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VALUATIONS – NEW PERSPECTIVES

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VALUATIONS – NEW PERSPECTIVES

Global economies have witnessed a series of unprecedented economic backwardations and a whole host of trial attempts toward financial resolution recently. The deepest impact of this conundrum has been on the worldwide investment and consumption cycles at the corporate and consumer levels respectively. As the world order is once again beginning to adapt to the new found cautious optimism, there appears to be light at the end of the tunnel at least for some of the developed countries to regain their pre-crisis supremacy and for some emerging/developing countries to try and become forces of reckoning during these thinner times. UAE has recently been granted an upgraded status of an “Emerging Market” from the erstwhile “Frontier Market” by MSCI and Dubai has won the hosting rights for the EXPO 2020, which in our opinion are likely to be mid-long term positives for the country in general and for Dubai in particular. In this backdrop, it becomes a rather imperative that we take a step back, and revisit some of the long followed principles of enduring ‘Value Paradigm’ and the resultant implications upon Business Valuation concepts. This article endeavors to reflect upon some such paradigm shifts.

Naresh

Naresh

Enterprise Value: Debt levels have recently ballooned out of proportions globally primarily owing to increased borrowings in the developed markets and adverse currency fluctuations in the emerging markets. Macro impacts of this high-gearing scenario is being felt on the economies’ unserviceable net account balances, while at the micro level, the corporate balance sheets are getting more and more indebted. Enterprise valuation approach as opposed to a pure Equity valuation is hence gaining in prominence to make a more meaningful assessment of Business Value.

P/E Ratio: One of the most widely followed valuation tools – the ‘P/E ratio’ has all of a sudden become not applicable for a whole host of companies, primarily functioning with high levels of operating and/or financial leverages, as more and more  corporate bottom-lines have turned red recently in the aftermath of the global crisis.

Book Value: The traditional ‘Net Book Value’ approach based on the Historical Cost convention is giving way to current replacement cost value metrics or fair value assessments.

Franchise Value: Sustainable competitive advantages built after years of weathering systemic shifts in consumer demands and preferences have been the underlying success mantra for some of the leading corporations today to generate incremental economic benefits compared to their respective competition(s), thereby creating massive brand values across the globe.

Innovation Value: New age innovation and technology led corporations have created humongous value for investors in the last 2 decades. In the words of Bill Gates, “never before in the history of mankind has innovation offered so much, to so many, in so short a time”.

Growth Value: Widely accepted as the most predominant value determining factor, the ‘growth rate’ of earnings and related cash flows, have taken away the limelight from the erstwhile valuation harbinger offered by highly capitalized brick and mortar businesses.

Liquidity Value: Capital markets across the world have risen sharply recently on the back of benign monetary policies and incessant liquidity flows in the form of Quantitative Easing(QE) in the U.S.A and Long Term Refinancing Option(LTRO) in Europe, thereby raising the market capitalizations of companies. Given that the developed economies will soon be incapacitated from maintaining such ostensibly loose monetary policies in perpetuity (which has already started taking shape in the form of USA’s QE Tapering measures), the marginal value derived from liquidity from here on may decline, yet there is no denying the fact that at least in the immediate past and for now, liquidity has offered the world a significant cushion of value reservoir.

Contingency Value: Under the premise of ‘Contingency Claims’ approach based on contingent new territory scalability models adopted by corporates thriving upon large investments in Research and Development year after year, the Binomial model, the Black Scholes Option Pricing model, and the Decision Tree Analysis model have gained in popularity in recent times allowing the value of flexibility to be factored whilst orchestrating strategic decisions in corporate boardrooms.

Intangibles & IPRs Value: Lastly, but perhaps most importantly, the growing prominence coupled with the alarming absence of one of the greatest value propositions – Intangibles(Brand name, Human Resources, Franchise etc.) & Intellectual Properties(Patents, Trademarks, Copyrights etc.) in the standard frameworks and reporting structures is getting bridged with more and more professionals and corporate decision makers across the globe admitting to the recognition/disclosure of intangibles in the financial reports and ascribing bigger allocations of deal values toward the qualitative intangible values.

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Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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