3. Operation of Each Product or Service

  3.1 Types of Business

  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.

3.1.1 Hotel Operations

  Hotels

  The Group has ownership in 4 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.
  During the year, the Group divested of its ownership in the Laguna
  Beach Resort, Phuket. In addition, Sheraton Grande Laguna Phuket was
  closed in mid 2011 for a major renovation and rebranding to Angsana
  Laguna Phuket.

  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 current developments available for
  sale are the following.

+-------------------+----------+-------------------------+-------------+
| Project           | Location | Type                    |  Price      |
|                   |          |                         |             |
|                   |          |                         | (Million    |
|                   |          |                         | Baht)       |
+-------------------+----------+-------------------------+-------------+
| Laguna Village    | Phuket   | Residence               | 29 - 55     |
|                   |          |                         |             |
|                   |          | Townhome                | 19 - 23     |
|                   |          |                         |             |
|                   |          | Apartments,             | 8 -33       |
|                   |          | Condominiums            |             |
+-------------------+----------+-------------------------+-------------+
| Banyan Tree       | Phuket   | Double Pool Villa       | 67 - 100    |
| Phuket            |          |                         |             |
|                   |          | Two-Bedroom Pool Villa  | 53          |
+-------------------+----------+-------------------------+-------------+
| Dusit Thani Pool  | Phuket   | Two-Bedroom Pool Villa  | 29          |
| Villas            |          |                         |             |
+-------------------+----------+-------------------------+-------------+
| Banyan Tree       | Bangkok  | Two-Bedroom Apartments  | 24 - 33     |
| Bangkok           |          |                         |             |
+-------------------+----------+-------------------------+-------------+

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

Project status

+------------------------+-----+----+-----+-------+---------+---------+
| Project                | Un  |    |     |       |         | %       |
|                        | its |    |     |       |         | const   |
| (Value – Million Baht) |     |    |     |       |         | ruction |
+------------------------+-----+----+-----+-------+---------+---------+
|                        | To  | So | %   | Contr | Rec     |         |
|                        | tal | ld | s   | acted | ognized |         |
|                        |     |    | old |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Laguna Village Villas  | 36  | 26 | 72  | 26    | 23      | 100     |
| (471 mb)               |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| The Lofts at Laguna    | 25  | 6  | 24  | 6     | 4       | 100     |
| Village (345mb)        |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Laguna Townhomes       | 78  | 61 | 78  | 61    | 58      | 100     |
| (1,435 mb)             |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Laguna Residences (655 | 22  | 17 | 77  | 17    | 17      | 100     |
| mb)                    |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Dusit Thani Pool       | 28  | 19 | 68  | 19    | 15      | 100     |
| Villas (983 mb)        |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Banyan Tree Phuket     | 48  | 31 | 65  | 31    | 31      | 100     |
| (3,230 mb)             |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Banyan Tree Bangkok    | 24  | 13 | 54  | 13    | 12      | 100     |
| (804 mb)               |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Total – completed      | 261 | 1  | 66  | 173   | 160     |         |
| projects               |     | 73 |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Laguna Deluxe          | 7   | 1  | 14  | 1     | -       | 24      |
| Residences (315 mb)    |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Total – under          | 7   | 1  | 14  | 1     | -       |         |
| construction projects  |     |    |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+
| Total                  | 268 | 1  | 65  | 174   | 160     |         |
|                        |     | 74 |     |       |         |         |
+------------------------+-----+----+-----+-------+---------+---------+

  Estate Service Management

  A vital differentiation from other property developers, Laguna
  Property Management and Estate Services 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

  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, Angsana Laguna Phuket, Angsana Private Pool
  Residences, Angsana Resort & Spa Bintan, 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
  currently has 2 sales offices / branches located in Laguna Phuket and
  Bangkok.

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 15,389 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 120
  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 invest in luxury
  resorts largely throughout the Pacific Rim area.

2.  Developments in 2011

  In the hotel segment, the Company disposed of its interest in Laguna
  Beach Resort in May 2011 for Baht 0.7 billion (representing its 50%
  ownership interest). In addition, Sheraton Grande Laguna Phuket closed
  for a major renovation in mid 2011 and was rebranded as Angsana Laguna
  Phuket upon reopening in mid-December.

  In the property segment, completion of phase 1 of the Lofts was
  achieved providing a wider range of products at the lower end of the
  price range. However, given the economic and political environment in
  which the Company has been operating in recent years, business levels
  remained subdued for much of the year with a total of 14 properties
  being sold for a sales value of Baht 245 million.

  Laguna Holiday Club business levels were also affected by the above
  factors.

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 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.

  The Company will also seek to continue to diversify its investment
  portfolio away from Phuket by identifying investment opportunities
  within the Southeast Asia region. Recent examples include its
  investments in Banyan Tree Lijiang, People’s Republic of China and the
  Banyan Tree Indochina Hospitality Fund which is developing an
  integrated resort in Laguna Lang Co (Vietnam).

Hotels 

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

As LRH has expertise in integrated resort management, the provision of such services to other external developments presents an opportunity to establish another income stream via management fees. The Company will provide facilities management to the Laguna Lang Co (Vietnam) integrated resort development including setting up and managing centralized services such as a laundry, retail centre, common area maintenance, transport, destination marketing, etc. 

Property Sales

  There has been a slowdown in sales in recent years due to the global
  economic downturn and local political turmoil in Thailand. However,
  the Company believes that once these situations stabilise, increased
  demand for our properties will return. The Company will focus on
  selling out the existing inventory before releasing any new projects
  and products for sale.

Laguna Holiday Club

  This business has suffered as a result of the economic downturn and
  local political turmoil with lower consumer discretionary spending on
  vacation ownership in recent times. Given the poor operating
  environment, operations have been scaled back and expansion plans have
  been put on hold until the economic and political environment
  improves.

3.4 Sales and Marketing

  Hotels

  All of the Company’s 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.

  The 2012 budgets have been prepared on the basis of stable global
  economic and local political environment. The target markets, source
  of reservations and geographical segmentations are set out in the
  table below:

+----------------+-------------------------+---------------------------+
|                | Laguna Phuket hotels    | Banyan Tree Bangkok       |
+----------------+-------------------------+---------------------------+
| Targeted       | The European leisure    | The leisure markets       |
| Markets / Type | markets account for     | account for approximately |
| of Customers   | more than 80% of total  | 80% of total guests,      |
|                | guests during high      | while business travelers  |
|                | season while regional   | and corporate meeting     |
|                | leisure markets along   | groups represent the      |
|                | with the corporate      | remainder.                |
|                | meeting groups account  |                           |
|                | for the majority of     |                           |
|                | guests during low       |                           |
|                | season.                 |                           |
+----------------+-------------------------+---------------------------+
| Source of      | More than 50% are from  | More than 60% are from    |
| Reservations   | travel agencies.        | direct bookings.          |
+----------------+-------------------------+---------------------------+
| Geographical   | Asia 30%, mainly from   | Asia 50%, mainly from     |
| Segmentation   | People’s Republic of    | Hong Kong, , Taiwan,      |
|                | China, Korea, Hong      | Singapore, Japan,         |
|                | Kong, Thailand,         | Thailand and Korea        |
|                | Singapore and Japan     |                           |
|                |                         |                           |
|                |                         |                           |
|                |                         | Europe  30%, mainly from  |
|                | Europe 50%, mainly from | United Kingdom, Germany   |
|                | Russia, United Kingdom, | and Spain                 |
|                | Germany, Switzerland,   |                           |
|                | Italy and Scandinavia   |                           |
|                |                         |                           |
|                | Oceania 7%              | Oceania 8%                |
+----------------+-------------------------+---------------------------+

  The increase in supply of upscale hotels in recent years has increased
  competition and combined with the strength of the Baht has resulted in
  downward pressure on room rates. The Company believes there is room
  for continued upward movement of room rates and occupancy levels as
  demand for Phuket remains strong as a result of:

-   Popularity with the existing European markets during high season,
    particularly Russia.

-   An increase in direct flights within the regional markets which
    significantly assists the demand during low season.

-   An increase in the emerging outbound markets from the People’s
    Republic of China and India.

-   A return of MICE and corporate business levels with improved local
    political stability and less global economic volatility

-   Limited additional supply coming into the market in the foreseeable
    future with many projects either postponed or abandoned.

Property Sales

  Given the economic and political environment in which we have been
  operating in recent years, the property sales business struggled.
  There has been a general increase in interest going into the high
  season and the Company is hopeful for a stronger high season than in
  recent years. Areas of focus will include:

-   Selling the already completed Laguna Village and Banyan Tree
    Residences inventory as potential buyers are now more cautious about
    buying into off-plan developments.

-   Penetration into newly emerging regional markets such as the
    People’s Republic of China and having collateral in several
    different languages.

-   Offering lower entry level priced product such as the Lofts and the
    more contemporary style of the expansive and luxurious Laguna
    Village Deluxe Residences.

-   Introducing innovative promotions and incentives such as long-term
    payment plans.

-   Continuing to improve our excellent after sales service offerings.

  The Company will stay very close to market forces to ensure that the
  Company continues its leadership position.

5.  Market Situation & Competition

The Phuket Situation

  A summary of the infrastructure in Phuket and recent developments is
  set out below:

-   The Phuket International Airport, currently has the capacity to
    handle 6.5 million passengers a year. The Airports of Thailand
    (AOT), the national airport operator, has announced plans to expand
    the Phuket International Airport. This will raise the airport’s
    capacity to 15 million passengers per year. Construction is expected
    to begin in 2012 with completion in 2014.

-   The five existing marinas have over 1,000 berths.

-   There are currently six international schools with just over 2,000
    students.

-   There are eight major hospitals, which are increasingly catering for
    the medical tourism sector.

-   There are seven golf courses, which are able to accommodate about
    1,600 golfers daily.

-   Retail developments such as Tesco Lotus, Big C hypermarkets, and a
    number of large shopping malls, including offerings from Central,
    Robinson, Ocean and Jungceylon. In addition, several smaller
    community shopping malls have been opened in recent years.

-   There has been little movement on the convention centre on Mai Khao
    beach and if happens, it will several years away.

  Competition

  Laguna Phuket Hotels

  The competitive set of Laguna Phuket are upper-tier hotels and luxury
  villas. There continues to be development activity, however a number
  of projects have been put on hold due to the current economic
  situation. The major competitors include the following.

+-----------------------------------------+----------------------------+
| Top-Tier Properties                     | Luxury Villa Properties    |
+-----------------------------------------+----------------------------+
| -   Le Meridien Phuket Beach Resort     | -   The Amanpuri           |
|                                         |                            |
| -   JW Marriott Resort & Spa            | -   Trisara                |
|                                         |                            |
| -   Hilton Phuket Arcadia Resort & Spa  | -   Andara                 |
|                                         |                            |
| -   The Movenpick Resort & Spa          | -   The Pavillions         |
|                                         |                            |
| -   Sala Phuket Resort and Spa          |                            |
|                                         |                            |
| -   Evason Phuket & Bon Island          |                            |
|                                         |                            |
| -   Anantara Phuket Villas              |                            |
|                                         |                            |
| -   Renaissance Phuket Resort & Spa     |                            |
|                                         |                            |
| -   The Westin Siray Bay Resort & Spa   |                            |
|                                         |                            |
| -   Centara Grand Beach Resort Phuket   |                            |
|                                         |                            |
| -   Piraya Resort & Spa                 |                            |
+-----------------------------------------+----------------------------+

  In addition, hotels in Phuket continue to face competition from rental
  properties which offer competitive rates for longer stay visitors, as
  well as competition from other resort destinations within the region.

  Banyan Tree Bangkok

The number of newly built hotels in recent years has led to an oversupply in downtown Bangkok. Moreover, the increased supply of new hotels and serviced apartments in Bangkok has resulted in a highly competitive market. 

  Property

  In the property sector, given the global economic downturn in recent
  years there has been a slowdown in new property developments.
  Prospective purchasers are now more cautious and want less money at
  risk during the construction stage which is making off-plan
  developments less attractive. The majority of potential buyers remain
  foreigners and require confidence in the ability of developers to
  deliver a quality product. The main competitors remain very much the
  same as the prior year with few quality developments entering the
  market. 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 are
  considered to be:

-   Cape Yamu

-   Trisara

-   Royal Phuket Marina Villas

  In regard to quality condominium projects, 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

3.6 Pricing Strategy

The Laguna Phuket hotels continue to work well together on price structuring. However, the sale of Dusit Thani Laguna Phuket and Laguna Beach Resort in 2010 and 2011 will result in a more competitive environment and the Company will need to maintain vigilance as it goes forward to ensure maximum average room rates. 

In the property sector, the concentration in 2012 will be on selling the existing completed inventory.

3.7 Three Year Outlook

  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 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 may serve to suppress tourism in Phuket and
  Bangkok, and this could 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