Industry Financial Analysis

FINANCIAL ANALYSIS (HOTEL INDUSTRY)

By Donnabelle Pineda and Marge Javillonar Managerial Accounting ADB-MBA Program, Batch 10

Submitted to: Prof. Ricardo Palo

Date: 4 August 2010

I.

Hospitality Industry

The hospitality industry is a trillion dollar service sector within the global economy. The industry covers a broad variety of service industries including, but not limited to, hotels, food service, casinos, and tourism.

This paper will concentrate on the hotel industry and will analyze 3 international hotel groups. Specifically, this paper will look at each of the hotel group’s financial statements, compare and analyze them using the different measures of liquidity, profitability and efficiency, and draw conclusions from these analyses regarding the financial performances of each hotel group.

1.

Mandarin Oriental Hotel Group1

Mandarin Oriental Hotel Group (Mandarin) is an international hotel investment and management group with deluxe and first class hotels, resorts and residences in sought-after destinations around the world. The Group now operates 42 hotels, including some under development, representing over 10,000 rooms in 27 countries (17 hotels in Asia, 13 in The Americas, and 12 in Europe, Middle East and North Africa). In addition, Mandarin operates 14 Residences at Mandarin Oriental, connected to its properties. The Group has equity interests in many of its properties and net assets of approximately USD2.1 billion as at 31st December 2009.

Mandarin’s aim is to be recognized widely as the best global luxury hotel group, providing 21st century luxury with oriental charm in each of its hotels. They plan to achieve this by investing in their

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Source: http://www.mandarinoriental.com/about_mo/our_company/

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exceptional facilities and its people, while maximizing profitability and long-term shareholder value. Their strategy is to open the hotels currently under development, while continuing to seek further selective opportunities for expansion around the world.

2.

InterContinental Hotel Group (IHG)2

IHG is an international hotel company whose goal is to create Great Hotels Guests Love. They have more guest rooms than any other hotel company in the world – that's more than 650,000 rooms in over 4,400 hotels in 100 countries. Their guests make over 130 million stays in IHG hotels every year. They operate seven hotel brands – InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express, Staybridge Suites and Candlewood Suites.

IHG operate hotels in three different ways – as a franchisor, a manager and on an owned and leased basis. Franchising is the largest part of its business with over 3,800 hotels operating under franchise agreements. They also manage 624 hotels worldwide and own 16 hotels worldwide.

3.

Marriot International Inc.3

Marriott International, Inc. (Marriott) is a leading lodging company with more than 3,400 lodging properties in 70 countries and territories.

The company is headquartered in Bethesda,

Maryland, USA, and had approximately 137,000 employees at 2009 year-end. It is recognized by Fortune as one of the best companies to work for, and by Newsweek as one of the greenest big

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Source: http://news.marriott.com/marriott-international-profile.html Source: http://www.ihgplc.com/index.asp?pageid=16

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companies in America. In fiscal year 2009, Marriott International reported sales from continuing operations of nearly $11 billion.

Marriott's goal is to create significant value by aggressively building its brands and growing its businesses. The company is dedicated to providing exceptional service to customers, growth opportunities for associates, and attractive returns to shareholders and owners.

II.

Financial Analysis

To effectively compare and evaluate each hotel group, this paper will provide the common-sized statements (see Annex 1), comparative analysis statements (see Annex 2), the significant ratios (Annex 3) and cash flows (Annex 4) that will help in the analysis of each hotel group’s financial performance.

A.

Mandarin Oriental Hotel Group

1.

Balance Sheet

Mandarin’s balance sheet reflected a very strong liquidity with cash continuously increasing from 2007 until 2009, vis-à-vis an increasing percentage against total assets. Accounts receivables are very minimal and decreasing during the period inclusive. Total non-current assets are continuously declining as a percentage of total assets during the period mainly because of decreases in associated and joint venture assets, as evidence by the disposal of joint ventures in the cash flow statements. All the rest of the assets accounts are relatively stable for the past 3 years. Its current liabilities increased significantly in 2009 due to maturity of long-term debts, which were categorized as current borrowings

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described as borrowings to be settled within 12 months after the balance sheet date. Because of this, long-term borrowings declined by almost the same amount. Stockholder’s equity remained unchanged throughout the period.

2.

Income Statement

Mandarin’s income statement reflected a proportional decline in revenue, cost of sales and gross profit. However, despite the decline in gross profit, operating expenses did not, thus, a significant drop in its operating profit by 68% in 2009. It is noted that there was a gain in the disposal of joint venture, which caused a net profit higher than the previous year despite the significant drop in operating profits from the previous year. There is also a significant decrease in taxes in 2009, which was due to the disposal of the joint venture and a decrease in the applicable tax rate applied for the year of 8% from 13%. Removing the proceeds from the disposal of the joint venture would result a net loss for 2009. Interest income also decreased significantly by 68% in 2009, following a 35% decrease in 2008. This was a result of the disposal of investments as mentioned earlier. There is also a noticeable decrease in financing charges mainly because of a decrease in long-term borrowings by 30% in 2009.

3.

Cash flow

In 2009, Mandarin’s consolidated cash flow reflected a decline in cash flow operating activities due mainly to a significant decrease in operating profit of 73% and interest received despite increases in cash flows from non-cash items and tax refunds, and decrease in interest and other financing charges paid. It was also affected by the decrease in dividends received from associates and joint venture as a result of their disposals. However, cash flow from investing activities had a net inflow due to the

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proceeds from these disposals. On the one hand, cash outflow from financing activities increased due to decreases in the drawdown of borrowings and issuance of shares compared to the previous year. Summing it all up, the company was able to project a positive cash flow that is 105% more than last year’s, but this was mainly due to the proceeds from disposal of its joint venture.

4.

Ratios

The ratios derived from the financial statements showed how the company manages its capital structure, the effectiveness of the company in operations to generate more income, and its ability to pay debts, interest and dividends. In its liquidity ratios, the company showed a good indicator that it is meeting its current financial obligations even though there was a decline in previous years. The activity ratios of the company, which measure its operating effectiveness to generate revenue from its investments and tangible assets, show a declining trend from 2007 to 2009. However, the company is not effective in using its investments in fixed assets to generate sales. Its leverage ratios are quite stable and minimal decline is observed. Its profitability ratios, same with its activity ratios, are declining but stable given the economic conditions in the global market.

B.

InterContinental Hotel Group (IHG)

1.

Balance Sheet

IHG’s balance sheet reflected a continuous decline in both current and non-current assets from 2007-2009. Significantly, in 2009, there was a 50% decline in cash and cash equivalents and other financial assets, a 70% decrease in retirement benefits assets, and disposal of non-current assets held

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for sale. Total assets, therefore, had declined. With regard to its current liabilities, despite the 400% increase in its loans and other borrowings, total current liabilities had declined from the previous years. For non-current liabilities, loans and other borrowings decreased while retirement benefits obligations and trade and other payables increased. The net effect is still a decrease in non-current liabilities by 14% from the previous year. Total liabilities, therefore, had declined. Stockholder’s equity showed a significant increase in 2009 compared to 2008 by more than 15,000% due to a decrease in the shares held by employee share trust, and increase in unrealized gains and losses reserve and currency translation reserve.

2.

Income Statement

IHG’s income statement showed that its net profits proportionally decreased by 18% and 43% in 2009 and 2008 respectively. The decreased in net profit in 2009 was due to decreased in revenue by 19%, increased in operating expenses by 4% which is mainly due to recognition of asset impairments. Though its financial expense had decreased by 49% from 2008 due to a decrease in loans and other borrowings, this has a little effect on net profit since there is a huge impairment made in its assets. It is noted also that there was a decrease in financial income by 75% which was due to a decrease in retirement benefit assets and other financial assets.

3.

Cash flow

IHG’s consolidated cash flow reflected a decline in cash flow operating activities in 2009 due mainly to a decrease in net profit by 18% and receipt of a tax refund resulting from impairment, collecting more trade and other receivables, decrease in retirement contributions, and increase in

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outflow from exceptional operating items. Net cash outflow from investing activities had increased mainly due to additional acquisition of property, plant and equipment, increase in investments in associates and other financial assets, and decrease in proceeds from associates and other financial assets. Net cash outflow from financing activities decreased from last year’s mainly because of the issuance of UKG250million 6% bonds amounting to $411million despite a 108% increase in repayment of other borrowings. Summing it all up, the company was only able to minimize its net cash outflow due to the issuance of bonds, which it used to sustain its other activities.

4.

Ratios

The ratios derived from the company’s financial statements, the company is facing difficulties in meeting its current financial obligations. On the other hand, its current activity ratios indicate that its fixed assets generate more revenues from the previous years. This could mean that the declining ratio is due to overinvestment in fixed assets despite sluggish revenues. In 2009, the company’s operating income was not sufficient to cover payments for interest, which can be alarming for its creditors. In 2009 and 2008, net profit ratios remained the same in spite of the increase in gross profit margin. Its debt-to-equity ratio is quite alarming, especially in 2008, where liabilities are 3,117x more than stockholder’s equity, but this was brought down significantly in 2009, but nevertheless, the ratio in 2009 is still very high compared to the other two companies.

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C.

Marriott International Inc.

1.

Balance Sheet

Marriot’s balance sheet reflected a total asset that consisted mostly of inventory (timeshare segment intervals, fractional ownership and residential products), averaging 20% of total assets and 51% of total current assets from 2007-2009, and receivables, averaging 11% and 29%, respectively. While cash and cash equivalents are a mere 2.2% and 6%, respectively. Accounts receivables and notes receivables (current and non-current) had shown decreases in 2009 from 2008 due to the company’s aggressive collection efforts, impairments and bad debts. Inventory had a 27% decrease due to inventory impairment. The company’s total liabilities in 2009 have decreased significantly compared to 2008 and 2007 due to payments of its debts by nearly $800 million in 2009 compared to the $1 million in 2008, driven mostly by decreases in current debts, payables and accrued payroll and benefits, and long-term debt. Stockholder’s equity remained stable during the period inclusive.

2.

Income Statement

Marriott’s income statement reflected an operating loss in 2009 due to a decrease in revenues that is not enough to cover operating costs and expenses, although the latter had decreased as well compared to last year’s, but the ratio of decrease was 2:1 (revenues vs. operating costs). Weak economic conditions, instability in the financial markets, and low consumer confidence were cited as reasons for the decline in sales and demands of their revenue-earning products such as lodging and timeshare. Impairment charges on their timeshare strategy were recorded for this year alone pre-tax as a result of difficult business conditions in the timeshare industry amounting to $860 million, which

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partially offset the unfavorable variances affecting the net income (loss) of the company in 2009. It is also noted that the company has undergone restructuring in 2008, which drove the decrease in operating costs until 2009. Interest expense has gone down by 30% due to repayments and lower interest rates on their borrowings. Gains and other income showed a sharp decrease in 2008 vs. 2007 due to sale of real estate, joint ventures and other investments compared to 2009 vs. 2008. The overall effect in 2009 was a net loss of $353 million, a 200% decrease from 2008.

3.

Cash flows

In 2009, Marriott’s cash flow reflected an increase in and a positive net cash flow from operating activities despite the net loss in its income statement because of the impairment charges and timeshare activity that were added back to operating activities. Net cash outflow from investing activities showed a decline from previous years mainly because of a decrease in CAPEX due to reduced development spending brought about by the restructuring, and completion of improvements to existing properties in 2008, and prudent investing activities by the company. Net cash outflow from financing activities increased by 130% mainly due to repayments of debts and repurchase of notes. Summing it all up, the company was able to minimize its net cash outflow due to minimized investment activities, and benefits from the impairment of its assets.

4.

Ratios

The ratios derived from the financial statements showed that the company is currently unable to meet its obligations without having to liquidate or depend too heavily on its inventory. However, it is noted that the company is able to generate about 7x of its revenues for every dollar of fixed asset in

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2009 and even higher in the previous years. Its leverage ratios are quite alarming because the company is quite aggressive in financing its growth with debt. Its profitability ratios are somewhat stable although declining given the present economic conditions in the global market. Its stock earnings were negative this year.

III.

Conclusion

Ongoing instability in the financial markets following the 2008 worldwide financial crisis, the current general economic conditions, and the slowdown in many industries, including the hotel industry, will continue to impact financial results and growth of any company. The present weak global economic conditions and the uncertainty over the duration of that weakness and the prospects for recovery will continue to have a negative impact in the coming years unless conditions improve.

As a result of current economic conditions, it is notable that the three companies that have been analyzed in this paper all continued to experience a decline in revenues despite measures to curb operating costs and minimize debts, and even their portfolios have been trimmed down to keep their companies afloat. Numerous asset impairments have been made for the past years, which mostly drove down valuation of their assets. A number of asset disposals have also been made, mainly to generate income from gains made on the proceeds and to finance other activities. All of them have made debt repayments, which significantly reduced their total liabilities, proving that their companies are credible lenders and resilient despite the risks in the market. However, all of these companies who are operating globally, still, are increasingly susceptible to the risks of doing business internationally, which could lower their revenues, increase costs, reduce profits or disrupt their businesses.

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If you are an investor, after looking at the financials and ratios of each company, it would be prudent to invest in the company that has shown resilience during these difficult times, not only in this industry, but also in the global market. The company that one has to trust with his investments is a company that has performed well and shown stable financial ratios despite the economic impact of the global financial crisis. These qualities are best exhibited by Mandarin Oriental Group who has been able to show that it can meet its financial obligations, both short-term and long-term, through its revenues and assets; its receivables are very low compared to the two other hotel groups indicating efficient collection and efficient operations; its profitability is positive in all aspects; its reduction of costs without compromising quality of service has been effective; and its stockholders are able to realize positive returns. It is also notable that its debt to equity is quite low compared to the other two companies, which means that their financing activities are at a minimum, and that there is still room for growth that can be done through its financing activities. There is also a potential for further growth with regard to its cash at bank, which accounts for an average of 27% of total assets for the periods covered in this analysis, that it can use for further investing activities that could potentially generate more income for the company.

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Annex 1. Common-Size Statements of Consolidated Financial Statements A.

Mandarin Oriental Hotel Group

1.

Balance Sheet (in million dollars)

12

2.

Income Statement

13

B.

InterContinental Hotel Group (IHG)

1.

Balance Sheet

14

2.

Income Statement

15

C.

Marriott International Inc. 1.

Balance Sheet

16

2.

Income Statement

17

Annex 2. Comparative Statements of Consolidated Financial Statements A.

Mandarin Oriental Hotel Group 1.

Balance Sheet

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2.

Income Statement

19

B.

InterContinental Hotel Group (IHG) 1.

Balance Sheet

20

2.

Income Statement

21

C.

Marriott International Inc. 1.

Balance Sheet

22

2.

Income Statement

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Annex 3. Cash Flow Statements A.

Mandarin Oriental Hotel Group

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B.

InterContinental Hotel Group (IHG)

25

C.

Marriott International Inc.

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Annex 4. Financial Ratios A.

Mandarin Oriental Hotel Group

27

B.

InterContinental Hotel Group (IHG)

28

C.

Marriott International Inc.

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