Interpretation of Expert Guidance on Valuation of Science and Technology Innovation Enterprises

In order to guide valuation institutions and their professionals in the valuation of science and technology innovation enterprises, China Appraisal Society (hereinafter referred to as CAS) has formulated "Valuation Expert Guidance No. 14 - Valuation of Science and Technology Innovation Enterprises" (hereinafter referred to as Expert Guidance). The relevant matters are explained as follows.

I. Background of the Expert Guidance

In November 2018, President Xi Jinping attended the opening ceremony of the First China International Import Expo and delivered a keynote speech, announcing the establishment of the STAR Market on the Shanghai Stock Exchange and the pilot registration system. According to the decision and deployment of the CPC Central Committee and the State Council, relevant departments orderly promoted the establishment of the STAR Market and the pilot registration system. In July 2019, the first 25 companies were listed on the STAR Market of the Shanghai Stock Exchange.

The establishment of STAR Market is an important measure to implement the innovation-driven development strategy, enhance the service level of capital market to improve the innovation capability of China's core technologies, promote the development of high-tech industries and strategic emerging industries, support the construction of Shanghai international financial centre and science and technology innovation centre, improve the basic system of capital market and promote high-quality development. Since the establishment of STAR Market, hundreds of companies have been listed. A large amount of science and technology innovation enterprises and great investment opportunities have brought a broad market for the valuation industry.

Compared with the valuation of traditional enterprise, the valuation of science and innovation enterprises is more difficult and risky. It reflects the new technical needs of valuation in terms of valuation purpose, valuation subject and valuation approach.

For the valuation of science and innovation enterprises, there are no specifically developed valuation standards. In this context, it is of great practical significance to explore how to do valuation of science and technology innovation enterprises under the framework of laws and regulations and valuation standards, and to meet the needs of the capital market for professional services of valuation of science and technology innovation enterprises.

II. Orientation of the Expert Guidance

The Expert Guidance is intended to guide valuation institutions and their professionals to carry out valuation for reference purpose and is not mandatory.

The Expert Guidance is aligned with the valuation standards system to serve the valuation of science and technology innovation enterprises. The valuation report is prepared and issued in accordance with the Valuation Practicing Standard - Valuation Report.

III. Preparation Process

After preliminary preparations, in June 2020, the CAS formed a project team to study and formulate expert guidance on valuation of science and technology innovation enterprises. The project team formed a draft proposal in May 2021. In June 2021, CAS organized a seminar on the draft proposal, and the project team revised and improved the draft proposal according to the expert opinions to form a consultation paper. In June 2021, the CAS issued a notice to solicit opinions from the valuation industry and sent letters to relevant units for opinions. In September 2021, the CAS organized the project team to summarize and analyze the collected feedback, and organized experts to further amend and improve the guidance to form a discussed edition. In November 2021, the CAS submitted the discussed edition to the relevant standards committee for review, and further improved the content in accordance with the review comments to form the proposed draft. In December 2021, the Expert Guidance was officially released.

IV. Main Contents

The Expert Guidance contains seven chapters, including Introduction, Valuation Purpose, Valuation Subject and Base of Value, Valuation Approaches and Concerns, Concerns of Verification of Scientific and Technological Innovation Enterprises, Development Stage of Scientific and Technological Innovation Enterprises and Concerns, Industry Characteristics of Scientific and Technological Innovation Enterprises and Concerns, and Report Disclosure, with a total of 59 articles.

Firstly, it clarifies the definition and scope of application of Expert Guidance related to science and technology innovation enterprises.

Secondly, it clarifies the considerations and requirements for the valuation of science and innovation enterprises.

Thirdly, it clarifies the industry characteristics and applicable valuation approaches that need to be paid attention to the valuation of science and technology innovation enterprises that are in different stages of their life cycle and belonging to different industries.

Fourthly, the content and requirements for disclosure of valuation reports of science and innovation enterprises are clarified.

V. The Description of Key Points

1. Application of Expert Guidance.

The Expert Guidance is applicable where an valuation institution complies with laws, administrative regulations and valuation standards, accepts the entrustment to evaluate and estimate the value of the science and innovation enterprise, the value of all or part of the equity of the shareholders of the science and innovation enterprise, or the value of the cash flow generating unit or asset group (asset group portfolio) of the company, and issues the valuation report.

2. Orientation of scientific and technological innovation enterprise.

The science and technology innovation enterprises in the Expert Guidance, refers to the scientific and technological innovation enterprises whose research direction is oriented to the world's scientific and technological frontier, to the main economic battlefield, to the major needs of the country and people's life and health, mainly to serve the national science and technology innovation strategy, breakthroughs in the important and core technologies, outstanding scientific and technological innovation capacity, outstanding ability to transform scientific and technological achievements, prominent industry position and widely accepted market recognition.

3. Industry scope of scientific and technological innovation enterprise.

The industry scope of scientific and technology innovation enterprises mainly includes new generation information technology, biomedicine, high-end equipment, new materials, new energy, energy conservation and environmental protection and other high-tech industries and strategic emerging industries.

4. The economic behavior, service content and service forms of Valuation of science and technology innovation enterprises covered by the Expert Guidance.

The business scope of valuation for science and technology innovation enterprises under the Expert Guidance includes the equity financing of pre-listing science and technology innovation enterprises, sale of equity, financing or sale of cash-generating units or asset groups (asset group portfolios) of science and innovation enterprises, shareholding reform of science and innovation enterprises, estimation of the expected market value of science and technology innovation enterprises, and the professional services of valuation for real estate, movable assets, intangible assets, business value, asset losses or other economic rights and interests involved in financial reporting purposes or other economic acts. The valuation institution shall confirm the specific content and the form of providing professional services with the client considering the background of economic behaviour. For statutory business involving state-owned assets, public interests and other matters that require valuation under the laws and administrative regulations, the client shall entrust a valuation institution to conduct the valuation and issue a valuation report in accordance with the law. For the valuation needs of science and technology enterprises that are not the statutory business, the valuation institution shall fully communicate with the client, confirm the specific content and needs of providing professional services, and confirm them in the contract for commission.

5. Considerations for the valuation procedures for science and technology innovation enterprises.

Before the acceptance of the valuation business of science and technology innovation enterprise by a valuation institution, it needs to fully communicate with the client on the matters of valuation and the requirements for the use of valuation reports, clarify the basic matters of the valuation business and reflect them in the contract for commission.

6. Select the applicable valuation approach according to the industry and development stage of the science and technology innovation enterprise.

In the valuation of science and technology innovation enterprises, the valuer should analyze the applicability of the three basic approaches (market approach, income approach and cost approach) as well as other valuation methods and appropriately select the valuation approaches based on the valuation purpose, base of value, information collection and data sources. The valuer should pay attention to the development stage of the science and technology innovation enterprise and apply valuation approaches, valuation assumptions and valuation parameters that are appropriate to the characteristics of the development stage of such enterprises. The valuer should pay attention to the industry sector to which the science and technology innovation enterprises belong and apply valuation approaches, valuation assumptions and valuation parameters that are appropriate to the characteristics of the industry. The valuation report shall fully disclose matters that have a significant impact on the valuation conclusion.

7. Fully disclose relevant matters combed with the characteristics of scientific and technological innovation enterprises.

As there are usually great uncertainties regarding the R&D effectiveness, business model, market entry, profitability and sustainable growth of science and technology innovation enterprises, the valuation conclusions are largely based on specific valuation assumptions and preconditions. Therefore, it is necessary to fully disclose the special valuation assumptions and preconditions, the limitations in the performance of valuation procedures and verification of valuation information, the presentation of valuation conclusions and the corresponding quantitative analysis, the validity period of valuation conclusions, the prerequisites and the risks for use of valuation conclusions, and to maintain consistency in the standard of information disclosure during multiple disclosure periods.