HSH Reports Annual Results

The audited results for the year ended 31 December 2010 of The Hongkong and Shanghai Hotels (HSH) show that the group’s business performance improved strongly over the previous year, with some recovery in the global hospitality markets following the significant downturn caused by the economic crisis which started in August 2008.

“2010 was a year in which we saw some recovery in the global hospitality markets following the significant downturn caused by the economic crisis which started in August 2008. However, whilst hotel revenues recovered partially towards the 2008 pre-crisis levels, inflationary pressures have remained on operating and other costs, especially labour costs, and margins continue to be under pressure. The performance of our hotels have varied quite significantly between different geographical locations, with strength in Greater China but recovery lagging in some parts of the US and Japan,” said HSH Chief Executive Officer, Mr. Clement K.M. Kwok. “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 inside our hotels, as well as our well-established commercial, residential and office properties.”

The group’s total turnover in 2010 amounted to HK$4,707 million, up 12% as compared to last year. Earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 24% to HK$1,143 million, while operating profit rose 35% to HK$794 million. A focus on controlling costs while providing the staff and resources to service the increased business levels has resulted in an improvement in EBITDA margin from 22% in 2009 to 24% in 2010.

Inclusive of non-operating items, being principally the year-end investment property revaluation surpluses, the net profit attributable to shareholders was HK$3,008 million, as compared to HK$2,660 million in 2009. The underlying profit attributable to shareholders, which the group has calculated by excluding the post-tax effects of the property revaluation surpluses and other non-operating items, amounted to HK$408 million, as compared to HK$323 million in 2009, representing an increase of 26%.

HSH’s financial position remains strong. The revalued net assets attributable to shareholders increased by 11% to HK$29,103 million, representing HK$19.66 per share and the gearing remained at a very conservative level of 5% at the year-end. The net cash surplus for the year, after deducting capital expenditure, interest and dividends, amounted to HK$568 million.

The Directors have recommended a final dividend of 8 HK cents per share (2009: 6 HK cents per share), making a total dividend for the year at 12 HK cents per share. Shareholders will also be given the option to receive their dividend in the form of scrip rather than cash.

On the situation in Tokyo, Mr. Kwok said, “We are of course deeply saddened by the massive earthquake that shook Japan on 11 March 2011 and the suffering and devastation it has caused to the people of Japan. The full extent of the devastation is still to be assessed.

“However, all of the guests and staff at The Peninsula Tokyo were safe and unharmed and the hotel premises did not suffer any physical damage of significance. On the night of the earthquake, The Peninsula Tokyo opened its doors to the general public, providing hot food and beverages and refreshment facilities to those seeking refuge, while special guestrooms were set aside for pregnant women, mothers with small children, and the elderly who needed a place to rest. The hotel has remained fully operational throughout and will continue to play a role in supporting the community where needed as it faces the challenges that lie ahead as Japan recovers from the earthquake. We have already launched a number of fundraising initiatives in our hotels to assist the relief efforts.

“The impact on our businesses, both in Japan and elsewhere, in the aftermath of this earthquake cannot be fully assessed at this stage. We will, of course, use our best endeavours to manage the financial and other consequences of this disaster and play our part in restoring a healthy operating environment at The Peninsula Tokyo as quickly as possible.”

Hotels

HSH’s Hotels Division recorded a mixed performance as economies around the world recovered at different speeds and travel demographics shifted from established long-haul markets to intra-regional and domestic markets. Challenges remained in some markets where the company operates, including weak corporate business, oversupply of luxury hotels and political instability. Nevertheless, hotels experienced a strong surge in the second half of the year in markets such as Hong Kong and New York.

China: Amongst the Peninsula Hotels, the strongest performance came from the flagship property, The Peninsula Hong Kong, where business was revived in both the corporate and leisure segments. Mainland China has become one of the top producing markets for the hotel, along with significant business growth from emerging markets including Russia and the Middle East. The Peninsula Arcade remains highly sought after by leading luxury retail brands and both it and the Office Tower were able to grow their average rent and maintain effectively full occupancy during the year. The Peninsula Shanghai held its Grand Opening Gala in March 2010 and has rapidly established itself as a leading hotel in China. Boosted by the World Expo 2010, the hotel benefited from strong demand from both domestic and international travellers and performed well for a hotel in its first full year of operations. The Peninsula Arcade has been fully occupied by leading luxury retail brands and officially opened in July 2010. Interior fit out work continues for the 39-unit Peninsula Residences, which form part of this complex. The Peninsula Beijing was able to maintain a leadership position in the capital whilst competition from the large supply of other luxury hotels remained intense. There was a significant recovery in revenue as compared to last year and the important stream of revenue from the Peninsula Arcade remained robust. The hotel’s Arcade upgrade is currently underway.

Asia: The Peninsula Tokyo, in its third year of operation, saw a surge in Asian and Middle Eastern visitors, who were relatively unaffected by the global economic crisis, and its revenue increased significantly from the previous year. Its wedding market was also robust. In Thailand, The Peninsula Bangkok was hit by anti-government demonstrations from April to June, which crippled Bangkok and led to gloomy forecasts for Thailand’s vital tourism sector. However, tourism rebounded to a limited extent in the final quarter of the year. At The Peninsula Manila, there was a marked improvement in business during 2010 and the hotel was further supported by the opening of Salon de Ning in December. Continuing the Salon de Ning theme at the Peninsula hotels in Hong Kong, Shanghai and New York, this venue has already become a leading nightspot in Manila.

USA: The Peninsula New York completed the final phase of its guestroom renovation in September 2010, which positioned the hotel favourably for future growth. The number of business and leisure travellers increased during the year although competition remained intense within the luxury hotel segment. The booming business experienced in the fourth quarter, reminiscent of the pre-crisis period, bodes well for the hotel. Business was weak for The Peninsula Chicago, which is highly dependent on domestic and corporate business. Nevertheless, the hotel continues to be recognised as one of the best in the US and its well-recognised leading market position places it strongly for future recovery. The Peninsula Beverly Hills has sustained business remarkably well throughout the economic crisis. In 2010, it enjoyed significant business improvement, particularly from the entertainment industry and the Middle East market. In October 2010, the hotel embarked on a comprehensive guestroom enhancement programme which will continue through the first half of 2011.

Overall, the revenue and EBITDA of the Hotels Division for the year were HK$3,576 million and HK$604 million, an increase of 12% and 40% respectively as compared to 2009.

Commercial Properties

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. In the first full year after the revitalisation of the complex’s restaurants and shopping arcade, food and beverage income was significantly increased and the shop spaces were fully let, reflecting the success of the renovation. The total revenue of the complex rose 8% from 2009 to HK$505 million. In order to continually enhance the value and attractiveness of this important asset, a major improvement plan has been approved. Starting in mid-2011, this will comprise a three-year phased programme that will significantly upgrade all the public areas of the residential towers and improve the layout and efficiency of the serviced apartment tower.

The Peak Complex enjoyed an increase in income over 2009, due to its strong positioning in the tourist market. The Peak Tower achieved 100% occupancy during the year and recorded an increase of 24% in year-on-year revenue. The Sky Terrace welcomed a record number of visitors. St. John’s Building enjoyed a high occupancy throughout the year with a 6% increase in revenue.

At The Landmark in Vietnam, both the office and residential towers maintained high occupancies, yet revenues were 15-18% lower than 2009 due to intense competition in Ho Chi Minh City.

Overall, the revenue and EBITDA of the Commercial Properties Division for the year were HK$688 million and HK$450 million respectively, an increase of 8% as compared to 2009.

Clubs & Services

The 122-year-old Peak Tram has maintained its position as one of Hong Kong’s most popular tourist attractions. In 2010, patronage of the Peak Tram rose to a record 5.4 million passengers, an 11% increase from 2009 and in line with the growth in visitor numbers in Hong Kong.

Income from club management activities rose, with a major contribution coming from the management of the Cathay Pacific lounges at Hong Kong International Airport. The Thai Country Club maintained the same number of golfers in 2010 but increased its revenue by 12% over 2009. At Quail Lodge, the hotel portion remained closed but the golf course and Clubhouse were open to service the club’s 300-plus members and catering clientele. Peninsula Merchandising achieved record sales in Hong Kong and Asia for its signature mooncakes during Mid Autumn Festival, while retail sales at the Peninsula Boutique in The Peninsula Hong Kong were very strong.

Overall, the revenue and EBITDA of the Clubs & Services Division for the year were HK$443 million and HK$89 million, an increase of 10% and 20% respectively as compared to 2009.

Projects and Developments

The focus of HSH’s 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.

In Shanghai, following the grand opening of the hotel portion in March 2010, the company focused on working with the various retail tenants to complete the Peninsula Arcade for its grand opening on 1 July 2010, as well as progressing with the interior construction and fit-out of the 39 apartment units which form part of The Peninsula Shanghai complex. Given the location of these apartments and taking a positive view of the long term value of this asset, the company has decided to hold these apartments as investment property and it is expected that they will be offered for rental from the second half of 2011.

HSH has also worked closely with a company associated with the Huangpu District Government in relation to the construction and fit-out of the former British Consulate buildings, now named Bund 33. Under an agreement signed in December 2009, The Peninsula Shanghai has commenced the management of the building No. 1 as a state guesthouse and the leasing of buildings No. 2, 3 and 4 as well as the basement of the Bund 33 complex for commercial usage, as from September 2010.

The next Peninsula hotel currently under construction is in Paris. Conversion of this magnificent, century-old Beaux Art building to become The Peninsula Paris hotel commenced in September 2010, following the appointment of the general contractor in July 2010. At the same time, interior designs for the hotel’s public areas and guestrooms are at an advanced stage. The Peninsula Paris will be the group’s first hotel in Europe and is scheduled to open in 2013.

HSH continues to devote significant efforts to the continual enhancement of its existing assets. During the year, plans have been finalised for an ambitious upgrade of the guestrooms at The Peninsula Hong Kong, already one of the best hotels in the world. The current guestrooms were unveiled some 17 years ago and the aim is to raise the bar once more, the construction of which is expected to commence in 2012 at a projected cost of approximately HK$450 million.

HSH has also approved a spend of approximately HK$731 million in a phased programme over the next three years to revitalise the public areas of the residential portions of the Repulse Bay Complex, as well as to reconfigure the de Ricou serviced apartment tower to increase efficiency and functionality. This investment is expected to further enhance the value of the Repulse Bay Complex which is currently valued at over HK$13.7 billion.

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