3. Operation of Each Product or Service

The key businesses of the Group are hotel operations, property
development operations and office rental. The Company’s major business
investment largely revolves around the operation and management of the
integrated resort of Laguna Phuket, located on the island of Phuket in
Thailand, as well as its investments in the Banyan Tree Bangkok and the
Banyan Tree Lijiang, People’s Republic of China.

1.  Type of Business

  3.1.1 Hotel Operations

  Hotels. The Group has ownership in 6 hotels in Phuket and 1 hotel in
  Bangkok all of which are top-tier and luxury villa properties. Each of
  the hotels offer deluxe and superior suites, exclusive villas and
  residences which also include bars and restaurants, swimming pools,
  fitness centres, meeting rooms and facilities, business centres, etc.

  Hotel – related operations. Laguna Phuket is operated under an
  integrated resort concept, along with many hotel-related facilities
  which are also provided to support the concept. All of these
  facilities are owned and operated by the Group, except, Laguna Phuket
  Golf Club which is managed by Banyan Tree Resorts & Spas (Thailand)
  Company Limited.

  3.1.2 Property Development Operations

  Property Sales

  Property Sales offers a range of residential and vacation properties
  such as apartments, semi-detached and detached villas including hotel
  residences such as the high-end Dusit Thani Pool Villas and Banyan
  Tree Residences that are situated within a resort or hotel property.
  Investors in Laguna properties have the option to receive a return on
  their investment by joining a hotel management scheme and renting
  their properties to guests. The latest developments available for sale
  are the following:

+---------------------+---------+--------------------+----------------+
| Project             | L       | Type               | Price          |
|                     | ocation |                    |                |
|                     |         |                    | (Baht          |
|                     |         |                    | millions)      |
+---------------------+---------+--------------------+----------------+
| Laguna Village      | Phuket  | Residence          | 32-38          |
|                     |         |                    |                |
|                     |         | Deluxe Residence   | 55-60          |
|                     |         |                    |                |
|                     |         | Townhome           | 19-20          |
|                     |         |                    |                |
|                     |         | Deluxe Townhome    | 23-25          |
|                     |         |                    |                |
|                     |         | Villas             | 13-15          |
+---------------------+---------+--------------------+----------------+
| The Lofts at Laguna | Phuket  | One-Bedroom        | 8-10           |
| Village             |         |                    |                |
|                     |         | Two-Bedroom        | 14-18          |
|                     |         |                    |                |
|                     |         | Penthouse          | 31-35          |
+---------------------+---------+--------------------+----------------+
| Banyan Tree Phuket  | Phuket  | Double Pool Villa  | 80-110         |
|                     |         |                    |                |
|                     |         | Two-Bedroom Pool   | 60-70          |
|                     |         | Villa              |                |
|                     |         |                    | 120-125        |
|                     |         | Grande Residence   |                |
+---------------------+---------+--------------------+----------------+
| Banyan Tree Bangkok | Bangkok | Two-Bedroom        | 25-42          |
|                     |         | Apartment          |                |
+---------------------+---------+--------------------+----------------+

  Project status

+--------------------+------+-----+----------+----------+-----------+
| Project (Value –   | U    |     |          |          | P         |
| million baht)      | nits |     |          |          | ercentage |
|                    |      |     |          |          | of        |
|                    |      |     |          |          | con       |
|                    |      |     |          |          | struction |
+--------------------+------+-----+----------+----------+-----------+
|                    | T    | S   | Co       | Re       |           |
|                    | otal | old | ntracted | cognized |           |
+--------------------+------+-----+----------+----------+-----------+
| Laguna Village     | 36   | 23  | 23       | 23       | 100       |
| Villas             |      |     |          |          |           |
|                    |      |     |          |          |           |
| (471 mb)           |      |     |          |          |           |
+--------------------+------+-----+----------+----------+-----------+
| The Lofts (345 mb) | 25   | 8   | 2        | -        | 2         |
+--------------------+------+-----+----------+----------+-----------+
| Laguna Townhomes   | 70   | 55  | 55       | 55       | 9         |
| (1,258 mb)         |      |     |          |          |           |
+--------------------+------+-----+----------+----------+-----------+
| Laguna Residences  | 29   | 15  | 15       | 15       | 93        |
|                    |      |     |          |          |           |
| (975 mb)           |      |     |          |          |           |
+--------------------+------+-----+----------+----------+-----------+
| Banyan Tree Phuket | 48   | 28  | 28       | 28       | 100       |
| (3,230 mb)         |      |     |          |          |           |
+--------------------+------+-----+----------+----------+-----------+
| Banyan Tree        | 24   | 10  | 10       | 10       | 100       |
| Bangkok (804 mb)   |      |     |          |          |           |
+--------------------+------+-----+----------+----------+-----------+
| Total              | 232  | 139 | 133      | 131      |           |
+--------------------+------+-----+----------+----------+-----------+

  The Group owns significant land both within and adjacent to Laguna
  Phuket upon which it plans to construct future property developments.

  Estate Service Management

  A vital differentiation from other property developers, Estate Service
  Management started operation in 2007 to provide services to the
  customers who buy properties within Laguna Phuket. The services
  comprise of pool maintenance, handyman services, ground and landscape
  maintenance, engineering services and common area management.

Holiday Club business

  Holiday Club operations are conducted through Laguna Holiday Club
  Limited for operations in Thailand and PT. AVC Indonesia for
  operations in Indonesia.

  Laguna Holiday Club commenced operations in 1998 selling memberships
  that entitle participants to annual vacations at the participating
  member resorts of Laguna Holiday Club Phuket Resort, Best Western
  Allamanda Laguna Phuket, Sheraton Grande Laguna Phuket, Sheraton
  Private Pool Residences, Angsana Resort & Spa Bintan, Springfield
  Cha-am, Chiang Mai Twin Peaks, Boathouse Hua Hin and View Talay
  Pattaya. Members also have access to over 4,000 resorts in more than
  100 countries through reciprocal arrangements with RCI and Interval
  International. Laguna Holiday Club is now well established with 4
  sales branches located in Laguna Phuket, Bangkok, Hua Hin and Bintan
  (Indonesia).

3.1.3 Office Rental

  Strategically located on South Sathorn Road, Thai Wah Tower I is a
  24-storey granite clad building and is one of the very first office
  condominium buildings in Bangkok. The entire building has
  approximately 20,000 sq.m. of usable area of which 15,390 sq.m. is
  owned by the Group. Through the years the building has maintained its
  reputation as a premium office building with timely refurbishments.

3.1.4 Overseas Investment in Hotels and Resorts

  Banyan Tree Lijiang, opened in 2006, is a joint venture company
  incorporated in the People's Republic of China between Laguna Banyan
  Tree Limited ("LBTL"), a wholly owned subsidiary of the Company, and
  Banyan Tree Holdings Limited ("BTH"). The property features 122
  luxurious villas, restaurants, bar, spa complex, gallery shop, gym,
  treks and tours.

  Otherwise, LRH invests overseas through Tropical Resorts Limited
  (“TRL”) and Bibace Investments Ltd (“BI”) which invests in luxury
  resorts largely throughout the Pacific Rim area.

3.2 Developments in 2009

  At Banyan Tree Phuket, construction of a further 22 Two-Bedroom Pool
  Villas and 4 Double Pool Villas were substantially completed by the
  end of 2009. All of the new villas are being sold to the public.

  Banyan Tree Bangkok completed conversion of former office floors and
  partially commenced operations of 32 new Banyan Tree Residences and 80
  new additional hotel suites in the second half of 2009.

  In property development, construction of 14 Laguna Townhomes and 6
  Laguna Residences were substantially completed in Laguna Village along
  with 22 Two-Bedroom Pool Villas and 4 Double Pool Villas at Banyan
  Tree Phuket by the end of 2009. A total of 9 properties were sold
  during the year with weak demand as compared to prior years mainly due
  to the impact of the global economic crisis.

  The Group entered into a hotel management agreement with Outrigger, a
  US-based resort operator from Hawaii, to manage rental program
  properties situated within Laguna Village with effect from 1 December
  2009. This is expected to have a positive impact on the rental program
  returns and sales of Laguna Village properties, in particular for the
  Lofts, Villa and Townhome products.

  Laguna Holiday Club scaled back its sales operations in Chiang Mai and
  Pattaya due to the economic downturn.

3.3 Future Plans

  The integrated resort concept of Laguna Phuket has proved a winning
  formula since the resort’s inception over two decades ago. The dynamic
  development over the last 20 years has created the mature resort which
  is evident today.

Nevertheless the Company is still confident that in the medium to long term that there continues to be opportunity to improve profitability and expand the existing facilities, particularly in light of the ongoing high demand for Phuket in terms of both hotel and residential accommodation and a hotel supply which is not expanding very quickly.

Future Expansion of Hotels in Laguna Phuket 

  The ability within the resort to add rooms supply without additional
  expenditure on infrastructure is a feature of the projects at Laguna
  Phuket.

  The design of a seventh resort in Laguna Phuket on the last remaining
  beach site has been finalised. This will be branded Angsana Phuket,
  and it will commence construction once the economic environment
  improves. The Company also has plans to expand the Dusit Thani Laguna
  Phuket by adding over 100 rooms and villas, as well as performing a
  full renovation of the Laguna Phuket golf course. The plans for these
  projects are in the process of being finalised but they will not
  commence until the economic environment is more certain.

It is also the Company’s policy to have the hotels in Laguna Phuket maintain their reputation as being luxury hotels with timely and periodic renovations and refurbishments of the hotel rooms.

Future Expansion of Hotels outside Laguna Phuket

Further expansion of Banyan Tree Bangkok has been completed by renovating existing office space into additional hotel suites and serviced apartments and this was completed in 2009.

 

Property Sales

  An integrated residential community called Laguna Village commenced
  construction in the first half of 2006. Phase 1 of Laguna Village
  comprises 56 Laguna Residences, 62 Laguna Townhomes and 36 Villas and
  by year end construction was completed and these products were largely
  sold out. Phase 2 comprises 20 Residences and 40 Townhomes and was
  released at the end of 2007. 9 Laguna Residences and 8 Laguna
  Townhomes were under construction during 2009 and will be completed in
  the first half of 2010.

  During the year Laguna Village was rebranded as Outrigger Laguna
  Phuket Resort & Villas in order to provide property owners who place
  their properties into the rental pool to achieve greater returns.

  In addition, the Company has “resort property sales” projects
  including the Dusit Thani Pool Villas at the Dusit Thani Laguna Phuket
  which were sold out by the end of 2009. In Banyan Tree Phuket, phase 2
  of the Double Pool Villas (4 villas) and phase 3 of the Two-Bedroom
  Pool Villas (22 villas) were released for sale in 2007 and commenced
  construction in early 2008. Construction of these villas was
  substantially completed at the end of 2009. Phase 3 of the Banyan Tree
  Double Pool Villas (8 villas) has also been released but yet to start
  construction. In 2008 the Company released its first apartment project
  in Laguna Phuket in over 15 years. The Lofts at Laguna Village is a
  development of 95 one and two-bedroom loft-style apartments and
  three-bedroom penthouses which commenced construction at the end of
  2009. The Company will continue to identify further resort property
  sales projects given the popularity of this type of lifestyle product
  which also provides a good investment return.

Laguna Holiday Club

  A number of additional locations within the region will be considered
  in the next few years as the Company believes that with the quality of
  management and staff now in place, the Company has the foundation to
  expand this operation internationally. Given the poor operating
  environment, 2009 and 2010 will be years of consolidation and the
  expansion plans for this successful business model will continue when
  the economic conditions improve.

Laguna Tours 

  Laguna Tours started as a centralised tour company which is directed
  at capturing the commissions generated by existing guests when they
  avail themselves of the many activities available on the island. This
  also provides us with the opportunity to exercise some quality control
  over the tours offered to the guests. In 2008 we established our own
  tours by purchasing 6 speed boats, and 4 buses and mini vans to
  provide speed boat tours and city tours. This new business segment has
  been branded as Laguna Tours and has proved to be successful. The
  Company will look to expand this operation further beyond 2010 as the
  economic environment improves.

  3.4 Sales and Marketing

  All of the Laguna Phuket hotels and business units are required to
  provide a Sales and Marketing Plan as part of their budget
  presentation. These all include a summary of their plans to provide
  the budgeted levels of income. For the hotels, the plans include
  statistics showing month-by-month comparisons to prior year and a
  market segmentation analysis.

  For the 2010 budgets, the Company looked at several years’ history due
  the unusual business trends in prior years, and set targets based upon
  the 2009 business levels.

  A summary of the hotel plans is as follows:-

a)  Hotel occupancies and average room rates, together with the
    resulting revenue per available room, are analyzed during the budget
    reviews on a month-by-month basis. Comparisons are carried out over
    the past five years, and in several cases this has meant substantial
    changes to the originally submitted budgets.

b)  The Company believes it is important to consider several years to
    provide a normalized comparison in the light of events in recent
    years such as Bird Flu, SARS, the Bali bombing, the Tsunami, the
    financial crisis and the economic downturn, etc.

c)  The hotels exhibit a high level of communication and cohesion in
    their Sales and Marketing approach. This has led to excellent
    flexibility and different reactions to changing market conditions.
    They continue to work together, but at the same time carve out new
    market segments.

d)  The very successful Laguna Phuket Plus campaign can now be switched
    on and off in reaction to market conditions and provides an
    important delivery from regional markets in the low season.

e)  The Laguna Phuket centralized Destination Marketing meetings
    provides a platform for inter-hotel discussion and the formation of
    resort wide programs.

f)  The focus in 2010 will be on generating occupancy whilst maintaining
    competitive rates in the market. The economies of the key markets
    have been hit hard by the global recession and the propensity to
    spend on luxury holidays will continue to be impacted although the
    Company expects at a lesser extent than 2009. The regional markets
    will continue to be targeted and attractive rates will be offered in
    all key markets in order to generate occupancy.

g)  The www.lagunaphuket.com website is now well established and the
    Company plans continued enhancements in 2010.

+---------------+-------------------------+----------------------------+
|               | Laguna Phuket hotels    | Banyan Tree Bangkok        |
+---------------+-------------------------+----------------------------+
| Tar           | Independent travelers   | Business travelers and     |
| geted Markets | during the high season  | meeting and incentive      |
|               | and the corporate       | groups although the        |
|               | meetings segment and    | leisure market has become  |
|               | the local regional      | increasingly important in  |
|               | market in the low       | recent years               |
|               | season                  |                            |
+---------------+-------------------------+----------------------------+
| Type of       | -   Leisure 85 percent  | -   Leisure 53 percent     |
| customers     |                         |                            |
|               | -   MICE group 15       | -   Corporate 20 percent   |
|               |     percent             |                            |
|               |                         | -   MICE group 15 percent  |
+---------------+-------------------------+----------------------------+
| Source of     | -   Travel Agencies 45  | -   Reservation sales      |
|  Reservations |     percent             |     office in Bangkok 80   |
|               |                         |     percent                |
|               | -   Direct Bookings 24  |                            |
|               |     percent             |                            |
+---------------+-------------------------+----------------------------+
| Geographic    | Asia 34 percent, mainly | Asia 53 percent, mainly    |
| Origin        | from Korea, Hong Kong,  | from Japan, Hong Kong,     |
|               | Thailand, Singapore,    | Singapore, Taiwan, Korea,  |
|               | Japan and China         | Thailand and China         |
|               |                         |                            |
|               | Europe 46 percent,      | Europe 27 percent, mainly  |
|               | mainly from United      | from United Kingdom,       |
|               | Kingdom, Russia,        | Germany and Scandinavia    |
|               | Germany, Switzerland,   |                            |
|               | Scandinavia and Spain   | Australia / New Zealand 8  |
|               |                         | percent                    |
|               | Australia / New Zealand |                            |
|               | 8 percent               | America 8 percent          |
|               |                         |                            |
|               | America 5 percent       |                            |
+---------------+-------------------------+----------------------------+

  Property Development

  The property sales sector in Phuket has been severely impacted by the
  global economic recession and credit crunch. Significantly reduced
  sales were experienced in 2009 and a difficult year is expected in
  2010. Marketing efforts will be concentrated on guests in our
  respective resorts and on regional markets which have not been hit so
  hard by the banking crisis and economic recession. The Company plans
  to maintain consumer interest so that when the economy improves there
  will be willingness for customers to then commit to purchasing a
  property. The Company will continue to focus on selling out Laguna
  Village and Banyan Tree Double Pool Villas. The Company will stay very
  close to market forces to ensure that the Company continues its
  leadership position.

  3.5 Market Situation & Competition

The Phuket Situation

  There continues to be development activity on Phuket, although as a
  result of the current global recession, the development activity in
  Phuket has slowed down significantly and this is expected to continue
  into 2010.

  A summary of the infrastructure in Phuket and recent developments is
  included

  below:

-   The Phuket International Airport, currently has the capacity to
    handle 6.5 million passengers a year. In May 2008, the Airports of
    Thailand (AOT), the national airport operator, announced plans to
    expand the Phuket International Airport. This will raise the
    airport’s capacity to 11.5 million passengers per year. Construction
    is expected to begin by the end of 2010 with completion in 2013.

-   The four existing marinas in Phuket, Boat Lagoon, Yacht Haven
    Marina, Royal Phuket Marina and Ao Po (which opened in 2009) have a
    total of 810 berths with more marinas in the construction and
    planning phases.

-   There are currently four international schools with just over 1,100
    students.

-   There are six major hospitals in Phuket, of which three are private:
    Phuket International Hospital, Bangkok Phuket Hospital and Mission
    Hospital.

-   There are six golf courses in Phuket, covering a total area of 4,053
    rai. The six courses comprise a total of 135 holes and are able to
    accommodate about 1,600 golfers daily. In 2009, a further 9-hole
    golf course was opened.

-   Retail developments in Phuket have grown to serve demand from both
    locals and foreigners. In addition to Tesco Lotus, Big C and
    Carrefour hypermarkets, the island is also home to a number of large
    shopping malls, including offerings from Central, Robinson, Ocean
    and Jungceylon, opened in 2006, is the largest and most
    sophisticated retail centre in Phuket. A number of smaller
    additional shopping malls in the middle of the island opened during
    2009.

There has been very little progress in regard to a convention centre for Phuket and such a facility appears to be a long way off.

Competition

Laguna Phuket Hotels

In 2008, the additions to the competitive set were the extension to the
Twin Palms Phuket Resort, the Marriott Courtyard at Surin Beach, the Six
Senses Destination Spa and the Anantara Phuket Resort on Mai Khao beach.
In 2009, the main additions were in the four-star market or small
additions to high end properties, none of which are considered to be in
the Laguna Phuket competitive set. Other new competitors in the high end
market which are expected to open within the next 3 years are as
follows:

-   Phuket Marriot Resort and Spa at Kamala Cove

-   Cape Sienna in Kamala

-   Renaissance Phuket Resort & Spa on Mai Khao beach

-   The Yamu at Cape Yamu (to be managed by GHM)

-   West Sands project in Mai Khao (condomiums and beach front
    residences)

-   Jumeirah Private Island Resort

-   Shangri-La on Bang Tao beach

-   Raffles Hotel in Phang Nga

-   Taj Exotica on Koh Lone

-   Park Hyatt

-   Four Seasons on Rawai beach

-   Phuket Pavillions expansion

-   Centara Grand Beach Resort

-   Grand Mercure at Karon beach

-   Capella Phuket

-   Kempinski Phuket

-   The Regent Phuket Cape Panwa

-   The Shore at Kata beach

-   Langham Place Miora Resort & Spa at Kalim beach

    All of these projects will be serious competitors to the Laguna
    Phuket hotels when they come on stream although this will be well
    into 2010 and beyond. It should be noted that a number of the above
    projects have been put on hold due to the current economic
    situation.

    Banyan Tree Bangkok

The global economic slowdown and the anti government protests together with a number of newly built hotels has led to an oversupply in downtown Bangkok in 2009 with approximately 2,700 rooms from 10 hotels put into the market in 2009 of which 44 percent of them are five star.

 At the end of 2010, it is estimated that there would be over 30,000 hotel rooms in the central business districts. However, some hotels may delay or accelerate construction depending on market conditions. Given the current economic and political situation reducing demand for rooms in Bangkok, it is resulting in a very competitive environment.

Property

In the property sector, given the current economic conditions there has
been a slowdown in new property developments during 2009 and the main
competitors remain very much the same as the prior year with few quality
developments entering the market. The significant developments that will
provide strong competition to Laguna Phuket property are:

-   West Sands project in Mai Khao

-   Phase II of Royal Phuket Marina

-   Andara

    Otherwise the vast majority of developments are either:

-   smaller and very high end; or

-   lower end developments that do not compete with Laguna Property.

    The high end developments that compete with the Banyan Tree (and to
    a lesser extent the Dusit Thani Pool Villas) would be considered to
    be:

-   Cape Yamu

-   Trisara phase C

-   Royal Phuket Marina Villas

    In regard to quality condominium projects that will compete with the
    new Laguna Phuket condominiums, only the following are considered to
    be competition based on quality and style which Laguna Phuket should
    at least be able to replicate/exceed:

-   Andara

-   Royal Phuket Marina Aquaminiums

-   Pearl of Naithorn

-   The Chava in Surin

-   Layan Gardens

3.6 Pricing Strategy

The Laguna Phuket hotels continue to work well together on price structuring. The discussions inevitably follow the normal course of competitors, and the Company will need to maintain vigilance as it goes forward to ensure maximum average room rates. 

In the property sector, for 2010, the pricing strategy is to maintain the sales prices in order to generate volumes as the market comes back.

3.7 Three Year Outlook

  After the 1997 economic crisis the Company has weathered the terrorist
  attacks on the USA and Bali, the Iraq War, the SARS crisis and Bird
  Flu and the Company is now fully recovered from the damage, both
  physical and market-related, of the Tsunami which hit Phuket on 26
  December 2004. Now the Company is coming out of one of the worst
  crises in recent years resulting from the global economic recession
  which has had a negative impact on the business and the Company is
  expecting a gradual recovery from this crisis.

  The continued investment into luxury hotels and resorts in Phuket
  signifies the island’s development into a world-class resort
  destination. As many as 15 major international operators including
  Shangri-La, Kempinski, Four Seasons, Jumeirah, Park Hyatt and others
  are set to debut in Phuket over the coming years, and the necessary
  infrastructure, such as marinas and golf courses, is being developed
  to support these hotels.

  In the short-term, global economic conditions and the domestic
  political situation will serve to suppress tourism in Phuket and
  Bangkok, and this will certainly affect the performance of the hotel
  and property sales divisions. However, given Phuket island’s enduring
  appeal, its value proposition, and its standing among global resort
  markets, it is expected that any downturn will be limited.
  Historically, political disturbances in Thailand have served to defer
  demand for hospitality and property in Phuket, but not cancel it. As
  such, the Company is still confident about the long-term prospects of
  Phuket in general and in particular Laguna Phuket.

  3.8 Rights and Constraints in Business

 

 BOI Privileges – None

  Other Privileges – None

  Constraints in Business – None