ERW. 022/ ACC003/56 26 th February 2013 Subject: Management's Discussion and Analysis period ending 31 st December 2012 Attention: The President, The Stock Exchange of Thailand Dear Sir, The Erawan Group Plc. would like to submit explanations and analysis of changes to our operating results for the 12-month ( FY12 ) and 3-month ( 4Q12 ) periods ending 31 st December 2012 as follows: ERAWAN's Consolidated Profit & Loss Statement (period ended 31 st December) Baht Millions FY11 FY12 % Ch. 4Q11 4Q12 % Ch. Hotels' Operating Income 3,536 4,122 +17% 811 1,151 +42% Rental and service Income 219 180-18% 43 47 +10% Total Operating Income 3,756 4,302 +15% 853 1,198 +40% Other Income 67 62-9% 11 9-19% Total Income 3,823 4,364 +14% 864 1,206 +40% Operating Expenses (2,851) (3,100) +9% (705) (854) +21% EBITDA 972 1,264 +30% 159 352 +122% Depreciation & Amortization (646) (641) -1% (157) (164) +5% Operating Profit 326 623 +91% 2 188 +10264% Finance Costs (407) (393) -3% (103) (98) -5% Pre-tax Profit/(Loss) (81) 230 N.M. (101) 90 N.M. Taxes (53) (63) +17% 2 (17) N.M. Minority Interest (39) (61) +57% (1) (16) +1385% Normalized Profit/(Loss) (173) 106 N.M. (101) 57 N.M. Gain from Disposal of Asset (Net) 664 - - - - - Net Profit/(Loss) 491 106-78% (101) 57 N.M. E.P.S. 0.22 0.05-78% (0.04) 0.03 N.M. N.M. = Not meaningful Key Highlights Thai tourism industry continued to post a solid growth in 4Q12 with the highest record tourist arrival for any three-month period at 6.3 millions, representing a 43% growth from the 4Q11. Together with the strong demand in the first nine months of the year, the total tourist arrivals for FY12 recorded at 22.3 million, a 17% growth from the same period last year following a 21% y-y growth in 2011. Growth witnessed in all key source markets especially Russia/India/China (+39% y-y) which accounted for 23% of total tourist arrivals in 2012. 1
Return Enhancing Strategy. As part of our return enhancing strategy, we have appointed Siam Commercial Bank Group to act as financial advisor, underwriter and fund manager to establish Erawan Hotel Growth Property Fund ( ERWPF ) which will initially invest in ibis Phuket Patong and ibis Pattaya. ERWPF is under the approval process of the Securities and Exchange Commission Thailand (SEC) and expected to offer to public investors within the 2Q13. As for our long-term asset improvement program, we completed 197 rooms renovation of Grand Hyatt Erawan Bangkok in the beginning of 4Q12 as planned. The final phase of the renovation will recommencement in 2Q13 and 3Q13. Hotel Growth Strategy. On 12 December 2012, we opened 2 new hotels, Mercure Bangkok Siam and ibis Bangkok Siam (together 378 rooms). We now have 16 hotels in operations with total of 3,890 rooms inventory in our portfolio. In addition, we are developing 2 new hotels in Pattaya. Holiday Inn Pattaya Extension (200 rooms) to be opened in 4Q14 Mecure Pattaya (210 rooms) to be opened in 4Q14 The developments of our new hotels progressed as planned. Operating Performance For 4Q12, our total operating income increased significantly due to strong performance of all our hotels and our rental properties. Our income from hotel operation increased 42% y-y to record at Baht 1,151 million with growth witnessed across segments and destinations. Our hotels located in Bangkok posted revenue growth of 45% from 4Q11 due to the healthy demand and the recovery from the flood situation which occurred last year. Income from rental properties continued to generate steady income with a 10% revenue growth compared to the same period last year. As such our total operating income recorded at Baht 1,198 million in 4Q12, a 40% growth from 4Q11. We generated an EBITDA of Baht 352 million, growing 122% from the same period last year at a higher pace than the revenue growth due to part of operating expenses are fixed and not related to higher revenue. Our EBITDA margin improved from 18% in 4Q11 to 29% in 4Q12 and our operating profit increased Baht 158 million to record at Baht 57 million. To sum, for FY12 our total operating income increased 15% to record at Baht 4,302 million, with strong improvements in both hotels and rental properties. Our income from hotel operation recorded at Baht 4,122 million, a 17% increased from 2011 with strong growth from our existing 13 hotels (+15% y-y) and the additional income from newly opened ibis Hua Hin in January 2012. We generated an EBITDA of Baht 1,264 million, growing 30% from the same period last year, while the normalized operating profit increased Baht 279 million to record at Baht 106 million compared to net loss of Baht 173 million in 2011. 2
Performance by Business Unit Hotel Business For 4Q12, our income from hotel operations increased 42% from the same period last year to record at Baht 1,151 million. Our income from room and F&B departments remained strong in all segments and destinations with 47% and 37% growth in room and F&B revenues, respectively. Our income from hotels located in Bangkok posted a 45% revenue growth while our hotels located outside Bangkok generated a 34% revenue growth from the same period last year. Luxury Resort was the highest growth segment in this quarter with 79% y-y income expansion due mainly to strong improvement of The Naka Island, a Luxury Collection Resort and Spa, Phuket after its rebranding in 4Q11. For FY12, our income from hotel operations grew 17% y-y to record at Baht 4,122 million, with growth of 18% and 17% in room and F&B departments. Operating statistics for our hotels room operations for the 4Q and 12M periods are as follows: Luxury BKK Luxury Resorts Renaissance Samui Naka Resort No of rooms 821 821 78 78 61 67 3-month period Dec-11 Dec-12 % Ch. Dec-11 Dec-12 % Ch. Dec-11 1 Dec-12 % Ch. Occupancy 55.4% 77.0% +21.6% 57.2% 85.2% +28.0% 38.1% 46.5% +8.4% ARR 4,362 4,931 +13.1% 4,376 4,484 +2.5% 9,485 11,715 +23.5% RevPAR 2,418 3,799 +57.1% 2,503 3,820 +52.6% 3,611 5,449 +50.9% 12-month period Dec-11 Dec-12 % Ch. Dec-11 Dec-12 % Ch. Dec-11 2 Dec-12 % Ch. Occupancy 67.9% 72.4% +4.5% 66.4% 79.5% +13.0% 26.6% 43.8% +17.2% ARR 4,560 4,783 +4.9% 4,669 4,684 +0.3% 11,044 8,928-19.2% RevPAR 3,096 3,463 +11.9% 3,103 3,722 +20.0% 2,937 3,912 +33.2% Midscale Economy (All ibis) No of rooms 683 872 1,863 2,052 3-month period Dec-11 Dec-12 3 % Ch. Dec-11 Dec-12 4 % Ch. Occupancy 74.7% 86.8% +12.1% 67.6% 77.8% +10.1% ARR 2,421 2,707 +11.8% 1,177 1,220 +3.7% RevPAR 1,809 2,350 +29.9% 796 949 +19.2% 12-month period Dec-11 Dec-12 3 % Ch. Dec-11 Dec-12 4 % Ch. Occupancy 78.5% 82.2% +3.7% 68.4% 74.6% +6.1% ARR 2,314 2,538 +9.7% 1,061 1,108 +4.4% RevPAR 1,817 2,087 +14.8% 726 826 +13.8% ARR = Average Room Rate (Bt/night) and RevPAR = Revenue per available room (Bt/night) 1 Operating statistics of Naka Resort for 4Q11 calculated base on 2 months operations in November and December 2011.The resort was temporally closed for rebranding in August 2011 and reopened on 1 November 2011. 2 Operating statistics of Naka Resort for FY11 calculated base on income generated for 9 months operations period in 2011.The resort was temporally closed for rebranding in August 2011 and reopened on 1 November 2011. 3 Operating statistics of Midscale Hotels exclude Mercure Bangkok Siam which was opened for 2 weeks in 2012. 4 Operating statistics of Economy Hotels exclude ibis Bangkok Siam which was opened for 2 weeks in 2012. 3
Details of each segment are as follows: Luxury Hotels Bangkok - For 4Q12, our Luxury Bangkok segment (comprised of Grand Hyatt Erawan Bangkok and JW Marriott Bangkok) recorded strong performance improvement on the back of healthy demand and our marketing strategies to optimize ARR and occupancy expansion. - F&B Revenue increased 37% in this quarter mainly due to the increase in occupancy and solid supports from local customers and MICE market. - To sum, our Luxury Bangkok segment recorded a total income of Baht 664 million compared to Baht 459 million in 4Q11. EBITDA recorded at Baht 219 million in 4Q12 compared to Baht 80 million in 4Q11. - For FY12, occupancy increased from 68% in 2011 to 72% in 2012 despite less room inventory from Grand Hyatt Room Renovation and ARR increased 5% from FY11 leading to RevPAR increased 12% from 2011. The Luxury Bangkok generated a total operating income of Baht 2,434 million and EBITDA of Baht 780 million in FY12, representing a 14% and a 28% growth from FY11, respectively. Luxury Resorts - For 4Q12, our Luxury Resort segment (comprised of Renaissance Koh Samui Resort and Spa and The Naka Island, a Luxury Collection Resort and Spa) produced the highest operating income growth among all of our hotel segments with solid improvement in both Renaissance Koh Samui and the Naka Resort. Renaissance Koh Samui RevPAR increased 53% in this quarter mainly due to the growth in occupancy from the healthy demand of the market and our marketing strategies to capture the growing market. In addition, Naka Resort RevPAR increased 51% in 4Q12 mainly due to the 24% increase in ARR after the promotion rate offered during the introduction period after its rebranding last year. - Overall, the Luxury Resort generated a total operating income of Baht 93 million in 4Q12 and Baht 307 million in FY12, representing a 79% and 39% increase from the same period last year. Midscale Hotels - For 4Q12, our Midscale segment (comprised of Courtyard by Marriott Bangkok, Holiday Inn Pattaya and the newly opened Mercure Bangkok Siam) continued growing in this quarter with 30% RevPAR growth. Courtyard by Marriott Bangkok generated the highest growth among the group from the healthy demand and the strong growth in ARR (+22% y-y). Holiday Inn Pattaya continued growing with healthy demand from both leisure and corporate customers. To sum, our Midscale generated a total income of Baht 200 million and an EBITDA of Baht 69 million, representing a 26% and 24% growth from the same period last year, respectively. - For FY12, total operating income from our Midscale sector recorded at Baht 719 million, representing a 14% growth from FY11. EBITDA increased 20% from FY11 to record at Baht 264 million. 4
- The calculation of operating statistics above excludes those of Mercure Siam which was opened for 2 weeks in 2012. Economy Hotels - Our Economy segment comprises of nine ibis hotels in five destinations in Thailand (Bangkok, Pattaya, Phuket, Samui and Hua Hin) with total inventory of 2,052 rooms. - For 4Q12, our Economy segment continued to record a solid growth. RevPAR, despite the opening of new ibis Hua Hin in January this year, continued to expand at 19% growth from the same period last year. Growths were witnessed in both occupancy and ARR across all destinations, with ibis Samui continued generated the highest growth among the group. The average occupancy of our Economy segment increased from 68% in 4Q11 to 78% in 4Q12 and the average ARR increased 4% from 4Q11. - Segment operating income and EBITDA increased 34% and 39% from 4Q11 to record at Baht 204 million and Baht 76 million, respectively. - For FY12, our Economy segment generated an operating income of Baht 712 million and an EBITDA of Baht 243 million in FY12, a 24% and 31% growth from FY11 respectively. - The calculation of operating statistics above excludes those of ibis Siam which was opened for 2 weeks in 2012. Rental and Service After the divestment of Ploenchit Center in 2Q11, we only own and operate Erawan Bangkok, a luxurious retail property adjacent to Grand Hyatt Erawan Hotel, and manage Ploenchit Center as a property manager. For 4Q12, our operating income from Erawan Bangkok increased 16% from the same period last year. Erawan Bangkok occupancy expanded 2% with 13% rate increase due to solid supports from our existing and new tenants. The EBITDA increased 26% to record at Baht 21 million. For FY12, the property generated an operating income of Baht 121 million and an EBITDA of Baht 85 million, representing Y-Y growths of 24% and 32%, respectively. However, the total rental and service income recorded a decline of 18% from FY11 figures due mainly to the absence of the income from Ploenchit Center which we divested in April 2011. Other Items on P&L - Gain on Disposal of Asset: We recorded a gain from disposal of asset of Baht 664 million from the divestment of Ploenchit Center in 2Q11 and FY11. 5
- Other Income: We recorded an income from the sale of a land plot in Sriracha of Baht 19 million in 2Q12 and FY12 while in 2Q11 and FY11 we recorded income from the sales of shop houses in Kata of Baht 36 million. - Depreciation & Amortization: This non-cash item increased by Baht 7 million to Baht 164 million in 4Q12 mainly from the depreciation of ibis Hua Hin which was opened in 1Q12 and addition depreciation from room renovation of Grand Hyatt Erawan Bangkok. However, depreciation for FY12 decreased by Baht 5 million to Baht 641 million due mainly to the absence of Ploenchit Center depreciation which accounted for Baht 18 million in FY11. - Finance Costs: Our finance cost decreased from Baht 103 million in 4Q11 to Baht 98 million in 4Q12 due to the decreased in our average cost of fund from 5.4% in 4Q11 to 5.2% in 4Q12. - Income Tax: Income tax in 4Q12 increased as a result of the higher pre-tax profit of Erawan Hotel PLC in this quarter. Financial Status With improving performance of our hotels and rental properties, we generated Baht 1,235 million of operating cash flow in FY12, a 33% increased from Baht 928 million in FY11. In 2Q12, we paid out Baht 180 million as dividend, representing a 37% payout ratio. The remaining cash flow was mainly used, together with bank loans, to fund the constructions of Mercure Bangkok Siam and ibis Bangkok Siam and the room renovation of Grand Hyatt Erawan Bangkok. As a result, our interest-bearing debt increased from Baht 7,499 million at the end of 2011 to Baht 7,874 million at the end of 2012 mainly due to additional loan drawdown to fund the aforementioned developments. Our shareholder equities decreased from Baht 3,769 million to record at Baht 3,714 million at the end of December 2012, mainly due to Baht 180 million dividend payout in 2Q12. Our total assets increased from Baht 12,238 million to Baht 12,834 million during the same periods. Our net interest-bearing debt to equity recorded at 2.0 times at the end of 2012. Sincerely yours Krailuck Asawachatroj Executive Vice President and Chief Financial Officer 6