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Mandarin Oriental International
(MAND SP)
Research
Investment Thesis
• Is it a commodity business?
– No. Mandarin differentiates by a trusted and well-known luxury brand name
• Does the business generate attractive economic returns?
– No. ROIC through 2009-2011 averaged a low ~5%, even as earnings recovered post global financial crisis
– But potential for ROIC to improve in the long-term as Mandarin seeks greater contribution from Hotel
Management, which requires no capital investment by Mandarin
• Is there potential for earnings growth?
– Yes. A trusted brand name is the strongest assurance that Mandarin can continue to expand its footprint, either
through Hotel Ownership or Hotel Management
– Mandarin has also developed a portfolio of properties for phased opening, god willing
– Supported by underlying trend - increasing number of higher spending leisure travellers
• Are there critical financial, regulatory, corporate governance and capital misallocation risks that
could hurt shareholders’ interests?
– No criticalities observed
– Under the J ardine Group stable of companies (J ardine Group has 74% ownership)
– Management preaches a strong balance sheet; evidenced by low net debt/equity of ~15% through 2008-2011
– FCF positive through 2008-2011
– Consistent dividend payout through 2008-2011
• Entry and exit strategy
– Current valuation is rich. Current price of ~US$1.30 returns an estimated 4% dividend yield for FY2012. But
Mandarin does not deserve a high valuation given its low ROIC.
– Entry: Mandarin’s earnings are severely impacted in a economic downturn when travelling dries up. Negative price
reaction to a plunge in earnings can provide buying opportunities
– Exit: An exuberant market can push prices towards the publicised “adjusted net asset value” – US$2.70 at Dec 2011
Valuation by Dividend Yield
US$1.00/share derives a decent return
Dividend Yield at
US$1.00/share
2011 2012 2013 2014 2015 2016
Dividend payout
60 56 62 69 75 82
Dividend payout % y-o-y
20% -6% 10% 11% 9% 10%
Consider: No excess cash 5.6% 7.7%
Consider: US$300m excess cash 7.8% 10.7%
Overview
•Dividend yield valuation is appropriate as historical payout has been maintained at around 100% (+/-) of PATMI
•Forecasting should be conservative as Mandarin has not generated attractive economic returns; has not displayed
that it is a strong business
•Assume a backdrop of positive but slow economic growth
Key Assumptions
• Occupancy and rates in 2011 are already at or above pre-crisis high
•Considerable competition exists
Hotel Ownership Hotel Management Associates & JVs
•Anticipate that the Mandarin Oriental brand
and the strategy of pursuing higher
spending leisure travellers would allow rates
to be raised by +2.0% p.a.
•Anticipate that Mandarin would clinch
three mangement contracts over five
years.
•Forecast earnings
growth of 3% p.a.
•Resulting in: Underlying EBITDA grows at about 6% p.a.
About 30% of market cap Good growth of about 10% p.a.
Valuation by Adjusted Net Asset Value
High value of US$2.70/share, but the company will never sell all its properties to monetise this value.
US$2.70/share is thus an impractical value from the perspective of a share investor.
Adjusted Net Asset Value
(US$/share)
Dec 2008 Dec 2009 Dec 2010 Dec 2011
Adjusted NAV 2.08 2.18 2.33 2.70
NAV 0.87 0.92 0.90 0.91
The adjusted net asset value per share has been adjusted to include the market value of the Group’s freehold and
leasehold interests which are carried in the consolidated balance sheet at amortized cost.
3X
Organisation Structure
The Residences At Mandarin Oriental: Private homes connected to hotel properties, enjoying the legendary service and amenities of
Mandarin Oriental. Not developed, sponsored, owned or sold by Mandarin Oriental. The developers and owners of The Residences use the
trademarks of Mandarin Oriental under licences ,which may expire or be terminated.
Hotel Ownership
(Subsidiaries)
Hotel Ownership
(Associates)
Hotel Management The Residences
Revenue
model
•Rooms
•F&B
•Others
•Management fees
•Profit-linkedincentive
management fees
•One-time branding fees
• Management fees
•Homeowners use of facilities
HK HK: 2 HK:1
Rest of Asia
Tokyo: 1
Manila: 1
J akarta:1
Singapore: 1 (50%)
Bangkok: 1 (45%)
KL: 1 (25%)
Macau: 2
Sanya: 1
Chiangmai : 1
Beijing: 1
Guangzhou: 1
Maldives: 1
Shanghai: 1
Taipei: 1
Macau: 1
Taipei: 1
Europe
and
Middle East
London: 1
Geneva: 1
Munich: 1
Paris:1
Prague: 1
Barcelona: 1
Abu Dhabi: 1
Bodrum: 1
Doha: 1
Marbella: 1
Milan: 1
Moscow: 1
London: 1
Abu Dhabi: 1
Bodrum: 1
Marbella: 1
Americas
Washington: 1 New York: 1 (25%)
Miami:1 (25%)
San Francisco:1
Boston:1
Las Vegas:1
Riviera Maya: 1
Bermuda: 1
Costa Rica: 1
Grand Cayman: 1
St .Kitts: 1
Dellis Cay: 1
New York: 1
Boston:1
Las Vegas:1
Costa Rica: 1
Grand Cayman: 1
St .Kitts: 1
Dellis Cay: 1
Total at Dec 2011: 15 owned hotels 12 managed hotels
15 under devt
5 Residences
8 under devt
Strategy
• Top global luxury hotel
– By investing in people and facilities
• Focus on higher spending leisure customers to command higher rates
– Higher spending leisure customers accounted for 40% of the Group’s room nights in 2011
• Further expansion around the world
– A further 15 hotels under development, all of which will be operated under long-term management contracts
that require no capital investment by the Group
– The long-term potential for growth is significant and the Group’s strategy of operating both owned and
managed hotels remains in place. Mandarin Oriental is well positioned to take advantage of selective
investment opportunities in strategic locations that offer attractive returns, while at the same time our
strong brand continues to be compelling to developers of luxury hotels
• Strong balance sheet
Positive Drivers and Risks
Positive Drivers
•Strong brand equity
•Increasing number of high net worth leisure travellers
•Phased opening of hotels in development portfolio
Risks
•Competition
•Asia: highly competitive market environment
•Tokyo, Miami: over-supply in luxury hotel rooms
•Unprofitable or low profitability hotels
•Following disposals over the past few years, the Group’s results are less affected by this region with
approximately 5% of earnings coming from our US portfolio. However, the Group’s 2009 results from The
Americas were also negatively affected by a provision against asset impairment relating to a managed
property
•Overpaying for hew hotel sites
•Capex
•In J akarta, Mandarin Oriental re-opened its doors in October 2009, following a comprehensive US$50 million
renovation programme
•Phased opening of hotels in development portfolio may not materalise
•A number of projects are experiencing delays as developers face challenging conditions in the financial
markets and one previously announced project in Chicago will not proceed
Review of Historical Rates and Occupancy
2011 rates (in US$), are higher than pre-crisis level. Some locations (e.g. London, Hong Kong) do much better than
others (e.g. J akarta) in terms of both occupancy and rates. Occupancy across hotels ranges from 40% - 80%.
Mandarin Oriental, HK The Excelsior, HK
399 
437 
374 
426 
468 
74%
69%
56%
68%
71%

100 
200 
300 
400 
500 
0%
20%
40%
60%
80%
2007 2008 2009 2010 2011
Mandarin Oriental, Singapore Mandarin Oriental, Bangkok
Mandarin Oriental, Jakarta Mandarin Oriental Hyde Park, London
179  184 
152 
171 
195 
88%
84%
74%
86%
89%

50 
100 
150 
200 
250 
0%
20%
40%
60%
80%
100%
2007 2008 2009 2010 2011
209 
265 
185 
218 
267 
75%
66%
69%
81%
82%

50 
100 
150 
200 
250 
300 
0%
20%
40%
60%
80%
100%
2007 2008 2009 2010 2011
269 
297  302 
325 
336 
66%
61%
43%
40%
45%

100 
200 
300 
400 
0%
10%
20%
30%
40%
50%
60%
70%
2007 2008 2009 2010 2011
68 
0% 0%
141 
159 
37%
0% 0%
46%
59%

50 
100 
150 
200 
0%
10%
20%
30%
40%
50%
60%
70%
2007 2008 2009 2010 2011
886  842  702  720  863 
88%
84%
81%
80% 80%

200 
400 
600 
800 
1,000 
76%
78%
80%
82%
84%
86%
88%
90%
2007 2008 2009 2010 2011
Review of Historical P&L
A decrease in revenue has a disproportionate impact on profit
506 
421 
487 
570 
52 
39 
52 
74 

100 
200 
300 
400 
500 
600 
700 
2008 2009 2010 2011
Revenue from Hotel Ownership Revenue from Hotel Management
Revenue (US$’m)
•The large majority of revenue is derived from Hotel
Ownership
•Both Hotel Ownership and Hotel Management
experienced a drop in revenue (-17% and -26%
respectively) in 2009 during the Global Financial Crisis,
as occupany and rates plummeted. Hotel Management
also saw a reduction in incentive management fees
•Revenue advanced in 2010 and 2011 as occupancy and
rates improved. 2011 revenue is higher than pre-crisis
level
71 
22 
49  50 
15 

16 
31 

20 
40 
60 
80 
100 
2008 2009 2010 2011
Underlying EBIT from Hotel Ownership
Underlying EBIT from Hotel Management
Underlying EBIT (US$’m)
•EBIT contribution is more evenly split. Hotel
Management has a higher EBIT margin (~30%) than
Hotel Ownership (~15%), partly because Hotel
Management incurs no depreciation expense
•Despite cost saving measures adopted, the slid in EBIT
(Hotel Ownership: -69%, Hotel Management: -64%) was
much more severe than the decrease in revenue,
reflecting fixed costs
•Other than the Global Financial Crisis, acts of gods e.g.
J apan Tsunami has also impacted results
Review of Balance Sheet and Capital Structure
Properties dominate assets. Significant cash position. Conservative debt level.
861 881
986
1038
515
562
434
470
500
463
253
213
0
500
1000
1500
2000
2500
2008 2009 2010 2011
Tangible assets Cash at bank Other assets
Total assets (US$’m)
•Total assets is mainly made up of tangible assets
(largely freehold and leasehold properties) and
cash at bank
Debt (US$’m)
•Debt is not excessive relative to equity. Net debt
to equity is especially conservative
•Interest expenses can be comfortable met
•Steep drop in profttability and interest coverage in
2009 reminds that excessive debt is dangerous in
this industry
7.4 
4.5 
8.4 
10.9 
14%
11%
16%
12%
65% 66%
64% 64%

2.0 
4.0 
6.0 
8.0 
10.0 
12.0 
0%
10%
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011
Underlying EBITDA / Net financing charges
Net debt / Total equity
Debt / Total equity
Review of Cash Flow
FCF positive albeit heavy recurring capex
Recurring Capex (US$’m)
•Heavy recurring capex at one-third to one-half of
operating cash flow
•Comprises ongoing improvements and major
renovations from time to time
Free cash flow (US$’m)
•FCF positive in last 4 years
122 
86 
120 
150 
78 
55 
47 
41 
39 
41 
45 
50 

20 
40 
60 
80 
100 
120 
140 
160 
2008 2009 2010 2011
Cash flows from operating activities (adjusted)
Recurring capex
Depreciation and amortization
44 
30 
45 
84 
20 
10 



10 
20 
30 
40 
50 
60 
70 
80 
90 
100 
2008 2009 2010 2011
FCF from subsidiaries
Dividends from associates and joint ventures
Review of Return on Invested Capital and Dividend Payout
Disappointingly low ROIC which is unlikely to improve in near-term given stiff competition.
Dividend payout of around 100% of PATMI.
ROIC 2008 2009 2010 2011
ROIC (Mandarin) 2% 5% 7%
ROIC (Hotel Ownership) 2% 4% 4%
NOPAT (Mandarin) 67 22 51 63
NOPAT from Hotel Ownership 55 17 38 39
NOPAT from Hotel Management 12 4 13 24
Invested capital 1,002 1,026 970 950
Invested capital - assets 1,206 1,221 1,161 1,173
Invested capital - liabilities 203 195 191 223
•ROIC is disappointingly low. The strong Mandarin
Oriental brand has not generated high economic
returns for owners
•Opine that it would be difficult to improve ROIC
through increasing hotel rates, given the stiff
competition
•Opine that the most realistic strategy to improve
ROIC would be to secure more hotels under
management, as this profit is earned without
having to invest capital
•Opine however that hotels under management
cannot be increased rapidly, as in order to uphold
the standards of Mandarin, partner selection, site
selection, staff training etc would be more
arduous than the average hotelier
Dividend Payout 2008 2009 2010 2011
Dividend 69 69 50 60
Dividend as % PATMI 103% 83% 112% 88%
EPS 6.79 8.47 4.48 6.78
DPS 7.00 7.00 5.00 6.00
Interim DPS 2.00 2.00 2.00 2.00
Final DPS 5.00 5.00 3.00 4.00
•Historical dividend payout has been maintained at
around 100% (+/-) of PATMI
•In 2009, underlying EPS was only US1.26 cents
Mandarin did not cut dividend payout drastically,
bolstered by non-trading gain, maintained
previous year payout of US7.00 cents
Corporate Governance
No criticalities observed
2007 2008 2009 2010 2011
Chairman Simon Keswick Simon Keswick Simon Keswick Simon Keswick Simon Keswick
CEO Edouard Ettedgui Edouard Ettedgui Edouard Ettedgui Edouard Ettedgui Edouard Ettedgui
CFO J ohn Witt J ohn Witt J ohn Witt Stuart Dickie Stuart Dickie
Auditor PwC PwC PwC PwC PwC
Stock Chart
During the GFC, share price slid to US$0.66
US$0.66
US$1.50
Listings
London
Bermuda
Singapore
Major shareholders
18-Mar-09 12-Mar-10 9-Mar-11 22-Mar-12
J ardine Strategic 73% 74% 74% 74%
Neptune Investment Management Limited - 5% 5% 6%
Neptune Investment Management Limited: We offer a wide range of collective investments in the form of Open Ended Investment
Companies (OEICs) and Unit Trusts.
US$2.00
END

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