HSH Reports 2011 Annual Results

The audited results for the year ended 31 December 2011 of The Hongkong and Shanghai Hotels (HSH) show that the group's business was affected by mixed market conditions for the various hotel operations in the midst of the continuing global economic uncertainties, as well as by two major natural disasters: the earthquake and resultant tsunami in Japan and the flooding in Bangkok. In the circumstances, HSH said it was pleased to be able to report an increase of 14% in underlying earnings as compared to the previous year.

HSH Chief Executive Officer, Mr. Clement K.M. Kwok, said, "This financial result was better than we had hoped for in the aftermath of the Japan earthquake and was achieved through the concerted efforts made by our staff across our global operations. Our staff in Tokyo and Bangkok reacted to the two natural disasters by selflessly providing care, support and help both to their local communities and to affected staff members. These efforts were strongly supplemented by our company and our colleagues around the world through fundraising efforts and moral support.

"It continues to be a strength of our group that our hotels business is balanced by a strong mix of commercial properties, including several successful high-end shopping arcades within our hotels, as well as our well-established commercial, residential and office properties."

HSH achieved an increase of 6% in earnings before interest, taxation, depreciation and amortisation (EBITDA) to HK$1,211 million in 2011 and an increase of 5% in operating profit to HK$834 million in 2011. The EBITDA margin remained unchanged from 2010, at 24%.

Inclusive of non-operating items, being principally the year-end investment property revaluation surpluses, the net profit attributable to shareholders was HK$2,259 million, as compared to HK$3,008 million in 2010. Underlying profit attributable to shareholders, which the company calculated by excluding the post-tax effects of the property revaluation surpluses and other non-operating items, amounted to HK$464 million, as compared to HK$408 million in 2010, representing an increase of 14%.

HSH's financial position remains strong. Revalued net assets attributable to shareholders increased by 9% to HK$34,703 million, representing HK$23.29 per share, and gearing remained at a very conservative level of 7% at the year-end. Net cash surplus for the year, after deducting capital expenditure, interest and dividends, amounted to HK$544 million. In addition, a gain of HK$135 million was credited to reserves on the purchase of additional interest in The Peninsula Beijing.

The Board has recommended a final dividend payable on 10 HK cents per share (2010: 8 HK cents per share). Together with the 2011 interim dividend of 4 HK cents per share paid on 4 November 2011, the total dividend in respect of the 2011 financial year will be 14 HK cents per share.

Hotels Division

Market conditions were varied amongst the hotel businesses, with a number of locations experiencing weak corporate business, oversupply of luxury hotels and political instability, as well as the two natural disasters mentioned. The strongest performer was once again The Peninsula Hong Kong with good signs of recovery at The Peninsula New York and The Peninsula Beverly Hills.

China: The Peninsula Hong Kong performed very well during the year, with a business revival in both the corporate and leisure segments. The top producing markets for the hotel were China, Japan and the USA. There was also healthy growth from new customer markets including Russia and the Middle East. The Peninsula Arcade remains highly sought after by leading luxury retail brands and both this and the Office Tower were able to grow their average rent and maintain effectively full occupancy during the year. The Peninsula Shanghai, now in the second full year of operations, has established recognition as one of the very top hotels in China. In the year following the Shanghai World Expo, the hotel benefited from increased demand from domestic travellers and continued to step up its marketing efforts in mainland cities. The Peninsula Arcade has been fully occupied by leading luxury retail brands. Meanwhile, The Peninsula Residences, which form part of this complex, completed interior fit out work for most of the 39 units and will commence leasing activities in 2012. Upgrading work for the Peninsula Arcade was completed during the year, which further strengthened the Arcade's position as one of the premier luxury goods shopping venues in the Chinese capital. The Arcade continues to provide an important stream of revenue for the hotel.

Asia: The Peninsula Tokyo faced the challenge of a depressed economy in the months following the massive earthquake and tsunami in March 2011, which affected the tourism industry deeply. By the third quarter of the year, business had rebounded to some extent, due partially to a more relaxed visa policy which resulted in the return of some mainland Chinese and other Asian and Middle Eastern visitors, who were relatively unaffected by the softening of global economies. The hotel's wedding business remained robust. In Thailand, The Peninsula Bangkok was recovering from the previous year's political uncertainty following the July 2011 election, until the extensive flooding which hit Bangkok around November 2011. Although the hotel was not directly affected by the flood water, the tourism industry was badly hit by the ensuing negative publicity and travel advisories imposed by foreign governments. Once again, the regional markets proved to be more resilient and by December 2011, inbound visitor arrivals to Bangkok had shown some recovery. In the Philippines, The Peninsula Manila celebrated its 35th anniversary in 2011 and achieved its highest RevPAR ever. The hotel saw a significant increase in frequent independent travellers' business and enjoyed strong food and beverage business.

USA: Following the completion of its guestroom renovation programme, The Peninsula New York enjoyed a good increase in business from some high-end overseas groups and expanded its business mix by focusing efforts on new sectors including technology, energy and entertainment. Business remained weak for The Peninsula Chicago, which is highly dependent on domestic and corporate business, although there was slight improvement in business in the second half of the year. The hotel celebrated its 10th anniversary. The Peninsula Beverly Hills , which celebrated its 20th anniversary in 2011, enjoyed strong business from the entertainment industry and the Middle East market. The hotel completed a renovation of all its guestrooms and suites, which now carry a refreshed, elegant new look.

Overall, the revenue and EBITDA of the Hotels Division for the year were HK$3,766 million and HK$605 million, an increase of 5% and 0.2% respectively as compared to 2010. This result was achieved despite the significant adverse impact of the earthquake in Japan and the flooding in Bangkok.

Commercial Properties Division

As in past cycles, the Commercial Properties Division proved more resilient during the economic downturn than the Hotels Division, providing stable income contribution to the group's earnings.

The most important asset in this Division is the Repulse Bay Complex, the larger part of whose revenue is derived from residential lettings which continued to experience strong demand throughout the year, in line with Hong Kong's robust economy. This was supplemented by the increase in patronage to the complex's two restaurants and shopping arcade, the latter of which remained fully let throughout the year. In particular, banquet and wedding business remained strong. The total revenue of the Complex rose 7% from 2010 to HK$538 million.

The Peak Complex achieved excellent results in 2011 due to its strong positioning in the tourist market. The Peak Tower maintained 100% occupancy during the year and recorded an increase of 17% in year-on-year revenue, which was also boosted by a record number of visitors to the rooftop Sky Terrace 428. St. John's Building enjoyed an effectively 100% occupancy throughout the year with an 18% increase in revenue.

At The Landmark in Vietnam, both the office and residential portions maintained high occupancies despite the intense competition in Ho Chi Minh City. The complex also completed the renovation of its health club, which was re-opened in September.

Overall, the revenue and EBITDA of the Commercial Properties Division for the year were HK$743 million and HK$493 million respectively, an increase of 8% and 10% as compared to 2010.

Clubs and Services Division

The 123-year-old Peak Tram has quite rightly maintained its position as one of Hong Kong's most popular tourist attractions. In 2011, patronage of the Peak Tram rose to a record 5.8 million passengers, a 7% increase from 2010.

Income from club management activities rose, with positive results coming from the management of the Cathay Pacific lounges at the Hong Kong International Airport. Two of the business class lounges at the airport completed their renovation and re-opened in April 2011 and January 2012 respectively. The Thai Country Club saw a decline in the number of golfers from Japan and although the club did not suffer any physical damage from the flooding in November, the number of rounds were reduced as a result. At Quail Lodge Golf Club, the golf course and Clubhouse remained open and the club hosted another successful edition of The Quail Motorsports Event in August. Peninsula Merchandising once again achieved record sales in Hong Kong and Asia for its signature Mid Autumn Festival mooncakes and HSH is planning to open the first Peninsula Boutique in South Korea in 2012. In Shanghai, No. 1 Waitanyuan has gained a fine reputation for its fine food, service and ambiance in the historic setting of the former British Consulate. HSH has also leased other premises within the Bund 33 complex for commercial usage. The site is managed by The Peninsula Shanghai.

Overall, the revenue and EBITDA of the Clubs & Services Division for the year were HK$500 million and HK$113 million, an increase of 13% and 27% respectively as compared to 2010.

Projects and Developments

The focus of projects and development activities continues to be on (i) the establishment of a small and select number of new Peninsula hotels in key international gateway cities and (ii) continual enhancement of existing hotels and other properties so as to maximise their long term value.

The next Peninsula hotel currently under construction is in Paris. Conversion of the magnificent, century-old Beaux Arts building on Avenue Kleber to become The Peninsula Paris commenced in September 2010. Interior design work for the hotel's public areas and guestrooms are at an advanced stage and we will begin interior fit out work in 2012. The Peninsula Paris will be the group's first hotel in Europe and is scheduled to open in late 2013.

Whilst the search for future new Peninsula hotel developments continue, HSH says it remains very selective in seeking opportunities in key gateway cities which will meet Peninsula's full requirements.

In the meantime, HSH continues to devote significant efforts to the continual enhancement of existing assets. In January 2012, the company commenced physical works for the extensive renovation programme for The Peninsula Hong Kong which, over two phases, will encompass a full upgrade of all of the hotel's guestrooms and suites as well as an expansion and upgrade of some restaurant areas.

An extensive renovation programme of the Repulse Bay Complex is already underway. This will significantly upgrade all the public areas of the apartment towers and completely reconfigure the layout of the serviced apartment tower, de Ricou, in order to improve its efficiency and rental yield. The project, which is divided into three phases, commenced in 2011 and is targeted for completion in 2014.

Corporate Responsibility

2011 has been a year of progress and transition. The group's Corporate Responsibility Committee was established in late 2007 to provide a formal governance structure to address the wider aspects of the environmental, social and ethical responsibilities. In the past three years, the company has invested in various environmental engineering projects, with positive effects on energy and water consumption. These investments have brought savings in utility cost and a satisfactory return on investment. The group's energy intensity has since been reduced by 15.5% and our carbon intensity by 6.1%.

Outlook

2012 earnings will, as previously forewarned, be impacted by the renovations at The Peninsula Hong Kong and the de Ricou serviced apartment tower at The Repulse Bay due to closure periods during the construction works. However, the company is hoping to mitigate this impact through increased earnings of our other assets and operations.

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