ONE in four foreign companies could be paying up to 25 per cent too much for their stake in China ventures because of excessively generous valuations by mainland officials, according to a valuations manager. Brett Shadbolt, of property consultants Chesterton Petty, urged companies considering a partner in China to seek an independent assessment at an early stage of negotiations. At present, those seeking to take a share of a Chinese company must seek a valuation by a local official who will submit the quote to the National Administration Bureau for State-Owned Property (ABSOP) for approval. This is to ensure that mainland assets realise their full value. Mr Shadbolt said: 'More often than not there is the 'pure coincidence' of assets adding up perfectly to the level of equity that is required by the local company.' Typically, the mainland assessors will use the asset approach, which is an implied value for a company's tangible assets; whereas, the West has adopted a discounted cash-flow method, which attempts to assess its market prospects. Alternatively, a company's sales may be overstated or the assessment of the company's production methods could ignore capacity restraints or overstate sales. Mr Shadbolt believes this could arise because the officials conducting the valuations are typically engineers or accountants applying a narrow professional perspective to assess the company's value. 'We try and interpret what the market would dictate.' He estimated that about 25 per cent of joint ventures get caught by overly-optimistic valuations at too late a stage in negotiations for correction. Assessors such as Chesterton Petty will generally charge a client on a scale fee rate, for buildings or land, and on a time basis for plant or machinery. 'We recommend companies to get an independent valuation sooner than later. If they have already been advised about the valuation by the ABSOP then it is too late. 'We like to get involved before the deal is finalised and try to reject the official valuation if there is too big a difference.' Alternatively, the foreign company should try to influence the Chinese partner to appoint a valuer in whom both sides are confident or reserve the right to review the draft valuation before it is finalised.
