CSRC: Strengthen the record management supervision and supervision inspection of securities appraisal institutions

On August 16, the China Securities Regulatory Commission (CSRC) released the 2023 Annual Securities Asset Evaluation Analysis Report, stating that in the next step, the CSRC will implement the requirements of the "Opinions on Strengthening Supervision to Prevent Risks and Promote the High-Quality Development of the Capital Market" and the "Opinions on Further Improving the Comprehensive Prevention and Control of Financial Fraud in the Capital Market". The CSRC will strengthen the record management and supervision of securities evaluation agencies, strictly investigate and punish illegal acts, enhance the ability of detecting and preventing fraud, and improve the quality management level of asset evaluation agencies. Additionally, the CSRC will enhance cooperation with industry regulators and industry associations to jointly maintain the order of the securities evaluation market. Data shows that as of the end of June 2024, there were 272 securities evaluation agencies in China, a decrease of 9 compared to the previous year, mainly due to incomplete annual records and agency closures. These agencies are mainly located in Beijing (77), Shenzhen (31), Shanghai (24), Jiangsu (19), Guangdong (17), and other regions, with a total of 168 agencies in these regions, accounting for 61.8%, which is stable compared to the previous year. The original text continues: The 2023 Annual Securities Asset Evaluation Analysis Report To facilitate understanding of the securities asset evaluation market situation and guide asset evaluation agencies in standardizing their practices, the CSRC Accounting Department organized efforts to analyze the situation of securities asset evaluation in 2023 and compile this report. The report mainly includes information on asset evaluation agencies engaged in securities services, securities asset evaluation business, significant asset restructuring evaluations, goodwill impairment tests related evaluations, infrastructure public REITs evaluations, regulatory focus areas, and issues related to the practice of securities evaluation. I. Basic Situation of Securities Evaluation Agencies 1. Decrease in total number of agencies, distribution remains stable As of the end of June 2024, there were 272 securities evaluation agencies in China, a decrease of 9 compared to the previous year, mainly due to incomplete annual records and agency closures. These agencies are mainly located in Beijing (77), Shenzhen (31), Shanghai (24), Jiangsu (19), Guangdong (17), and other regions, with a total of 168 agencies in these regions, accounting for 61.8%, which is stable compared to the previous year. 2. Overall increase in practitioners, significant differences in number of agency personnel By the end of 2023, there were a total of 9,282 asset appraisers in securities evaluation agencies, an increase of 4.2% compared to the previous year. The average number of personnel in each agency is 34. There are 72 agencies with more than 40 asset appraisers, accounting for 26.5%; 55 agencies with 20 to 40 appraisers, accounting for 20.2%; 145 agencies with fewer than 20 appraisers, accounting for 53.3%. 3. Slight increase in revenue, slight decrease in securities evaluation revenue The total revenue of securities evaluation agencies was 11.27 billion yuan, a 3.0% increase compared to the previous year. Asset evaluation revenue was 8.50 billion yuan, accounting for 75.4% of the total revenue, a 6.8% increase compared to the previous year. Securities evaluation revenue was 1.37 billion yuan, accounting for 12.2% of the total revenue, a 4.9% decrease compared to the previous year. 4. Cumulative compensation limit of professional risk funds and professional liability insurance exceeds 3 billion yuan, over half of agencies exceeding 5 million yuan As of the end of 2023, 269 securities evaluation agencies extracted professional risk funds or purchased professional liability insurance. The total amount of professional risk funds was 1.18 billion yuan, and the total accumulated compensation limit of professional liability insurance was 2.15 billion yuan, totaling 3.33 billion yuan, with an average of 12.373 million yuan. 137 securities evaluation agencies had a cumulative compensation limit of professional risk funds or professional liability insurance exceeding 5 million yuan, accounting for 50.9%. (Continued in next message due to length)In the fiscal year, the number of assessment reports for financial purposes was 6,369, an increase of 24.5% from the previous year's 5,114, accounting for 52.8% of all reports and remaining the most important economic activity. At the same time, the number of assessment reports for equity/asset transfers was 3,065, an increase of 33.7% from the previous year, the fastest growing segment.Evaluation of financial report purposes shows a significant increase in fees. Looking at the average fees, the average fee for asset evaluation projects in 2023 was 11.1 million yuan, an increase from the previous year's 10.5 million yuan. Among them, the average fee for asset evaluation projects for financial reporting purposes was 12.1 million yuan, a 15.2% increase from the previous years 10.5 million yuan; the average fee for asset evaluation projects for issuing shares to purchase assets was 43.5 million yuan, the highest fee, but a decrease from 47.4 million yuan in the previous year. In terms of fee concentration, the top 10 asset evaluation agencies with the highest fees combined to receive a total fee of 576.96 million yuan, accounting for 43.1%, an increase from the previous year's 40.5%. FiveOverseas asset acquisitions show signs of revival. In 2023, there were 424 overseas asset evaluation reports, accounting for 3.5% of the total evaluation reports, an increase of 15.2% from the previous year's 368 reports. Among them, 272 evaluation reports were for the purpose of financial reporting, accounting for 64.2% of the overseas asset evaluation reports. There were 41 reports for overseas asset acquisitions (including issuing shares to acquire assets), showing an increase from 28 reports in the previous year, indicating a revival in overseas asset acquisitions. Three, significant asset restructuring evaluations In 2023, there were a total of 185 significant asset restructuring projects, with 72 completed, 57 failed, and 56 still ongoing, resulting in a completion rate of 38.9% for the restructuring projects. The completed projects included 27 disposition projects, 40 acquisition projects, and 5 asset exchange projects. OneSignificant decrease in the number and size of restructuring projects. In terms of quantity, there were 72 completed restructuring projects, a decrease of 35.7% from the previous year's 112 projects; in terms of size, the average asset transaction value for the 72 projects was 23.1 billion yuan, a 50.9% decrease from 47 billion yuan in the previous year; in terms of sectors, 54 mainboard listed companies completed significant asset restructurings, with a transaction size of 131.523 billion yuan, a 73.7% decrease from the previous year; 15 GEM listed companies completed significant asset restructurings, with a transaction size of 34.351 billion yuan, a 40.8% increase year-on-year. TwoDecrease in concentration of significant asset restructuring business Of the 72 completed significant asset restructurings, 39 securities evaluation agencies and 2 securities companies were involved. The top 10 securities evaluation agencies undertook 37 projects, accounting for 51.4%, indicating a decrease in the concentration of significant asset restructuring business from the previous year. ThreeAsset base method and income method still dominate in pricing Of the 72 completed significant asset restructuring projects, 54% used the asset base method, 36% used the income method, and 10% used the market method for pricing. The asset base method and income method are the most commonly used pricing methods in the capital market. Meanwhile, there are differences in pricing methods for acquisition and disposition projects, with income method being mainly used for acquisition asset evaluation, accounting for 49%; while the asset base method is mainly used for disposition asset evaluation, accounting for 67%. The differences in pricing methods are mainly due to the characteristics of the traded assets, profitability, and differences in asset quality. FourThe evaluation conclusion is an important reference for transaction pricing. Of the 72 projects, evaluation conclusions for 75 assets were disclosed, with 31 projects having the same transaction amount as the evaluation value, accounting for 41%; 16 projects with a difference rate within 2%, accounting for 21%; 10 projects with a difference rate between 2% and 5%, accounting for 13%; 4 projects with a difference rate between 5% and 10%, accounting for 5%. The evaluation conclusion is an important reference for transaction pricing. FiveImprovement in profit commitment realization. In the past five years, there were a total of 201 significant restructuring projects with performance commitments set for 2023 and disclosure of completion status. Among them, 127 projects achieved profit commitments, accounting for approximately 63.2%, a significant increase from the previous year's 46.4%. Of the 201 projects, the profit realization rate for the first year of the commitment period in 2023 was 77.2%, a significant improvement from 55.3% in the previous year. Four, goodwill impairment asset evaluation As of the end of 2023, the cumulative goodwill of 2,523 listed companies was 120 trillion yuan, a year-on-year increase of 1.7%; 915 companies made provisions for goodwill impairment amounting to 62.837 billion yuan this year, a decrease of 23.7% year-on-year. Securities evaluation agencies issued 2,737 goodwill impairment testing evaluation reports (including valuation reports) to 1,281 listed companies, a decrease of 17.6% year-on-year. This report selected the top 100 A-share listed companies with the largest amount of impairment provisions in 2023 and analyzed the goodwill impairment testing evaluation of 553 asset groups. The specific observations are as follows: OneRecoverable amount Among the 553 goodwill impairment testing evaluations, 526 disclosed the evaluation results of the recoverable amount, with 510 disclosing the method used to determine the recoverable amount. Out of these, 478 recoverable amounts were determined by the present value of expected future cash flows, while 32 were determined by deducting the net value of disposal costs from the fair value, accounting for 93.7% and 6.3% respectively, with the present value of expected future cash flows being the more commonly used method. TwoKey parameters of present value of future cash flows Key parameters for the present value of future cash flows include the forecast period, key parameters for profit forecasts, determination basis, and discount rates. Out of the 478 goodwill impairment testing evaluations that used the present value of expected future cash flows to determine the recoverable amount, 468 disclosed the forecast period, mostly for 5 years; as for the key parameters for profit forecasts, 439 disclosed them, with revenue growth rates during the forecast period mainly concentrated between 3% and 10%, while the stable and perpetual growth rates were generally 0, with some companies showing some differences; in terms of the determination basis for profit forecasts, 403 disclosed the basis for key parameters, such as management forecasts, corporate budgets, industry analysis reports, and historical company data; as for discount rates, 453 disclosed the values used. ThreeNet value after deducting fair value and disposal costs When determining the recoverable amount by deducting the net value after fair value and disposal costs, the main disclosures by the listed companies were the method used to determine fair value, key parameters, and basis for determination. According to statistics, 93.7% of companies used the present value of future cash flows to determine the recoverable amount.In the valuation of 32 items using the net amount determined by fair value minus disposal costs to determine the recoverable amount, 26 items disclosed the method of determining fair value, 21 items disclosed key parameters, and 17 items disclosed the basis for determining key parameters.Five, evaluation of infrastructure public REITs By the end of 2023, there were 29 listed and issued infrastructure public REITs, raising a total of 95.45 billion yuan. The evaluation of the listing and annual reports of infrastructure public REITs is mainly undertaken by top securities evaluation agencies, with a high concentration of business. (1) Evaluation of infrastructure public REITs listing In 2023, there were 5 infrastructure public REITs listed, raising a total of 17.09 billion yuan. In terms of project attributes, there were 2 real estate operating type infrastructure funds, with underlying assets being warehouse logistics infrastructure and software industrial park. There were 3 franchise operating type infrastructure funds, with underlying assets being photovoltaic energy generation, renewable energy generation, and highways. 1. Evaluation agency involvement The 5 infrastructure public REITs listed in 2023 involved a total of 8 evaluation reports, issued by 4 securities evaluation agencies, all using the income approach as the final evaluation conclusion. 2. Discount rate Under the income approach, important evaluation parameters include cash flow forecasts, income periods, and discount rates. Considering the maturity and stability of infrastructure public REITs projects, with relatively stable future cash flow forecasts and limited profit forecasting periods, the discount rate is a key parameter affecting the evaluation results. For the 4 evaluation reports related to real estate operating type infrastructure projects, the discount rate was determined using the risk aggregation method, with rates ranging from 6.5% to 8%, and an average of 7.63% (for the 16 reports in 2022, the discount rates were concentrated between 6% and 8.25%, with an average of 7.06%). For the 4 evaluation reports related to franchise operating type infrastructure projects, the discount rate was determined using the weighted average cost of capital (WACC) method, with rates ranging from 9.00% to 9.89%, and an average of 9.25% (for the 5 reports in 2022, the discount rates were concentrated between 7.95% and 9.15%, with an average of 8.43%). (2) Evaluation in infrastructure public REITs annual reports 1. Evaluation agency involvement By the end of 2023, the 29 listed and issued infrastructure public REITs had disclosed a total of 63 annual evaluation reports, including 40 real estate appraisal reports and 23 asset appraisal reports, with 13 institutions conducting evaluations. Among them, 16 real estate operating type infrastructure projects issued a total of 46 reports, including 40 real estate appraisal reports and 6 asset appraisal reports; 13 franchise operating type infrastructure projects issued a total of 17 reports, all of which were asset appraisal reports. All of the aforementioned 63 reports used the income approach as the evaluation method and as the final evaluation conclusion. 2. Discount rate For the 46 evaluation reports related to real estate operating type infrastructure projects, the discount rate was determined using the risk aggregation method, with rates ranging from 6.0% to 8.75%, and an average of 7.00%. For the 17 evaluation reports related to franchise operating type infrastructure projects, the discount rate was determined using the weighted average cost of capital (WACC) method, with rates ranging from 7.50% to 10.27%, and an average of 8.83%. Overall, the discount rates used for franchise operating type infrastructure projects were higher than those for real estate operating type infrastructure projects. Six, key focus areas for securities asset evaluation inquiries In 2023, the stock exchange issued 256 inquiries regarding asset evaluation matters in the information disclosure of listed companies. Inquiries focused on the selection of evaluation methods, disclosure of the evaluation process, analysis of evaluation results, and the professional competence of evaluation agencies. Specifically: (1) Explanation of evaluation methods A company used the income approach to evaluate vacant properties but did not explain the rationale for using this method. The stock exchange pointed out that listed companies and asset evaluation agencies should explain whether the income approach evaluation is reasonable in conjunction with the property leasing situation, and the reasons for not using the market approach for evaluation. When a company acquired assets, it used both the asset-based and market approaches for evaluation, with significant differences in the valuation values between the two methods. The company ultimately chose the higher valuation value from the market approach as the evaluation conclusion. The stock exchange pointed out that listed companies and asset evaluation agencies should explain the reasons why the market approach valuation value is significantly higher than the asset-based valuation value, and the rationale for choosing the market approach valuation value. (2) Explanation of the evaluation process A company engaged in equity acquisitions but did not fully disclose the evaluation process. The stock exchange pointed out that listed companies and asset evaluation agencies should explain the determination method of future expected cash flows and discount rates under the income approach, the selection and reasons of value proportions under the market approach, the principles of selecting comparable objects or cases, the evaluation methods for main assets under the asset-based approach, and the rationale for the evaluation process. When a company sold assets, insufficient disclosure was made regarding the market approach calculation process. The stock exchange pointed out that listed companies and asset evaluation agencies should explain the specific situation of the market approach evaluation, including the specific process of selecting comparable transaction cases, comparing and adjusting relevant indicators, and combining the business scale, operational performance, customer situation, core technology, etc., of comparable targets to demonstrate comparability. (3) Explanation of evaluation results When a company acquired assets, the related exploration rights had not been converted into mining rights. The stock exchange pointed out that listed companies and asset evaluation agencies should consider factors such as the payment of mining rights, the exploration stage of exploration rights, necessary procedures to be fulfilled, the expected time to obtain mining rights, substantial obstacles to mining right renewal, etc., and explain whether the evaluation results have taken these factors into account. A company evaluated the same target twice in 2022 using the income approach valuation value as the evaluation result, but in 2023, the asset-based approach valuation value was used as the evaluation result. The stock exchange pointed out that listed companies and asset evaluation agencies should explain the reasons and rationale for choosing the asset-based approach valuation value as the evaluation result in 2023 when there were no significant changes in industry policies and the income approach valuation was used in the previous two evaluations. (4) Explanation of the professional competence of evaluation agencies A certainThe company is conducting overseas mining rights evaluation. The stock exchange points out that listed companies and asset evaluation institutions should combine the relevant qualifications of the evaluation institution, the situation of its employees engaging in securities services, and major cases to demonstrate whether the evaluation institution has the professional competence to evaluate overseas mining rights.7. Issues in Securities Asset Evaluation Practice This report analyzes the handling and penalties of securities evaluation agencies in 2023, and identifies the main issues in the practice of securities evaluation agencies: 1. Failure to register for securities service business Asset evaluation agencies engaging in securities service business should register with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance. A certain agency accepted a commission from a listed company to conduct goodwill impairment testing and evaluation, but failed to register as required after taking on the business. Some securities evaluation agencies engaging in securities service business failed to submit business information as required or submitted inaccurate information. 2. Inadequate goodwill impairment testing and evaluation - Failure to pay attention to trends: For example, when continuously working on the same project, failure to pay attention to the main operational data of the enterprise, changes in operating capital, and failure to consider the impact of changes in the operating condition of the enterprise on the specific risk return rate. - Incorrect discount rate: For example, using pre-tax discount rates for both future cash flow present value evaluation and fair value evaluation. - Incomplete evaluation methods: For example, only calculating the present value of the future cash flow of the asset group for the amount that can be recovered from the asset group, without calculating the net amount after deducting disposal costs from the fair value. - Lack of communication records with registered accountants: For example, failure to record communication records with registered accountants in the working papers. - Inaccurate disclosure in evaluation reports: For example, inaccurate disclosure of impairment testing processes, asset group scope, and operational risks. 3. Insufficient basis for profit forecasts - Insufficient basis for revenue forecasts: For example, forecasting steady revenue growth for a company for the next 5 years without sufficient basis, and without considering the impact of previous revenue declines, insufficient feasibility of intention contracts, industry policy changes, and company decision changes on revenue. - Insufficient basis for gross profit margin forecasts: For example, failure to analyze historical trends in gross profit margins, fixed costs, and variable costs, and failure to verify forecasted gross profit margins. - Unreasonable working capital forecasts: For example, using industry values for the asset turnover ratio that are not in line with the actual situation of the company, resulting in unreasonability in working capital forecasts. - Mismatch between capital expenditures and revenue forecasts: For example, forecasting consistent revenue for the perpetuity period, while capital expenditures should generally be roughly equal to depreciation and amortization expenses. However, the capital expenditure forecast by the securities evaluation agency is approximately twice the depreciation and amortization expenses, and they did not analyze the mismatch between capital expenditures and revenue forecasts. 4. Inaccurate selection of evaluation parameters - Incorrect discount rate parameters: For example, when selecting comparable companies, failing to record the criteria and steps for selecting comparable companies, failing to consider significant differences between comparable companies and the evaluated unit in business and scale; when calculating specific risk factors, failing to determine risks based on the attributes and changes in the operational status of the evaluated entity; when conducting overseas mining rights evaluation, failing to consider the source and determination process of country risk values. - Inaccurate selection of comparable transaction cases in the market approach: For example, when assessing real estate using the market approach, the basic information of market transaction cases is missing, comparability is low, and the reasons for differences in market prices on the same valuation date are not explained. - Insufficient collection of comparable cases and lack of on-site inspections: For example, when evaluating investment properties using the market approach, non-trading property information is selected, and on-site inspections are not conducted. 5. Inaccurate and incomplete disclosure in evaluation reports - False records: For example, in the valuation of shareholder equity value, the evaluation report records that after the relevant department reaches an agreement with the company on development conditions, the land can be developed normally, but during visits, the relevant department did not respond and the land was reclaimed for free. - Omission of important information: For example, in the impairment testing of long-term equity investments, the evaluation report only discloses that an agreement requires the company to demolish the house by a certain date, but it does not disclose that if the demolition is not completed by that date, the land will be reclaimed. - Incomplete disclosure: For example, failure to disclose the existence of defects in real estate ownership certificates, such as mortgages and guarantees, for the evaluated units. 6. Inadequate implementation of asset evaluation procedures - Failure to follow verification procedures for bank deposits and accounts receivable, missing on-site inventory procedures, superficial on-site interviews. - Failure to fully verify renovation invoices and other documents - fictitious renovation expenses are included in asset values. - Failure to verify equipment conditions and ownership - equipment purchase contracts do not match on-site equipment specifications, leading to overvaluation of fixed assets within the evaluation scope. - Inconsistency between financial data used for evaluation calculations and audit reports - failure to verify data discrepancies. - Failure to consider VAT deductions and offsetting as well as other relevant income in forecasting future cash flows - improper use of pre-tax deduction ratios for research and development expenses. 7. Inadequate internal management and quality control review - Inadequate internal management: For example, inadequate provisions for professional liability insurance and occupational risk funds, allowing evaluation personnel from other institutions to practice under the name of the agency without actually performing on-site inventory, obtaining documents, and preparing working papers. - Inadequate quality control reviews: For example, missing content such as audit opinions, feedback, and issues to be addressed in quality control review documents, as well as not identifying calculation errors or incorrect parameter usage during the review phase. These issues reflect that some securities evaluation agencies lack quality management, and some asset evaluators fail to maintain the necessary professional prudence and competence, resulting in flawed evaluation conclusions. In the next step, the CSRC will implement the relevant requirements of "Opinions on Strengthening Regulatory Prevention and Promoting High-Quality Development of the Capital Market" and "Opinions on Further Enhancing Comprehensive Punitive and Preventive Measures for Financial Fraud in the Capital Market", strengthen supervision and inspection of securities evaluation agencies, strictly punish illegal activities, improve the ability of asset evaluation agencies to identify and prevent fraud, enhance quality management, and strengthen cooperation with industry regulatory authorities and associations to jointly maintain the order of the securities evaluation market. This article is adapted from the official website of the CSRC, edited by GMTEight: Chen Xiaoyi.