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 14 Spa Pool Villas were completed and became available for
use during December 2001 and January 2002 and 14 new two bedroom pool
villa’s were completed and became available for sale in the second half
of 2005. The 22 Double Pool Villas, which are the most luxurious product
offered by the hotel, were substantially completed at the end of 2006.
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. In 2006 Dusit Laguna
  Resort upgraded 30 rooms to a new room type called the Dusit Club
  Room. In addition, construction commenced on 28 Dusit Laguna Villas
  which will be available for sale to the public. The resort is managed
  by Dusit Hotels and Resorts Co., Ltd. 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 415 rooms, suites, villas and residences. In
2006, a brand new Grande Room wing opened with 45 rooms, all with
private balconies and views of the lagoon. The hotel has added 36 Golf
Residences to its inventory since 2005 which it manages on behalf of the
owners of these 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 apartment-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 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 59 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, fourteen of
  which are located within the Laguna Phuket hotels and golf course and
  Canal Village shopping center.

  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. In November 2005 the Laguna Holiday Club
  opened its third sales office in the Angsana Resort & Spa Bintan in
  addition to the now well established sales offices in Laguna Phuket
  and Bangkok.

  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 Laguna 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 of Laguna Village
(which comprises of 36 Laguna Village Villas, 56 Laguna Townhomes and 49
Laguna Residences), 28 Dusit Laguna Villas and 22 Banyan Tree Double
Pool 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 will be offered for investors in Laguna Village.

The Wedding Chapel 

  In early 2005 we opened and commenced operating our wedding chapel,
  known as the “Chapel on the Lagoon”. It is managed by South Pacific
  Bridal, a company specialising in Japanese weddings, and it is well
  positioned to capture the lucrative Japanese and European wedding
  markets.

  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, seven air-conditioned coaches were purchased
and operated by LSC to provide transportation for all Laguna Phuket
employees to and from work.

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 Rai. 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 14,259 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. Apart from providing 16,500
sq.m. of office premises on floors 10 to 32, Tower II is also home to
the Banyan Tree Bangkok which is located on the higher floors of the
same building. The plan is to convert the majority of the office
premises in Thai Wah Tower II into hotel facilities over the next 2
years.

Overseas Investment in Hotels and Resorts

LRH invests overseas through Tropical Resorts Limited (“TRL”) and TRL
Investment Limited (“TRLI”) which operates luxury resorts largely
throughout the Pacific Rim area and the investments in hotels and
resorts overseas.

  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. Note: effective 1^(st) January 2007, LRH divested
  part of its ownership interest in this project down to 49.04 percent.

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 2007 budgets, we looked at several years’ history due
the unusual business trends in recent years, and set targets based upon
2006 business levels.

For the 2007 Budget, all budgets assume a conversion rate of 38 Baht to
1 US Dollar. Approximately 80 percent of our room 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)  We believe 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 2007 will be to capitalise on what are expected to be
    good market conditions, and the renovation program that was
    undertaken during 2006 will stand the Laguna Phuket hotels in good
    stead. Phuket continues to be popular with both European and
    regional travelers and we believe 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 we plan
    continued enhancements in 2007.

  The property sales sector in Phuket continues to improve every year
  and we expect this to continue in 2007, although recent announcements
  by the interim military government regarding legislation that impacts
  the ability of foreigners to own property in Thailand may have a
  negative sentiment on this sector. For 2007, we will continue to focus
  on selling out Laguna Village, the Banyan Tree Double Pool Villas, and
  the Dusit Pool Villas. Despite the excellent results in recent years,
  this sector is not without its challenges, and we will stay very close
  to market forces to ensure that we continue our 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 net work.

-   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 and other events to
    gain media coverage and positioning.

Distribution Channels

As more than 80 percent of our guests are traveling for leisure
purposes, the majority of our 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 (Meetings,
  Incentives, Conferences and Exhibitions) where the organizers normally
  deal directly with the hotels.

  Source of Bookings

  Local Travel Agency & Tour Operators 58%

  Domestic Wholesalers 11%

International Wholesalers 9%

  Corporate accounts & governments 1%

  Direct Bookings 21%

Type of Customers

Leisure 85%

Meeting and conference 15%

  Geographic origin:

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

  North Asia

  Japan 7%

  Hong Kong 10%

  Korea 11%

  Taiwan 6%

  China 3%

  Russia 5%

  Southeast Asia

  Thailand 3%

  Singapore 3%

  Other Asia 2%

Europe

  UK 13%

  Switzerland 4%

  Germany 6%

  Spain 2%

  Europe other 2%

  Australia/New Zealand 4%

  USA/ Canada 4%

  Historical Overview

The following chart shows a statistical record of the hotels in Laguna
Phuket over the past five years.

LRH Laguna Phuket

  -------------------- ----------- ----------- ----------- ----------- -----------
  (* 000’s)            For the     For the     For the     For the     For the
                       year ended  year ended  year ended  year ended  year ended
                       31 December 31 December 31 December 31 December 31 December

                       2002        2003        2004        2005        2006

  Occupancy (%)        64%         70%         77%         51%         63%

  Average Room Rate    6,831       5,748       6,018       5,126       6,478

  Room Revenue*        1,417,589   1,303,004   1,505,789   834,969     1,379,908

  F&B Revenue*         655,805     646,147     755,519     502,009     771,258

  Total Revenue*       2,186,328   2,057,718   2,382,227   1,429,102   2,266,570

  GOP*                 1,109,644   1,015,911   1,205,584   437,992     979,709

  GOP (%)              51%         49%         51%         31%         43%
  -------------------- ----------- ----------- ----------- ----------- -----------

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 the first half of 2007) and a
  Hyatt Regency is under construction at the southern end of Nai Yang
  beach and is planned to be completed in November 2007. On what we call
  the “Peninsula Site” just North of Banyan Tree a Shangri La resort has
  been announced and construction will commence in the first quarter of
  2007 with an expected completion date at the end of 2008.

  In the meantime, the road infrastructure of Phuket continues to
  expand. Jung Ceylon, (large shopping centre in Patong) which was
  delayed in 2005, soft opened in December 2006 with the full opening
  announced for the first quarter of 2007.

  The airport runway extension has not yet been started, but officials
  confirm that it is budgeted for the near future. Following the opening
  of Suvarnabhumi airport in Bangkok, a new international terminal at
  Phuket airport is scheduled to open in the first half of 2007 and will
  provide a much needed facelift to the Phuket airport as well as
  increasing the capacity that the airport can handle.

  The performance of the tourism industry in Phuket in 2006 was
  negatively impacted by the lack of direct flights into Phuket,
  particularly from the key feeder markets of Hong Kong and Japan. This
  is an issue that has been addressed in the last quarter of 2006 with:

-   daily direct flights from Hong Kong which started on 15^(th)
    December operated by Dragonair;

-   Jetstar are now operating 3 direct flights from Sydney every week
    which started on 23^(rd) November; and

-   Russian charters in the last quarter of 2006 are back to the 2004
    levels which will greatly assist the high yielding first quarter of
    2007

  The much vaunted convention centre seems to be mired in debate, and we
  still have no clear direction for that project.

Competition

  Hotels

  The only addition to the competitive set in 2006 was the opening of
  the Phuket Pavillions resort located behind Laguna Phuket overlooking
  Bangtao beach and this resort has only 30 pool villas. The changing of
  ownership of the Crowne Plaza and rebranding to Movenpick and the full
  renovation of the Indigo Pearl on Nai Yang beach from a 4 star to a 5
  star hotel were the only other events of note during the year.

  There continues to be plenty of development activity on Phuket, with a
  number of new hotel projects being announced during the year. As noted
  above, the Conrad and Hyatt Regency are unlikely to open until late
  2007 and hence no additional inventory will be opened in the
  competitive set in the coming year. However there are a significant
  number future developments announced that are scheduled for 2008 and
  beyond, and these include:

-   Alan Zemans high end boutique hotel, Andara

-   Barama Bay island project (79 pool villas) to be branded Jumeriah

-   West Sands project on Mai Khao beach (350 properties from
    condominiums to beach front residences)

-   Cape Yamu - to be managed by GHM

-   Puravana – a high end villa project in Nai Harn beach area

-   Royal Garden Resorts luxury all pool villa next to the Marriot, on
    Mai Khao beach

-   120 room property on Mai Khao beach, Shangri La being developed by
    Durham investments, affiliated to the Indonesian company JSI on the
    site north of Banyan Tree

-   Raffles Phang Nga Resort and Residences - 150 rooms and 25 luxury
    residential villas located on 240,000 square metres of beachfront
    land.

  Property

  In Property, we continue to see a large number of smaller developments
  all over the island and in particular adjacent to Bangtao beach. The
  significant developments that will provide strong competition to
  Laguna Phuket property are:

-   West Sands project on Mai Khao

-   Blue Canyon, if and when they release their golf course projects

-   Phase 2 of Royal Phuket Marina

  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 villas) would be considered to be:

-   Andara

-   Trisara phase 2

-   Barama Bay

-   Raffles Phang Nga Resort and Residences

-   Cape Yamu

-   Shangri- La villas

Pricing Strategy

The Laguna Phuket hotels are working together better than ever on price structuring. The discussions inevitably follow the normal course of competitors, and we will need to maintain vigilance as we go forward to ensure maximum average room rates. The following chart shows the average room rate movements over the past 7 years:- 

Laguna Phuket

  ------------------ ------- ------- ------- ------- ------- ------- -------
                     2000    2001    2002    2003    2004    2005    2006

  Average Room Rate  5,814   6,977   6,831   5,748   6,036   5,126   6,478
  (Baht)                                                             

  Average Exchange   40.6    44.6    43.1    41.6    40.4    40.2    37.7
  Rate Baht : US$                                                    

  Average Room Rate  143     156     159     138     149     128     172
  (US$)                                                              
  ------------------ ------- ------- ------- ------- ------- ------- -------

A look at the historical growth of rates across Laguna Phuket by hotel
shows the following:

  ----------------- -------- -------- -------- -------- -------- ---------
                             2002     2003     2004     2005     2006

                                                                 

  Banyan Tree       Occ      68%      67%      70%      53%      61%
  Phuket                                                         

                    ARR      17,585   17,639   18,368   14,121   18,587

                    Revpar   11,912   11,767   12,941   7,537    11,316

  Sheraton Grande   Occ      64%      73%      75%      46%      59%
  Laguna Phuket                                                  

                    ARR      5,600    4,393    5,164    4,278    5,113

                    Revpar   3,581    3,214    3,877    1,988    3,016

  Dusit Laguna      Occ      63%      68%      78%      55%      72%
  Resort                                                         

                    ARR      4,912    3,755    3,883    3,303    4,458

                    Revpar   3,093    2,561    3,019    1,801    3,216

  Laguna Beach      Occ      64%      69%      81%      50%      60%
  Resort                                                         

                    ARR      4,507    3,653    3,710    3,330    3,972

                    Revpar   2,894    2,534    3,007    1,673    2,370
  ----------------- -------- -------- -------- -------- -------- ---------

  Occ = Occupancy

  ARR = Average room rate

  Revpar = Revenue per available room

Three Year Outlook

  After the 1997 economic crisis we have weathered the storms of the
  terrorist attacks on the USA and Bali, the Iraq War, the SARS crisis
  and Bird Flu and we are now largely recovered from the damage, both
  physical and market-related, of the Tsunami which hit Phuket on
  26^(th) December 2004. As we plan for the future, we hope 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 fourth quarter of 2006 the business levels of the hotels were
  finally back to those experienced in 2004 and we expect to maintain
  these levels throughout 2007 now that 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 at the beginning of 2007 and look set to be at or
  even exceed the 2006 levels.

  For the hotels, we have seen a shift back to our traditional European
  season from December to March. During the ‘low’ season, the hotels
  remain busy, but at a lower average rate. This is where the
  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, but
  we are 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 we view with care, and we
  must be vigilant for signs that demand has gone off the boil. For now,
  however, we can certainly continue through 2007 at levels similar to
  2006, and there is currently no reason to suppose that there will be
  any downturn in the following year, and we believe our prediction of a
  continuation of current levels during the next three years is
  supportable.

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
  traveller and meeting and incentive groups although the leisure market
  has become increasingly important in recent years.

  Source of Bookings

  ----------------------------------------------------------- -----------
  Local and international wholesalers                         33%

  Corporate accounts and government                           32%

  Meetings and incentives                                     16%

  Packages                                                    5%

  Other                                                       14%
  ----------------------------------------------------------- -----------

  Geographic origin

  North Asia

  ----------------------------------------------------------- -----------
  Japan                                                       13%

  Hong Kong                                                   11%

  China                                                       3%

  Taiwan                                                      3%

  South East Asia                                             

  Singapore                                                   12%

  Malaysia                                                    3%

  Other Asia                                                  3%

  Europe                                                      

  UK                                                          8%

  Australia/New Zealand                                       7%

  USA/Canada                                                  9%

  Others                                                      28%
  ----------------------------------------------------------- -----------

3.2.3 Rights and constraints in Business

BOI Privileges – None

Other Privileges – None

Constraints in Business – None