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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 Jardine Group stable of companies (Jardine 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: Mandarins 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 YieldUS$1.00/share derives a decent return

Dividend Yield at US$1.00/share

2011 2012 2013 2014 2015 2016Dividend 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 ValueHigh 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 2011Adjusted NAV 2.08 2.18 2.33 2.70NAV 0.87 0.92 0.90 0.91The adjusted net asset value per share has been adjusted to include the market value of the Groups 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-linked incentive

management fees

One-time branding fees Management fees Homeowners use of facilities

HK HK: 2 HK:1

Rest of AsiaTokyo: 1Manila: 1Jakarta:1

Singapore: 1 (50%)Bangkok: 1 (45%)

KL: 1 (25%)

Macau: 2Sanya: 1

Chiangmai : 1Beijing: 1

Guangzhou: 1Maldives: 1Shanghai: 1

Taipei: 1

Macau: 1

Taipei: 1

EuropeandMiddle East

London: 1Geneva: 1Munich: 1

Paris:1

Prague: 1Barcelona: 1

Abu Dhabi: 1Bodrum: 1

Doha: 1Marbella: 1

Milan: 1Moscow: 1

London: 1

Abu Dhabi: 1Bodrum: 1

Marbella: 1

AmericasWashington: 1 New York: 1 (25%)

Miami:1 (25%)San Francisco:1

Boston:1Las Vegas:1

Riviera Maya: 1Bermuda: 1

Costa Rica: 1Grand Cayman: 1

St .Kitts: 1Dellis Cay: 1

New York: 1 Boston:1

Las Vegas:1

Costa Rica: 1Grand Cayman: 1

St .Kitts: 1Dellis Cay: 1

Total at Dec 2011: 15 owned hotels 12 managed hotels15 under devt

5 Residences8 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 Groups 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 Groups 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 Groups results are less affected by this region with

approximately 5% of earnings coming from our US portfolio. However, the Groups 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 Jakarta, 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 Occupancy2011 rates (in US$), are higher than pre-crisis level. Some locations (e.g. London, Hong Kong) do much better than others (e.g. Jakarta) in terms of both occupancy and rates. Occupancy across hotels ranges from 40% - 80%.

Mandarin Oriental, HK The Excelsior, HK

399 437 374 426468

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 171195

88% 84%74%

86% 89%

50

100

150

200

250

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011

209265

185 218267

75%66% 69%

81% 82%

50

100

150

200

250

300

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011

269 297 302325 336

66% 61%

43% 40%45%

100

200

300

400

0%10%20%30%40%50%60%70%

2007 2008 2009 2010 2011

680% 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&LA decrease in revenue has a disproportionate impact on profit

506421

487570

52

3952

74

100

200

300

400

500

600

700

2008 2009 2010 2011

RevenuefromHotelOwnership RevenuefromHotelManagement 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

2249 50

15

6

1631

20

40

60

80

100

2008 2009 2010 2011

UnderlyingEBITfromHotelOwnership

UnderlyingEBITfromHotelManagement

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. Japan Tsunami has also impacted results

Review of Balance Sheet and Capital StructureProperties dominate assets. Significant cash position. Conservative debt level.

861 881 986 1038

515 562 434470

500 463 253 213

0

500

1000

1500

2000

2500

2008 2009 2010 2011

Tangibleassets Cashatbank Otherassets

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

UnderlyingEBITDA/Netfinancingcharges

Netdebt/Totalequity

Debt/Totalequity

Review of Cash FlowFCF 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

5547 4139 41 45

50

20406080

100120140160

2008 2009 2010 2011

Cashflowsfromoperatingactivities(adjusted)

Recurringcapex

Depreciationandamortization

4430

45

84

20

10

6

8

102030405060708090100

2008 2009 2010 2011

FCFfromsubsidiaries

Dividendsfromassociatesandjointventures

Review of Return on Invested Capital and Dividend PayoutDisappointingly 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 GovernanceNo criticalities observed

2007 2008 2009 2010 2011Chairman Simon Keswick Simon Keswick Simon Keswick Simon Keswick Simon KeswickCEO Edouard Ettedgui Edouard Ettedgui Edouard Ettedgui Edouard Ettedgui Edouard EttedguiCFO John Witt John Witt John Witt Stuart Dickie Stuart DickieAuditor PwC PwC PwC PwC PwC

Stock ChartDuring the GFC, share price slid to US$0.66

US$0.66

US$1.50

ListingsLondon

BermudaSingapore

Major shareholders

18-Mar-09 12-Mar-10 9-Mar-11 22-Mar-12Jardine 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 InvestmentCompanies (OEICs) and Unit Trusts.

US$2.00

END

Mandarin Oriental International(MAND SP)Investment ThesisValuation by Dividend YieldUS$1.00/share derives a decent returnValuation by Adjusted Net Asset ValueHigh value of US$2.70/share, but the company will never sell all its properties to monetise this value.US$2.70/share is thus an impractical value from the perspective of a share investor.Organisation StructureStrategyPositive Drivers and RisksReview of Historical Rates and Occupancy2011 rates (in US$), are higher than pre-crisis level. Some locations (e.g. London, Hong Kong) do much better than others (e.g. Jakarta) in terms of both occupancy and rates. Occupancy across hotels ranges from 40% - 80%. Review of Historical P&LA decrease in revenue has a disproportionate impact on profitReview of Balance Sheet and Capital StructureProperties dominate assets. Significant cash position. Conservative debt level.Review of Cash FlowFCF positive albeit heavy recurring capexReview of Return on Invested Capital and Dividend PayoutDisappointingly low ROIC which is unlikely to improve in near-term given stiff competition.Dividend payout of around 100% of PATMI.Corporate GovernanceNo criticalities observedStock ChartDuring the GFC, share price slid to US$0.66END