Pros and cons of valuation methods in Vietnam- 123docz.net

2.1. OVERVIEW OF VALUATION METHODS IN VIETNAM

2.1.4. Pros and cons of valuation methods in Vietnam

The fact of applying net book value method in combination with profits surplus issued by decree 28/CP/1998, 64/2002 and lately 187/2004 was an advanced juncture against previously pure property value method. The method mentioned to two major components creating business value are visible asset value and invisible

Advantageous value include in enterprise

value

State capital basing on account

book at equitization time

Average of 3 years after-tax profit rate with state capital basing on account

book

Interest rate of Government 10 years bond (or

more) since equitization time

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asset value and simultaneous concerned with a fixed extent profitable ability to correlate with industry in general. Another advantage was this method is simple, easy to apply into practice in Vietnam, when almost privatized enterprises had not large actual value. However, the simple method leads to different issues:

Valued assessment method is apart from factors creating enterprise values Because of simple and executed depending on each enterprise, so the current enterprise assessment method often leads to evaluate low enterprise value, losing state capital. On the other side, the method also did not count all risks of enterprise that cause the assessment to consider too high. The reasons are:

The major basis to specified enterprise value according to this method is statement of accounts (balance sheet) – document reflected on assets in general. Scheduled figures in balance sheet were often reflected according to original price and put on subjective manners of each enterprise. Even some largely valued fixed assets were land... still not reflected on statement of assets of Vietnam enterprises yet because of inconvenient facts in law on land. For this reason, much financial information still did not reflected though balance sheet as invisible values, the current market price and particularly, prospective values of index in balance sheet. Meanwhile, investor need evaluate how is this index in the future because invest in stock is invest in future.

Advantageous values calculated according to the previous method are based on average return rate within 3 past years, then are compared to State bond interest rate. It is not sure that the advantageous values will reflect enterprise’s profitability in the future. Thus, the advantageous values are valued under, sometimes as

―negative number‖ for fresh enterprises or temporarily lost enterprises but prospective in the future. Moreover, government bond market has not developed in Vietnam so far. It has not been put bonds out to contract periodically. 10 year

bond’s interest is not considered as a standard figure for the economy, sometimes it is much higher/lower than banking interest as well as average return rate of economy. For example, 10 year-government bond on September 2006 that was tendered through Ho Chi Minh Stock market centre was 8.7%/year whereas banking deposit interest was about 9-9.2%/year.

The method is not also mentioned to profitability in the future via business targets, quality of technology as well as other invisible values (or potential risks) that enterprises currently have. They are really important factors for investors to decide to buy stocks.

Rating method is not suitable for all kinds of enterprise.

Each sector, each field has typical technical economic features. Enterprises running in different sectors have different technical economic features, even complete different. Newly regulation brings chances for enterprises to apply a suitable value process, but in fact, it’s difficult for them to prove its suitability.

For example, in case, an insurance company or an advertisement company, we all know that their asset value is not large, most of them are hired assets. In term of potential sales, profit in the future, if just applying rating method under the current regulation of State, the business value is very low in comparison with its real value.

Valuation process is under administrative decision.

Up to now, the process and results of valuation has been strongly affected by valuation committee including mostly state officials, but not everyone understand about financial market, business characteristics, technology….For example, the valuation board of SAM includes a vice chairman - representatives of Department of Commerce, a deputy manager – representatives of Department of surveying land-

housing use, and a vice chairman – representative of Post and Telecommunication Department.

Pros and cons of valuation methods in Vietnam

Dividend Discount Model (DDM), Discounted Cash Flow (DCF)