MARKET ASSESSMENT ASSETS OF EMERGING MARKET - FEATURES OF THEIR INFORMATION SECURITY

1. Baltic Valuation Conference 2013 MARKET ASSESSMENT ASSETS OF EMERGING MARKET - FEATURES OF THEIR INFORMATION SECURITY VioletaKasarova PhD (Bulgaria), Rumi Chuknyisky, PhD, Peter Chuknyisky, PhD, Dari Dobrovidel (USA) 2013

2. Purpose of this reportis to demonstrate the specifics at usage of the comparative approach for market assessment of assets at various types of markets and the necessary for the purpose information. The focus falls on : • emerging market in Bulgaria in relation with the market assessment of companies as unique investment assets; • developed market of the USA in relation with the market valuation of estates. All of the examples which are stated in the report are taken from the practice of the authors.

3. General terms The economies in the world, in general are divided into: • Developed • Emerging. Respectively the markets are also divided into developed and emerging. According to the World Bank, an economy is considered as emerging economy, whenever its wealth creation level, measured by the gross domestic product per capita, is below that of the developed economies. Following this criterion, the World Bank classified in 2007, the economies of 209 countries as follows - 65 as developed and 144 as emerging. These data are presented in the following table.

4. Classification of the economies in the world World Development Indicators Database, July 2008.World Bank

5. Classification of the markets

6. Classification of the markets Developed Markets Emerging Markets Frontier Markets Developed markets Emerging markets Frontier markets Americas Europe&CIS Africa Middle East Asia • Americas • Europe&Middle East • Pacific Americas Europe, Middle East&Africa Asia

7. Developed markets

8. Emerging markets

9. Frontier markets Many analysts consider the emerging markets as a whole, without formation of a subgroup of the frontier markets. We have adopted the same approach.

10. Specific features of the market assessment of the emerging markets The assessors of the emerging markets have to do more complex and responsible job, because they are: • Deprived from historical data for the stock market, which makes them to face, as per Pereiro (2010), the beta dilemma for calculation of the price of the equity (САРМ - Capital AssetPricingModel); • Restricted in use of the comparative approach in its classic way due to availability of country and specific risks, which do not allow to be build in a correct way, using market data, multiples for the branches of the economy, as well as to choose companies analogues. This process gets deeper also because of lack of sufficient market evidences for realized deals of the relevant market, which makes difficult the direct comparison. • Charged with an uneasy task to integrate the specific conditions of the emerging markets in the models of the discounted cash flows.

11. Specific features of the market assessments of the emerging markets According to a study of Bulgarian analysts, in the assessments of the Bulgarian experts: • dominates the expenses approach, • followed by the income apprоach and • the comparative approach takes the third place. Every of the three above stated apprоaches, as per Damodaran (2002), has its advantages and disadvantagesand its application is related with many limitations and difficulties, which influence the final results of the assessment. The comparative approach is very suitable for assessment of emerging markets, but there are some problems for its usage.

12. THE COMPARATIVE APPROACH IN THE PRACTICE OF THE BULGARIAN ASSESSORS The restricted usage of the comparative approach in evaluation of enterprises (business) is hidden in the problems, related with the access to relevant market data. In the meantime this approach is largely used for evaluation of estates in Bulgaria, precisely because of the availability of information for sufficient number of market analogues, with prices that are result of accomplished deals.

13. THE COMPARATIVE APPROACH IN THE PRACTICE OF THE BULGARIAN ASSESSORS The comparative approach is based on: • Principle of substitution – a fundamental principle in the market evaluation, which suggests that no rational buyer will pay for the object more than the value of analogous object that has already changed its ownership on the functioning market and there is direct price information for it. • The law of one price (LOP), according to which the price of two identical assets should not differ in conditions of well functioning market and rational behavior of the investors. The main advantage is that encounters the circumstances of the market and the real priorities of the investors, while its application requires a presence of active market and accessible financial information for evaluated asset and its analogues. However, these two prerequisites, make in principle the comparative approach to be fast and easy for application, but hard for usage under conditions of emerging market, such as Bulgaria due to the low volumes of sales and transactions (mergers and acquisitions of companies), which limits the opportunities for choice of analogues. The solution of this situation is to use foreign analogues, which requires however, a series of additional adjustments to be done in order to achieve unified measures of the information.

14. Algorithm of the comparative approach in the market valuation Good results after using the comparative approach in the market assessments of the emerging markets can be achieved if: • An information is used for analogues from the developed markets, as for instance the Аmerican market • There are sufficient market evidences (realized sales) in specific emerging economy.

15. EXAMPLE 1. Market evaluation with usage of analogues of the Bulgarian economy OBJECT OF THE ASSESSMENT – Bulgarian- American Credit Bank AD (ВАСВ) , owner of 12 624 725 tradable shares DATE OF THE ASSESSMENT - 30.09.2011 BANKS ANALOGUES: Used in the assessment market multiple Р/В and • Corporate Commercial Bank AD (6C9/CORP), market multiple Р/S. Adjustments for leveling the • Central Cooperative Bank AD(4CF /CCB), differences in the effectiveness of the evaluated object • First Investment Bank AD (5F4/FIB)and its analogues. Fair market value per single share is = (2.102 + 0.681)/2 = 1.392 leva Information sources for the assessment – Bulgarian stock exchange (http://www.bse-sofia.bg/), Bulgarian national Bulgarian National Bank (http://www.bnb.bg/), sites of the banks analogues - http://www.corpbank.bg/investor_relations.html; http://www.ccbank.bg/bg/about-us/annual-reports/; http://www.fibank.bg/bg/za-nas/page/698

16. Example 2. Market assessment with use of analogues of the developed American market OBJECT OF THE ASSESSMENT – Bulgarian enterprise DATE OF THE EVALUATION – 31.12.2011. ANALGOUES– two enterprises from USA Information sources for the assessment: Bloomberg - URL: http://www.bloomberg.com/ Yahoo! Finance - URL: http://finance.yahoo.com/ Moody’s - URL: https://www.moodys.com/ Value Line - URL: http://www.valueline.com/ Bulgarian Stock Exchange–URL: http://www.bse-sofia.bg/ Index of Economic Freedom - http://www.heritage.org/index/pdf/2011/index2011_highlights.pdf

17. Example 2. Market assessment with use of analogues of the developed American market Market multiples

18. Example 2. Market assessment with use of analogues of the developed American market

19. Example 3. Market value using the comparative approach for assessment of estates on a developed market (following the example of the market of the USA) Examples of Search Engines in Business Evaluation of Commercial and Residential Real Estate Properties in the USA Developed Market