Central Pattana Public Company Limited Management's Discussion and Analysis Consolidated Financial Results: 4Q06 and FY2006 Overall Performance In 2006, retail market experienced a slow down due to sluggish economic growth. As shown in our FY2006 operation and financial performance, Central Pattana Public Company Limited ("CPN") faired reasonably well during such downturn. FY2006 total revenue grew 4.4% y-o-y whilst net profit showed a growth of 16.6% y-o-y, compared to that of FY2005 (exclusion of gain for the financial lease of assets to CPNRF and write-off as a result of impairment of assets under development).During FY2006, CPN completed an asset enhancement project at Central Town Rattanthibet and an expansion and renovation project at CentralWorld, both in December 2006. In addition, CPN has started construction of two of the five planned green-field developments, Central Plaza Chaengwattana and Central Pattaya Beach, which will be opened by 4Q08 and 2Q09, respectively. In light of the steady free cash flow, CPN's Board of Directors has proposed for approval of the shareholders' meeting in April 2007 a dividend payment of Baht 0.31 per share or 40% payout of net profit from the FY2006 performance. Comparison between FY2006 and FY2005 performance should be done under the consideration that partial performance of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 has been transferred to CPN Retail Growth Property Fund (CPNRF) since August 2005 due to the financial lease of most of the assets of those properties to CPNRF. This was the main contribution to the changes in the company's performance when comparing this year's performance to that of the same period of the previous year. However, for comparative purpose, additional analysis is provided to show what the company's performance would have been if performance of such properties and other items associated with the financial lease had been excluded in the calculation in FY2006 and FY2005. In addition, there were two non-recurring items accounted in FY2005 financial result: 1) a gain for the financial lease of the partial areas of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 to CPNRF and a write-off (non-cash) as a result of impairment of assets under development. Net Profit: - CPN reported 4Q06 net profit of 365.4 MB, a drop of 15.4% q-o-q, reflecting full quarter book of depreciation of CentralWorld's expansion phase, in addition to the seasonal increase in personal expense (bonus) and advertising and promotion spending. - On a y-o-y basis, 4Q06 net profit decreased 4.3%, due to the inclusion of additional portion of the one-time gain of 118.1 MB (82.2 MB net of tax) from financial lease of the assets to CPNRF booked in 4Q05. - For FY2006, net profit registered at 1,685.2 MB, a drop of 48.8% y-o-y, reflecting the accounting of a one-time gain of 2,884.8 MB (2,018.9 MB net of tax) from financial lease of the assets to CPNRF and a 406.6 MB (170.7 MB net of tax and minority interest) write-off as a result of impairment of assets under development in FY2005. Total Revenue (Rental & Service Income and F & B Sales): - Total revenue grew by 4.7% q-o-q to 1,798.1 MB, primarily due to escalating take up rate at CentralWorld and the seasonal increase in revenue from promotion area. - 4Q06 total revenue improved by 18.4% y-o-y mainly due to the increases in rental and service income from the opening of CPN's largest shopping center, CentralWorld, in August 2006. - On a FY2006 basis, total revenue amounted to 6,706.2 MB, up 4.4% y-o-y even after the full year absence of partial performance of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 in FY2006. The growth mainly came from additional saleable area at Central Town Rattanathibet, the opening of CentralWorld, escalating take up rate at The Offices at CentralWorld and increase in service income Table 1 Consolidated Result 4Q06 and FY2006 Summary Consolidated Result 4Q06 Q-o-Q Y-oY FY2006 Y-oY % Chg 4Q06 and FY06 (Bt mil) %chg %Chg(Bt mil)FY2005 FY2005Adj/1 Rental & service income and F&B sales 1,798 4.7% 18.4% 6,706 4.4% 4.4% Gross Profit 727 (4.3%) 13.2% 2,923 0.1% 0.1% EBITDA 1,059 16.0% 36.7% 3,677 (41.6%) 7.7% Net Profit 365 (15.4%) (4.3%) 1,685 (48.8%) 16.6% EPS (Bt) 0.15 (22.2%)(12.0%) 0.77 (50.4%) 13.1% Note: /1Excluding one-time gain from financial lease of assets to CPNRF and write-off as a result of asset under development Financial Performance Summary Total Revenue CPN reported 4Q06 consolidated income from rental & service and food & beverage of 1,798.1 MB, representing a growth of 4.7% q-o-q. Rental & service income amounted to 1,705.5 MB, up 5.0% q-o-q mainly due to increases in take up rate at CentralWorld from 51% in 3Q06 to 81% in 4Q06 and seasonal increases in revenue from promotion area.4Q06 y-o-y comparison saw a significant growth in rental & service income of 18.4% due to the opening of CentralWorld in August 2006,the higher take up rate at The Offices at CentralWorld which climbed from 74% in 4Q05 to 90% in 4Q06,from the rate adjustments for common area and air-conditioning service fee (CAM Charge) also in August and from the higher rental rates achieved at all properties.4Q06 Food & beverage sales amounted to 92.6 MB, flat q-o-q, but down 19.0% y-o-y due to closure of food courts at Central Plaza Ratchada-Rama 3 for renovation and CentralWorld. On a FY2006 basis, consolidated income from rental & service and food & beverage stood at 6,706.2 MB, up 4.4% y-o-y. Rental & service income grew 5.1% y-o-y to 6,309.7 MB even though the majority of income from Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 were transferred out to CPNRF. For comparative purpose, excluding performance of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 in FY2006 and FY2005, FY2006 income from rental & service and food & beverage of the company's other properties increased 13.5% y-o-y. The growth was primarily due to full year contribution of additional saleable area at Central Town Rattanathibet after the relaunching in September 2005, the opening of CentralWorld, higher take up rate at The Offices at CentralWorld and increases in service income from the new CAM Charge rate applied to all properties since August 2006. FY2006 Food & beverage sales declined 5.6% y-o-y on closures of food courts at Central Plaza Ratchada-Rama 3 for renovation and CentralWorld in 3Q06. Other income in 4Q06 amounted to 154.9 MB, a decrease of 18.7% q-o-q, attributed to a one-time development fee received from Thai Business Fund 4 for the construction management of the expansion phase of CentralWorld in 3Q05. On a y-o-y basis, 4Q06 other income dropped 45.7%, mainly due to the inclusion of a one-time gain of 118.1 MB from financial lease of the assets to CPNRF in 4Q05. For FY2006, other income decreased 82.3% to 585.6 MB, as that of FY2005 included a one-time gain of 2,884.8 MB from financial lease of the assets to CPNRF. Excluding such gain, FY2006 other income would have been 38.7% higher than the 422.1 MB of FY2005's, primarily due to property management fee from CPNRF. Total Cost Total cost of rental & service and food & beverage include utilities, depreciation and amortization on rented properties, on-site personnel, repair & maintenance and property tax. In 4Q06 CPN reported total cost of 1,071.3 MB, up 11.8% q-o-q, reflecting a full quarter book of depreciation of the expansion phase of CentralWorld launched in August 2006 and increases in repair & maintenance. The total cost grew 22.1% y-o-y, due to higher utility costs and additional depreciation of the expansion phase of CentralWorld. For FY2006, total cost stood at 3,782.8 MB, an increase of 8.1% y-o-y due to the full year absence of partial cost of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3. Excluding cost of Central Plaza Rama 2 and Central Plaza RatchadaRama 3, FY2006 total cost of the company's other properties increased 13.3% y-o-y, mainly driven by additional depreciation of the expansion phase of CentralWorld, higher cost at Central Town Rattanathibet since it was launched in September 2005 and higher utility costs at all properties due to increased electricity rate (FT Baht per unit). Total Operating and Administration Expenses Total operating and administration expenses include expenses on personnel, advertising and promotion, office supplies, professional fees, depreciation and amortization on office equipments. In 4Q06, CPN recorded operating and administration expenses of 375.2 MB, up 30.2% q-o-q due to seasonal increases in personal expense (bonus) and advertising and promotion spending. For 4Q06 y-o-y comparison, total operating and administration expenses grew by 17.0% due to higher advertising and promotion spending at CentralWorld and higher personnel expense from organization restructuring and salary base adjustment. On a FY2006 basis, consolidated operating and administration expenses showed a decrease of 23.3% to 1,078.0 MB as that of FY2005 included a non-cash write-off of 406.6 MB as a result of impairment of assets under development and partial expense of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 were transferred out to CPNRF. Excluding the write-off and expenses of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 in FY2006 and FY2005, operating and administration expenses in FY2006 would have increased 11.8% y-o-y, mainly due to significant increase in advertising and promotion expense for marketing activities during and after the opening of CentralWorld's newly opened phase and higher personnel expense from organization restructuring, salary base adjustment and increase in personnel to support business expansion. Net Profit In 4Q06, CPN reported net profit of 365.4 MB, down by 15.4% q-o-q, reflecting higher advertising and promotion spending for the Christmas and New Year season and increases in personal expense (bonus). 4Q06 net profit dropped 4.3% y-o-y primarily due to the inclusion of additional portion of the one-time gain of 118.1 MB (82.2 MB net of tax) from financial lease of the assets to CPNRF in 4Q05 and higher depreciation from CentralWorld. In FY2006, consolidated net profit amounted 1,685.2 MB, down 48.8% y-o-y, as FY2005's performance included a one-time gain of 2,884.8 MB (2,018.9 MB net of tax) for the financial lease of the partial areas of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 to CPNRF and a write-off (non-cash) of 406.6 MB (170.7 MB net of tax and minority interest) as a result of impairment of assets under development. Excluding the gain and write-off and other related items, FY2006 net profit would have been 16.6% higher than FY2005's of 1,446.3 MB, due to increase in total revenue as previously mentioned. Financial Position as at December 31, 2006 Assets As of December 31, 2006, the consolidated assets amounted to 34,336.5 MB, an increase of 960.2 MB, or 2.9% y-o-y. Total current assets declined by 2,796.1 MB, or 38.4% y-o-y mainly due to cash payment for land acquisition of Khon Kaen project and payment for construction and renovation of CentralWorld and asset enhancement projects. Property and equipment (net) increased 14.1% y-o-y to 26,351.7 MB due to land acquisition and construction at various projects. Non-current assets stood at 29,849.0 MB, or an increase of 14.4% y-o-y. Liabilities CPN recorded Consolidated liabilities of 21,762.3 MB, an increase of 175.1 MB, or 0.8% y-o-y. Total interest bearing debt amounted to 11,112.1 MB, accounting for 51.1% of total liabilities and flat y-o-y as 1,503.9 MB of debt was repaid in FY2006 whilst unsecured bonds of 1,500 MB (1,000 MB at 6.39% fixed and 500 MB at MLR-1.55%) were issued in June. Shareholders' Equity Shareholders' equity registered at 12,574.2 MB, an increase of 785.1 MB, or 6.7% y-o-y, attributed to FY2006 net income of 1,685.2 MB and dividend payment for the FY2005 performance of 871.5 MB in May 2006. Profitability Gross Profit Margin 4Q06 gross profit margin was 40.4%, down from 42.3% in 4Q05 and 44.2% in 3Q06. The decline in margin was mainly attributed to the low margin at CentralWorld, which was caused by higher utility cost, additional depreciation expense from the opening of its expansion phase and from discounts given to tenants. Net Profit Margin 4Q06 net profit margin decreased to 18.2% from 22.2% in 3Q06 mainly due to higher depreciation at CentralWorld, higher seasonal marketing expenses and higher personnel expenses. 4Q06 net profit margin dropped from 20.7% in 4Q05, as there was an inclusion of gain from a non-recurring item in the 4Q05 net profit. Excluding such item and its related transaction, 4Q05 net profit margin would have been 17.3%, lower than that of 4Q06, as a result of higher contribution of investment in CPNRF in 4Q06. In FY2006, net profit margin stood at 22.6%, down from 33.7% in FY2005 mainly due to the inclusion of net gain from two non-recurring items in FY2005. Excluding these two non-recurring items and their related transactions, FY2005 net profit margin would have been 21.0%. The growth of net profit margin in FY2006 was mainly supported by full year contributions from property management fee from and the investment in CPNRF. Return On Equity In 4Q06, return on equity stood at 12.4% down from 13.9% of 4Q05 due to inclusion of additional portion of the one-time gain for the financial lease assets to CPNRF in 4Q05. Excluding such gain, 4Q05 return on equity would have been 10.9%. For FY2006, return on equity was 14.3%, a drop from 33.5% of FY2005. Excluding net gain from two non-recurring items and their related transactions, FY2005 return on equity would have been 14.7%. Capital Structure At the end of FY2006, net interest bearing debt to equity stood at 0.6 times, slightly higher than 0.4 times at the end of FY2005, due to a reduction of cash and cash equivalent to purchase land and for payment of construction and renovation mainly at CentralWorld, whilst equity also grew mainly from FY2006 net income. Interest coverage ratio was 5.9 times, relatively unchanged from that of FY2005. Obligation recovery service decreased slightly from 0.6 times in FY2005 to 0.5 times in FY2006, due to increases in capital expenditure in new projects and dividend payment in FY2006. For the FY2006, CPN repaid long-term borrowings of 1,503.9 MB and issued a total of 1,500 MB of unsecured bonds (1,000 MB at 6.39% fixed and 500 MB at MLR-1.55%). At the end of FY2006 interest-bearing debt comprised of 61% fixed and 39% floating interest rate with weighted average interest of 5.6% per annum, compared to 4.8% of FY2005, due to the bonds that were issued in June 2006 that carried higher coupon rates compared to existing borrowings and due to the impact of the increased proportion of floating interest rate borrowings which have higher interest rates than the fixed borrowings. In a declining interest rate environment, CPN has a policy to maintain interest rate at the fixed-to-floating ratio of 60:40. Table 2 : Key Financial Ratios Key Financial Ratios 4Q05 3Q06 4Q06 12M05 12M06 Liquidity ratio Current ratio (times) 1.6 1.2 0.9 1.6 0.9 Quick ratio (times) 1.4 1.0 0.8 1.4 0.8 Cash generate from operation ratio 0.4 1.2 1.4 0.7 0.8 Days account receivable (days) 8.2 8.5 9.5 4.2 10.1 Profitability ratio Gross profit margin (%) 42.3% 44.2% 40.4% 45.5% 43.6% Operating profit margin (%) 37.2% 34.1% 27.2% 68.8% 33.8% Net profit margin (%) 20.7% 22.2% 18.2% 33.7% 22.6% Cash generate from operation to sales(%) 83.2% 195.4% 311.5% 73.2% 162.2% Return on equity (%) 13.9% 15.1% 12.4% 33.5% 14.3% Efficiency ratio Return on assets(%) 4.7% 5.2% 4.3% 10.1% 5.0% Return on fixed assets(%) 6.8% 7.1% 5.3% 13.7% 6.1% Assets turnover(times) 0.2 0.2 0.2 0.3 0.2 Financial policy ratio Obligation recovery service/1 (times) (0.3) 0.6 0.8 0.6 0.5 Net debt to equity (times) 0.4 0.6 0.6 0.4 0.6 Interest coverage/1 (times) 3.7 6.2 9.7 5.9 5.9 Note: /1 Cash generate from operation excludes cash payment of endorsed promissory notes. Operations As of December 31, 2006 total saleable area stood at 836,412 sqm, which includes 684,338 sqm of retail space, 145,701 sqm of office space and another 6,373 sqm of residential space. Total retail saleable area increased by 1.3% q-o-q on the completion of Central Town Rattanathibet's new parking building, part of which comprises of new retail space in Decmeber 2006 and 10.4% y-o-y mainly on the opening of expansion phase of CentralWorld in August 2006. The saleable area mentioned above also includes saleable area of Central Plaza Rama 2 and Central Plaza Ratchada-Rama 3 of which performance has been transferred to CPNRF but CPN acts as the property manager. For q-o-q basis, average occupancy for retail malls increased from 84% in 3Q06 to 92% in 4Q06, attributed largely to the increase in take up rate at CentralWorld and the reopening after completion of asset enhancement projects at Central Plaza Ramindra and Central Plaza Ratchada-Rama3. In 4Q06, occupancy rate at CentralWorld increased from 51% in 3Q06 to 81% from higher occupancy after reopening of the renovation phase (Zone A and ZEN Department Store) in December 2006. Average occupancy rate for CPN's offices slightly decreased to 89% in 4Q06 from 90% at 3Q06. Although there was a marginal increase in occupancy at The Offices at CentralWorld, the overall decrease in office occupancy came from the lower occupancy of Pinklao's Tower A which declined from 97% in 3Q06 to 92% 4Q06 due to a lease expiration of a large tenant. Table 3: Operational Statistics Retail Malls Format Net leaseable Occupancy (%) area (sq.m.) 4Q06 3Q06 4Q05 Ladprao Plaza 55,553 100% 99% 100% Ramindra Plaza 13,585 76% 65% 95% Pinklao Plaza 55,638 98% 96% 99% Pattaya Festival 15,258 100% 100% 100% Ratchada-Rama3 Plaza 52,767 96% 88% 97% Chiangmai Plaza 73,770 99% 99% 99% Bangna Plaza 57,721 99% 100% 98% Rama2 Plaza 96,466 99% 99% 97% Rattanathibet Town Center 77,729 90% 99% 97% (more)