3. Operation of Each Product or Service

3.1 Nature of Products and Services

  Laguna Phuket Hotels

  Banyan Tree Phuket

  This award winning resort offers a unique holiday experience,
  featuring 148 exclusive villas, 32 with jacuzzis and 116 of which have
  their own swimming pools. This unique resort is further enhanced by
  the Banyan Tree Spa offering massage, body and beauty treatments. The
  Banyan Tree Phuket opened in May 1995 and is managed by Banyan Tree
  Hotels & Resorts Pte. Ltd. The resort is positioned as being one of
  the premier resort and spa destinations in the Asia Pacific.

  Dusit Laguna Resort

  The first hotel to open at Laguna Phuket, in November 1987, offering
  beachfront accommodation in 226 rooms and suites. The resort is
  managed by Dusit Hotels and Resorts Co., Ltd. In addition,
  construction commenced on 28 Dusit Pool Villas which are available for
  sale to the public and will be completed in mid 2008. To add to the
  resort’s facilities and services, the Angsana Spa, managed by Banyan
  Tree Resorts & Spas (Thailand) Company Limited, opened within the
  Dusit’s grounds in December 1999. Dusit targets the independent
  traveler segment from Europe in the high season and the local regional
  market in the low season.

  Laguna Beach Resort

  Laguna Beach Resort offers deluxe accommodation in 254 superior rooms
  and suites. The resort opened in November 1991, under the management
  of the Pacific Islands Club Group, but has been owner operated since
  1994. In September 2001, the Angsana Spa opened adjacent to Laguna
  Beach Resort. The resort targets the high end, family orientated
  market.

  Sheraton Grande Laguna Phuket

  The Sheraton Grande Laguna Phuket is a 70 acre complex. The resort
  opened in 1992 and offers 419 rooms, suites, villas and residences. It
  is a member of the Starwood Luxury Collection, which comprises
  Sheraton’s most prestigious hotels in the world. The Angsana Spa
  operates a facility within this hotel. The resort targets families and
  independent travelers during its high season and the corporate
  meetings customer segment and the regional market during the low
  season.

  Allamanda Laguna Phuket

  An condominium-style resort, offering one and two bedroom suites and
  duplexes with lagoon, pool or golf course views. The resort, managed
  by Banyan Tree Hotels & Resorts Pte. Ltd., opened in 1993. The units
  in this resort have been sold to the public and LRH no longer owns
  this resort. The hotel targets the four star family market and tour
  operators.

  Laguna Property Sales

  Laguna Property Sales offers residential and vacation properties such
  as Laguna Village Villas (duplex apartments), Laguna Townhomes
  (semi-detached villas) and Laguna Residences (detached villas). In
  addition, hotel residences are offered for sale in the Dusit Laguna
  Resort (Dusit Pool Villas) and the Banyan Tree Phuket (semi-detached
  Two Bedroom Pool Villas and the new ultra luxurious detached Banyan
  Tree (Double Pool Villas). The Group owns significant land both within
  and adjacent to Laguna Phuket upon which it plans to construct future
  property developments.

  The latest developments released for sale are phase I and phase II of
  Laguna Village (which comprises of 36 Laguna Village Villas, 102
  Laguna Townhomes and 76 Laguna Residences), 28 Dusit Pool Villas,
  phase 2 of the Banyan Tree Double Pool Villas (4 villas) and phase 3
  of the Banyan Tree Two Bedroom Pool Villas (22 villas).

  Investors in the Allamanda Laguna Phuket, Dusit Laguna Resort, Banyan
  Tree Phuket, Laguna Townhomes and Laguna Residences have the option to
  receive a return on their investment by joining a hotel management
  scheme and renting their properties to guests. An independent rental
  scheme is available for investors in Laguna Village.

  Laguna Holiday Club

  The Laguna Holiday Club opened in 1998 selling memberships that
  entitle participants to annual vacations at the participating member
  resorts of Laguna Holiday Club Phuket resort (a member-dedicated 79
  suite resort which was opened in October 2006), Allamanda Laguna
  Phuket, Sheraton Grande Laguna Phuket, Sheraton Private Pool
  Residences, Angsana Resort & Spa Bintan, Springfield Cha-am and Chiang
  Mai Twin Peaks. 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 7 sales offices branches located in Laguna Phuket, Bangkok,
  Chiangmai, Cha-am, Hua-Hin, Pattaya and Bintan (Indonesia).

  Laguna Phuket Facilities

  Laguna Phuket Golf Club

  This resort-style, 18-hole golf course has been open to members,
  guests and the public since August 1992. It is managed by Banyan Tree
  Hotels & Resorts Pte. Ltd.

  Quest Laguna Phuket Adventure

  Quest is a corporate training facility providing management groups
  with programs tailored to suit individual company goals. Common focus
  areas include problem solving, team cohesion, leadership and effective
  communication. Quest also operates recreational programs for resort
  guests and children. It opened in 1994 and is managed by Sheraton
  Overseas Management Corporation.

  Canal Village

  Canal Village is a shopping center with more than 50 outlets for
  lease, centrally located on 10 Rai of land within Laguna Phuket. Canal
  Village officially opened in 1994 and is owner operated.

  Banyan Tree Gallery

  This chain of retail outlets specialises in indigenous artifacts and
  handicrafts. The chain has over 50 outlets worldwide, 14 of which are
  located within the Laguna Phuket hotels and golf course and Canal
  Village shopping center.

The Wedding Chapel 

  In early 2005, the Company opened and commenced operating a wedding
  chapel, known as the “Chapel on the Lagoon”. It is owner managed and
  well positioned to capture the lucrative Japanese and European wedding
  markets.

  Laguna Tours & Travel

  Laguna Tours & Travel started operation in 2007 by selling selected
  third parties tours to Laguna guests. Laguna Tours & Travel will
  establish its own operated tours which will commence in mid 2008,
  starting with speed boat tours and city tours.

  Estate Service Management

  Estate Service Management started operation in early 2007 in order 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.

  Laguna Service Company Limited

  Laguna Service Company Limited (“LSC”) is a non-profit, joint venture
  company established in April 1991, to provide essential services to
  the hotels, such as laundry, water supply, inter-resort
  transportation, landscaping, common area maintenance, marquee
  facilities, a gas station and centralized destination marketing.
  During 2001 a computer school was constructed and opened to provide
  computer training for all Laguna Phuket employees. In 2002, 7
  air-conditioned coaches were purchased and operated by LSC to provide
  transportation for all Laguna Phuket employees to and from work, and
  in 2007 a central car park was introduced for all employees to park
  their cars.

Laguna Chiang Rai 

  Located in the Mae Chan district of Chiang Rai province, northern
  Thailand, Laguna Chiang Rai is a land bank of 1,090 Rais. This project
  has been suspended.

Bangkok operations 

Banyan Tree Bangkok 

  Located in central business district of Bangkok, The Banyan Tree
  Bangkok is a 216-suite hotel managed by Banyan Tree Hotels & Resorts
  Pte. Ltd. A Banyan Tree Spa operates within the hotel. The Banyan Tree
  Bangkok targets business travelers as well as the wholesale business
  and independent tourist markets.

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.

  Opened in late 1995, Thai Wah Tower II, is a 60-storey mixed use
  building situated next to Thai Wah Tower I and is the home to the
  Banyan Tree Bangkok which is located on the higher floors. In late
  2007, office space on floors 10 to 32 have commenced being converted
  to hotel rooms and residences. The construction is expected to be
  completed at end of 2008.

Overseas Investment in Hotels and Resorts

  Banyan Tree Lijiang, opened in 2006, 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 55
  luxurious villas, restaurants, bar, spa complex, gallery shop, gym,
  treks and tours. Effective from 1 January 2007, LRH divested part of
  its ownership interest in this project down to 49.04 percent, and
  hence its status has been changed to an associated company.

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

3.2 Marketing and Competition

3.2.1 Laguna Phuket Marketing

Review of Sales and Marketing Plans

  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 2008 budgets, the Company looked
  at several years’ history due the unusual business trends in recent
  years, and set targets based upon 2007 business levels.

  For the 2008 Budget, all budgets assume a conversion rate of 35 Baht
  to 1 US Dollar. A significant portion of the rooms revenue is
  contracted in US Dollars.

  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, 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 2008 will be to capitalise on what are expected to be
    good market conditions, and the renovation program that was
    completed in 2006 and 2007 will stand the Laguna Phuket hotels in
    good stead. Phuket continues to be popular with increasing arrivals
    from Europe, in particular Russia and regional markets such as
    Australia and the Company believes that the underlying dynamics of
    Phuket as a holiday destination will enable us to deliver higher
    room rates in the longer term.

g)  There continue to be three markets which settle in Baht, namely,
    Japan, Australia, and Thailand.

h)  The lagunaphuket.com website is now well established and the Company
    plans continued enhancements in 2008.

  The property sales sector in Phuket continues to improve every year
  and this is expected this to continue in 2008. The military coup and
  subsequent political uncertainty along with proposed amendment to the
  Foreign Business Act and strong Baht created a poor investment climate
  for potential buyers (who are mainly foreign) in 2007. A return to
  normalcy in 2008 is expected via a successful general election and a
  more “foreigner friendly” investment climate in 2008. The Company will
  continue to focus on selling out Laguna Village, the Banyan Tree
  Double Pool Villas, and the Dusit Pool Villas. This sector is still
  with its challenges, and the Company will stay very close to market
  forces to ensure that the Company continues its leadership position.

Targeted Markets

-   Leisure FITs

-   Leisure Group

-   MICE group (Meeting, Incentive, Convention and Exhibition)

-   Government and Embassies

-   Airline programs

  Sales & Marketing Tactics

-   Build and manage customer database

-   Develop sales and promotion collateral to the highest standard

-   Develop and upgrade electronic marketing – Website, E-mail, CD ROM,
    etc.

-   Participate in major travel trade shows such as ATF in January, PATA
    travel mart in March, ITB in March, EIBTM in May, IT& CMA in October
    and WTM in November.

-   Develop direct mail campaigns for MICE market

-   Sales Calls to corporate accounts in key markets – Bangkok, Hong
    Kong, Singapore, Taiwan and Japan.

-   Sales visits to major wholesalers in UK, Germany, Russia,
    Switzerland, France, Italy and Scandinavia.

-   Create awareness through advertising in the regional leisure and
    consumer magazines.

-   Organize familiarisation trips by inviting clients from Europe, Asia
    and North America, including selected Bangkok based meeting
    organizers.

-   Create an effective advertising campaign to develop the market
    segments targeted.

-   Establishing close relationship with various government
    organizations and bodies.

-   Implement a customized process which involves database analysis,
    behavior segmentation, brand contact and network.

-   To work closely with the TAT, TG and TICA.

-   Further emphasis on public relations.

-   Participate in various Frequency Marketing Programs, being a member
    of Airlines mileage program, credit card companies, etc.

-   Develop special summer packages for low season.

-   Tie in with the major airlines that fly into Phuket to develop
    promotional packages.

-   Organize Thai Airways Laguna Phuket triathlon, Laguna Phuket
    International Marathon and other events to gain media coverage and
    positioning.

Distribution Channels

  A significant portion of the Company’s guests are traveling for
  leisure purposes, the majority of the clients book through their
  travel agencies. The hotels therefore, work very closely with them and
  offer contracts that are normally signed on a one year basis so that
  these travel agencies or wholesalers will promote the hotels to the
  consumers. Also, many guests have started to book directly with the
  hotel through the hotels worldwide reservation system of each hotel
  chain and by direct booking through the internet.

  Laguna Phuket hotels are also very popular for MICE (Meeting,
  Incentive, Convention and Exhibition) where the organizers normally
  deal directly with the hotels.

  Source of Reservations

  Overseas & Local Travel Agencies 45 percent

  Direct Bookings 24 percent

  Worldwide Reservation system – hotel chain 9 percent

  Reservation & Sale offices 9 percent

  Internet 7 percent

  Others 6 percent

Type of Customers

  Leisure 85 percent

  Meeting and conference 15 percent

  Geographic Origin

  Major geographic markets of the hotels in Laguna Phuket in 2007 have
  been as follows: -

  Asia 40 percent, mainly are

  Korea 7 percent

  Hong Kong 6 percent

  Thailand 4 percent

  Singapore 4 percent

  Japan 3 percent

  China 3 percent

Europe 42 percent, mainly are

  UK 11 percent

  Russia 8 percent

  Germany 6 percent

  Switzerland 4 percent

  Spain 2 percent

  Australia / New Zealand 10 percent

  America 5 percent

  Others 3 percent

The Phuket Situation

  There continues to be plenty of development activity on Phuket, with
  several new hotel projects being announced during the year. The Conrad
  at Cape Panwa is still under construction with no date of completion
  and opening announced (unlikely to be in 2008) and a Hyatt Regency is
  under construction at the southern end of Nai Yang beach and although
  this was scheduled to be completed in November 2007, construction is
  moving very slowly and it is not likely to be ready until the third
  quarter of 2008. On what is called the “Peninsula Site” just north of
  Banyan Tree, land has been cleared for a Shangri-La resort to be built
  but construction has yet to commence. It is forecast that construction
  will commence in January 2008 (still in the process of getting the
  required permits) and hence it is unlikely that this resort will be
  competition for the LP hotels before 2010.

  In the meantime, the road infrastructure of Phuket continues to
  expand, but not to the required pace and level for the rapidly
  developing island of Phuket. Jungceylon, (large shopping centre in
  Patong) is now fully completed and operational and will be fully
  tenanted by the 2007/8 high season.

  The airport runway extension has not yet been started, and there seems
  to be little hope of any movement on this in the near future. There
  has been no movement in the last 12 months.

  Following the opening of Suvarnabhumi airport in Bangkok, a new
  international terminal at Phuket airport opened at the end of 2007 and
  will provide a much needed facelift to the Phuket airport as well as
  increasing the capacity that the airport can handle – however this is
  a short term fix because the number of arrivals in Phuket continues to
  increase at a rate that will soon result in the Phuket airport being
  at full capacity, particularly during high season.

  The much vaunted Phuket convention centre seems to be finally making
  progress. On 13 October 2007 it was reported that the investment group
  ING Funds (Thailand) has chosen a 350-rai plot of Treasury Department
  land in Mai Khao as the preferred site for the Phuket International
  Convention and Exhibition Center (ICEC). ING Funds hope to fund the
  three billion Baht project through a limited public company that would
  be set up by the Treasury Department, if the idea is approved by the
  Finance Ministry. Although a big step in the right direction, the fact
  that the project is using government land, and requires the government
  to first establish a public limited company, would be a significant
  hurdle to overcome before this project becomes a reality.

Competition

  Laguna Phuket Hotels

  The only addition to the competitive set in 2007 was the full
  renovation and opening of the Indigo Pearl on Nai Yang beach from a
  4-star to a 5-star hotel. Other new competitors in the market which
  are expected to open within the next 3 years are as follows:

-   Evason Hidaway at Yao Noi

-   Six Senses Erawan Spa at Naka Yai

-   Sala on Mai Khao beach

-   Hyatt Regency on Nai Yang beach

-   Duplex villas at Twin Palms

-   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

-   Luxury resort at Thai Muang in Phang Nga

  All of these projects will be serious competitors to the Laguna Phuket
  hotels when they come onstream although this will be well into 2009
  and beyond.

3.2.2 Banyan Tree Bangkok

  The budgeting process and sales and marketing tactics for the Banyan
  Tree Bangkok are very similar to those outlined above for Laguna
  Phuket. The targeted markets are more directed at the business
  traveler and meeting and incentive groups although the leisure market
  has become increasingly important in recent years.

  Reservations are mainly made through the reservation sales office in
  Bangkok, accounting for approximately 80 percent of total room nights.

  Geographic Origin

  Asia 55 percent, mainly are

  Japan 12 percent

  Hong Kong 10 percent

  Singapore 10 percent

  Thailand 6 percent

  China 3 percent

  Taiwan 3 percent

  Europe 26 percent, mainly are

  UK 8 percent

  Spain 4 percent

  Germany 3 percent

  Australia/ New Zealand 8 percent

  America 7 percent

  Other 3 percent

Competition

  Investors and international hotel operators remain positive about the
  long term prospects for the Thai tourism market despite recent weaker
  performance in Bangkok. Hotels in Bangkok suffered with lower
  occupancy rates in 2007 impacted by political uncertainties, the New
  Year’s Eve bombings and a weak economy. CB Richard Ellis projects that
  more than 2,000 new 4-star and 5- star hotel rooms will be completed
  in 2008, raising the supply by 24 percent from 2007. Major hotel
  projects that are due next year include Centara Grand at Central
  World, The Regent Bangkok and Sofitel Sukhumvit Bangkok. Serviced
  apartments in Bangkok are also competing with hotel and many offer
  daily rates. The total supply of serviced apartments is expected to
  exceed 12,000 units in 2008. Therefore, competition is expected to
  increase significantly during 2008.

However, the growth in international hotel operators will be positive for Bangkok both raising the quality of the total hotel supply and harnessing the marketing power of the international operators to attract visitors to Thailand.

  3.2.3 Property

  In Property, the Company continues to see a large number of smaller
  developments all over Phuket island. The significant developments that
  will provide strong competition to Laguna Phuket property are:

-   Shangri-La Pool Villas in Bangtao

-   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 and do not compete with Laguna Property.

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

-   Cape Yamu

-   Jumeriah Private Island (Barama Bay)

-   Trisara phase C

-   Shangri-La Pool Villas

-   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

-   Palm Beach Club

-   Royal Phuket Marina Aquaminiums

-   Pearl of Naithorn

-   The Chava in Surin

-   Layan Gardens

3.2.4 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. The following chart shows the average room rate movements over the past 7 years:- 

Laguna Phuket hotels

  ------------------------- ------- ------- ------- ------- ------- ------- -------
                            2001    2002    2003    2004    2005    2006    2007

  Average Room Rate (Baht)  6,977   6,831   5,748   6,036   5,126   6,478   6,952

  Average Exchange Rate     44.6    43.1    41.6    40.4    40.2    37.7    34.5
  Baht : US$                                                                

  Average Room Rate (US$)   156     159     138     149     128     172     202
  ------------------------- ------- ------- ------- ------- ------- ------- -------

  In the Property sector, for 2008, the Company expects to achieve the
  following prices for the various products. As noted above the pricing
  strategy will be to continue to increase the price of homes steadily
  but to maintain the sales pace

+-----------------------+------------------------------+--------------+
| Project               | Type                         | Price        |
|                       |                              |              |
|                       |                              | (Baht        |
|                       |                              | millions)    |
+-----------------------+------------------------------+--------------+
| Laguna Village        | Residence                    | 30 -35       |
+-----------------------+------------------------------+--------------+
| Laguna Village        | Townhome                     | 18-24        |
+-----------------------+------------------------------+--------------+
| Laguna Village        | Villa                        | 12-15        |
|                       |                              |              |
|                       | Condominium                  | 8-20         |
+-----------------------+------------------------------+--------------+
| Laguna Lakes          | High End Condominium         | 15-30        |
+-----------------------+------------------------------+--------------+
| Banyan Tree           | Double Pool Villa            | 90-110       |
|                       |                              |              |
|                       | Two-Bedroom Pool Villa       | 40-50        |
|                       |                              |              |
|                       | Grande Residences            | 140-150      |
+-----------------------+------------------------------+--------------+
| Dusit                 | Pool Villa – non ocean front | 36-40        |
|                       |                              |              |
|                       | Pool Villa –ocean front      | 55-60        |
+-----------------------+------------------------------+--------------+

3.2.5 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. As the Company plans for the future, it hopes for the
  best, but must also plan for the worst, since it is reasonable to
  assume that there may be some more crises ahead.

  In the year 2007 the air access has improved and the renovations have
  been largely completed throughout Laguna Phuket. The business demand
  for Property Sales and the Laguna Holiday Club is showing good signs
  in 2007 and bodes well for 2008.

  For the hotels, the Company has seen a shift back to the traditional
  European high season from December to March. During the ‘low’ season,
  the hotels remain busy, but at a lower average rate. This is where
  opportunity lies in the coming years. Given the short length of stay
  of the regional low season customers, direct flights from the key
  feeder markets of Hong Kong, Singapore, Japan, Taiwan and Korea are so
  critical. Now that these flights are in place this will have a
  positive impact on the low season performance of the hotels. Such
  markets will be pursued by a growing supply in the Phuket market,
  although this is not expected to be significant in the next 3 years,
  the Company is optimistic that Laguna Phuket’s brand awareness in the
  market will keep us ahead of the competition.

  In Property Sales, this is a market which the Company views with care,
  and must be vigilant for signs that demand has gone off the boil. As
  mentioned above even though there was a poor investment climate for
  investors throughout most of 2007, a return to normalcy via a
  successful general election at the end of 2007 should result in a more
  “foreigner friendly” investment climate in 2008. The Company’s
  experience, skills and success in the property sales operation in
  recent years makes us believe that good levels of sales during the
  next three years are achievable.

  3.2.6 Rights and Constraints in Business

BOI Privileges – None

Other Privileges – None

  Constraints in Business – None