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 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 and the Company does not currently
  use hedging instruments to hedge against movements in foreign
  currencies. However given the appreciation of the Thai Baht against
  the US dollar in recent years the Company is considering using hedging
  instruments to protect the future profitability of the Company.

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,
  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 three years by terrorist attacks in New York and Bali, a sluggish
  world economy, the Iraq War and SARS. These events have had a flow on
  effect onto the Company’s results. Conversely the property market in
  Phuket has boomed in 2003 and continues to do so 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 on
  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 in 2004
  which further diversifies our reliance on the tourism industry in
  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.
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 slow down in tourism in line with
international trends.

Hotels

The competitive set of the Laguna Phuket hotels comprises the JW
Marriott Resorts & Spa, Le Meridien Phuket Beach Resort, the 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
(opening in the third quarter of 2004) just north of Bangtao Bay and the
rebranding of 2 existing four star hotels to Conrad and Hilton
respectively. Whilst Trisara will compete with the Banyan Tree Phuket,
the impact of rebranding of the 2 four star hotels is expected to be
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 in recent years. 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.

  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.

  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 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. There were
  published press reports stating that the Group may not have proper
  title to certain plots of land it purports to own. 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.