Central Pattana Public Company Limited Management's Discussion and Analysis Consolidated Financial Results: 4Q08 and FY2008 Overall Performance Over the year 2008, retail market has been affected by both domestic political instability and global economy slowdown,resulting in lower consumer confidence and softer spending.Albeit stagnant demand, FY2008 performance showed a solid growth, owing to organic growth and efficient top-line-driven cost management. New developments remain intact with an opening of CentralPlaza Chaengwattana in November 2008. Central Pattana Public Company Limited ("CPN") reported its three-month consolidated net profit in 4Q08 of 476.5 MB, decreased by 8.4% y-o-y. Consolidated total revenues (rental & service income and food & beverage sales) registered 2,215.7 MB, relatively flat y-o-y, as 4Q07 performance included a non-recurring income of 214.3 MB from compensation for cancellation of rights to certain land at CentralWorld. Without the non recurring income, the 4Q08 consolidated total revenues would have increased 11.6% y-o-y and consolidated net profit would have gained 55.8% y-o-y mainly from additional contribution from a newly opened CentralPlaza Chaengwattana and lower marketing and promotion expenses. On a q-o-q basis, consolidated total revenue grew 2.6% from the new shopping mall while consolidated net profit declined 16.8%, reflecting seasonal increases in personnel expenses (annual bonus) and marketing and promotion expenses during year-end celebrations and the launch of the new shopping center. On the FY2008 basis, results also showed an impressive improvement with consolidated total revenues of 8,598.6 MB, up 8.9% y-o-y and the net profit of 2,185.8 MB, up 22.6% y-o-y.Without the non-recurring income in FY2007 performance, consolidated total revenues and net profit in FY2008 would have increased 11.9% y-o-y and 39.3% y-o-y, respectively. The main contributors remained organic growths of its retail properties and the efficient cost control. As for operational performance, CPN's retail space was maintained at 97%, unchanged from that of the preceding quarter whilst that of office space slight declined from 95% in the preceding quarter to 94% in 4Q08. Effective rental rate for FY2008 averaged 1,259 Bt/sqm/mth, up 3.2% y-o-y. Noted that starting from January 1, 2008, accounting policy for any excess of acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost has been changed from the previous "negative goodwill" to realized profit or loss. Such change has impact on consolidated financial statements. (see Note 29 to the financial statements for the year ended December 31, 2008) In light of capital requirement for under-developing projects, CPN's Board of Directors meeting has proposed for an approval at the shareholders' meeting on April 30, 2009 a dividend payment of Baht 0.33 per share, reflecting a reduction of dividend payout ratio from the policy's of 40% of net profit to 33% of FY2008 net profit. Table 1: Consolidated Results Summary Consolidated Result 4Q07/1 3Q08 4Q08 YoY% QoQ% FY07/1 FY08 YoY% (Bt mil) Chg Chg Chg Rental& ervice income 1,984.9 2,160.3 2,215.7 11.6% 2.6% 7,681.0 8,598.6 11.9% and F & B sales Gross profit 842.9 936.1 883.3 4.8% (5.6%) 3,207.6 3,709.0 15.6% Operating profit 449.0 840.7 629.8 40.3% (25.1%)2,404.3 3,030.9 26.1% Net profit 305.9 572.5 476.5 55.8% (16.8%)1,569.1 2,185.8 39.3% EPS (Bt) 0.14 0.26 0.22 55.8% (16.8%) 0.72 1.00 39.3% Note:/1 Excluding non-recurring item of 214.3MB in 4Q07 and FY07 New Developments Global liquidity crisis has impacted CPN in two folds. Firstly, fund raising through CPNRF has been delayed due to unfavorable market conditions; hence, CPN financial structure has been diverted from the plan. Secondly, CPN now takes a more defensive stance in terms of business expansion. On the development front, plans for four green-field projects namely CentralPlaza Chaengwattana, CentralFestival Pattaya Beach, CentralPlaza Chonburi, and CentralPlaza Khon Kaen remain intact funding through internal cash flow and long-term loans from banks, thanks to the company's strong track record and its A+ credit rating. Recently, CPN opened two new shopping centers; CentralPlaza Chaengwattana (suburb of Bangkok) in November 2008 and CentralFestival Pattaya Beach (Chonburi Province-East of Thailand) in January 2009. Construction of the other two centers; CentralPlaza Chonburi (Chonburi Province-East of Thailand) and CentralPlaza Khon Kaen (Khon Kaen Province-Northeast of Thailand) is progressing as per schedule and within budget while sale targets were achieved at both sites. These two projects should be commercial operated in May 2009 and December 2009, respectively. On one hand, CPN believes that the unfavorable global environment could bring good opportunity to the company in terms of land and project acquisition and low construction and development cost. For other projects in pipeline, CPN plans to revisit criteria such as demand/supply, construction cost, land price, acquisition price and total return maximization to ensure prudent investment. Operational Performance Summary As at December 31, 2008 total leasable area stood at 778,496 sqm (up 9.1% q-o-q and 8.8% y-o-y), which includes 627,843 sqm of retail space, 144,280 sqm of office space, and 6,373 sqm of residential space. The leasable area mentioned above excludes that of CentralPlaza Rama 2 and CentralPlaza Rama 3, totaling 133,268 sqm, as the two properties were transferred to CPN Retail Growth Property Fund ("CPNRF") which CPN acts as the property manager. At the end of 4Q08, average occupancy for CPN's retail malls stood at 97%, relatively unchanged from the preceding quarter and 4Q07. Occupancy rate of CentralWorld improved to 97% in the quarter following openings of a mini anchor "Center Point" and other retail fashion outlets, whilst that of the newly opened CentralPlaza Chaengwattana stood at 91%,improved from 85% as at the opening. Rental rate maintained its upward momentum as rate increases were achieved from renewals and new leases at almost all properties. Effective rental rate in 4Q08 averaged 1,284 Bt/sqm/mth (up 0.3% q-o-q and 3.6% y-o-y) and that of FY2008 averaged 1,259 Bt/sqm/mth (up 3.2% y-o-y). For comparative purpose, excluding that of the newly opened CentralPlaza Chaengwattana,averaged effective rental rates in 4Q08 and FY2008 were 1,291 Bt/sqm/mth (up 0.8% q-o-q and 4.2% y-o-y) and 1,260 Bt/sqm/mth (up 3.3% y-o-y),respectively.Noted that these rental rates were taken into account special rental discount given to groups of tenants at CentralWorld. At the end of 4Q08, occupancy rate for CPN's offices average 94%, relatively unchanged from that of the previous quarter and slightly increased from 92% in 4Q07. Table 2: Operation Statistics Retail Shopping Net Leaseable Occupancy Rate (%) Centers Area (Sqm.) 4Q07 3Q08 4Q08 Lardprao 55,531 100% 99% 97% Ramindra 17,159 99% 99% 100% Pinklao 55,684 91% 99% 98% Pattaya 15,227 99% 100% 100% Ratchada-Rama3 18,192 100% 100% 100% Chiangmai 76,321 98% 99% 99% Bangna 57,435 99% 98% 98% Rama2 5,937 100% 100% 100% Rattanathibet 76,848 99% 99% 98% CentralWorld 184,592 93% 92% 97% Chaengwattana 64,917 n/a n/a 91% Total 627,843 96% 97% 97% Offices Net Leaseable Occupancy Rate (%) Area (Sqm.) 4Q07 3Q08 4Q08 Lardprao 17,719 86% 99% 97% Pinklao A 22,426 91% 86% 85% Pinklao B 11,334 80% 89% 92% Bangna 10,007 98% 100% 97% CentralWorld 82,794 95% 96% 96% Total 144,280 92% 95% 94% Financial Performance Summary Total Revenue Total revenues consisted of rental & service income and food & beverage sales. In 4Q08,CPN recorded consolidated total revenue of 2,215.7 MB, up 0.8% y-o-y, with a marginally decrease in rental & service income of 0.5% y-o-y to 2,091.3 MB, as there was a non-recurring income of 214.3 MB from compensation for cancellation of rights to certain land at CentralWorld to ZEN Department Store in 4Q07 performance. Without the non-recurring item, 4Q08 total revenue would have increased 11.6% y-o-y with 10.8% y-o-y growth in rental & service income. FY2008 results also showed a strong improvement with total revenues of 8,598.6 MB, up 8.9% y-o-y. Without the non-recurring income in the FY2007 performance, total revenue in FY2008 would have increased 11.9% y-o-y with 11.5% y-o-y growth in rental & service income.This improvement was due to four distinct sources; a) Increased service income after adjustment of common area, air- conditioning, and maintenance ("CAM charge") rate in January 2008. b) Higher contribution from CentralWorld upon cutting down special rental discount and escalating occupancy rate. c) Rental growth achieved at all properties. d) Additional income from the newly opened CentralPlaza Chaengwattana. Food & beverage sales in 4Q08 registered 124.4 MB, up 27.4% y-o-y. For the full year 2008,food & beverage sales increased 20.7% y-o-y to 456.3 MB. The growths were due to re-openings of food centers "Food Park" at CentralPlaza Rama 3 and CentralPlaza Pinklao after completions of their renovations, in addition to an additional contribution from food center at the newly opened CentralPlaza Chaengwattana. Total Cost Total cost of rental & service and food & beverage include utilities, depreciation and amortization of rented properties, on-site personnel,repair& maintenance and property tax.In 4Q08, CPN recorded total cost of 1,332.3 MB, up 16.7% y-o-y. Cost of rental&servicegrew by 15.2% y-o-y to 1,229.0 MB. Similarly, for FY2008, total cost increased by 9.3% y-o-y to 4,889.6 MB. Cost of rental&service grew by 7.9% y-o-y to 4,516.4 MB,mainly due to higher depreciation and amortization of CentraWorld upon further completion of its enhancement project, additional depreciation of the newly opened CentralPlaza Chaengwattana, and higher lease payment at CentralPlaza Lardprao.The latter was an estimated amount based on the renewed lease payment structure which will be proposed for an approval at the extraordinary shareholders'meeting on March 25, 2009. Cost of food & beverage increased 36.9% y-o-y for the 4Q08 and 29.5% y-o-y for the full year 2008, which were in line with the increase in food and beverage sales. Total Operating and Administration Expenses Total operating and administration expenses constitute expenses on personnel, marketing and promotion costs, office supplies, professional fees, depreciation and amortization of office equipments. Total operating and administration expenses for 4Q08 stood at 519.9 MB,up 44.6% q-o-q due to marketing and promotion spending for the launch of CentralPlaza Chaengwattana, in addition to seasonal increases in personnel expenses (annual bonus) and marketing and promotion expenses. The latter's increase in the fourth quarter is considered normal for retail business, as retail operators implement more marketing activities and hold more campaigns during year-end celebrations. On a y-o-y basis, total operating and administration expenses in 4Q08 declined 10.5% y-o-y, mainly from lower marketing and promotion expenses. For FY2008, total operating and administration expenses amounted to 1,556.8 MB, up 2.8% y-o-y from compounding effects of declined marketing and promotion expenses and increased personnel expenses as a result of an increase in number of employees to support new projects. On the backdrop of stagnant economy and soft spending, CPN's marketing and promotion expenses were well managed through top-line driven basis. For FY2008,excluding the one-time expenses of the opening celebrations of CentralPlaza Chaengwattana,the marketing and promotion expenses amounted to 461.5 MB, decreased by 18.4% y-o-y and representing 5.4% of total revenues, compared to 7.4% of the previous year. Net Profit CPN reported 4Q08 consolidated net profit of 476.5 MB, down 8.4% y-o-y. Excluding the non-recurring item in the previous year performance, 4Q08 consolidated net profit would have increased by 55.8% y-o-y, mainly due to higher revenues and lower marketing and promotion expenses as mentioned previously. For FY2008, consolidated net profit stood at 2,185.8 MB, up 22.6% y-o-y. Excluding the non-recurring item in FY2007, consolidated net profit would have grown 39.3% y-o-y, mainly from organic growth of the shopping mall business. Table 3: Profitability Ratios Key Financial Ratios 4Q07/1 3Q08 4Q08 FY07/1 FY08 Profitability ratio Gross profit margin (%) 42.5% 44.7% 39.9% 41.8% 43.1% Operating profit margin (%) 23.7% 26.8% 18.7% 27.9% 24.1% Net profit margin (%) 14.1% 21.7% 18.3% 18.7% 22.2% Return on equity (%) 9.6% 15.3% 13.4% 12.5% 15.9% Note:/1 Excluding non-recurring item of 214.3MB in 4Q07 and FY07 Financial Position as at December 31, 2008 Assets As at September 30, 2008, CPN reported consolidated total assets of 39,934.0 MB, increased by 2,729.3 MB, or 7.3% from the end of FY2007. The key contributors are the followings. a) An increase in Property and Equipment (representing 80.9% of total assets) by 3,531.1 MB from new land acquisition in Chiangmai Province (north of Thailand) and construction in progress of under-developing projects. b) A decrease in Cash and cash equivalents and Current investments by 1,000.1 MB from land acquisition and construction payment of combined projects. Liabilities Consolidated total liabilities stood at 25,231.7 MB, increased by 1,666.3 MB, or 7.1%, from the end of FY2007. In 9M08, long-term debts of 765.3 MB were repaid and new debts of totaling 3,000 MB were issued to fund new projects. As at September 30, 2008, interest-bearing debts stood at 14,249.6 MB, increased by 2,204.7 MB from FY2007 and represented 56.5% of total liabilities. Shareholders' Equity Consolidated total shareholders' equity registered at 14,702.3 MB with a total retained earnings of 9,830.7 MB, representing 66.9% of total shareholders' equity. Compared to that of FY2007, total shareholders' equity increased by 1,063.0 MB, primarily due to the following reasons. a) 9M08 net profit of 1,709.3 MB. b) Dividend payment of 718.9 MB (0.33 Baht/share). c) Net increase of 98.5 MB from realizing negative goodwill as gains to retained earnings as a result of a change in accounting policy* (*see Note 15 to the interim financial statements for the three-month and nine-month period ended September 30,2008) Table 4: Financial Position Balance Sheet (Bt mil) FY06 FY07 FY08 FY08 % Change Total Assets 34,336.5 37,204.6 43,783.8 17.7% Total Liabilities 21,762.3 23,565.3 28,610.5 21.4% Interest-Bearing Debts 11,112.1 12,044.9 16,445.1 36.5% Shareholder's Equity 12,574.2 13,639.3 15,173.3 11.2% Retained earnings 7,727.3 8,720.6 10,307.2 18.2% Capital Structure As plan to raise fund through the property fund vehicle "CPNRF" has to be postponed due to unfavorable market sentiment, CPN's capital structure has been diverted from property fund to borrowings. During FY2008, new debts of totaling 5,450 MB were raised to support business expansion. These include 1,450-MB short-term loan (average interest rate of 3.80% p.a.), 1,500-MB unsecured bond (3-year term, bullet payment and fixed interest rate of 4.80% p.a.) and 2,500-MB long-term bank loan (7-year repayment term and floating interest rate of MLR-2.0% p.a.). This brought up the net interest-bearing debt to equity ratio to 0.8 time, compared to 0.6 time at the end of FY2007. At the end of FY2008 interest-bearing debt comprised of 65% fixed and 35% floating interest rate. Interest expenses and financial charges for FY2008 amounted to 543.4 MB, decreased by 6.4% from the FY2007 year-end. Weighted average interest declined to 5.2% per annum,compared to 5.5% in the FY2007. In declining interest rate environment, CPN has a policy to maintain interest rate at the fixed-to-floating ratio of 60:40. Table 5: Key Financial Ratios Key Financial Ratios FY07 FY08 Liquidity ratio Current ratio (times) 1.0 0.8 Quick ratio (times) 0.9 0.7 Cash generate from operation ratio(times) 0.9 0.6 Days account receivable (days) 14.2 17.8 Efficiency ratio Return on assets (%) 4.4% 5.4% Return on fixed assets (%) 5.7% 7.2% Assets turnover (times) 0.2 0.2 Financial policy ratio Obligation Recovery Service/1 (times) 0.7 0.4 Net debt to equity (times) 0.6 0.8 Interest coverage (times)/1 7.2 7.2 Note: /1 Cash generated from operation excludes cash payment of endorsed promissory notes Change in Accounting Policy With the implementation of revised Thai Accounting Standard No.43 (TAS No.43) "Business Combinations", starting from January 1, 2008, the accounting for any excess of acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost has been changed from the previous "negative goodwill" to realized profit or loss. The effect of the change in accounting policy* on Consolidated Financial Statements as at December 31, 2008 is highlighted as followings. Consolidated Balance Sheet as at December 31, 2008 a) A decrease of 112.6 MB in Negative goodwill with a corresponding increase in the Unappropriated retained earnings. b) An increase of 98.5 MB in Intangible assets with a corresponding increase in the Unappropriated retained earnings. Consolidated Statements of Income as at December 31, 2008 c) A reduction of 6.7 MB in reported profit for the year from reduction of credit to the statement of income resulting from the amortization of negative goodwill that would have been recognized under the previous accounting policy. (*see Note 29 to the financial statements for the year ended December 31,2008)