Qualification Programme (QP) Case Analysis Competition 2009

Qualification Programme (QP) Case Analysis Competition 2009 The case Golden Galaxy Hotels Group Golden Galaxy Hotels Group ( Golden Galaxy ) is a public company, which has been listed on the Shanghai Stock Exchange since 2005. The company grew from modest beginnings. In the early 1990s, James Yee and his wife Connie operated a boutique Hotel in Beijing. They opened a second location in Shanghai in 2005, and a third in Sanya in 2007. Since then the company has grown to the point that it now owns or manages nine properties in key tourist locations in China. Golden Galaxy provides an extensive network of four star hotels strategically situated in China. Each Golden Galaxy hotel is well-appointed, comfortable, competitively priced and seeks to offer the same high standard of friendly, professional service. Unlike traditional brand-managed or franchised hotels, Golden Galaxy aims to provide their guests with a distinctive lodging experience. Each of the hotels has a personality specifically tailored to reflect the local market environment and features modern, sophisticated design that includes well-designed public spaces, popular "destination" bars and restaurants, and highly personalised service. Management believes that the Golden Galaxy falls into the Four-Star category of the National Tourism Administration of the People's Republic of China. Golden Galaxy has a number of target markets. The major market is inbound tourism, but the company also attracts corporate and conference business. Other market sectors such as the sport and wedding markets are also important. The Golden Galaxy s network consists mostly of properties wholly owned by the company, but also includes hotels that are privately owned. This arrangement offers management and marketing/distribution expertise and services to independently owned hotels who wish to take advantage of the benefits of belonging to a hotel chain with a recognised brand name. Golden Galaxy s infrastructure provides an opportunity for independent properties to compete more effectively and to maximise the returns. Golden Galaxy s locations include hotels in central locations in Beijing (Xicheng, Dongcheng, and Chaoyang District), Shanghai (Huangpu District, Luwan District and Jing an District), plus resort location hotels in Sanya, Xia'men, and Qingdao. Hong Kong Institute of CPAs All Copyright Reserved 1

Beijing Hotel Operations The management of Golden Galaxy have an ongoing concern about the profitability of the hotel chain. Only the Shanghai hotels and Resort hotels seem to be earning a Return on Investment (ROI) which exceeds the company s cost of capital of 10%. Of particular concern are the Golden Galaxy Beijing hotels (the Beijing Hotels ), which are earning an ROI of only 1.7%. One of the issues in the Beijing Hotels appears to be room pricing. In the 2008 financial year the average price per room for the Beijing Hotels was 790. Other hotels of a similar standard in Beijing appear to have an average room rate of over 1,000. Golden Galaxy s CFO, Michael Lim, believes that there may be problems with the company s pricing strategy. Michael Lim wishes to explore further the pricing of rooms on the Beijing Hotels, and have gathered the following data. Accommodation Data - 2008 Accommodation Revenues Average room rate 790 Total number of rooms all locations 700 Days open during year 365 Maximum number of room nights 255,500 (700 x 365) Actual number of room nights 159,360 Average Occupancy Rate 62.4% (159,360 255,500) Total Accommodation Revenues for year 125,894,000 (159,360 x 790) Accommodation Cost Structure Variable Per Room Total Variable Fixed Total Cost Direct Operating Expenses 200 31,872,000 41,208,000 73,080,000 Indirect Operating Expenses 12,654,000 12,654,000 Total Operating Expenses 31,872,000 53,862,000 85,734,000 Share of Depreciation and Amortisation 15,441,000 15,441,000 Share of Corporate Expenses 11,690,000 11,690,000 Total Accommodation Costs for year 31,872,000 80,993,000 112,865,000 Accommodation Total Assets 777,817,000 Michael Lim notes that the total costs are heavily weighted towards fixed costs. The variable costs per room are relatively low and consist of such items as laundry, maid service, room amenities, room TV and internet service, and power. Also there is a very heavy investment in Accommodation Total Assets. Presumably most of this is comprised of land, buildings, and room fittings and equipment. Hong Kong Institute of CPAs All Copyright Reserved 2

Shanghai Hotel Operations The Shanghai Hotel Operations (the Shanghai Hotels ) have some significant problems according to rumours circulating among the management group, some of whom think that the hotel should drop one or more of its operating segments. The three major operating segments of the hotel are accommodation, food & beverage, and conferences. Below is a draft set of segmented results for the Shanghai Hotel. Shanghai Hotel Segmented Results ( 000 s) (Indirect Expense Allocation Based on Direct Operating Expenses) Total Accom Food/Bev Conf Total Hotel Revenues 89,923 53,950 22,480 13,493 Less: Direct Operating Expenses 39,773 12,345 18,580 8,848 Direct Operating Profit 50,150 41,605 3,900 4,645 Indirect Operating Expenses Hotel selling, general and administrative 8,250 Property rates, insurance and other 2,500 Depreciation and amortisation 7,719 Corporate expenses 4,496 Total Indirect Operating Expenses (Allocated on the basis of Direct Operating Expenses) 22,965 7,128 10,728 5,109 Net Operating Profit (EBIT) 27,185 34,477 (6,828) (464) Michael Lim considers that other possible bases for allocating Indirect Operating Expenses should be explored. These alternatives include Floor Space Occupied, Revenues, and Number of Employees. Details of all potential allocation bases are provided below. Allocation Bases Total Accom Food/Bev Conf Floor Space (sq m) 1,600 1,200 160 240 Percentages 100% 75% 10% 15% Revenues ( 000 s) 89,922 53,950 22,480 13,492 Percentages 100% 60% 25% 15% Number of Employees 300 210 75 15 Percentages 100% 70% 25% 5% Direct Operating Expenses ( 000 s) 39,772 12,345 18,580 8,847 Percentages 100% 31% 47% 22% Hong Kong Institute of CPAs All Copyright Reserved 3

Resort Location Hotel Operations Resort Location Hotels (the Resort Hotels ) have two classes of customers: families and business travellers. A family usually consists of 2 adults and 1 child, and occupy one room. The average length of stay for a family is 6 nights. Family guests usually stay during school vacation periods. Business travellers are single occupants taking advantage of the extensive conference facilities at the hotels. The average length of stay for a business occupant is 2 nights and the demand from business guests is constant throughout the year. Business travellers place more frequent bookings than families and the average length of their stay is shorter. Despite the differences in seasonality of demand, the annual number of guest nights for families and business travellers is approximately equal. Given the similar demand for both customer types, Frank Wong, the Financial Controller of the Resort Location Hotel Operations has assumed that the customer support costs were about the same for each customer and so priced the guest rooms the same at 650 per room per night, a 56% markup on direct operating costs. Alison Rowe, the Operations Manager, has recently been aware of an increasing number of complaints from customers. Upon further investigation, most complaints are from family guests and relate to pricing of the rooms. Many of the families are threatening to stay at competitors hotels in the area who allegedly charge less for the same class of room. As an example one family proved that they could stay at a neighbouring property for 250 less per night. In addition, many competitors were offering package holidays to families. Alison approached Frank Wong and asked him to investigate why the hotel was charging more than its competitors. Frank believes that the problem may be to do with unfair cost assignments and suggested that customer costs be assigned to each customer category using activity-based costing. He collected the following information about the customer related activities and costs in 2008. Customer activities and costs - 2008 Customer activities: Business Travellers Families Number of reservations 15,810 5,270 Business centre usage (hours) 63,000 10,000 Housekeeping hours 15,000 25,000 Customer costs: Processing reservations 10,000,000 Business centre costs 3,000,000 Housekeeping costs 15,000,000 Direct Operating costs 28,000,000 Hong Kong Institute of CPAs All Copyright Reserved 4

Group Financial Performance The Board and Managing Director of Golden Galaxy are concerned about the financial results for the year ended 31 December 2008. While it is clear that the heavy debt servicing costs are pulling down the company s profitability, the Board has concerns about operating results, especially at the Beijing Hotels. They have instructed Michael Lim to prepare some analyses of hotel profitability in order to gauge the seriousness of the problem. The following are internal financial data for the three major segments of Golden Galaxy; Beijing Hotels, Shanghai Hotels, and Resort Hotels: Segmented Income Statement Summary ( 000's) Total Beijing Shanghai Resort Total Revenues 256,923 125,894 89,923 41,106 Total Hotel Operating Expenses 164,257 85,734 50,523 28,000 Total Hotel Operating Profits 92,666 40,160 39,400 13,106 Depreciation and Amortisation 25,733 15,441 7,719 2,573 Corporate Expenses 17,985 11,690 4,496 1,799 Net Operating Profits (EBIT) 48,948 13,029 27,185 8,734 Less: Interest Expense 68,650 Add : Non Operating Income 4,111 Net Profit (Loss) Before Tax (15,591) Taxation* 12,846 Net Profit (Loss) After Tax (28,437) Segmented Balance Sheet Summary ( 000's) Total Beijing Shanghai Resort Assets Total Fixed Assets, Goodwill and Investments 1,069,380 695,097 267,345 106,938 Total Current Assets 129,250 82,720 28,435 18,095 Total Assets 1,198,630 777,817 295,780 125,033 Total Current Liabilities 55,485 33,290 16,646 5,549 Long term debt and capital lease obligations 786,788 Total Shareholders' Equity 356,357 Total Liabilities and Shareholders' Equity 1,198,630 *Hypothetical Corporate Income Tax rate of 5% on Total Revenues. Hong Kong Institute of CPAs All Copyright Reserved 5

Memorandum from an Independent Director to the Managing Director In view of the unsatisfactory financial performance of Golden Galaxy, an Independent Director, Diane Soon, wrote to the Managing Director, James Yee, and proposed a mechanism to manage the operations of the Group. To : James Yee, Managing Director From : Diane Soon, Independent Director Date : 31 December 2008 Re : Performance measurement for Golden Galaxy Hotels Group Dear James, I have recently attended a continuing professional development seminar on financial and nonfinancial performance measurement run by the HKICPA. This seminar highlighted, in my opinion, some strategic gaps in Golden Galaxy s performance measurement. To highlight the key points of the seminar, I shall use the balanced scorecard. The balanced scorecard is a method of evaluating total performance and linking performance measures to our strategic vision. This is achieved by developing performance measures, both financial and nonfinancial, from four perspectives. These perspectives are financial, customer, internal process, and learning and growth. By developing performance measures for each of these perspectives, the end result is a performance measurement system that is meaningful to managers and supports our strategic vision. I have taken the opportunity to develop a draft balanced scorecard for our hotel group appended below for your perusal. I hope you would find it useful. Please feel free to discuss should you have any questions or concerns. Regards Diane Hong Kong Institute of CPAs All Copyright Reserved 6

Proposed Balanced Scorecard Measures for the Company: Financial Measures Increase in Golden Galaxy total sales 8% Return on Assets for group (group net profit / group assets) 2% Asset productivity for group (group sales / group assets) 50% Hotel employee costs as percentage of total group costs Less than 25% Average sales per group employee 2,000,000 Customer Measures Average sales revenue per customer 4,000 Repeat sales to existing customers 10% Market share of Golden Galaxy 15% Customer approval rating of room quality 95% Customer approval rating of friendliness of front desk staff 95% Customer satisfaction rating for external tours booked through hotel 95% Internal Process Measures Group Gross Profit per group employee 900,000 Labour costs as percentage of total group costs 30% Rooms not prepared by check-in time (per quarter) 5% Bookings incorrect on check-in (per quarter) 3% Average number of booked rooms (per week) 2,000 Customers with housekeeping complaints 2% Learning and Growth Measures Group employee retention rate 85% Group employees new ideas implemented 5% Group employee job satisfaction rating 75% Hong Kong Institute of CPAs All Copyright Reserved 7

Golden Galaxy Hotels Group Extracts from Latest Company Annual Report for Year Ended 31 Dec 2008 Extract 1 - Chairperson s Review Financial Performance Golden Galaxy has reported a loss of 28,437,000 for the year ended 31 December 2008 (2007: profit of 1,659,000). Earnings before interest and tax was 48,948,000 (2007: 75,391,000) with the Beijing hotels contributing 27 percent, Shanghai hotels 56 percent, and the Resort hotels contributing 17 percent. Group revenue for the period under review was 256,923,000. This was a decrease of 8 percent on the previous twelve months (2007: 279,265,000). Total hotel operating profit decreased by 23 percent to 92,666,000 (2007: 119,925,000). Earnings per share was a loss of 20.8 cents per share in 2008 (2007: + 17.5 cents per share). Financial Position Total shareholders equity as at 31 December 2008 totalled 356,357,000 (2007: 384,794,000) with total assets at 1,198,630,000 (2007: 1,194,454,000). Net asset backing (with land and building revaluations and before distributions) as at 31 December 2008, was 4.75 per share, compared to 5.13 per share as at 31 December 2007. Beijing Hotel Operations Revenue including lease payments from independents, for the Beijing hotel operations (three owned/leased operated hotels) for the period under review was 125,894,000 (2007: 142,430,000). Hotel occupancy was 71.5 percent across the main Beijing hotels. During the latter part of 2007 and early 2008, refurbishment work was completed at Xicheng and Dongcheng hotels, with work still to commence on the Chaoyang. Shanghai Hotel Operations Revenue for the Shanghai hotel operations (three owned/leased/operated hotels) for the period under review was 89,923,000 (2007: 94,950,000). Hotel occupancy was at 74.3 percent across the Shanghai hotels. During the 2007-08 year the company completed refurbishment work on its Huangpu and Luwan hotels, with work scheduled to commence in late 2008 on its Jing an hotel. Resort Location Hotel Operations Revenue for the Resort Location hotel operations (three owned hotels) for the period under review was 41,106,000 (2007: 41,885,000). Hotel occupancy was at 68.5 percent across the resort hotels. During the 2007-08 year the company completed refurbishment work on its Sanya and Qingdao hotels, with work scheduled to commence in late 2008 on its Xia men hotel. Dividend Announcement Due to the operating loss for the year, your Board of Directors has resolved not to pay dividend this year. Hong Kong Institute of CPAs All Copyright Reserved 8

Board of Directors The Board currently comprises James Yee, Managing Director; Connie Yee, Chair and nonexecutive director; Kelvin Tang (representing the hotels under management); Diane Soon (a CPA); and Daniel Lee (solicitor and legal advisor to Golden Galaxy). In March 2008, Adrian Smith resigned from the Board to take up another position and Daniel Lee was appointed as an independent director in his place. I would like to thank Adrian for his contribution to the Board and to the company over the past seven years. Outlook Golden Galaxy has come a long way since it was established in the early 1990s as a privately owned company, growing significantly from its modest beginnings. Golden Galaxy continues to seek out suitable properties to add to its hotel portfolio which now totals nine properties. Golden Galaxy has a number of target markets. The major market is inbound tourism, but the company also attracts corporate and conference business. Other market sectors such as the cultural, sport and wedding markets are also important. Golden Galaxy is seeking to expand its share of all sectors during the 2009 financial year, although this will require a concentrated effort in the competitive market for tourist hotel nights and associated packages. The Board is considering expanding to major areas in Hong Kong to broaden its base and tap into a growing demand for quality specialist hotels for business travellers. Major areas such as Wanchai, Causeway Bay and Kowloon are the prime focus of attention, with other areas under consideration. Funding options for such an investment are being reviewed, including the possibility of new equity investment. Although tourism numbers in Mainland China continued to increase in 2008, there were a number of factors affecting our profitability during the year. Among these factors were disappearing discretionary spending with rising fuel and living costs, and a shortage of skilled staff across the whole hospitality sector. Added to this were higher staff wages. Finding adequate numbers of staff and those with appropriate skills has continued to challenge the hotel industry throughout the year. The tourism sector has also been challenged this year. Specifically international travel patterns continue to change and while Mainland China is still perceived to be an attractive destination, the relatively high cost of living in major cities such as Shanghai and the cost of airfares are factors that influence tourism numbers and our industry generally. Furthermore, the growing world recognition of the impact that international travel has on the environment, such as through carbon miles, may have a significant effect on tourism numbers. However, in spite of the difficult year ended 31 December 2008, the Board believes that the prospects for 2009 are positive, but challenges and factors outside the control of the company will play a significant role in the results that will be delivered during the course of the year. The National Tourism Administration of the People's Republic of China forecasts a steady growth in guest nights, and hotel occupancy during the second half of 2008 was better than the equivalent months in 2007. Also in 2009 good numbers are expected for tourists from Hong Kong and Macau which accounts for nearly 60% of all arrivals. Growth from other international markets such as South East Asia and Taiwan is expected to continue in 2009-2010 and the company continues to work on initiatives to increase its market share. Staff Changes James Yee, the current Managing Director, wishes to retire from active involvement in the operations of the company, but will remain on the board, at least until his current term expires. On behalf of the Board, I would like to thank him and the rest of the company s management and staff for their efforts during 2008. Hong Kong Institute of CPAs All Copyright Reserved 9

Extract 2 Summarised Financial Accounts for 2007 and 2008 Golden Galaxy Hotels Group Amounts in 000 s Income Statements - years to 31 December 2008 2007 Revenues Rooms 155,555 169,940 Food and beverage 83,990 88,710 Others 9,778 11,345 Total Hotel Revenues 249,323 269,995 Management fee - related parties 7,600 9,270 Total Revenues 256,923 279,265 Operating Costs and Expenses Rooms 38,889 40,786 Food and beverage 47,454 49,855 Other departments 3,177 3,630 Hotel selling, general and administrative 61,024 51,299 Property rates, insurance and other 13,713 13,770 Total Hotel Operating Expenses 164,257 159,340 Total Hotel Operating Profits 92,666 119,925 Less Depreciation, amortisation and impairment 25,733 26,382 Corporate expenses 17,985 18,152 Net Operating Profits (EBIT) 48,948 75,391 Less Interest expense, net 68,650 63,958 Add Other non-operating income 4,111 4,189 Net Profit / (Loss) Before Tax (15,591) 15,622 Taxation* 12,846 13,963 Net Profit / (Loss) After Tax (28,437) 1,659 Dividends 0 0 Increase / (Decrease) in Retained Earnings for year (28,437) 1,659 *Hypothetical Corporate Income Tax rate of 5% on Total Revenues Hong Kong Institute of CPAs All Copyright Reserved 10

Golden Galaxy Hotels Group Amount in 000 s Balance Sheets as at 31 December 2008 2007 Assets Fixed Assets, Goodwill and Investments Property and equipment net of depreciation 946,155 969,010 Goodwill 82,990 86,265 Investments and advances to joint venture companies 40,235 35,460 Total Fixed Assets, Goodwill and Investments 1,069,380 1,090,735 Current Assets Cash and cash equivalents 79,235 49,874 Accounts receivable 15,240 17,970 Related party receivables 6,390 5,715 Prepaid expenses and other current assets 28,385 30,160 Total Current Assets 129,250 103,719 Total Assets 1,198,630 1,194,454 Liabilities and Equity Current Liabilities Accounts payable 43,325 44,050 Accruals 8,835 9,355 Other current liabilities 3,325 3,805 Total Current Liabilities 55,485 57,210 Long term debt and capital lease obligations 786,788 752,450 Shareholders' Equity Issued capital ( 2.00 par value) 150,000 150,000 Retained earnings 206,357 234,794 Total Shareholders' Equity 356,357 384,794 Total Liabilities and Shareholders' Equity 1,198,630 1,194,454 Hong Kong Institute of CPAs All Copyright Reserved 11

Extract 3 - Board of Directors Connie Yee (Chairperson and non-executive director), 57 Non-executive director of the company since its beginning and chair since the company was listed in 2005. James Yee (Managing Director), 59 Has managed the business since its beginning. Appointed Managing Director since listing in 2005. He holds a Masters degree in Marketing and is a member of the audit committee. Kelvin Tang (non-executive director), 40 Non-executive director since 2005. Kelvin Tang is presently Chief Executive Officer and Executive Director of a company responsible for the management of a number of hotels. Diane Soon (independent director), 53 Appointed to the Board in 2005, Diane Soon is a CPA with approximately thirty years experience. She is currently a member of the Taxation Committee and the Disciplinary Tribunal of the Hong Kong Institute of CPAs, Beijing Office. She is admitted as a Barrister in China. Diane Soon is the chair of the audit committee. Daniel Lee (independent director), 57 Appointed to the Board in August 2007 as a replacement for Adrian Smith, Daniel Lee is a Barrister and solicitor with over thirty years experience and is currently a consultant to a leading China law firm. He specialises in corporate and commercial law. Daniel Lee is a member of the audit committee. Extract 4 - Senior Management In addition to James and Connie Yee, the Senior Management Team includes: Michael Lim, CPA - Chief Financial Officer and Company Secretary Responsible for all accounting, IT, finance and administration. Pamela Jones - Marketing Manager Responsible for the promotion and advertising of the owned and managed properties. Jonathan Yip - Operations Manager Beijing Hotels Jonathan is responsible for overall operations of hotels in Xicheng, Dongcheng, and Chaoyang. Jeremy Yeow - Operations Manager Shanghai Hotels Jeremy is responsible for overall operations of hotels in Huangpu District, Luwan District and Jing an District. Alison Rowe - Operations Manager Resort Hotels Alison is responsible for overall operations of hotels in Sanya, the Xia men, and Qingdao Hotel Managers Each hotel has a manager responsible for its day to day operations. They report to the appropriate Operations Manager. Hong Kong Institute of CPAs All Copyright Reserved 12

Industry Information Summary of China Hotel Industry Review 2008 The 2008 edition of the annual summary of the China Hotel Industry Review offers a comprehensive statistical breakdown of yet another positive year for tourism and the hotel industry in particular when further increases were seen in overall visitor arrivals, occupancy and revenues. In 2008, international visitor arrivals reached 130.03 million, decreased 1.4% over 2007, with 53.05 million (40.8%) staying overnight. Arrivals from Hong Kong continued to climb to 78.35 million during 2008, a 0.51 % rise over 2007. In terms of the performance of the hotel industry, the average achieved hotel room rate was 969, a rise of 27% over 763 in 2007, while income before tax per available room across all hotels reached 156,050, up 36.3% over 114,461 in 2006. In the first half of 2008, hotel occupancy rate averaged 87%, about 3.2% increase than in 2007. Meanwhile, the average achieved hotel room rate during the first half 2008 rose 3.9% to 1,227. To further drive the development of the industry, the National Tourism Administration of the People's Republic of China will actively seek to develop markets for exhibitions/conferences and cruise ship travel, thereby attracting more high-yield visitors to Mainland China. Capitalising on the global trend on multi-destination travel, we will work closely with cities throughout the Pearl River Delta to ensure that Mainland China becomes a must stop on the traveller s itinerary. We will also energetically develop emerging markets such as India, the Middle East and Russia to bring even greater benefits to China s tourism industry as a whole, including the hotel sector. Performance Highlights China welcomed 130.03 million International visitors in 2008, 1.4% less than in the previous year. Demand grew by 5.4% but this was slightly outpaced by a 6.0% increase in supply, resulting in average occupancy of 86%, a one percentage point decrease from 2007. Average room rates for all hotel categories combined saw an upsurge 11.2% from 1,090 in 2007 to 1,212 in 2008. While room revenues increased by 8.2% in 2008, total room expenses (per available room) increased by only 6.2% resulting in an 8.6% increase in room profitability. Food and beverage revenues and expenses increased by 8.5% and 5.8% respectively in 2008, resulting in a 14.5% increase in food and beverage profitability. As a result of these increases, the average income before tax for hotels in 2008 increased by 19.3% to 195,062, a substantial gain achieved mostly through a rise in average room rates which nearly reached the historical peak level of 1,233 in 1998. While performance levels are expected to remain strong in 2009 and 2010, growth is likely to be more moderate given softer world and regional economies and continued new supply openings. Hong Kong Institute of CPAs All Copyright Reserved 13

Industry Information Summary of HK Hotel Industry Review 2007- Hong Kong Tourism Board (HKTB) (The 2007 Report is the latest available to the public. A full version of the 2008 report is available online, by subscription only, and priced at HK$750. Further details can be found at the HKTB s travel-trade website, PartnerNet.hktb.com) In 2007, the tourism industry s performance set new records again as visitor arrivals reached 28.17 million, up 11.6% over 2006, with 17.15 million (60.9%) staying overnight. Arrivals from Mainland China continued to climb to 15.49 million during 2007, a 13.9% rise over 2006. International visitors exceeded 12.68 million (up 8.8%). In terms of the performance of the hotel industry, the average achieved hotel room rate was HK$1,212, a rise of 11.2% over HK$1,090 in 2006, while income before tax per available room across all hotels reached HK$195,062, up 19.3% over HK$163,516 in 2006. In the first half of 2007, the tourism industry showed continued growth with arrivals rising 8.9% to 14.19 million. During the period, hotel occupancy rate averaged 83%, the same as for the same period in 2006. Meanwhile, the average achieved hotel room rate during the first half 2007 rose 4.8% to HK$1,238. Hong Kong Institute of CPAs All Copyright Reserved 14

Hong Kong Hotel Industry Summary - 2007 All Hotels+ High Tariff A Hotels High Tariff B Hotels Medium Tariff Hotels Tourist Guesthouses Number of Establishments 140 1 21 43 60 511 Total Number of Rooms 51,581 10,585 18,951 15,496 5,068 Hotel Occupancy (%) 86 84 88 86 73 Average Daily Rooms Rates (HK$) 1,212 1,964 1,057 616 450 Amount per Available Room (HK$) Departmental Revenues Rooms 357,699 599,244 339,109 193,729 120,427 Food & Beverage 176,093 397,391 147,422 43,374 N = Negligible Internet 2,096 4,643 1,784 541 N Telephone 3,605 7,571 3,165 1,117 92 Spa / Health Club 3,881 13,229 1,491 45 N Minor Operated 11,095 19,756 7,895 9,018 2,861 Rentals & Other Income 15,052 24,058 14,133 9,307 1,356 Total Departmental Revenues 569,521 1,065,892 514,999 257,131 124,736 Departmental Expenses Rooms 64,767 106,851 57,094 42,916 26,749 Food & Beverage 118,773 255,111 102,599 34,771 73 Internet 543 1,326 349 213 314 Telephone 2,679 4,604 2,592 1,268 360 Spa / Health Club 3,445 11,473 1,394 149 N Minor Operated 5,563 10,708 3,883 4,001 81 Rentals & Other Expenses 3,056 3,449 903 5,938 39,508 Total Departmental Expenses 198,826 393,522 168,814 89,256 67,085 Total Departmental Profit 370,695 672,370 346,185 167,875 57,651 Undistributed Operating Expenses Administrative & General 29,504 55,069 24,533 16,662 5,933 Marketing 23,351 45,974 22,074 7,298 445 Energy Costs 24,165 38,843 23,527 13,465 6,811 Property Operation & Maintenance 18,535 31,699 16,607 10,976 8,474 Total Undistributed Op Expenses 95,555 171,585 86,741 48,401 21,663 Income Before Management Fees 275,140 500,785 259,444 119,474 35,988 Management Fees [Base & Incentive] 21,580 46,276 17,231 8,498 10,459 Income Before Fixed Charges 253,560 454,509 242,213 110,976 25,529 Fixed Charges 58,498 77,019 62,656 37,537 13,253 Income Before Taxes 195,062 377,490 179,557 73,439 12,376 Payroll Information (Percentage of Total Revenues) Payroll and Related Expenses % Tot Rev % Tot Rev % Tot Rev % Tot Rev % Tot Rev Rooms 7.0 5.8 6.6 12.0 16.9 Food & Beverage 9.8 11.1 9.4 7.0 N Internet N N N N N Telephone 0.3 0.3 0.4 0.4 N Spa / Health Club 0.5 0.8 0.2 N N Minor Operated 0.4 0.4 0.3 0.6 N Administrative & General 3.0 2.6 2.8 4.7 2.6 Marketing 1.6 1.4 1.8 1.6 N Property Operation & Maintenance 1.6 1.3 1.7 2.3 1.1 + Does not include Tourist Guesthouses 1 Total number of hotels may not add up due to insufficient information for some of the hotels to be classified into different tariff categories. Hong Kong Institute of CPAs All Copyright Reserved 15

The Summary Golden Galaxy Hotels Group ( Golden Galaxy ) is a public company which has been listed on the Shanghai Stock Exchange since 2005. Golden Galaxy provides an extensive network of four star hotels strategically situated in China. It has a number of target markets. The major market is inbound tourism, but the company also attracts corporate and conference business. Other market sectors such as the sport and wedding markets are also important. The management of Golden Galaxy have an ongoing concern about the internal control and profitability of the hotel chain. Only the Shanghai Hotels and Resort Hotels seem to be earning a Return on Investment (ROI) which exceeds the company s cost of capital of 10%. In 2008, the hotel industry in Mainland China was affected by the global economic slow down. Although Olympics attracted large number of International tourists, there were a number of factors affecting the profitability during the year. Among these factors were disappearing discretionary spending with rising fuel and living costs, and a shortage of skilled staff across the whole hospitality sector. In 2009, the hotel industry in Beijing is beginning to be affected by a potential human swine flu outbreak. Unfortunately, one of its Beijing hotels in Chaoyang had received a guest infected with H1N1 human swine flu on 11 May 2009. As such, the Chaoyang hotel was quarantined for a week according to the epidemic prevention policy of the government. This has caused some financing and operational challenges to Golden Galaxy. In preparing the five years plan for Golden Galaxy, assume that your team are members of the Board and management, how would your team address to the following: Questions: 1. What were the problems facing Golden Galaxy Hotels Group in 2008? 2. How would you address the problems in 2009 and what are the opportunities available? 3. How would you grow the businesses in the next five years? Hong Kong Institute of CPAs All Copyright Reserved 16