公司金融 · 2026-02-16

Sustainable Growth Rate in WACC Calculation: Aligning Terminal Value Assumptions with Long-Term Potential

The HKEX’s 2025 consultation on listing regime enhancements for specialist technology companies, coupled with the SFC’s heightened scrutiny of valuation models in IPO prospectuses, has brought a long-standing technical tension to the forefront: the misalignment between the sustainable growth rate (g) used in the terminal value calculation and the weighted average cost of capital (WACC) applied in the discount period. In a rising interest rate environment where the Hong Kong Interbank Offered Rate (HIBOR) has averaged 4.2% over the past 12 months (HKMA, 2025), and with the Hang Seng Index’s implied equity risk premium compressing to 5.8% as of Q2 2025, CFOs and their financial advisors face a critical inflection point. Using a g that exceeds the long-term nominal GDP growth rate of Hong Kong—projected at 3.5% by the Census and Statistics Department (2025)—in a terminal value calculation that also applies a WACC derived from near-term risk premiums creates a mathematical contradiction: the model assumes the firm can grow faster than the economy indefinitely while simultaneously discounting that growth at a rate that assumes declining risk. This article examines the structural mechanics of this alignment, provides a framework for calibrating g within a defensible range, and offers specific regulatory-referenced adjustments for HKEX-listed issuers preparing valuation disclosures under the Listing Rules.

The Structural Tension Between g and WACC

The terminal value formula—TV = FCF_n × (1+g) / (WACC – g)—is mathematically sensitive to the spread between g and WACC. A 50-basis-point reduction in that spread can increase terminal value by 15-20% for a typical Hong Kong-listed industrial company with a 4.0% WACC and a 2.5% g. The core problem is that WACC and g are not independent variables; they are linked through the economy’s long-run equilibrium.

The Perpetuity Assumption and the Nominal GDP Ceiling

The fundamental constraint on g is the long-term nominal GDP growth rate of the jurisdiction in which the firm operates. For a Hong Kong-incorporated company deriving 70% of its revenue from the domestic market, the terminal growth rate cannot exceed Hong Kong’s nominal GDP growth over a perpetuity horizon without implying the firm will eventually own the entire economy. The Census and Statistics Department’s 2025 projection of 3.5% nominal GDP growth—comprising 2.0% real growth and 1.5% inflation—sets an upper bound. For companies with significant PRC exposure, the National Bureau of Statistics’ 2025 projection of 4.0% nominal growth provides a higher but still finite ceiling.

The SFC’s Code of Conduct for Corporate Finance Advisors (Chapter 17, paragraph 17.6) requires that valuation assumptions be “reasonable and internally consistent.” Using a g of 4.0% for a Hong Kong-focused retailer while applying a WACC of 8.0% derived from a 6.0% equity risk premium (implying high perceived risk) violates this consistency requirement: the model assumes the firm can grow faster than the economy while the cost of capital implies investors demand a premium for above-average risk, which should logically decline over a perpetuity horizon.

The Risk Premium Decay Problem

WACC is typically estimated using a short-to-medium-term risk-free rate (e.g., the 10-year HKSAR Government Bond yield at 3.8% as of 30 June 2025) and an equity risk premium derived from historical or implied market data. Over a perpetuity horizon, the risk-free rate should revert to a long-term neutral rate, and the equity risk premium should contract as idiosyncratic risks diversify away. The Damodaran (2025) framework for Hong Kong estimates a long-term equity risk premium of 4.5%, compared to the current implied premium of 5.8%.

Failing to adjust WACC for this decay creates a systematic upward bias in discount rates applied to terminal cash flows. For a company with a terminal value comprising 70% of total enterprise value—common in mature Hong Kong-listed consumer goods firms—a 130-basis-point overstatement in WACC reduces fair value by approximately 18%.

Calibrating g: A Jurisdictional and Sectoral Framework

The sustainable growth rate must be anchored to three factors: the company’s reinvestment rate, its return on invested capital (ROIC), and the macroeconomic ceiling of its primary market. The formula g = Reinvestment Rate × ROIC provides a firm-level constraint that must then be tested against the GDP ceiling.

The Reinvestment Rate Constraint

For a Hong Kong-listed property developer with a ROIC of 6.0% and a reinvestment rate of 40%, the implied sustainable growth rate is 2.4% (0.40 × 0.06). If the company’s historical revenue growth has been 5.0% over the past five years, the terminal g of 2.4% reflects a realistic convergence to a steady state. The HKEX’s Listing Rules (Chapter 11, Rule 11.10) require that profit forecasts in listing documents be based on “reasonable assumptions” with “clear disclosure of the basis.” A terminal g exceeding the reinvestment rate-implied figure without explicit justification—such as expected regulatory changes or market expansion—exposes the sponsor to SFC enforcement action under the Securities and Futures Ordinance (Cap. 571, Section 213).

Sector-Specific Ceilings

Sector-level growth rates provide additional calibration points. The Hong Kong Monetary Authority’s (HKMA) 2025 Banking Stability Report projects the local banking sector’s nominal loan growth at 3.0% over the next decade. A Hong Kong-listed bank using a 4.0% terminal g would need to demonstrate market share gains or expansion into higher-growth ASEAN markets to justify the assumption. For technology companies listing under the new Chapter 18C (Specialist Technology Companies), the HKEX’s guidance note (GL117-24) explicitly flags that terminal growth rates above 5.0% require “detailed supporting analysis” including addressable market size and competitive position.

Practical Adjustments for WACC-TVG Alignment

Achieving internal consistency requires three specific adjustments to the standard WACC calculation when applied to terminal value.

Adjusting the Risk-Free Rate to a Long-Term Neutral Rate

The current 10-year HKSAR Government Bond yield of 3.8% reflects near-term monetary policy expectations. For terminal value calculations, the risk-free rate should be replaced with a long-term neutral rate estimate. The HKMA’s 2025 Monetary Policy Report estimates Hong Kong’s long-term neutral real rate at 1.0-1.5%. Adding the Census and Statistics Department’s long-term inflation target of 2.0% yields a nominal neutral rate of 3.0-3.5%. Using 3.3% as the terminal risk-free rate—50 basis points below the current yield—reduces the WACC by approximately 30 bps for a company with a 60% equity weight.

Adjusting the Equity Risk Premium for Horizon

The SFC’s Fund Manager Code of Conduct (Chapter 9, paragraph 9.3) requires that valuation methodologies be “appropriate for the investment horizon.” For terminal value—a perpetuity—the equity risk premium should reflect the long-term historical average rather than the current implied premium. The Damodaran (2025) dataset for Hong Kong shows a 20-year historical equity risk premium of 4.8% versus the current 5.8%. Applying the 4.8% figure to the terminal WACC calculation reduces the cost of equity by 100 bps. Combined with the risk-free rate adjustment, the terminal WACC drops from 8.0% to 6.5% for a typical firm—a 150-bps reduction that brings the WACC-g spread from 5.5% to 4.0%, significantly altering the terminal value.

Testing for Internal Consistency: The Growth-Cost Convergence

The final test is whether the adjusted terminal WACC and the chosen g are economically coherent. If a company’s long-term ROIC is 8.0% and its reinvestment rate is 35%, the implied g is 2.8%. The terminal WACC should be at least 300 bps above this g to avoid the “blow-up” risk in the Gordon Growth Model (where a spread below 200 bps produces extreme sensitivity). A terminal WACC of 6.5% with a g of 2.8% yields a 370-bps spread—within the defensible range. If the unadjusted WACC of 8.0% were used, the 520-bps spread would understate the terminal value by approximately 25%.

Regulatory and Disclosure Implications for HKEX-Listed Issuers

The SFC’s 2024 thematic review of valuation practices in IPO prospectuses found that 65% of reviewed documents failed to disclose the specific basis for the terminal growth rate assumption (SFC, 2024). The HKEX’s Listing Decision LD143-2024 further clarified that terminal value assumptions must be “quantified and reconciled” with the company’s historical performance and industry benchmarks.

Disclosure Requirements Under the Listing Rules

HKEX Listing Rules Chapter 11, Rule 11.16 requires that any valuation included in a listing document “state the key assumptions on which it is based” and “explain the basis for those assumptions.” For terminal value, this means:

Explicit disclosure of the terminal growth rate and its justification against long-term GDP growth and reinvestment rate-ROIC analysis.
A sensitivity table showing the impact of a ±100-bps change in both g and WACC on the valuation.
A reconciliation of the terminal WACC with the near-term WACC, explaining the adjustments for risk-free rate and equity risk premium horizon.

Under the SFC’s Code of Conduct for Sponsors (Chapter 17, paragraph 17.8), sponsors are liable for “materially misleading” valuation assumptions. A terminal g set at 4.5% for a Hong Kong-listed utility company with a 5.0% ROIC and a 30% reinvestment rate—implying a firm-level g of 1.5%—would be prima facie inconsistent. The sponsor would need to justify the 3.0% gap through market share expansion, regulatory changes, or cost structure improvements, supported by third-party data.

Actionable Takeaways for CFOs and Advisors

Anchor terminal g to the lower of the reinvestment rate-ROIC product and the jurisdiction’s nominal GDP growth—for Hong Kong-incorporated issuers, the Census and Statistics Department’s 3.5% projection provides the ceiling; any deviation requires explicit justification in the valuation memorandum.
Adjust the terminal WACC by replacing the current risk-free rate with the HKMA’s long-term neutral rate estimate (3.0-3.5%) and substituting the current equity risk premium with the 20-year historical average (4.8%) to eliminate the horizon mismatch.
Maintain a minimum 300-bps spread between the terminal WACC and g to avoid excessive sensitivity; if the adjusted spread falls below 300 bps, reduce g or increase the terminal WACC through a higher long-term debt premium.
Prepare a sensitivity table with ±100-bps changes in both g and terminal WACC for all HKEX filing documents, as this is now an implicit requirement under SFC’s 2024 thematic review findings.
Reconcile the terminal growth rate with the company’s five-year historical CAGR in the prospectus or annual report; a terminal g exceeding historical growth without a clear catalyst (e.g., new market entry, regulatory change) will trigger SFC inquiries under the Securities and Futures Ordinance.