1 Risk factors

CURRENCY FLUCTUATION

  Between 70 percent and 80 percent of our rooms revenue is denominated
  in hard currencies, predominantly the US dollar. Because 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 the Banyan
  Tree Lijiang hotel (which was completed and opened in April 2006 which
  at 31^(st) December 2006 represented approximately 7 percent of the
  group’s total assets) and 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.

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 several years by terrorist attacks in New York and Bali, 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 since 2003 (although a slow down was experienced in 2005
  following the Tsunami) 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.

  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. 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.

Hotels

  The competitive set of the Laguna Phuket hotels comprises the JW
  Marriott Resort & Spa, Le Meridien Phuket Beach Resort, the Le Royal
  Meridien Phuket Yacht Club, the Movenpick Resort & Spa, the Hilton
  Arcadia Resort & Spa and to a lesser extent the Amanpuri and Trisara,
  all of which are located in Phuket. There are still relatively few
  hotel projects announced or under construction. The only new projects
  that would be considered to be in our competitive set are the Hyatt
  Regency (planned to open in late 2007), the Shangri-La Resort & Spa
  (planned to open at the end of 2008) and the Conrad (yet to re-open)
  respectively. The renovation of the Laguna Phuket hotels during 2006
  will ensure the product offering is up-to-date and remains
  competitive.

Low Season

  Low season in Phuket is from May until October and the hotels normally
  run at low occupancies with reduced room rates. 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 resumption of direct flights from Hong Kong
  in December 2006 and the newly commenced direct flights from Australia
  in November 2006 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 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 recent years, there have been 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.