One patent and one cartoon character: turning a right into a number a bank can read

Key points

  • The Hong Kong Monetary Authority launched its IP financing sandbox in December 2025, and an independent valuation is part of the process.
  • The International Valuation Standards have no chapter on intellectual property. IP is covered by IVS 210 Intangible Assets, and there are three approaches: income, market and cost.
  • For IP that already earns revenue, the income approach is the usual answer. The market approach needs comparable IP transactions, which patents rarely have.
  • Three inputs carry most of the judgement: economic life, royalty rate and discount rate.
  • The conclusion should be a single figure, with a sensitivity analysis showing which judgements it leans on.

It starts with one question: can I borrow against my patent?

What is my patent worth, and can I take it to a bank? I hear this more and more often, and there is policy behind it. The 2025 Policy Address promised to promote intellectual property financing, valuation and protection. The IP financing sandbox followed on 22 December 2025, with participating banks testing the whole process of lending against IP as collateral, including obtaining an independent valuation. The Government also announced a two year Patent Valuation Pilot Support Scheme, offering eligible small and medium enterprises matching funding of up to HK$80,000.

The difficulty is that a bank can read the value of a building and cannot always read the value of a patent. Valuation is the bridge between the two. My colleagues and I have recently put together an IP valuation guideline following IVS, working two fictional examples from beginning to end. This article sets out the thinking, the trade offs and the examples in plain terms.

Why the most valuable IP can sit at zero in the accounts

Intellectual property is a legal concept. Its worth lies not in what the owner may do, but in what the owner may stop others from doing. Scarcity is created, and an abstract idea becomes an asset that can be sold, licensed or pledged.

Open the accounts, though, and you often cannot see it. HKAS 38 paragraph 63 provides that internally generated brands, mastheads, customer lists and items similar in substance shall not be recognised as intangible assets. The result is that a company’s most valuable intellectual property can carry a book value of zero. A bank cannot judge the collateral from the accounts, which is precisely why an independent valuation is needed.

As for the basis, IVS has no chapter called intellectual property. IP is a subset of intangible assets, so IVS 210 Intangible Assets applies, together with the general standards IVS 100 to IVS 106. The edition referred to here is the one effective on 31 January 2025.

Three roads: income, market and cost

Think of property for a moment. To assess a shop you can look at the rent it earns, at comparable transactions in the same district, or at what it would cost to rebuild. Intellectual property has the same three roads, but the road conditions are very different.

Take the market approach first. IVS 210 paragraph 50.03 sets two conditions, and both must be met: information on arm’s length transactions in identical or similar intangible assets close to the valuation date, and enough information to allow the valuer to adjust for all significant differences. Most patents meet neither. Every patent is unique, and transactions are seldom public.

Then the cost approach. What it costs to redevelop a technology and what that technology earns today are usually two different things. For IP that already earns revenue, the cost approach is mostly a reasonableness check.

That leaves the income approach, which is the mainstream, and three methods are common.

First, relief from royalty. An owner occupier pays no rent, and the rent saved is what the property is worth to them. In the same way, a company that owns a patent pays no royalty to a third party. You forecast the related revenue, apply a market royalty rate, deduct costs and tax, and discount back to the valuation date.

Second, the excess earnings method, most often the multi period excess earnings method (MPEEM). Not all of a product’s profit is earned by the intellectual property. You deduct the returns due to the contributory assets, working capital, machinery, the workforce and other intangibles, and what remains is attributable to the subject IP. One rule is worth remembering. For a single revenue stream, the excess earnings method may be applied to only one intangible asset (IVS 210 paragraph 60.17).

Third, the with-and-without method. You compare the cash flows in two scenarios, with the IP and without it, and the present value of the difference is the value. It is common for non compete agreements, and the difference between the two scenarios should sit in the cash flows, not in two different discount rates.

The three numbers that carry the judgement

Economic life. The legal term is only a ceiling. IVS 210 requires legal, technological, functional and economic factors to be considered both separately and together. A patent with fifteen years of protection left may be worth very little if a better substitute technology is expected within three.

The royalty rate. There are two sources: market rates from comparable licence agreements, and the profit split. The second is a good common sense check. A consumer goods manufacturer will not accept a royalty rate that leaves its branded product less profitable than an unbranded one.

The discount rate. A single piece of intellectual property is usually riskier than the company that owns it. It is specialised, it can be overtaken, and it is hard to sell on its own. So the company’s weighted average cost of capital is only the starting point, and a premium for the risk of the IP itself is added on top.

Example one: a Hong Kong standard patent

The names, facts and figures in both examples are fictional and are for illustration only.

Why a Hong Kong standard patent? The sandbox documents do not specify which categories or which jurisdictions of IP qualify, and the pilot scheme gives priority to holders of Hong Kong standard patents granted through the original grant route. For the first example I chose the case closest to the policy.

VisionEdge is a Hong Kong company that develops artificial intelligence defect detection systems for production lines. The subject asset is a Hong Kong standard patent granted in 2024 after substantive examination, with protection running to 2041. Products using the technology earn HK$32 million a year. The valuation is for a bank loan application, the basis of value is Market Value, and the valuation date is 30 June 2026.

The market approach is not used, because there are not enough comparable patent transactions. MPEEM is not used either, because the trademark, the customer relationships and the software platform all drive the same revenue. Forcing a split would add judgement without adding reliability. Machine vision technology is commonly licensed and has a benchmark for rates, so relief from royalty is the method.

Economic life is taken as seven years rather than the legal fifteen, because artificial intelligence is moving quickly and general purpose vision models are catching up.

On the royalty rate, fourteen licence agreements for machine vision and industrial artificial intelligence patents show rates from 3.0 per cent to 10.0 per cent, with a median of 5.5 per cent. The subject patent has broad claims and is the main selling point of the product, but it is protected only in Hong Kong and has a short life. The two sides offset, and 6.0 per cent is taken, slightly above the median. The profit split check follows. The product earns an operating margin of about 25 per cent, so a 6.0 per cent rate transfers roughly 24 per cent of operating profit to the licensor, and the licensee still earns a reasonable return.

The comparable agreements assume the licensor bears maintenance, so annual patent maintenance costs of about HK$100,000 are deducted, and the saving is taxed at the 16.5 per cent profits tax rate. The discount rate starts from an industry weighted average cost of capital of about 13 per cent, with a 4 per cent patent risk premium added, giving 17 per cent.

The conclusion is a Market Value of HK$10.4 million. On sensitivity, a royalty rate between 5.5 and 6.5 per cent and a discount rate between 16 and 18 per cent produce a result between HK$9.3 million and HK$11.6 million, which shows how much the conclusion leans on those two inputs. The cost approach serves as a reasonableness check. The company has spent about HK$8 million on research and development in this technology since 2018, and a commercialised technology worth somewhat more than its cost is reasonable.

Example two: a cartoon character

The second example deliberately uses the market approach, because character IP is one of the few categories with a real transaction record. Dimsum Studio created the cartoon character Bao in 2018, and earns mainly by licensing to toys, fashion, restaurants and convenience stores. Licensing income has grown from HK$8.1 million to HK$9.6 million over three years, and licensing profit is about 48 per cent of income. There are more than forty licensees, but the largest accounts for 35 per cent. The valuation date is 31 March 2026.

Working through this example, the point I thought about most is that a multiple has to describe the intellectual property, not a company. Enterprise value is the value of a whole business, and it contains working capital, equipment and people. Applying the multiple paid for a whole company to a single character counts assets that do not belong to it. So the comparable transactions are limited to pure sales of character rights.

Six sales of character rights between 2022 and 2025 give a median multiple of 4.75 times licensing income and 9.5 times licensing profit. None of them is identical to Bao, so the adjustments are made one by one: smaller scale, less 10 per cent, licensee concentration, less 5 per cent, narrower territory, less 5 per cent, an eight year track record, plus 5 per cent, and comparable growth, no adjustment. The net adjustment is minus 15 per cent, and the reason for each one has to be written down. The adjusted figures are HK$38.8 million and HK$37.1 million, weighted equally, giving HK$38 million.

The market approach remains uncommon for intellectual property, so the income approach is used as a check. Discounting the net licensing income actually received at 15 per cent gives HK$35.1 million, of which about 59 per cent comes from beyond the five year forecast period, which leans heavily on long term assumptions. The two figures are close, and the conclusion is HK$38 million. On sensitivity, reasonable movements in the main assumptions give a result of about HK$35 million to HK$42 million.

What else will the bank ask?

The valuation is not the amount that can be borrowed. The bank applies its own loan to value ratio and considers the borrower’s cash flow and other collateral. On these two examples, a bank will ask at least four more things. First, realisation. A patent is hard to sell separately from the business, and a bank may ask for a value on a liquidation premise. Second, the chain of rights. A character usually involves several illustrators, animators and contractors, and the bank needs to see a written assignment of rights from each of them before ownership is clear. Third, territory. If most sales are overseas while protection is only in Hong Kong, how much of the revenue is actually protected? Fourth, popularity. The value of a character depends on the public continuing to like it.

There is one more thing both banks and business owners should understand. The conclusion of a valuation is a single figure. The bank has to decide how much to lend against it, and vagueness will not do. Behind that figure, though, there must be a sensitivity analysis showing how much the conclusion depends on judgements such as the royalty rate and the discount rate. The division of labour is clear. The conclusion answers how much it is worth, and the sensitivity answers how firmly that answer stands. Note too that a narrow sensitivity range does not mean the valuation is better. It may only mean the assumptions were drawn too tightly, hiding the real uncertainty.

Hong Kong is not alone in thinking about this. Early in 2026 the International Valuation Standards Council consulted on the next edition of IVS, proposed to take effect on 31 January 2028, and one of the proposals is to add requirements relating to range in the scope of work and in reporting. In other words, whether the conclusion should be a single figure or a range is still being settled at the standards level. My position for now is a single figure with a sensitivity analysis, because the bank has to lend against it and only a single figure can carry that role. The position may not be permanent, and how the standard lands is worth watching.

Common questions

What can a business owner prepare in advance? Most of it already sits in the ordinary records: registration certificates and renewal fee records, assignments of rights from inventors and contractors, revenue from related products and licences, existing licence agreements, and whether there are any disputes.

Can a company that is not yet profitable raise IP financing? It can, though it is harder. Without a track record the value is less certain, and the bank still needs to see clearly how the loan will be repaid.

In closing: put the judgement in the open

Valuing intellectual property is not about putting a price tag on a right. It is about setting out, item by item, why the right is worth something, how much, and on what assumptions.

IP financing in Hong Kong has only just begun, and the Government has said it will assess whether local valuation guidance is needed. Until that guidance arrives, IVS already provides a framework that is clear enough. Whether the work is any good is judged not by how attractive the numbers look, but by whether every judgement was written down and can stand being questioned.

The guideline mentioned at the start has since been completed as Version 1, dated 21 September 2026. A summary and all 33 of its questions and answers are on my IP Financing page at kennethma.hk/ip-financing, and you are welcome to write to me for a copy, or to find a time to talk about what the intellectual property on your own books is worth.