuer collects financial information of these companies to evaluate the similarity between these companies and the subject company in terms of financial ratios. After calculating key financial ratios of these companies, the results are as follows:

- Assess similarity in terms of financial ratios:

+ Assess the similarity in terms of ratios reflecting the scale of company

+ Assess the similarity in terms of ratios reflecting the growth of company

+ Assess the similarity in terms of ratios reflecting the effectiveness of company

Comments: companies 1, 2 and 4 have many similarities in terms of financial ratios with subject company, so they are selected as comparable companies. Accordingly, the market value ratios of these companies shall be used to value the subject company.

- Collect market information, the valuer determines 4 market value ratios of these comparable companies P/E, P/B, P/S, EV/EBITDA as follows:

- Determine value of subject company:

Comments: comparative companies are basically the same as the subject company, so the average ratios can be determined by the arithmetic mean of market ratios of the comparable firms as follows:

Accordingly, the value of a company is determined according to the market ratios as follows:

Comments:andratios are basically similar between comparable companies,andratios are less similar, therefore, if business value is determined according to averageandratios, the weight of 30% for each ratio applies, if the business value is determined according to averageandratios, the weight of 20% for each ratio applies.

Value of subject company = 10.972,98 × 30% + 13.044,4 × 20% + 11.234 × 20% + 10.241 × 30% = VND 11.219,87 billion

2. Example 2:applying to the asset-based method to identify the business value

When valuing a company with information below:

- The balance sheet of company dated December 31, N

Unit: VND million

- The revaluation of all assets of the companies shows that there are changes as follows:

+ Cash fund is missing 20 million for unknown reasons.

+ Some uncollectable receivables are VND 1.000 million; VND 15.000 million is definitely earned.

+ Damaged raw materials inventory cost 200 million; the rest increases VND 300 million.

+ Tangible fixed assets revalued at market price increased by VND 5,000 million.

+ Hoang Sa s stock price calculated at the time of valuation is VND 25.000 per share.

+ The amount of capital contributed to the joint venture is revalued by VND 3.000 million.

+ corporate income tax rate: 20%- Other information:

+ The cost of equity of the company is 20%, interest rate of short-term loans is 7,625% per year. Accordingly, the weighted average cost of capital of company is 15,83%

+ The average profit of the company for the last 3 years is VND 20.000 million (in the last 3 years the company has not recorded any irregular profits from liquidation of fixed assets or financial income).

Answer:

* Estimate total value of tangible assets and financial assets of the company as follows:

1. Fund checking: -20

2. Value of receivables:

Unable to receive: -1,000

3. Materials:

+ Damage: - 200

+ Increase: +300

4. Tangible fixed assets: + 5.000

5. Value of securities invested in Truong Sa Company: The market price of 1.000.000 shares calculated at the time of valuation of the company is: 1.000.000 shares x 25.000 VND/share = VND 25.000 million, increase VND 25.000 -15.000 = VND 10.000 million.

6. Capital contributed to the joint venture increase: + 3.000

Comments: assets including: short-term securities, securities investment, joint ventures are not involved in the process of generating revenue for the subject company, so they are not included in operating asset of company.

Total value of operating assets:

* Income earned from tangible operating assets and financial assets of company = 101.680 × 15,83% = VND 16.095,944 million

* Income earned from intangible assets for company = 20.000 - 16.095,944 = VND 3.904,056 million

* Value of intangible assets of company == VND 19.520,28 million

Conclusion:Value of subject company: VND 154.200,28 million.

3. Example 3:apply the free cash flow to equity to determine the value of the company

When valuing a company with information below:

- Information from financial statement of company on December 31, N as follows:

Unit: VND million

- Based on the latest 3-year business of the company, business environment and macroeconomic prospects, it is forecasted that in the next 5 years, the annual growth rate of company is 5%, followed by an annual increase of 3%.

- Long-term loan cost is 10% per annum and the ratio of debt to total value is.

- The interest rate of 10-year Government bonds is 6% per year.

- The average non-leverage risk coefficient is calculated on the basis of the leverage ratio of the shares of 5 companies in the same industry with the subject company listed on the Vietnamese stock market is 1,145.

- The expected return on the Vietnamese stock market calculated using the VN-Index method is 12% per year.

- The company has no non-operating assets.

Answer:

* Determine the forecasted cash flow

FCFF on December 31, N is calculated as follows:

FCFF = earnings before interest and after taxes (EBIAT) + depreciation and amortization - capital expenditure - working capital expenditures and short-term non-operating assets (net operating capital difference)

FCFF = (200.000 + 10.000) × (1 - 22%) + 50.000 - 35.000 - (-5.000)

FCFF = VND 183.800 million

FCFF in the period of first year through fifth year is calculated as follows:

FCFF₁= 183.800 × (100% + 5%) = VND 192.990 million

FCFF₂= 192.990 × (100% + 5%) = VND 202.639,5 million

FCFF₃= 202.639,5 × (100% + 5%) = VND 212.771,48 million

FCFF₄= 212.771,48 × (100% + 5%) = VND 223.410,05 million

FCFF₅= 223.410,05 × (100% + 5%) = VND 234.580,55 million

* The risk factor taking into account the effect of the capital structure (b_L) of the subject company is calculated according to the formula

Assessedb_L= averageb_Ux (1 + D/E x (1-t))

Assessedb_L= 1,145 x (1 + 1/3 x (1-25%)

Assessedb_L= 1,431

Cost of equity of subject company:

R_e= R_f+b_L× (R_m– R_f)

R_e= 6% + 1,431 × (13% - 6%) = 16%

The weighted average cost of capital of the subject company:

13.17%

* Terminal value

FCFF year 6

FCFF₆= 234.580,55 × (100% + 3%) = VND 241.617,97 million

Terminal value:

* Value of subject company:

Conclusion: Because the subject company has no operating assets, therefore, the value of the subject company is VND 2.017.944,75 million./.