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EBITDA increased by 4% to HK$512 million

The Hongkong and Shanghai Hotels, Ltd announces unaudited interim results

The Hongkong and Shanghai Hotels, Limited (HSH) announced its unaudited interim results. Commenting on the Group’s interim results, Managing Director and Chief Executive Officer Mr. Clement K.M. Kwok said, "Our operating results for the first half of 2011 were impacted by the massive earthquake and tsunami which struck Japan on 11 March. This had a significant adverse impact on the business results of The Peninsula Tokyo which, prior to the earthquake, had been trading at levels above the previous year. Generally, the Hotels Division had a positive first quarter but has seen momentum slowing in several markets during the second quarter."

The Hotels Division recorded a 5% increase in revenue compared with the first half of 2010. The RevPAR in all the hotels improved over the same period last year, apart from The Peninsula Tokyo where RevPAR fell by 18%. The RevPAR growth has been mostly driven by increases in the average room rate. There was also robust demand for space at the hotels’ shopping arcades, although The Peninsula Beijing’s arcade recorded slightly lower occupancy due to renovation work.

In the Commercial Properties Division, occupancies at the Group’s principal assets remained largely at full capacity. The various businesses in the Clubs and Services Division have mostly shown improved performance year-on-year.

"All our operations continue to take appropriate measures to contain costs in order to mitigate the impact on the Group’s results from the Japan earthquake and in recognition of the uncertain global economic environment," said Mr. Kwok.

The total turnover for the period amounted to HK$2,310 million, up 6% over the same period in 2010. EBITDA (earnings before interest, tax, depreciation and amortisation) increased by 4% to HK$512 million.

After taking into account the increase in fair value of investment properties of HK$1,784 million (2010: HK$547 million) and the current and deferred tax charges of HK$98 million (2010: HK$87 million), profit attributable to shareholders in the six months amounted to HK$1,907 million. The Group’s underlying profit attributable to shareholders, which was calculated by excluding the post-tax effects of the property revaluation surplus and other non-operating items, amounted to HK$152 million (2010: HK$147 million).

Earnings per share and underlying earnings per share were HK$1.29 (2010: HK$0.47) and HK$0.10 (2010: HK$0.10) respectively.

Shareholders’ funds increased to HK$31,102 million or HK$20.92 per share. Net borrowings decreased to HK$1,500 million and the Group’s gearing ratio remained at 5%. The Company has also provided a calculation of the adjusted net assets attributable to shareholders, which after taking into account the fair market valuations of hotel properties and golf courses, amounted to HK$34,094 million or HK$22.93 per share.

The Directors have resolved to pay an interim dividend of 4 HK cents per share (2010: 4 HK cents per share).

Outlook
The general recovery in the hospitality markets since the 2008 global economic crisis continued at the start of 2011, with most of the Group’s hotels performing ahead of both the Group’s expectations and last year in the first quarter. Unfortunately, this momentum slowed in the second quarter, with the massive Japanese earthquake significantly adversely affecting business at The Peninsula Tokyo and some knock-on effects elsewhere due to reduced outbound travel from Japan. Both the Beijing and Shanghai markets continued to be highly competitive and were not able to meet the Group’s expectations in the second quarter, with Shanghai unable to match the rooms demand of last year when the World Expo was being held. Business at The Peninsula Bangkok has struggled for several years as a result of ongoing political uncertainty in Thailand. Current occupancies and rates are far below the previous normal levels of a few years ago and, although it is hoped that the recent election will bring more stability, this has not yet materialised in improved business. Against these uncertainties, the Hong Kong luxury hotels market has remained strong and The Peninsula Hong Kong continues to be the mainstay of the Group’s earnings in the Hotels Division.

In the United States, business at The Peninsula Beverly Hills has been very strong and The Peninsula New York has enjoyed pockets of high demand from overseas guests. However, business from domestic US sources remains subdued as can be seen from the operating performance of The Peninsula Chicago.

Taking the above comments together, the outlook for the second half of the year for our hotel businesses continues to be mixed. Mr. Kwok remarked, "We are hoping that the traditional autumn high season for hotels such as Hong Kong, Beijing, Shanghai and New York will yield satisfactory results. Completion of the renovation of the shopping arcade at The Peninsula Beijing will boost earnings. The recent pick-up in the Tokyo market since the earthquake has created a mild level of optimism that the recovery may come faster than originally expected. Nevertheless, the results of The Peninsula Tokyo will undoubtedly be well below both last year and our original expectations.

"A key challenge for us in the hotels business continues to be the maintenance of our profit margins in the face of inflationary costs, especially labour rates. We continue to manage our costs tightly and to seek improvements in efficiency and procurement wherever possible.

"As a long term investor in hotel, commercial and other properties, we are pleased that the current mixed performance in the Hotels Division contrasts with the strong performance in our commercial properties, which are mainly based in Hong Kong. Demand for residential apartments in The Repulse Bay Complex, and hence the terms of rental renewals, are robust and the Peak Complex continues to achieve pleasing year-on-year growth. We believe that the medium term prospects for these businesses remain highly positive. The Repulse Bay residential properties will benefit from our plans to upgrade the public areas. The redevelopment and reconfiguration of the de Ricou serviced apartment tower, while causing some income disruption in 2012, is expected to significantly improve the rental yield after completion.

"We are looking forward to the re-design and renovation of the guestrooms at The Peninsula Hong Kong, which will commence in phases in 2012. With our long term investment horizon in mind, we expect this renovation to strengthen The Peninsula Hong Kong’s position at the top of the luxury hotels market in Hong Kong and to create significant value for our Company. However, this renovation programme will cause disruption to our earnings when portions of the hotel rooms start to be closed for renovation from the beginning of 2012 onwards.

"Overall, our Group remains in a strong financial position, with a low level of gearing and significant capability to make further investments, both in terms of new hotel and other developments and enhancements to existing assets."

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