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Advanced Financial Accounting: Interpretation of Financial Statements
1.
2. Hi Ms Choong
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5. Industry Background
10,481 Hotel Groups in China
Intense competition in Hotel Industry
– strong competition from local hotels in the
countries
– an even stronger competition from the
international chain of hotels that are more
renown globally
6. Industry Background
Attributed to
the Global
economy, due
to concerns
with regards to
the worsening
financial crisis,
is still impacting
the hotel
industries in
China.
According to a
research, more
than 70% of
hotelier across
China expect
declines in
occupancy, ADR
and total
revenue in
2009. Only 10%
or less expect
growth.
7. Industry Background
• CNY1.16 trillion of Income
(increase of 5.8%)
• CNY874.9 billion from domestic
tourists
• US$40.8 billion from
international tourists
2008 Expenditure
8. Industry Background (Extra Notes)
As Shangri-La is a hotel group that operates internationally, we
searched for global industry insights from the Tourism and
Hospitality Sector. However we were not able to find data for
worldwide it. Thus, we did a research on the China Tourism
industry instead where Shangri-La has a majority number of hotels.
According to CNTA statistics,
In 2008, China received 130.04 million tourists; down 1.4% from
2007
24.33 million were foreign visitors; down 6.8%, 53.05 million were
inbound tourist; down 3.1% from 2007
Has achieved USD40.8 billion from international travel; down 2.6%
from 2007.
9. Industry Background (Extra Notes)
In 2008, China recorded 1.712 billion domestic tourists; up 6.3%
from 2007.
Income from domestic travel reached CNY874.9 billion; up 12.6%
from 2007.
In 2008, 45.84 million Chinese tourists travelled abroad; up 11.9%
from 2007.
10. Company Background
• Owned by the Kuok Group
• Founded in 1971
• Flagship Hotel in Singapore
• Holding Company incorporated in Bermuda
• Trading in both SGX and HKSE
• Operating hotels
• Manages hotels for third-party owners
• Ownership interests in investment properties
• 65 deluxe hotels and resorts as at 31/12/2009
• Currently one of the largest luxury hotel operators in China
(more than 50% of their hotels are in China)
11. Background
• Group Brand includes:
• Shangri-La Hotels
• Shangri-La Resorts
• Shangri-La Residences
• Trader Hotels
• CHI, The Spa
• 15 more opening within the next 3 years
(Europe, North America, Middle East, China)
12. Company Background (Extra Notes)
Shangri-La was founded by the Kuok Group of Companies in the
early 1970s. The first Shangri-La Hotel was opened in 1971 in
Singapore. The management arm of the group, Shangri-La Hotels
and Resorts, was founded in 1983. In 1989, the group established
an affiliated brand called Traders Hotels. In 1997, Shangri-La Hotels
and Resorts were bought by Shangri-La Asia (SLA), an investment
holding group listed on the Hong Kong Stock Exchange.
Shangri-La Asia is an investment holding group. Along with its
subsidiaries, it owns and operates hotels and also provides hotel
management and related services. Its activities include:
Hotel and Resort management
Leasing and other investment activities
Laundry services
15. Strengths
• Qualitative Aspect:
Marketing & Communications
Branding
• Strong branding
• Perception of high-end Business Hotel with Asian Hospitality
and Grace
Strong Marketing Strategies
• High profit margin
• Target corporate clients
• China base
• Personalised services to each individual guests
• Good loyalty programme
16. Strengths
• Qualitative Aspect:
Human Resources
• Very people-centred
• Good compensation and benefits
• Compulsory training
• Makes employees want to strive harder for the company
Internal Control
• Strong internal control
• Strict policies on maintaining standard
• Whistle blowing policies
17. Strengths
• Quantitative Aspect:
Cash Position (as shown in FS Later)
• Strong cash position in FY 2008
• Net increase of HKD8 million compared to FY2007
• Positive Cash Flow after Investing and Financing Activities
Trade Debtors and Creditors (as shown in FS Later)
• Decreasing trend of trade debtors
• Decreasing trend also found in trade creditors
18. SWOT Strength (Extra Notes)
Management Team:
Shangri-La tries to strike a balance in its top and senior
management position with some of them being headhunted
from the industry and others being internally promoted
Giovanni Angelini, the ex-CEO of Shangri-La Asia, was
headhunted. Shangri-La then went on a massive expansion
programme with hotels and properties slated to be open every
year until 2015. Thus, Shangri-La’s assets are expected to
grow by another 40%. Madhu Rao, the CFO of Shangri-La
Asia, has been working with Shangri-La for over 20 years.
Having a balance allows them to make better business
decisions which would be beneficial to the company as all
possibilities are being accounted for.
19. SWOT Strength (Extra Notes)
Marketing and Communications (Branding & Marketing):
There is a brand positioning of the hotel where the rich and high class
want to be seen there. Thus they have gotten the right group of
target customers wanting to spend more.
On marketing, the company also has a high gross profit margin and
turnover. Their secondary target of corporate clients allows them to
be recession proof. Their loyalty programme, which is not on
redeemable point system but rather gives free upgrades upon return,
ensure clients come back.
20. Weaknesses
• Qualitative Aspect:
Management Issue
• Family-run Business
• Corporate Governance issues
Expansion Issue
• Expanding too fast might be a worrying issue
• Standard might be compromised
Software Systems Issue
• No comprehensive software to handle hotel functions
• Different sections of the hotel uses different systems
• Hence reduces effectiveness and efficiency
21. Weaknesses
• Quantitative Aspect:
Decreasing Profitability (as shown in FS)
• Decrease in Net Profits by HKD191 million compared to FY 2007
• FY 2008 Net Profits was less than 50% that of FY 2007
• Attributed by increasing Operating Expenses
22. SWOT Weakness (Extra Notes)
Expansion Issue:
It is good that the company is expanding rapidly. However, we are
afraid that standards might be compromised. There is also no
indication of any quality control when researched.
25. Opportunities
Strong China Base
• China is a growing market with increasing wealthy
individuals
• Has more than 50% of hotels in China
• Make Shangri-La a name in China’s upper class market
Unfufilled Customer Needs
• No strong and reputable “Business Hotel” name in
China and World
• Use Shangri-La to its advantage
26. Opportunities
Other New Emerging Markets
• Developing in Mongolia, Russia and Middle East
• Propensity to have higher profits in the future
Hotel Management Contracts
• Hotels are shifting to take leverage on brand name to
manage hotels
• Lower cost
27. SWOT Opportunities (Extra Notes)
New Emerging Market with Hotel Management Contracts:
With new markets that are recently emerging, investing hotels can
invest and generate a higher ROI in the future. Taking leverage to
manage hotels under its brand name will lower cost and free cash
as the companies do not need to be tied to construction projects.
28. Threats
Social Threats
• Threat on Terrorism
• Detrimental should anything happen
• Long term effect
Natural Calamities and Disasters
• Earthquakes, Floods and Tsunami
• Group has hotels in the Pacific Ring of Fire
• Indirectly contributes to Long term effect also
Competitor Threats
• Other hotels are also expanding
• Groups that are bigger and has a larger network than Shangri-La
• Currently no strategies to overcome it
29. SWOT Threats (Extra Notes)
Social Threats:
Terrorism has been a prevalent and pertinent issue on global
security. This can be detrimental to the industry because it not only
incur financial loss (buildings etc) but also contributes to the long
term effect of guests not wanting to return (psychological).
Natural Calamities:
Large hotel chains face the problem of their property being victims
to natural disasters which would also contributes to long term
effect (psychological) of the guest not wanting to come back.
32. Why Competitors?
The mentioned hotel chains are large hotel
companies with more than 1000+ hotels in
each group respectively. Because of this,
they are more renowned and they might
have also diluted the market, making
competition harder for emerging hotels.
This allows them to have a wider customer
base of which Shangri-La may face a
disadvantage. In addition, having a strong
loyalty programme allows them to retain
most of their clients.
33. The Four Seasons Group only manages
hotel and never builds as they take
leverage of the brand name. Thus, it will
reduce cost for the company and allow its
additional cash flow to be put into other
activities (Eg. Marketing, Training) that
might further enhance the group.
This Group adopts the same branding and
marketing strategy as a hotel offering
Asian Hospitality. This would be a direct
threat to Shangri-La should both hotels
operate in the same country and places.
Furthermore, they are both fighting for the
same clients as they are targeting
corporate customers as well.
36. Hotel Operation
Hotel Management
Property Rental
Revenue Analysis –
Shangri-La’s Business Segments in 2008
95% of Revenue
(Hotel Operation)
Room Rentals
Food &
Beverage
Pie chart represents total
revenue
All business segments
have increased in revenue
37. Shangri-La
Revenue Analysis –
Revenue Generated by Shangri-La
1,353 mil
1,219 mil
2007 2008
11% increase
($134 million)
2008
(US$'000)
2007
(US$'000)
Change
1,353,271 1,219,248 11%
39. Revenue Analysis (Extra Notes)
There was an increase in revenue of $134,023,000 (which is an
11% increase) from period ended 2007 to 2008.
The increase was unusual because, the hotel industry was suffering
from the recession. Shangri-La's revenue increase of 11%
contrasted to Banyan Tree's revenue decrease of 2%. Investigating
the factors of Banyan Tree's revenue decrease, it is revealed that
their property sales business segment decreased in revenue by
39% or 33,751,000. This is probably due to the property market
crash and political crisis in Thailand.
40. Revenue Analysis (Extra Notes)
To determine the factors affecting Shangri-La's revenue increase,
we will analyse the revenue breakdown into 3 business segments.
The segments are: Hotel Operation, Hotel Management And
Related Services, and Property Rentals.
Evidently, the revenue of all three business segments of Shangri-la
has risen. However we will focus on Hotel Operations as it has
generated 95% of total revenue. The further breakdown of the
Hotel Operation revenue reveal that F&B sales and room rentals
were mainly responsible for this segment's increase.
41. Revenue Change
Shangri-La 11% increase
Banyan Tree 2% decrease
In 2008, the hotel industries were in a depressed state
A superficial comparison to Banyan Tree’s 2% revenue
decrease confirms this
Therefore, Shangri-La’s management has done well to
increase its revenue.
Revenue Analysis
Comparing to Competitors
43. Opening of New
Hotel Developments
• Chengdu and
Tainan
• No. of available
hotel rooms
increased
Beijing Olympics
• Foreign clients to
China increased
• Special
promotions for
amenities, food
and beverage
Promotions &
Packages
• Pre-Olympic
vacation packages
• Featured its cuisine
at Beijing Festival (to
countdown to Olympics)
• Auditorium rental
package introduced
to 5 hotels
Revenue Analysis – Hotel Operations
Factors that increased revenue
44. Opening of New
Hotel Developments
• Chengdu and
Tainan
• No. of available
hotel rooms
increased
Beijing Olympics
• Foreign clients to
China increased
• Special
promotions for
amenities, food
and beverage
Promotions &
Packages
• Pre-Olympic
vacation packages
• Featured its cuisine
at Beijing Festival (to
countdown to Olympics)
• Auditorium rental
package introduced
to 5 hotels
Shangri-La capitalises
on festivals and events
to generate more
revenue
More hotels
developments
are expected to
be opened,
renovated/
extended in the
future
Revenue Analysis – Hotel Operations
Factors that increased revenue
The auditorium rental
package was strategic
45. Revenue Analysis (Extra Notes)
Opening of New Hotel Developments
The increase from hotel room rentals can be attributable to the
opening of Shangri-La's Far Eastern Plaza Hotel, Tainan in 2008 and
Shangri-La Hotel, Chengdu towards the end of year 2007.
Foreign Client Influx Due To Beijing Olympics
In addition, the 2008 Beijing Olympics have had an impact on
further increasing Shangri-La Beijing's hotels (including Traders
Hotel) revenue.
Although the influx of foreign clients applies to Shangri-La hotels
and its subsidiaries in China, we must be mindful that China makes
up of the majority of Shangri-La's revenue (39%).
46. Revenue Analysis (Extra Notes)
Promotion Packages
Shangri-La has capitalised on the Beijing Olympics to introduce Pre-
Olympic vacation packages in January 2008, which are essentially
tour and room rental packages for these hotels in Beijing .The
packages ranged from US$2,500 to US$3,500 each.
The Beijing Festival in February 2008, which was marketed by
Shangri-La as a countdown to the Beijing Olympics, indicated that
many of Shangri-La’s signature Shang Palace restaurants will host
culinary activities, showcasing authentic Chinese cuisine and modern
interpretations of Chinese cuisine During the Beijing Olympic Games,
Shangri-La has provided special food menus and additional capacity
packed room-service meals to cater to clients watching the Olympics
This would have caused the increase in F&B revenue.
47. Revenue Analysis (Extra Notes)
Introducing Auditorium Rental
Keeping in line with its target market of corporate clients,
Shangri-La has introduced the Signature "stages' package at five
hotel locations: Chengdu, Guangzhou, Xian, Suzhou and Chiang
Mai
This package includes auditorium rental, with complimentary
sound recording and photographing of the client's event (i.e.
award presentations, press conferences, interviews, seminars and
forums, product launches, intimate concerts and film previews).
By doing so, Shangri-la has attracted corporate clients who will
attend the events at those hotels .
48. Revenue Analysis – Management & Rentals
Factors that increased revenue
Hotel Management
• RevPar (revenue per available room) increased by 11 to 15%
for third-party hotels
• Opening of 2 subsidiary hotels
Property Rentals
• Opening of office towers for rental (Chengdu in late 2007)
• Property market was bad, but sellers kept the property prices
high. As such, consumers opted to rent property than to buy
property.
49. Revenue Analysis (Extra Notes)
Hotel Management
Several hotel subsidiaries and associates had opened for business
during year 2008. Shangri-La also had hotel management
agreements with 15 third-party operating hotels.
Property Rentals
Property rental revenue increased due to the opening of the office
tower at Chengdu in late 2007. The property market was doing
badly, but investors were still keeping to their high property
prices. Business and household consumers instead chose to rent
premises. This explains why Shangri-La's property rentals have
generated more revenue compared to the previous year end.
50. Revenue Analysis
Factors that increased revenue
Based on Shangri-La’s activities
and promotions, the revenue is
deemed to be sustainable.
53. Gross Profit Margin Analysis
2007 2008 Change
59% 59% 0 %
• GPM is 59 cents per dollar of revenue
• No change in Gross Profit despite increase
in revenue
• Due to increase in COGS by $57 million (17%)
• 44% of COGS was made up of inventories
(presumably F&B cost)
54. Gross Profit Margin Analysis –
Factors that increase COGS
F & B Cost
• Food and beverage was
purchased at higher price
due to Olympic Games
Labour cost
• The expansion of hotels
required more staff to be
hired
• Additional staff was hired
for Olympics and Beijing
festival to cope with
foreign clients
55. Shangri-La’s management admitted:
• Influx of foreign clients due to the Olympic Games was
affected by the Chinese Government tightening controls over
Visa Issuance
• In other words, the estimated foreign client influx was over-
budgeted
Gross Profit Margin Analysis –
What went wrong?
56. Gross Profit Margin Analysis (Extra Notes)
Shangri-la, in anticipation of Beijing hosting the Olympic Games
have over-budgeted foreign visitor arrivals. China had tightened
visa issuance control because of security concerns and therefore
affected expected hotel room occupancies. They had overspent
on food and beverage inventories due to over-budgeting on
special amenities and special menus for Olympic-goers. Naturally,
the labour deployed would be higher and thus, labour cost would
contribute to increase in COGS.
57. Gross Profit Margin Analysis –
What went wrong?
Management have proven themselves to be
generally effective. The issue of Visa Issuance
Control was not easily predictable. It is expected
that COGS management will improve the next
financial year.
58. Gross Profit Margin Analysis –
Comparison of GPM to Banyan Tree
• Banyan Tree’s GPM of 78 cents (per dollar of revenue) is
higher than Shangri-La’s GPM of 59 cents (per dollar of
revenue)
• The difference in GPM is likely to be due to some differences
in Shangri-La’s and BT’s business segments
• Shangri-La’s Food & Beverage focus is higher than BT’s. The
potential for COGS inefficiency is higher than BT’s.
GPM 2008 GPM Change
Shangri-La 59% 0 %
Banyan Tree 78% 3 %
59. • Operating Supplies was low enough to effect a 3 percentage
point change
• BT’s lower Operating Supplies was due to low revenue
recognition from Property Sales
• Not due to cost-cutting measures
GPM 2008 GPM Change
Shangri-La 59% 0 %
Banyan Tree 78% 3 %
Gross Profit Margin Analysis –
Comparison of GPM to Banyan Tree
60. Gross Profit Margin Analysis (Extra Notes)
The gross profit margin of Shangri-La has remained the same at 59%
in 2008, despite the revenue increase of 11%. This is due to the
increase of COGS by US$57,270,000 (up by 17%). In year 2008, for
every dollar of revenue, 59 cents was earned after deducting COGS.
This was lower than Banyan Tree's gross profit margin for 2008,
which was 78 cents earned for every dollar of revenue.
Comparing the gross profit margin change to Banyan Tree, Banyan
Tree's gross profit margin increased by 3 percentage point. Banyan
Tree's management has explained that their operating supplies was
lower due to lower revenue recognition from Property Sales segment
Extracting data on the COGS, it is revealed that the consumption of
inventories of US$171,597,000 made up of 44% of total COGS.
61. Therefore, Gross Profit is adequate
even though it maintained
Gross Profit Margin Analysis –
Comparison of GPM to Banyan Tree
69. • Net Profit Margin is at 17 cents (per dollar of revenue)
• There was a decrease in NPM by 14 percentage point
• Indications that expenses have increased
Net Profit Margin Analysis
2007 2008 Change
31% 17% 14 %
70. Net Profit Margin Analysis –
Factors of increase in expenses
Safety
Concerns
• Natural
disasters in
Sichuan &
Myanmar
• Ensure
client’s safety
and comfort
Increase in
Staff
• Staff costs
• Employment
benefits
Expansion of
hotel
• Rise in
depreciable
assets
• Rise in
taxation
• Rise in audit
fees
71. Safety
Concerns
• Natural
disasters in
Sichuan &
Myanmar
• Ensure
client’s safety
and comfort
Increase in
Staff
• Staff costs
• Employment
benefits
Expansion of
hotel
• Rise in
depreciable
assets
• Rise in
taxation
• Rise in audit
fees
By investing in client’s
safety and comfort
during emergencies,
Shangri-La will be
able to attract and
retain its clients
Employment benefits
ensure the loyalty and
service standards of
the staff
Net Profit Margin Analysis –
Factors of increase in expenses
The expansion of
hotel ensures future
economic benefits.
Depreciation, taxes
and audit fees are
part and parcel of an
expanding business.
72. Net Profit Margin Analysis (Extra Notes)
The net profit margin of Shangri-La is 17 cents for every dollar of
revenue, down from 2007 when it was 31 cents per dollar of
revenue. This decrease is considered normal when compared with
Banyan Tree's decrease in net profit margin.
Shangri-La is doing better than its competitor, Banyan Tree, which
has made 5 cents for every dollar in revenue in 2008.
The net profit margin decreased by 14 percentage point. Marketing
expenses, Admin Expenses and other expenses have risen
substantially. This was probably due to the costs incurred from
opening more hotels and deploying more resources to security and
client safety in response to the natural disasters in Sichuan and
Myanmar.
73. Net Profit Margin Analysis (Extra Notes)
With the opening, extension and renovations of hotels, the amount
in depreciation has increased substantially. The expansion of
Shangri-La's hotels have also increased taxation (after deducting
the tax credit in 2007) and audit fees. The employment of more
staff and management, and Shangri-La's philosophy of rewarding
its staff, affected a rise in salaries expenses and employee benefit
expenses.
74. Net Profit Margin Analysis –
Comparison of NPM
• BT’s NPM of 5 cents (per dollar of revenue) is much lower
than Shangri-La’s NPM of 17 cents (per dollar of revenue)
• BT Management admitted that there may be some
inefficiency in payroll cost, which forms the bulk of expenses.
NPM 2008 GPM Change
Shangri-La 17% 14 %
Banyan Tree 5% 25 %
75. Net Profit Margin Analysis –
Comparison of NPM
Indicates that Shangri-La’s operating costs are
comparatively efficient. Net profit is adequate
considering BT’s NPM .
76. Net Profit Margin Analysis –
Comparison of Change in NPM
• BT’s increased NPM was due to legal fees of Tsunami
insurance claims, hiring of staff. Due to the economy, some
of its business segments fared worse off than Shangri-La.
NPM 2008 GPM Change
Shangri-La 17% 14 %
Banyan Tree 5% 25 %
77. Net Profit Margin Analysis –
Comparison of Change in NPM
Shangri-La’s management is better able to
cope with the economic downturn and risks.
Effective management is indicative of profit
sustainability.
79. Analysing Profit Sustainability & Adequacy
• Management able to cope with downturn
• Operating cost is generally efficient and effective
• Expansion of hotels
• Shangri-La’s policies of quality, comfort and safety to clients
• Attracting events organisers to hold corporate events at
Shangri-La
80. Shangri-La's revenue increased where Banyan Tree's revenue
(basis of hotel industry) had fallen. This indicates that Shangri-La's
promotional packages and focus on corporate clients were
effective. Their policies which focuses on the safety and comfort of
their clients ensure the quality of Shangri-La's hotel service.
Furthermore, Shangri-La has been expanding and renovating their
hotels to ensure future economic benefits.
Despite the increase in COGS resulting from the Olympic Games
over-budgeting, Shangri-La's management have proven that they
are able to cope with uncertainty by responding to safety concerns
during the natural disasters in China and Myanmar. The
management has also coped well with foreign exchange risk.
Therefore, Shangri-La will be able to sustain its profits.
Analysing Profit (Extra Notes)
85. Fixed Assets Turnover Analysis
• The fixed assets turnover for Shangri-La has decreased from
0.37 in 2007 to 0.36.
• Banyan Tree’s fixed asset turnover has also showed a
decrease from 0.43 2007 to 0.42 in 2008.
• The income by benefit of fixed assets purchased in previous
years was seen as Shangri-La was able to increase its revenue
for 2008.
• However, Shangri-La invested more in fixed assets in 2008
and the benefit of these fixed assets has yet to be reaped,
therefore resulting in a lower fixed asset turnover than
previous year.
86. Although the fixed asset turnover is preferred to be high, it is
normal for this turnover in the hotel industry to be low. The reason
is mainly because the hotels cannot fully utilise their space for
business purpose (e.g. lobbies and corridors cannot be rented out)
and guest rooms (capacity that cannot be changed in the short
run).
Fixed Assets Turnover (Extra Notes)
88. Safeguarding Future Profitability
• Shangri-La is currently expanding so there’s a huge increase
in the fixed asset such as the properties under development
which resulted in an increase in total fixed assets.
• This decreased the fixed asset turnover, however, when these
fixed assets are put to use in the future, they will be able to
generate future revenue.
• Therefore, the company has adequate investment into
safeguarding its future profitability.
92. Shangri-La
Banyan Tree
2008 (USD’000) 2007 (USD’000)
Total Liabilities 2,671,323 1,915,682
Shareholder’s Equity 3,953,331 3,887,870
Debt to Equity Ratio 0.6758 0.4928
2008 ($’000) 2007 ($’000)
Total Liabilities 678,718 655,164
Shareholder’s Equity 556,549 568,708
Debt to Equity Ratio 1.220 1.152
93. Debt to Equity Ratio Analysis
• The debt to equity ratio for Shangri-La has increased from
0.4928 in 2007 to 0.6758 in 2008.
• Banyan Tree’s debt to equity ratio has also increased from
1.152 in 2007 to 1.220 in 2008 .
• Both companies relies more on debt to finance their
operations instead of equity.
• Shangri-La has obtained more bank loans to finance their
investment as compared to through means of equity.
• Banyan Tree has on the other hand more liabilities and lesser
equity due to a change in accounting policy, but they are also
relying more on debt financing.
94. A company is generally considered to have a high financial risk if it
has a high debt to equity ratio. When there is a recession in the
economy, it could lead to a downturn in the activity of the
company with the likelihood that it will have difficulties in meeting
its interest payments. Although it is generally not preferred to have
a very high debt to equity ratio, hotels industry finds it more
profitable to have it as high as possible since interest expense from
borrowings are tax deductible.
Debt to Equity Ratio (Extra Notes)
98. Shangri-La
Banyan Tree
2008 (USD’000) 2007 (USD’000)
Earnings before
Interest and Tax
290,658 505,054
Interest Expense 37,775 51,937
Interest Coverage
Ratio
7.69 9.72
2008 ($’000) 2007 ($’000)
Earnings before
Interest and Tax
60,434 142,898
Interest Expense 18,906 16,421
Interest Coverage
Ratio
3.20 8.70
99. Interest Coverage Ratio Analysis
• The interest coverage for Shangri-La has decreased from 9.72
in 2007 to 7.69 in 2008.
• Banyan Tree’s interest coverage ratio has also decreased from
8.70 in 2007 to 3.20 in 2008.
• Shangri-La has lower earnings although the interest expense
for the year has decreased mainly due to the increase in the
amount of Shangri-La’s COGS and losses which more than
offset the increase in revenue for the year.
100. Banyan Tree decrease in interest coverage ratio was owing to the
decrease in revenue for the year.
A high interest coverage ratio suggests that the company is
generating sufficient cash to meet its regular loan payments when
they fall due. However, if this ratio is too high, it might indicate
that a company is overlooking opportunities to maximise earnings
through financial leverage. This is not an issue as Shangri-La is
maximising the earnings, resulting in a decrease of the interest
coverage ratio.
Interest Coverage Ratio (Extra Notes)
102. Sensible and Effective Structure
• Although Shangri-La has a relatively high debt to equity ratio,
its interest coverage ratio of approximately 7 times gives
investor assurance that they will be able to pay their debts
when they are due.
• Therefore, Shangri-La finances are sensibly and
effectively structured as they uses debt financing which is
cheaper and at the same time maintain an moderate interest
coverage ratio.
103. Liquidity Position
-Net Working Capital
-Current Ratio
-Quick Ratio
-A/R Turnover
-Inventory Turnover
Stock Price
-Earnings Per Share
-P/E Ratio
-Dividend Yield
-P/B Value (Net Asset Backing)
Conclusion
IFS: Assignment 3
107. Shangri-La
Banyan Tree
2008 (USD’000) 2007 (USD’000)
Current assets 713,510 681,957
Current liabilities 469,078 507,144
Net Working Capital 244,432 174,813
2008 ($’000) 2007 ($’000)
Current assets 250,242 338,374
Current liabilities 199,733 205,846
Net Working Capital 50,509 132,528
Percentage Increase: 39.82%
Percentage decrease: 61.89%
108. Net Working Capital Analysis
• With a positive net working capital Shangri-La is better able to
cope with economic downturn. (E.g. Creditors pushing for
payment).
• Shangri-La has 39.82% increases in their working capital as
compared to previous year. This shows that the company’s
liquidity position is improving.
• Banyan Tree on the other hand has a decrease in their
working capital of 61.89%.
109. Hotels can operate with a less working capital than businesses in
other industry; this is mainly because substantial amount of
revenue is obtained through room sales, which is not supported by
stocks. Another reason is because the high proportion of revenue
generated from hotel is mostly by cash or short term credit.
Net Working Capital (Extra Notes)
113. Shangri-La
Banyan Tree
2008 (USD’000) 2007 (USD’000)
Current assets 713,510 681,957
Current liabilities 469,078 507,144
Current Ratio 1.52 1.35
2008 ($’000) 2007 ($’000)
Current assets 250,242 338,374
Current liabilities 199,733 205,846
Current Ratio 1.25 1.64
114. Current Ratio Analysis
• Shangri-La’s current ratio has increased from 1.35 in 2007 to
1.52 in 2008.
• On the other hand, Banyan Tree’s current ratio has decreased
from 1.64 in 2007 to 1.25 in 2008.
• This indicates that Shangri-La is improving its liquidity.
• It is favourable as it suggest that Shangri-La is able to repay
its debt obligations.
115. Shangri-La’s current ratio has increased while Banyan Tree’s
current ratio decreased. This indicates that Shangri-La is
improving its liquidity, however, they can afford to lower their
current ratio to maximise their profitability (e.g. making
investment). As it could indicate that they more money is being
tied up in working capital and not used efficiently. For example,
it could indicate collection on A/R is not as quickly. However,
creditors like it to be high as it indicates the company capability
to repay its debt obligations.
Current Ratio Analysis (Extra Notes)
116. Although, it is preferred generally to have at least a current
ratio of 2, it is normal to have a lower current ratio for hotel
industry. This is mainly because the general rule is for providing
a safety margin for operations that would normally have a
portion of their assets tied up in inventories (e.g.
manufacturing industry whereby inventories made up a large
portion of current assets). However, hotel’s inventories are
mostly for food and beverages service and they form a small
portion of current assets. Therefore hotels can operate with
current ratio of less than 2.
Current Ratio Analysis (Extra Notes)
120. Shangri-La
Banyan Tree
2008 (USD’000) 2007 (USD’000)
Current assets less
inventory less other
receivables and
prepayments less
deposit
713,510 – 31,805 –
74,542 – 62,342 =
544,821
681,957 – 28,215 –
60,024 – 39,698 =
554,020
Current liabilities 469,078 507,144
Quick Ratio 1.16 1.09
2008 ($’000) 2007 ($’000)
Current assets less
inventory less other
receivables
250,242 - 13,409 -
49,867
= 186,966
338,374 - 11,051 -
48,264
= 279,059
Current liabilities 199,733 205,846
Quick Ratio 0.94 1.36
121. Quick Ratio Analysis
• Shangri-La’s quick ratio increased from 1.09 in 2007 to 1.16 in
2008.
• However, Banyan Tree’s quick ratio deteriorated from 1.36 in
2007 to 0.94 in 2008.
• Shangri-La has better liquidity position than Banyan Tree
• This indicates that Shangri La is more able to meet short term
obligations with its liquid assets.
122. As hotel industry has relatively low inventories, the current ratio
and quick ratio for these companies will normally be around the
same. Similar to current ratio, creditors would prefer for this ratio
to be high as an indication that the company is able to repay its
debt obligations while owners would rather it be low to maximise
its profitability.
Quick Ratio Analysis (Extra Notes)
127. Accounts Receivable Analysis
• Shangri-La accounts receivable turnover has increased from
18.86 in 2007 to 21.49 in 2008.
• Banyan Tree’s accounts receivable turnover has on the other
hand decreased from 6.78 in 2007 to 5.78 in 2008.
• As compared to Banyan Tree, Shangri-La’s extension of credit
and collection of the accounts receivable are efficient and
effective.
128. Shangri-La has a relatively high accounts receivable turnover; this
indicates that their extension of credit and collection of the
accounts receivable are efficient.
Shangri-La has a will most probably have most of its credit sales in
the property rental business segment, as customer will mostly pay
for their bills straight after their stay or after their meal.
As credit sales for Shangri-La is a small component of total sales,
using total sales to calculate accounts receivable turnover is not a
fair representation of Shangri-La’s accounts receivable turnover.
Accounts Receivable Turnover Analysis
(Extra Notes)
133. Inventory Turnover Analysis
• Shangri-La’s inventory turnover has decreased from 19.67 in
2007 to 18.37 in 2008.
• Banyan Tree’s inventory turnover has also decreased from
8.08 in 2007 to 6.48 in 2008.
• Shangri-La’s inventories is mainly in the food and beverages
sector – perishable goods
• Movement of stocks is slower due mainly to the economic
downturn, and business being affected by natural disasters in
China.
• There is also a decrease in Banyan Tree’s inventory turnover
which indicates that Shangri-La decrease is normal.
134. Shangri-La has an inventory turnover of 18.37, this is mainly
because inventories of Shangri-La is in the food and beverage
sector, which mostly comprises of perishable goods.
Banyan T’s inventories turnover for 2008 is lower as compared to
Shangri-La, mainly due to the difference in nature of business
segments. Shangri-La’s inventories is mainly affected by the food
and beverage sector (F&B perishables thus cannot keep for long)
whereas Banyan Tree’s inventories consist of mainly spa
supplies(luxuries that need not be sold as quickly).
Inventory Turnover Analysis (Extra Notes)
136. Liquidity Position
• Net working capital is positive, current ratio and quick ratio is
favorable.
• Accounts receivable turnover is effectively managed.
• Although inventory turnover has decreased, the management
has admitted to an inefficiency and will proactively monitor
and respond to its inventory turnover in the following year.
• Therefore, Shangri-La is managing its liquidity efficiently and
able to sustain its operations.
141. Shangri-la's EPS had dropped by 7 cents from 2007 to 2008.
Although the fluctuation in EPS does not appear to be attractive,
the result is actually similar to Banyan Tree's EPS, who had a
6.8cents drop in the same period. This shows that Shangri-La
investors have become more conservative during the period of
poor economy.
Overall, Shangri-La has a lower fluctuation as compared to Banyan
Tree.
EPS Analysis (Extra Notes)
142. Factors Affecting EPS
Net Profit
•39% decrease
from 2007 to
2008
No. of
Shareholders
•Increased
•Due to share
options granted
to directors &
key employees
143. As per previous analysis, we realised that there is a 39% decrease
in net profit. Since net profit is part of the computation of EPS, its
decrease will cause a decrease in EPS; Secondly, there is an
increase in number of shareholders and it dilutes the EPS. The
increase is due to the share options being granted to directors and
key employees who completed one year of service in the company.
The Company has two share option schemes: the Executive Option
Scheme and the New Option Scheme.
Because the factors determined are considered to be normal
(consider that there is an economy downturn during that period),
the EPS for Shangri-La is generally positive.
EPS Analysis (Extra Notes)
152. Although higher PE may indicate investors’ prospects on a
company, Banyan Tree and Shangri-La are dealing in a similar
industry. As we assume all other factors are the same, investors
might as well pay a lower price to invest in similar stock.
Because if anything happen in the economic (recession), both
companies will be affected since they are in the same industry.
Given the case where the investor can choose to invest $20, get
back $1 in Company A as compared to investing $40 to get back
$1 in Company B. The investment of $20 appears to be more
attractive since they yield the same return ($1) to the investor.
In this case, the lower the P/E ratio, the more attractive it appears
to the investor. As such, the P/E ratio for Shangri-La has decreased
from 24.85 to 19.95, thus making it more attractive.
P/E Ratio Analysis (Extra Notes)
157. 2007
(USD’ Cents)
2008
(USD’ Cents)
Shangri-La 1.1 2.69
Banyan Tree 0 0
Dividend Yield
• Dividend is usually contingent on profit
• Dividend yield is naturally lower during economy downturn
158. Banyan Tree has $0 dividend yield for both year while Shangri-La
has an increase of 1.6 cents from 2007 to 2008.
Assuming all other factors are equivalent, an investor looking to
supplement his or her income would likely prefer Shangri-La stock
over that of Banyan Tree because 2.69 cents is more than
receiving nothing.
This figure may appear to be low. However, dividend is usually
contingent on profit. In economic downturn, dividend is naturally
lower. Economy is expected to be picking up in 2009 and 2010.
Based on future plans of expansion of hotel and Shangri-La, being
active in promoting its packages, we are expecting profits to
increase over the next few years. As a result dividend will be
expected to go higher.
Dividend Yield Analysis (Extra Notes)
163. Shangri-La
2008 (USD$’000) 2007 (USD$’000)
Total shareholder equity
No. of ordinary share (‘000)
Net asset backing per share
4,251,388
2,885,363
4,185,328
2,881,488
1.47 1.45
788,645,000
761,110,294
804,493,000
758,402,280
Banyan Tree
Total shareholder equity
No. of ordinary share
Net asset backing per share 1.04 1.06
164. 2007 2008
Shangri-La 1.45 1.47
Banyan Tree 1.06 1.04
Net Asset Backing per Share Analysis
• As the net asset backing per share is still more than 1, it
shows that the market price is higher than book value of the
shares.
• Investors can hold on and wait for the market price to drop as
close to the book value as possible to buy the shares.
165. The net asset backing per shares shows the accounting value of
each ordinary share issued. However this value is not a realistic
ratio because the firm will need to realise all its assets (which take
into account intangible assets like goodwill of the company) and
liabilities to individual shareholders. Since all the assets shown will
be in historical value and not fair market value, we believe that it
will not give a fair comparison.
A better comparison would be the Price book ratio analysis.
Net Asset Backing per Share Analysis
(Extra Notes)
167. Shangri-La
2008 (USD$) 2007 (USD$)
Share price
Net asset backing per share
P/B ratio
1.1494
1.47
3.1705
1.45
0.78 2.19
2008 (USD$) 2007 (USD$)
P/B ratio
0.2982
1.04
1.4180
1.06
0.29 1.34
Banyan Tree
Share price
Net asset backing per share
168. 2007 2008
Shangri-La 2.19 0.78
Banyan Tree 1.34 0.29
Price Book Ratio Analysis
• The significant decrease is attributed to the financial crisis where
investors and speculators are more apprehensive in their
investment.
• Investors are currently taking a conservative approach by not
entering into the market.
• A ratio lower than 1 indicates that investor are paying less than
the company’s net book value. However, it does not seem to be
motivating investors to invest at this point of economy downturn
even though it is attractive.
169. The drop in the ratio from 2.19 to 0.78 may be attributed to the
financial crisis where investors and speculators are more
apprehensive in investing in the stock market. As the ratio is less
than one (0.78 in this case), it still generally indicates that the firm
is not very successful in creating value for its shareholders.
Investors perceive that they wont be able to make much profits,
thus they are not very willing to pay more than its book value to
secure a share because they believe that they will not be able to
get a higher return in the future at that point in time. However, a
lower ratio also indicates that the investor is paying lesser that the
company's net book value and hence, it is of a lower risk and they
may recover their investment upon its liquidation because the book
value is more than the initial investment outlay.
Price Book Ratio Analysis (Extra Notes)
171. Although the earnings per share is not favourable, it is still
generally positive. On top of that the price earning ratio has
decrease, thus making it more attractive to investors. Furthermore,
the dividend yield was more than the close competitor which did
not even give out dividends at this juncture.
The net asset backing does not give a clear picture and is
unrealistic but looking at the price book ratio, it is lesser than 1
which shows that investors are paying less than the company’s net
book value.
Therefore, in light of all the considerations above, the stock price
for Shangri-La is attractive.
Attractiveness of Stock Price
173. There is a difference in the FRS being used. Banyan trees adopted
Singapore FRS while Shangri-la used Hong Kong FRS.
For most figures, confidential values are not given and they are
significant in the computation. Thus the above analysis can only be
meant for reference.
Business conditions for the hotel industry might have changed
substantially due to the recovering of the financial crisis from 2009
onwards which may lead to out-of-date analysis.
Limitations
174. The comparison between Shangri-La and Banyan Tree is not very
meaningful due to the nature and size of both companies. Banyan
Tree focuses more on Resort and Spa whereas Shangri-La focuses
on City Hotels.
Ratios are calculated using historical cost data. Historical earnings
may not reflect future earnings esp. when large changes are going
on in the China hotel industry.
Limitations
175. As Shangri-La is a hotel group that operates internationally, we
searched for global industry insights from the Tourism and
Hospitality Sector. However we were not able to find data for
worldwide it. Thus, we did a research on the China Tourism
industry instead where Shangri-La has a majority number of hotels.
The accounts receivable turnover requires credit sales to compute.
However, as the credit sales is not provided, the total sales figure is
assumed to be the credit sales. The credit sales is not a substantial
amount of total sales as most transactions are on cash or short
term credit basis.
We have assumed that there is no preference dividend upon
calculating the earnings per share.
Assumptions (Micro Aspect)
176. Banyan Tree is a direct competitor of Shangri-La and it represents
the industry average, except otherwise stated.
Shangri-La will sustain and continue as a going concern with no
substantial change to its trade.
The economy will start to recover as anticipated by the IMF and WB
in 2010.
The information that are provided by our resources are accurate
and reliable.
With all the necessary information at present, it is sufficient to
show Shangri-La’s future growth and development.
Assumptions (Macro Aspect)
178. In the Long Term View
• 15 hotels scheduled to be opened in the next 5 years
• Expansion plans continuing in China and will be moving into
other big markets like Europe, North American & Indian
Subcontinents
• Branding of Shangri-La and it’s image built over the years
• Potential of good capital gain upon sales of shares
179. In the Long Term View…
As the market is recovering, we can further determine that
Shangri-La will be doing better in the future. As have 15 more
hotels scheduled to open within the next 4-5 years,
sustainability may not be an issue as they are expanding into
the Europe, North America, Indian Subcontinent and with
major expansion still continuing in China.
Despite the adverse conditions, statistics show that the no. of
tourists going to China in 2008 has increase and China's
forecasted GDP will continue to grow. Also, due to a shift in
consumer's mindset where they do not mind to pay more for
better service has cause Shangri-La to take leverage in this
aspect. On top of that, the branding of Shangri-La as a
business hotel will attribute to further and better earnings in
the future.
180. As the share price is HKD14.60 = SGD 2.61, Ms Lui will able to get
38 lots upon investing. However, based on current dividend of 4.1
cents per share, she will only be able to get a dividend payment of
$1592 which would only be about 1.6% of the investment return
of 5% per annum, a far cry from her requirement of at 5% per
annum. Even the dividend payout during 2007 would also be
$1848, which is only 1.8% of the investment return.
However, she shouldn't use the past two years dividend payout as
a basis of assumption that the company would only give a payout
of that lesser amount because company may not be able to
declare high dividends on both 2007 and 2008 as they might be
financially strapped due to the economic crisis. On top of that,
their competitors did not even declare dividends at all.
Conclusion
181. Adding on, although Ms Lui may not be able to get 5% based on
annual dividend returns, she should not only take dividend payouts
into consideration but rather take a calculated risk to invest in the
stocks now for future capital gains. We would suggest Ms Lui to
take leverage of the share price and invest in Shangri-La ‘s stock.
As from the data extrapolated online, we can see that the current
share price is not at its peak yet and it is at a reasonable rate to
actually step in to invest. Moreover with the IMF and World Bank
predicting that the economy would recover by this year indicates
that investors will start coming in to invest in the near future,
pushing the prices up again.
Conclusion
182. We also believe that due to the expansion, it will create value for
its shareholders and investors perceive that they will be able to
make much profits, thus they are willing to pay more than its book
value to secure a share because they believe that they will be able
to get a higher return in that future point in time.
Moreover, with an effective management team that manages their
profitability and liquidity well, Shangri-la will continue to be a key
player in the hotel industry. Although most hoteliers held a bleak
outlook for international demand, domestic demand sources seem
like an alternative choice to focus on. Shangri-la should be able to
forecast such growth in domestic demand and react accordingly
with their current marketing and branding strategy.
Conclusion
183. Therefore, without taking the dividend payouts into consideration,
Shangri-La is actually a good company to invest in due to the
potential of getting a good capital gain upon the sale of the shares
in the future, which might be more than the annual 5% ROI that
Ms Lui might require. We would hence recommend her to
invest right now.
Conclusion
187. Banyan Tree Ltd. (2008). Financial Report 2008. Singapore.
Shangri-La Asia Ltd. (2008). Financial Report 2008. Hong Kong.
Shangri-La Asia. (2010, January 15). Shangri-La Hotels and Resorts
| Press Releases. Retrieved January 10, 2010, from Shangri-La
Hotels and Resorts.
Citations
Editor's Notes
Operating hotels is their major principal activity, while ownership interests in investment properties like residences, made up the least revenue of the company.
Cash Position: Cash rich. Has cash in the bank, healthy
Trade Debtors and Creditors: People don’t owe them, they don’t owe people = company is quite healthy based on this
Decreasing Profitability: Alarming! May be attributed to financial crisis. Expenses went up – Ploy to do stock obsolesces during financial crisis?
Although the fixed asset turnover is preferred to be high, it is normal for this turnover in the hotel industry to be low. The reason is mainly because the hotels cannot fully utilise their space for business purpose (e.g. lobbies and corridors cannot be rented out) and guest rooms (capacity that cannot be changed in the short run).
