1 Risk factors

CURRENCY FLUCTUATION

  Between 70% and 80% of our rooms revenue is denominated in hard
  currencies, predominantly the US dollar. As US dollar revenues tend to
  amount to over Baht 1.2 billion per annum while the vast majority of
  our expenses are incurred in Thai Baht, changes in the value of the
  Thai Baht against the US dollar can cause fluctuations in the results
  of our operations. Devaluations in the US dollar against the Thai Baht
  would consequently have an adverse effect on our reported financial
  results.

  The Company does not have significant assets or liabilities
  denominated in foreign currencies with the exception of a financial
  instrument which has hedged the impact of the movement in Thai Baht :
  US dollar exchange rate on the reported financial results. This
  financial instrument has effectively converted Thai Baht loans to US
  dollar denominated loans and as a result the impact on exchange rate
  movements on the US dollar revenue streams are hedged by the resulting
  exchange gain or loss on the restatement on these US dollar
  denominated loans in the financial statements. The Company is
  currently constructing a Banyan Tree in Lijiang, China, the cost of
  which will be denominated in RMB. Loans taken out to finance this
  project will be predominantly denominated in US dollars and the
  revenue streams will also be denominated in US dollars.

ECONOMY AND TOURISM IN THAILAND

  As most of the Company’s revenue is generated from tourism and
  property sales in Thailand, the Company has exposure to both the world
  and Thai economies and the tourism industry in Thailand. Any
  conditions, such as changes in the attractiveness of Thailand as a
  tourism destination, an economic downturn, acts of terrorism, natural
  disasters, increased levels of criminal activity, civil unrest or
  epidemics which affect tourism in Thailand or result in a depression
  in property values in Phuket, may have an adverse effect on the
  Company’s business, financial condition, profitability and results of
  operations.

  The tourism industry in Thailand has been particularly impacted in the
  last four years by terrorist attacks in New York and Bali, a sluggish
  world economy, the Iraq War, SARS, Bird Flu and most recently the
  Tsunami in the Indian Ocean on 26^(th) December 2004. These events
  have had a flow on effect onto the Company’s results. Conversely the
  property market in Phuket has boomed in 2003 and 2004 (although a slow
  down was experienced in 2005) and this has had the effect of more than
  compensating for the reduction in the hotels revenues and
  profitability. We see property sales as being an important growth area
  for the Company and will assist in diversifying risk. The Company is
  also directly investing in its first overseas hotel with the
  construction of the Banyan Tree in Lijiang, China. This is expected to
  open in July 2006 and further diversifies our reliance on the tourism
  industry in Phuket and Thailand.

  Competition

Destination

  Indonesia has continuing stability problems, which has a direct impact
  on tourism in the region. This affects Bali in particular, which is
  the main direct competitor to Phuket. Subsequent to the October 2002
  bombing, Bali has been marketing itself with aggressive rates
  worldwide which has resulted in a gradual return to its normal
  business levels although this progress has been halted by the second
  bomb in October 2005 and continued security concerns. Fortunately
  Bali’s and Phuket’s high and low seasons are out of phase with one
  another, and our rate strategies are not greatly affected by Bali’s
  discounting.

  Other than this, we remain optimistic that Phuket as a destination
  will continue to bounce back from the recent events in the same way as
  it has done in the past.

Hotels

  The competitive set of the Laguna Phuket hotels comprises the JW
  Marriott Resort & Spa, Le Meridien Phuket Beach Resort, Le Royal
  Meridien Phuket Yacht Club, and to a lesser extent the Amanpuri, all
  of which are located in Phuket. There are relatively few hotel
  projects announced or under construction. The only new projects that
  would be considered to be in our competitive set are the Trisara hotel
  and villas just north of Bangtao Bay (which opened in the third
  quarter of 2004) and the rebranding of 2 existing four star hotels to
  Hilton (opened in 2004) and Conrad (yet to re-open) respectively.
  Whilst Trisara competes with the Banyan Tree Phuket, the impact of
  rebranding of the Hilton has been relatively small.

Low Season

  Low season in Phuket is from May until October and the hotels normally
  run at low occupancies with reduced room rates. With the global
  economic environment of the last few years impacting the meetings and
  incentive business and the re-emergence of Bali (prior to the Bali
  bombing) the lower occupancies experienced in the low season has been
  particularly marked. The hotels in Laguna Phuket have joined forces
  and launched a promotional campaign targeting the regional market, as
  well as the meetings and incentives business. The “Laguna Phuket Plus”
  campaign has been a particular success in Laguna Phuket’s competitive
  advantage, and will continue to be further enhanced. The construction
  of the Wedding Chapel which opened in early 2005 will also assist to
  drive business during the low season.

  OPERATING RISKS INHERENT IN THE HOSPITALITY INDUSTRY

  Our hotels are subject to operating risks inherent in the hospitality
  industry. These risks include:

-   seasonality of the industry in that we are subject to different
    levels of tourism and business/commercial travel across the year,
    and thereby our revenues tend to vary within the year;

-   our dependence on travel patterns and preferences with respect to
    Phuket;

-   changes in regulatory conditions in Thailand;

-   periodic local oversupply of or reduced demand for guest
    accommodation, which may adversely affect occupancy rates and actual
    room rates achieved;

-   changes in general, regional and local economic conditions which may
    effect, among other things, the disposable income of consumers and
    the traveling public and which may cause increases in operating
    costs due to inflation and other factors which may not be offset by
    increased revenues;

-   regional and local political and social conditions affecting market
    demand, including crime, civil disorder and terrorism;

-   epidemics affecting the travel and tourism industries;

-   travel advisories cautioning people to defer and/or avoid travel;

-   foreign exchange rate movement;

-   convenience of access to Thailand and in particular the airline
    capacity into Thailand and Phuket; and

-   adverse weather conditions and natural disasters such as the Tsunami
    in the Indian Ocean which occurred at the end of 2004.

  Any of these factors could have an adverse effect on our business and
  management monitor each of these closely so that our strategies can be
  quickly adapted to any changes in the operating environment.

  Management risk

  Our success depends largely on the skills, experience and performance
  of key members of our senior management team. If we were to lose one
  or more of these key employees, our ability to set and implement
  successfully our strategy could be adversely affected. Our future
  success also depends on the continued service of our key operating,
  marketing, design and administrative personnel.

  Land title

  In 2003, there were a number of disputes in Thailand relating to
  property owners having valid title to their properties. Although we
  are confident that the Group has valid title to all the land upon
  which it operates or which is for sale by it in Thailand, there can be
  no assurance that other parties will not challenge our claim of title.
  Even if such challenges are not successful, they may have a material
  adverse effect on our property sales business in Thailand if
  purchasers express concern that we are unable to transfer good title
  to them.

  ThAI labour laws

Nearly all of our employees are based in Thailand. Labour laws in Thailand are highly protective of employees. Under Thai labour laws, we are generally prohibited from discharging employees without compensation absent gross misconduct, neglect, or acts of dishonesty. As such, we have limited measures at our disposal to reduce headcount in order to increase efficiencies, reduce costs or achieve similar objectives. During the outbreak of SARS in 2003, we were restricted from dismissing employees and could only institute a voluntary unpaid leave program. We have been restricted in the past and expect in the future to be limited to using voluntary separation plans where we are required to pay high amounts of severance pay and similar measures under which selected employees may elect to leave us in return for lump-sum compensation packages and other benefits.