The Hongkong and Shanghai Hotels, Limited Annual Results for the Year Ended 31 December, 2015

HONG KONG, March 16, 2016 /PRNewswire/ --

The Hongkong and Shanghai Hotels, Limited today announced its annual financial results for 2015. Mr Clement K.M. Kwok, Managing Director and Chief Executive Officer of The Hongkong and Shanghai Hotels, Limited (HSH) commented on the results announcement:

"I am pleased to report that we delivered a satisfactory set of financial results in spite of a challenging year for our company, with intense competition and a difficult operating environment in many of our key markets.

The satisfactory results achieved by the Group in the face of many challenges emphasises the importance of having a diversified portfolio of assets to weather the cyclical nature of the hotel industry. We continued to work hard to improve revenues and increase shareholder value through asset value appreciation and operational earnings, while doing business in a high cost environment.

Our long-term strategic mission is to build, maintain and create the highest quality assets that become legacies in their time. At 150 years old, we are the oldest registered company in Hong Kong, but one that is still at a youthful stage in its development and growth strategy. We are still building for the future and it is an exciting time for us as a group.

Highlights of 2015

The highlight of the year was the grand opening of The Peninsula Paris in April 2015. In its first full year of operation, The Peninsula Paris has achieved tremendous international recognition and is already becoming noted as one of the finest hotels in Europe. The grand opening party was a spectacular display of traditional Peninsula hospitality with thousands of international and local guests and celebrities in attendance.

In December 2015, we were pleased that Westminster City Council's planning committee resolved to grant in principle planning consent for a new 190-room hotel, to be known as The Peninsula London, located at 1-5 Grosvenor Place, Hyde Park Corner, Belgravia in central London. London is one of the world's most dynamic capital cities and we are excited to move another step closer to introducing The Peninsula brand to London.

Also in December 2015, we were pleased to move another step forward with The Peninsula Yangon project. An agreement was reached between the Myanmar Ministry of Rail Transportation and Yoma, our partners in Yangon, for the extension of the land lease that is required for the development of a mixed-use project located in the Yangon business district in Myanmar. The former Myanmar Railway Headquarters forms part of this development and will be renovated to become The Peninsula Yangon.

In July 2015, together with our partners Dogus Holding A.S. and BLG Gayrimenkul Yatirimlari ve Ticaret A.S., we entered into a conditional shareholders' agreement to form a joint venture partnership, of which HSH will have a 50% share, for a proposed hotel development in Istanbul, Turkey. The location of our project is truly exceptional, with views across the Bosphorus to the Topkapi palace, and despite short-term security concerns we remain optimistic for the development of the high-end tourism market in Istanbul.

We are working through the challenges of these three exciting hotel projects and it is our focus to make these projects work in commercial and financial reality. Our cashflow strategy is to keep our existing business generating sufficient levels of cash to support our new projects while maintaining a robust financial position, and to ensure that we have a healthy interest rate cover despite our project commitments.

We were pleased to reach an agreement with the Hong Kong Government for the renewal of the operating right to The Peak Tram, commencing 1 January 2016. As one of Hong Kong's most popular tourist attractions that has been in operation since 1888, it is a much-loved and important asset for our company and I am delighted that we can continue to provide our services to tourists and the local community.

In December 2015, the Group restructured the lease agreement for The Peninsula Tokyo with our Japanese partner, MEC, which previously owned the hotel building and granted our Group a 50-year lease which commenced in 2007. We were delighted to reach an agreement to purchase the hotel building from MEC and to enter into a new Land Lease Agreement for a fixed term of 70 years from December 2015, for a cash consideration of JPY10.3 billion (excluding acquisition and transfer taxes). We therefore extended our tenure of The Peninsula Tokyo by 28 years.

Improving assets through renovation

We reported in 2014 that our business would be impacted in the short term by the renovations at The Peninsula Chicago and The Peninsula Beijing. This impact will continue into 2016 as the commencement of the renovation of The Peninsula Beijing was delayed due to the additional time required to achieve the necessary permits. We are confident that when these renovations are complete in 2016 for The Peninsula Chicago and 2017 for The Peninsula Beijing, we will see increased revenue and earnings from the improved product offering. These renovations are in line with our philosophy of improving existing assets to deliver long-term value for our shareholders.

A challenging environment

As a Hong Kong company with the majority of our assets located in Hong Kong, we are concerned about the short-term outlook for the tourism industry in Hong Kong. Overall tourist arrivals declined 2.5% year-on-year and Chinese mainland arrivals declined by 3% year-on-year. As a result, average room rates have been under pressure, not just for The Peninsula Hong Kong, but also for our competitive set and across the industry. Retail sales have inevitably suffered as a result of lower tourist arrivals, and the tenants in our shopping arcades are reporting a challenging environment.

Unfortunately the tragic terrorist events in Paris in January and November shocked the world and placed a shadow over the city, with tourism heavily impacted in the short term. Our businesses in Paris and Bangkok were impacted by the terrorist attacks in these cities during 2015, and we continue to be concerned about the global terrorist threat and its impact on tourism.

Financial Performance

The Group's revenue in 2015 amounted to HK$5,741 million, representing a slight decrease of 2% over 2014. The EBITDA for the year of HK$1,440 million, a decrease of 6% over the previous year, reflects the challenging situation that we faced in many of our key markets, as well as the impact of the renovations in The Peninsula Beijing and The Peninsula Chicago. Profit attributable to shareholders amounted to HK$1,000 million, after including property revaluation gains, net of tax and non-controlling interests. The Group's underlying profit attributable to shareholders for the year ended 31 December 2015 decreased by 14% to HK$688 million.

We believe that if we had not commenced the major renovations at The Peninsula Beijing and Chicago and the earnings of those projects had been the same as last year, the underlying profit of the Group in 2015 would have been flat to last year, which we consider to be a very creditable result in the light of the market environment especially in our main market of Hong Kong. Although revenue was down, we have worked hard to control costs. Despite general inflation in labour and operating costs, the Group's total operating costs and overheads were maintained at a level similar to last year, partly helped by reduced operating costs during the renovations of The Peninsulas in Beijing and Chicago as well as a weaker foreign currency.

The Board has recommended a final dividend payable on 24 June 2016 of 15 HK cents per share. Together with the 2015 interim dividend of 5 HK cents per share paid on 30 October 2015, the total dividend in respect of the 2015 financial year will be 20 HK cents per share, a decrease of 13% compared to 2014.

A detailed review of our business performance is below.

BUSINESS PERFORMANCE

Our Group comprises three key divisions -- hotels, commercial properties and clubs and services.

Group Results

Hotels Division

The Peninsula Hong Kong

The Hong Kong market experienced 3.9% fewer overnight arrivals during 2015 and overall hotel occupancy for the city declined 4 percentage points year-on-year. As a result of the weaker demand across the city, The Peninsula Hong Kong experienced a soft year with average room rates and RevPAR negatively affected.

During 2015, Japanese visitor arrivals to The Peninsula Hong Kong declined, mainly due to the weak currency in their home market, and although we continue marketing efforts in Japan, we believe that until the currency regains value, the Japanese segment will remain soft for the short-to-medium term. It was widely reported that Chinese mainland visitors arrivals declined in Hong Kong, but at The Peninsula Hong Kong we were not significantly affected by this trend and our mainland arrivals remained relatively stable. With the fall in leisure travellers, our strategy is to capture more corporate and group business, which we successfully secured by attending additional trade shows and sales events in the wider Asian region.

Food and beverage revenue remained healthy, and although mildly affected by the lower occupancy rates in the hotel, the local market and local patronage to our outlets remains strong. Spa revenue increased due to a popular new product line. The Peninsula Office Tower remained fully let and the Shopping Arcade revenue remained stable, demonstrating that our tenants continue to value The Peninsula brand, although we are sensitive to the weaker retail market across the city.

The hotel's three-year collaboration with Britain's prestigious Royal Academy of Arts, Love Art at The Peninsula, generated significant positive media coverage with a full-sized replica of a coach teetering on the Sun Terrace in an artwork by renowned British Sculptor Richard Wilson. This pioneering approach to art has helped to positively impact our company's image in the local and international art communities. Throughout June, National Geographic broadcast a promotional documentary about the hotel's 85^th anniversary celebration, titled The Making of a Gala. In November, a Terry O'Neill James Bond photography exhibition was successful and resulted in sell-out bookings at Gaddi's. Our strategy with these initiatives is to bring our brand to the forefront of art, culture and lifestyle.

The Peninsula Shanghai

The Peninsula Shanghai had a stable year despite intense competition and an oversupply of inventory across the city, and remains the leader in both RevPAR and average room rates in Shanghai. Domestic travellers are the top geographic segment making up around 50% of hotel guests, followed by the US and Hong Kong. Emerging markets include Russia and the Middle East, with high level business delegations increasing from these markets because of investments in China. The high levels of PR exposure generated from The Peninsula Paris has helped drive new business from these markets due to increased brand recognition.

The Peninsula Academy programme has been very popular with affluent travellers in Shanghai looking for new and unique experiences, such as a private tour of Shanghai's finest heritage buildings in one of the hotel's Rolls-Royce Phantoms. We are seeing a move towards online and mobile bookings, which has led to a higher number of last-minute bookings and also strong business generated from online travel agencies, including Ctrip.

The shopping arcade in The Peninsula Shanghai remains almost fully let. Our strategy is to maintain a strong mix of tenants selling fashion, jewellery and watches to encourage more shoppers to visit the arcade. Our tenants are expanding their presence in the arcade and bring long-term revenue.

All food and beverage businesses located on the Bund were impacted when the government boarded up the area and reduced street lighting following the tragic events on the Bund on New Year's Eve 2014. This affected our revenue in the first quarter, but food and beverage business picked up later in the year. While ongoing austerity measures in the Chinese mainland have negatively impacted demand from some of our government-related business, this was successfully mitigated by increased banqueting for family gatherings, reunions and personal celebrations.

As of 31 December 2015, The Peninsula Shanghai Residences sold 13 out of the 19 units available for sale.

The Peninsula Shanghai is active in community activities and corporate responsibility efforts. The 2015 Tour de Bund saw hotel guests, city residents, company teams, media, club and professional cyclists -- including Ding Yong, winner of the Chinese National Road and Track Cycling Championships -- saddle up for a charity ride through the heart of Shanghai. With its fifth anniversary in 2015, this event helps to promote the benefits of fitness and healthy living, increases awareness of pollution-free travel, and raises money for Raleigh China, a charity which used these funds to construct much-needed schools in rural areas of Guizhou province, China, and to build access roads and water storage facilities.

The Peninsula Beijing

The market in Beijing was challenging in 2015 due to continued austerity measures impacting both rooms business and overall food and beverage and spa businesses across the city. However, despite a slight slowdown, there is a reorientation of the Chinese mainland economy from an export-driven model to a domestic consumption-driven economy, and we expect to see increased spending on food and beverage and experiences.

In keeping with our Group's philosophy of improving existing assets to deliver long-term value for our shareholders, a major RMB 890 million renovation for The Peninsula Beijing started in 2015. The renovation will be completed in 2017, slightly later than planned, due to a delay in obtaining the necessary permits. As forewarned in the 2014 Annual Report and the 2015 Interim Report, the disruption caused by the renovation negatively affected our earnings in 2015 as a result of rooms being taken out of commission and some retail tenants moving out of our shopping arcade due to the disruption to business. We expect this impact on earnings will continue throughout 2016 and into 2017 when the renovation will be completed.

The renovation will significantly enhance the lobby, restaurants and our room product, with new guestrooms starting at a spacious 60 square metres - the largest in Beijing and among the largest in China. Each room will feature a sleek entrance hall, a separate bedroom, living area and a dressing room, and an outsized bathroom styled in black and white veined marble. The renovation will also include fully customised in-room amenities, and proprietary Peninsula technology with interactive digital bedside and desk tablets that can be pre-set in 11 languages.

The renovation of The Peninsula Beijing incorporates the Group's sustainability efforts, incorporating BREEAM principles, the implementation of new LED lights, a much-improved air filtration system, and better facilities for our staff including a staff gym, relaxation area and cafe. During the renovation, we took the opportunity to send employees from Beijing to our other Group properties with our cross exposure programme, allowing them to learn best practices and broaden their skillset by experiencing a new work environment, operations, people and culture.

The Peninsula Tokyo

The Peninsula Tokyo enjoyed a strong performance in 2015, helped by the strengthening of the Japanese economy and the weakening of the yen making it more affordable for overseas travellers. Japan has made significant changes to visa requirements within the Asian region which has resulted in increasing numbers of visitors from the Philippines, Thailand, and Indonesia. Local consumption was slightly weaker, resulting in lower food and beverage revenue at The Peninsula Tokyo. 

Our strategy was to improve RevPAR and market positioning, which we successfully achieved in 2015. There was a large increase in transient business, with an increase of 20% over 2014 in terms of the international wholesale segment. Mainland Chinese visitor arrivals to Tokyo have increased substantially. The weddings business improved later in 2015 after a slow start across the city, and The Peninsula Tokyo marketing team commenced a more aggressive marketing strategy to promote our weddings business. Our strategy is to focus on improving our rooms and food and beverage offerings to the local domestic market, and to encourage more business in our restaurants and spa.

In December 2015, the Group successfully restructured the lease agreement for The Peninsula Tokyo with our Japanese partner, MEC, which previously owned the hotel building and granted our group a 50-year lease which commenced in 2007. We were delighted to reach an agreement to purchase the hotel building from MEC and to enter into a new Land Lease Agreement for a fixed term of 70 years, for a cash consideration of JPY10.3 billion (excluding acquisition and transfer taxes). We therefore extended our tenure of The Peninsula Tokyo by 28 years.

The Peninsula Bangkok

Thailand started the year with a strong recovery over 2014 and this was helped further in the second quarter, when the Thai Government ended martial law, which was positive news for our MICE (Meetings, Incentives, Conferences and Exhibitions) business. We saw increased revenue from catering as a result of more conferences and meetings. The second quarter, which is traditionally slow in Bangkok, enjoyed its strongest year since 2008.

The continually weakening Thai baht was positive for tourism and we saw increasing arrivals from the Korean market and other regional markets. Australian business declined in 2015, possibly due to many airlines offering direct flights to Chiang Mai and the islands, instead of having to transit via Bangkok. Also, many Australian and European long-haul travellers booked transit flights via the Middle East, which impacted the Bangkok market as a travel hub destination.

Unfortunately there was an impact on our business due to the terrorist attack in Bangkok in August, which deterred some leisure tourists from visiting Thailand in the months following the attack, but the business impact appears to have been short-lived and tourists returned to Thailand in the fourth quarter. We continue to be concerned about security threats in Bangkok and are continually assessing and working to improve our safety and security efforts to protect our guests and staff.

One of the key Group marketing strategies in 2015 was to focus on promoting Thailand and The Peninsula Bangkok, including the global Peninsula Wellness programme launched at The Peninsula Bangkok Spa. Highlights included a Thai massage programme in collaboration with Wat Pho Temple, new treatments and product lines, and Tastefully Thai, a group-wide three-month celebration of Thai cuisine, culture, art and wellness. We are delighted to report that The Peninsula Bangkok Spa was voted Number 1 in Asia by Travel + Leisure.

The Peninsula Manila

The Peninsula Manila enjoyed a positive year, with revenue increasing 5% and RevPAR up 10% over the same period last year, partially due to consolidation in the local market as some competitor set hotels closed and others were under renovation. Various bans on local airlines were lifted for the EU and US and new routes opened up to Russia, which significantly boosted traffic. Cruise ship arrivals to the Philippines increased significantly. The rise of the middle class in the Philippines had a significant effect on our business with domestic travellers now comprising the second largest group after the US.

Madrid Fusion Manila, a gastronomic event held in April, attracted a significant number of international and local visitors and celebrity chefs to our food and beverage outlets. Our Peninsula Manila colleagues were proactive in serving the community and we are delighted to report that The Peninsula's global campaign for charity, Hope for the Philippines, completed Phase 1 of the project with the design and construction of 75 new homes for people displaced after Typhoon Yolanda in 2013.  All 75 houses were turned over to their new owners in January 2016.

The Peninsula New York

The market in New York City was particularly challenging in 2015 due to intense competition and flat growth across the city. The decline in RevPAR of 7% was a similar result for most of our competitive set. However, we were pleased to report that we improved our RevPAR market positioning despite the challenging environment. New York has been flooded with additional supply, which also impacted our competitive set. The traditionally strong business from The Middle East and Switzerland did not grow to the extent we had expected. The US dollar strengthened against the Euro which had a softening effect on our European business. Corporate business was relatively stable although we were disappointed to lose a key corporate account. Our strategy remains to build a broader base of varied corporate businesses to support the hotel and to maintain occupancy.

The worst winter weather in 35 years meant that business in our rooftop bar, Salon de Ning, was slower in the first quarter although this picked up in the autumn. There was intense competition in the food and beverage industry in New York City, with many new and trendy celebrity chef restaurants opening in the city. Our direct competitive set embarked on renovations and product overhauls. We repositioned Clement restaurant as a more approachable dining option within Midtown and also introduced a new fixed-price pre-theatre dinner with shuttle service to Broadway. With the new American fare menu direction, PR and marketing efforts have continued to position the restaurant and bar as a top spot to dine in the city.

In December, The Peninsula New York volunteered to participate in the NYC Carbon Challenge, committing to reduce its carbon intensity by 30% by 2025, in support of the city's collaborative effort in curbing greenhouse gas emissions. The NYC Carbon Challenge reflects our company's own Sustainable Luxury Vision 2020 in which we endeavour to support the local communities where we operate and to be conscious of our environmental footprint.

The Peninsula Chicago

The US market in 2015 was flat. Boutique hotels have become popular in Chicago and there was an increasing supply of inventory in the market in 2015. In the past 24 months