ERW. 083/ ACC012/55 12 th November 2012 Subject: Management's Discussion and Analysis period ending 30 th September 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 9-month ( 9M12 ) and 3-month ( 3Q12 ) periods ending 30 th September 2012 as follows: ERAWAN's Consolidated Profit & Loss Statement (period ended 30 th September) Baht Millions 9M11 9M12 % Ch. 3Q11 3Q12 % Ch. Hotels' Operating Income 2,726 2,971 +9% 888 893 +1% Rental and service Income 177 133-25% 39 46 +17% Total Operating Income 2,902 3,105 +7% 927 939 +1% Other Income 57 53-7% 9 7-13% Total Income 2,959 3,157 +7% 936 947 +1% Operating Expenses (2,146) (2,246) +5% (710) (736) +4% EBITDA 813 912 +12% 226 211-7% Depreciation & Amortization (488) (477) -2% (158) (160) +1% Operating Profit 324 435 +34% 68 51-25% Finance Costs (304) (296) -3% (103) (98) -5% Pre-tax Profit/(Loss) 21 139 +579% (36) (47) -34% Taxes (55) (46) -17% (19) (3) -84% Minority Interest (38) (45) +18% (13) (3) -73% Normalized Profit/(Loss) (73) 49 N.M. (68) (54) +21% Gain from Disposal of Asset (Net) 664 - - - - - Net Profit/(Loss) 592 49-92% (68) (54) +21% E.P.S. 0.26 0.02-92% (0.03) (0.02) +21% N.M. = Not meaningful 3Q12 Highlights Thai tourism industry continued to expand in 3Q12 with tourist arrivals recorded at 5.1 millions in this quarter, representing a 4% growth from the same period last year. The 9-month figures increased 6% to stand at 15.6 million, with strong growth in all key source markets. Arrivals from Europe, despite the prevailing economic situation, continued to increase 17% y-y. 1
Return Enhancing Strategy. The room renovation of Grand Hyatt Erawan Bangkok, our Luxury Bangkok flagship hotel, progressed as planned. The renovation, which is a 2-year program conducted from 2012 to 2013 in low seasons only, is part of our long-term asset improvement program to enhance the leadership and competitiveness of our flagship hotel in the Luxury Bangkok segment. Hotel Growth Strategy. We are developing 4 hotels in Bangkok and Pattaya. The developments of our new hotels progressed as planned. Mercure Siam and ibis Siam (together 378 rooms) are on target to open in December 12, 2012 Holiday Inn Pattaya Extension (200 rooms) to be opened in 4Q14 Mecure Pattaya (210 rooms) to be opened in 4Q14 Operating Performance For 3Q12, our total operating income increased slightly, despite decrease in room inventory from Grand Hyatt Erawan Bangkok room renovation, due to solid performance improvements of all our hotels and in Rental Properties. While the income from our Luxury Bangkok hotel segment reduced by 8% due to decrease in room inventory from the renovation, the income from other hotel segments and Rental Properties increased 18% and 17%, respectively compared to the same period last year. Grand Hyatt Erawan Bangkok Renovation in 2012 will be completed in the beginning of 4Q and the hotel will operate at full capacity from 4Q12 to the beginning of 2Q13. For 9M12, our total operating income increased 7% to record at Baht 3,105 million, with strong improvements in both hotels and rental properties. We generated an EBITDA of Baht 912 million, growing 12% from the same period last year, while the operating profit increased 34% to record at Baht 435 million. Performance by Business Unit Hotel Business For 3Q12, our income from hotel operations increased 1% from the same period last year to record at Baht 893 million. Our income from room and F&B departments remained strong in all segments and destinations. Excluding Grand Hyatt Erawan Bangkok, total income from hotel operations increased 10% Y-Y to record at Baht 621 million, with 12% and 5% growth in room and F&B revenues, respectively. Luxury Resort was the highest growth segment in this quarter with 53% Y-Y income expansion due mainly to strong improvement of the The Naka Island, a Luxury Collection Resort and Spa, Phuket after its rebranding in 4Q11. Luxury Bangkok segment, of which the room inventory decreased by 21%, generated total income of Baht 529 million, 8% decrease from 3Q11. For 9M12, our income from hotel operations (including Grand Hyatt Erawan Bangkok) grew 9% Y-Y to record at Baht 2,971 million, with growth of 10% and 11% in room and F&B departments. 2
Operating statistics for our hotels room operations for the 3Q and 9M periods are as follows: Luxury BKK Luxury Resorts Renaissance Samui Naka Resort No of rooms 821 821 78 78 61 67 3-month period Sep-11 Sep-12 % Ch. Sep-11 Sep-12 % Ch. Sep-11 1 Sep-12 % Ch. Occupancy 75.4% 63.3% -12.1% 80.0% 77.4% -2.6% 16.9% 32.3% +15.4% ARR 4,434 4,797 +8.2% 4,141 4,694 +13.3% 8,938 7,541-15.6% RevPAR 3,342 3,038-9.1% 3,314 3,633 +9.6% 1,508 2,432 +61.3% 9-month period Sep-11 Sep-12 % Ch. Sep-11 Sep-12 % Ch. Sep-11 2 Sep-12 % Ch. Occupancy 72.1% 70.9% -1.2% 69.6% 77.5% +8.0% 23.0% 42.9% +19.9% ARR 4,611 4,729 +2.6% 4,751 4,757 +0.1% 11,861 7,914-33.3% RevPAR 3,324 3,351 +0.8% 3,305 3,689 +11.6% 2,724 3,395 +24.7% Midscale Economy (All ibis) No of rooms 683 683 1,704 1,863 3-month period Sep-11 Sep-12 % Ch. Sep-11 1 Sep-12 % Ch. Occupancy 78.9% 75.9% -3.0% 64.0% 70.1% +6.1% ARR 2,269 2,475 +9.1% 878 945 +7.5% RevPAR 1,790 1,878 +4.9% 562 663 +17.9% 9-month period Sep-11 Sep-12 % Ch. Sep-11 2 Sep-12 % Ch. Occupancy 79.8% 80.7% +0.8% 68.7% 73.5% +4.8% ARR 2,280 2,477 +8.6% 1,023 1,068 +4.4% RevPAR 1,820 1,998 +9.8% 703 785 +11.6% ARR = Average Room Rate (Bt/night) and RevPAR = Revenue per available room (Bt/night) 1 Operating of Naka Resort for 3Q11 calculated base on 1 months operations in July 2011.The resort was temporally closed for rebranding in August 2011 and reopened on 1 November 2011. 2 Operating of Naka Resort for 9M11 calculated base on income generated for 7 months operations period in 2011.The resort was temporally closed for rebranding in August 2011 and reopened on 1 November 2011. Details of each segment are as follows: Luxury Hotels Bangkok - For 3Q12, our Luxury Bangkok segment (comprised of Grand Hyatt Erawan Bangkok and JW Marriott Bangkok) recorded a lower operating income, mainly due to less room inventory in Grand Hyatt Erawan Bangkok from its room renovation. - While the renovation reduced 21% of overall Luxury Bangkok room inventory, room revenue from our Luxury Bangkok segment decreased only by 8% from 3Q11 due to the strong performance of JW Marriott Bangkok and the remaining inventory in Grand Hyatt Erawan Bangkok. The ARR increase at 8% from 3Q11. - F&B Revenue increased 2% in this quarter, despite less number of room guests from less room inventory, due to solid supports from local customers and MICE market. 3
- To sum, our Luxury Bangkok segment recorded a total income of Baht 529 million compared to Baht 576 million in 3Q11. EBITDA recorded at Baht 129 million in 3Q12 compared to Baht 189 million in 3Q11. - For 9M12, RevPAR increased 1% from 3Q11 due mainly to the 3% growth in ARR. The Luxury Bangkok generated a total operating income of Baht 1,769 million and EBITDA of Baht 561 million in 9M12, representing a 5% and a 6% growth from 9M11, respectively. Luxury Resorts - For 3Q12, 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 10% in this quarter due to our focus on ARR improvement. For the Naka Resort, which was only in the first year of operation after its rebranding which repositioned the hotel from luxury wellness to a wider-market luxury pool villa, the RevPAR increased 61% from the same period last year. - Overall, the Luxury Resort generated a total operating income of Baht 63 million in 3Q12 and Baht 214 million in 9M12, representing a 53% and 27% increase from the same period last year. Midscale Hotels - For 3Q11, our Midscale segment (comprised of Courtyard by Marriott Bangkok and Holiday Inn Pattaya) continued growing in this quarter with 5% RevPAR growth from 3Q11 due mainly from our marketing strategy to increase the ARR. To sum, our Midscale generated a total income of Baht 163 million and EBITDA of Baht 60 million, representing a 3% and 11% growth from the same period last year, respectively. - For 9M12, total operating income from our Midscale sector recorded at Baht 519 million, representing a 10% growth from 9M11. EBITDA increased 20% from 9M11 to record at Baht 196 million. Economy Hotels - Our Economy segment comprises of eight ibis hotels in five destinations in Thailand (Bangkok, Pattaya, Phuket, Samui and recently Hua Hin) with total inventory of 1,863 rooms. - For 3Q12, our Economy segment continued to record a solid growth. RevPAR, despite the opening of new ibis Huahin in January this year, continued to expand 18% from the same period last year. Growths were witnessed in both occupancy and ARR across all destinations, with the highest growth in ibis Samui. The average occupancy of our Economy segment increased from 64% in 3Q11 to 70% in 3Q12 and the average ARR increased 8% from 3Q11. - Segment operating income and EBITDA increased 26% and 77% from 3Q11 to record at Baht 150 million and Baht 40 million, respectively. - For 9M12, our Economy segment generated an operating income of Baht 509 million and an EBITDA of Baht 168 million in 9M12, a 20% and 28% growth from 9M11 respectively. 4
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 3Q12, our operating income from Erawan Bangkok increased 26% from the same period last year. Erawan Bangkok occupancy expanded 6% with 20% rate increase due to solid supports from our existing and new tenants. The EBITDA increased 30% to record at Baht 22 million. For 9M12, the property generated an operating income of Baht 90 million and an EBITDA of Baht 63 million, representing Y-Y growths of 27% and 34%, respectively. However, the total rental and service income recorded a decline of 25% from 9M11 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 9M11. - Other Income: We recorded an income from the sale of a land plot in Sriracha of Baht 19 million in 2Q12 and 9M12 while in 2Q11 and 9M11 we recorded income from the sales of shop houses in Kata of Baht 36 million. - Depreciation & Amortization: This non-cash item increased by Baht 2 million to Baht 160 million in 3Q12 mainly from the depreciation of ibis Hua Hin which was opened in 1Q12. However, the figure for 9M12 decreased by Baht 11 million to Baht 477 million due mainly to the absence of Ploenchit Center depreciation which accounted for Baht 18 million in 9M11. - Finance Costs: Our finance cost decreased from Baht 103 million in 3Q11 to Baht 98 million in 3Q12 due to the decreased in our interest-bearing debt from Baht 7,680 million in 3Q11 to Baht 7,635 million in 3Q12 while our average cost of fund remained at 5.3% in 3Q12, similar to 3Q11. - Income Tax: Income tax in 3Q12 decreased as a result of the lower pre-tax profit of Erawan Hotel PLC in this quarter. Financial Status With improving performance of our hotels and rental properties, we generated Baht 804 million of operating cash flow in 9M12, a 15% growth from Baht 700 million in 9M11. We paid out Baht 180 million as dividend in 2Q12, 37% payout ratio. The remaining cash flow from operations was mainly used, together with bank loans, to fund the construction of Mercure Siam and ibis Siam and the room renovation of Grand Hyatt Erawan Bangkok. 5
As a result, our interest-bearing debt increased slightly from Baht 7,499 million at the end of 2011 to Baht 7,635 million at the end of September 2012. Our shareholder equities at the end of this quarter decreased by Baht 120 million to record at Baht 3,649 million at the end of September 2012, mainly due to the Baht 180 million dividend payout. Our total assets increased from Baht 12,238 million to Baht 12,329 million during the same periods. Our total liabilities-to-equity ratio recorded at 2.4 times and net interest bearing debt-to-equity of 2.0 times at the end of 3Q12. Sincerely yours Krailuck Asawachatroj Executive Vice President and Chief Financial Officer 6