2003 Hotel Market Overview

Beijing, Chengdu, Dalian, Guangzhou, Guilin, Hainan Island, , Shanghai, Shenzhen,

Phil Golding, Associate Director Hubert Viriot, Senior Associate Lim Ai Yi, Associate

HVS INTERNATIONAL SINGAPORE 100 Beach Road #32‐04 Shaw Towers Singapore 189702 (65) 6293 4415 (65) 6293 5426 (fax)

New York San Francisco Boulder Denver Miami Dallas Chicago Washington, D.C. Weston, CT Phoenix Mt. Lakes, NJ Vancouver Toronto London Madrid New Delhi Singapore Hong Kong Sydney São Paulo Buenos Aires

FOREWORD

Dear Industry Colleagues,

The hotel industry changes constantly, and industry professionals may from time to time find it challenging to keep up with the ongoing developments.

At HVS International we endeavour to provide our industry colleagues with the most up-to-date information on the different hotel markets, to facilitate this task of hotel investors, developers and operators. We therefore present a series of Asian Hotel Market Overviews.

In this report, we will conduct a thorough analysis of China and highlight some of the most important hotel markets.

Each market section discusses the following aspects:

· Market profile; · Accessibility; · Seasonality and segmentation; · Total hotel supply and market performance; · Five-star hotel supply and performance; · Outlook.

We hope you find this information helpful. Should you require any further information or if HVS can be of any assistance, please do not hesitate to contact us.

Yours sincerely,

HVS International Singapore

HVS International Table of Contents

Table of Contents

1. China Overview ...... 1 2. Beijing...... 8 3. Chengdu ...... 14 4. Dalian ...... 20 5. Guangzhou ...... 26 6. Guilin ...... 32 7. Hainan Island ...... 38 8. Hong Kong ...... 44 9. Shanghai ...... 51 10. Shenzhen ...... 58 11. Wuhan ...... 64

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Hotel Market Overview – China

COUNTRY OVERVIEW With a total area of 9,326,410 km², the People’s Republic of China is the third largest country in the world after Russia and Canada. It is bordered by North Korea, Russia and Mongolia to the north; Kyrgyzstan, Tajikistan, Pakistan and India to the west; and Nepal, Bhutan, Myanmar, Laos and Vietnam to the south.

China stretches some 5,000 km across the East Asian landmass in a dramatically varied configuration of broad plains, expansive deserts, and lofty mountain ranges, including vast areas of inhospitable terrain. The eastern half of the country, with a long seacoast and a number of offshore islands, is a region of fertile lowlands, foothills and mountains, desert, steppes, and subtropical areas. The western half of China is a region of sunken basins, rolling plateaus, and towering massifs, including a portion of the highest tableland on earth.

China is the world’s most populous country with approximately 1.3 billion inhabitants. Han Chinese makes up about 93% of the population; the rest is composed of 55 different ethnic minorities. Approximately 70% of the population is rural; however, the urban population is increasing significantly in line with the economic development of the country. About 94% of the population live on approximately 36% of the land. The population is primarily concentrated in the eastern part of China with the most densely populated areas including the Chang Jiang Valley, Sichuan Basin, North China Plain, Zhu Jiang Delta and the industrial area around the city of Shenyang. On the other hand, the western regions, such as Inner Mongolia, Xinjiang, Gansu and Qinghai – which comprise 55% of the country’s land area, contain only 5.7% of the population.

Political Background On 12 February 1912, China’s two-millennia-old dynastic system of imperial government was brought down with the abdication of the last Manchu emperor, the child Puyi. Under the guidance of Sun Yat-Sen, the leader of the nationalist Kuomintang party, the Republic of China was formed, with its capital housed in Beijing.

On 1 October 1949, after years of civil war between the communist and the Kuomintang forces (following the Japanese occupation), Mao Zedong formally proclaimed the foundation of the People’s Republic of China whilst the defeated Kuomintang forces fled to the Island of

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Formosa (). Ever since, China has been a communist state claiming Taiwan as a wayward province.

On 8 September 1976, Mao Zedong died bringing to a close 30 years of ‘Maoism’. Under the impulsion of Deng Xiaoping China began a ‘Second Revolution’ that included a reform of the Chinese Communist Party and its political activities, a reform of the government’s organisation, the economy and defence, and cultural and artistic reforms. These reforms were undertaken to realise the broad goal of the Four Modernisations announced by Premier in 1975 (the modernization of industry, agriculture, science and technology, and national defence) and to bring China into the community of advanced industrial nations by the start of the new millennium. As a result of these reforms, China experienced strong economic growth during the past two decades. These reforms were rewarded in 2001 when China entered the World Trade Organisation (WTO).

In November 2002, Vice President Hu Jintao took over presidency of the ruling Communist Party and became China’s new president at the National People’s Congress. The parliament also elected a new premier, Wen Jia Bao, and several new senior ministers. Heading a new generation of leaders, Hu is widely anticipated to continue to give priority to political stability and economic reforms to facilitate the country’s gradual entry in the WTO.

With political stability (except for the China-Taiwan dispute) and further economic development, we anticipate strong growth in the tourism sector, including demand for hotel accommodation.

National Economic Economic development has been the priority of China’s leaders, and Overview consequently the national economy has expanded significantly during the last two decades. Table 1 provides a summary of China’s historical and forecast key economic indicators.

Table 1 Historic and Forecast Economic Indicators, China 1994-06

Historical Forecast 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Real Economic Growth Rate (%) 12.6 10.5 9.6 8.8 7.8 7.2 8.0 7.3 7.8 7.6 7.8 8.0 8.0 Private Consumption (%) 7.7 10.1 9.6 5.8 6.7 12.5 — — — — — — — Government Consumption (%) 9.1 5.9 8.4 7.2 8.4 13.0 — — — — — — — Total Investments (% Change) 22.7 11.1 12.9 6.9 0.5 -11.2 -5.0 9.5 — — — — — Unemployment Rate (%) 2.8 2.9 3.0 3.1 3.3 3.1 3.5 3.8 — — — — — Consumer Price Index (%) 24.1 17.1 8.3 2.8 -0.8 -1.3 0.4 0.7 0.3 -0.5 0.5 1.5 3.5 Export (% Change) 31.9 23.0 1.5 21 0.6 6.1 28.3 15.0 — — — — — Import (% Change) 11.2 14.2 5.1 2.5 -1.5 18.2 30.8 20.0 — — — — — Chinese yuan:US$ 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3

Source: Economist Intelligence Unit 8.8444

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As indicated in Table 1, China experienced significant economic growth, averaging approximately 8.8%, between 1994 and 2002.

Economic growth has been led by increases in industrial output. Although originally pioneered by government enterprises, private investors and foreign investment have significantly contributed to the industrial output in recent years. As controls on the economy reduced, and with demand for personal services growing in line with the enrichment of the urban population, services have also been growing rapidly.

It is important to note that China’s economic growth has mainly benefited the coastal areas on the eastern seaboard due to good accessibility, links with overseas Chinese businesses and a more developed infrastructure. As such, eastern provinces have consistently achieved far higher rates of growth than the western provinces.

Despite the strong growth and progress achieved in recent years, some key fundamental challenges face China, such as, reforming the ailing state-owned enterprises, overhauling the financial sector and raising the average income of China’s rural population. The banking system is also in desperate need of reform: non-performing loans are estimated at over 20% of total loans; however, it is widely believed that this estimate is somewhat conservative and that the real figure is probably much higher. As such, there are fears that vulnerable sectors, agriculture in particular, may suffer from foreign competition as China enters the WTO.

Nevertheless, China’s strong economic growth is anticipated to continue during the coming years and the long-term economic outlook thus remains very positive. We anticipate that this economic growth will have a positive impact on the tourism sector and demand for hotel accommodation, in particular in the Commercial segment (Corporate and Meeting, Incentive, Conference and Exhibition ‘MICE’ demand).

Tourism Overview – Table 2 sets out visitor arrivals to China from 1996 to 2002. Visitors

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Table 2 Visitors to China 1996-02

% of Total CAAG* 1996- Nationality 1996 1997 1998 1999 2000 2001 2002 2002 02 Asia Japan 1,548,843 1,581,747 1,572,054 1,855,197 2,201,528 2,385,700 2,925,553 22% 11% Korea 693,944 781,119 632,806 991,979 1,344,721 1,678,836 2,124,310 16% 20% Mongolia 281,907 342,881 364,761 354,459 399,110 387,057 453,126 3% 8% Indonesia 137,767 147,328 104,602 182,904 220,554 224,177 274,717 2% 12% Malaysia 298,451 361,308 300,119 372,870 441,010 468,613 592,447 4% 12% Philippines 243,727 276,656 256,498 298,285 363,852 407,990 508,572 4% 13% Singapore 286,316 316,825 316,434 352,479 399,377 415,047 497,149 4% 10% Thailand 193,287 168,508 144,332 206,424 241,074 298,417 386,328 3% 12% Others 380,894 434,720 447,888 492,724 613,490 716,524 881,598 7% 15% Total 4,065,136 4,411,092 4,139,494 5,107,321 6,224,716 6,982,361 8,643,800 64% 13% % Change — 9% -6% 23% 22% 12% 24%

Europe UK 205,197 227,907 242,873 258,894 283,877 302,527 342,967 3% 9% France 123,291 131,286 138,044 155,640 184,964 199,523 222,135 2% 10% Germany 178,982 184,712 191,888 217,632 239,062 253,354 281,835 2% 8% Italy 62,104 65,139 72,538 72,216 77,840 77,684 91,711 1% 7% Switzerland 33,397 30,257 28,410 29,913 30,743 30,816 32,239 0% -1% Sweden 34,237 38,506 40,561 46,788 53,570 52,807 62,811 0% 11% Netherlands 41,287 52,257 58,946 70,064 75,978 92,953 100,405 1% 16% Russia 555,897 813,681 692,000 832,995 1,080,209 1,196,175 1,271,635 9% 15% Others 398,556 345,128 269,116 313,901 341,110 361,433 420,062 3% 1% Total 1,632,948 1,888,873 1,734,376 1,998,043 2,367,353 2,567,272 2,825,800 21% 10% % Change — 16% -8% 15% 18% 8% 10%

The Americas USA 576,416 616,438 677,311 736,386 896,180 949,161 1,121,197 8% 12% Canada 156,613 174,092 195,953 213,699 236,556 253,876 291,329 2% 11% Other 76,156 76,636 74,643 75,911 84,355 75,346 97,048 1% 4% Total 809,185 867,166 947,907 1,025,996 1,217,091 1,278,383 1,509,574 11% 11% % Change — 7% 9% 8% 19% 5% 18%

Oceania Australia 132,683 156,840 186,438 206,539 234,102 255,096 291,303 2% 14% New Zealand 30,150 28,296 30,001 31,440 37,595 44,350 50,198 0% 9% Other 10,613 8,305 8,509 8,795 10,681 10,761 12,182 0% 2% Total 173,446 193,441 224,948 246,774 282,378 310,207 353,683 3% 13% % Change — 12% 16% 10% 14% 10% 14%

Others 63,619 67,434 61,022 57,162 68,894 88,161 106,640 1% 9% % Change — 6% -10% -6% 21% 28% 21% — —

Total 6,744,334 7,428,006 7,107,747 8,435,296 10,160,432 11,226,384 13,439,497 100% 12% % Change — 10% -4% 19% 20% 10% 20%

* Compound Average Annual Growth

Source: China National Tourism Administration 17%

Table 2 illustrates that, during the period 1996 to 2002, international arrivals to China increased significantly by 12% per annum, from approximately 6.7 million in 1996 to 13.4 million in 2002, the highest

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number ever recorded. Asia remains the key feeder market to China, accounting for 64% of total arrivals in 2002. Arrivals from Japan and Korea alone represented approximately 38% of total arrivals.

2003 Arrival Statistics In 2003, international visitor arrivals to China were negatively impacted by the outbreak in March of the Severe Acute Respiratory Syndrome (SARS). As such, after recording strong growth in January and February (+25% compared to 2002), international arrivals plummeted from March onwards. Year-to-date statistics, as at July, indicate international visitor arrivals to China were 24.85% below 2002 levels. At the worse of the crisis, in May/June, visitor arrivals were some 50% below the same period in 2002. As such, international visitor arrivals to China are anticipated to decline in 2003 in comparison to 2002 levels. However, recent preliminary statistics for August and September indicate arrivals have started to recover. Consequently, we estimate arrivals for the full year 2003 are likely to be less than 10% below 2002. Moreover, we anticipate a full recovery in 2004 with double-figure growth rates in line with historical trends.

Outlook As China’s economy continues to grow, we anticipate that international arrivals for both commercial and leisure reasons are likely to continue to increase. Furthermore, domestic movements within the country are likely to increase significantly. As such, the WTO predicts that China will receive more than 180 million tourists in 2020, ranking top among countries in international tourist arrivals ahead of France and the United States of America.

Corporate demand for hotel accommodation is likely to increase nationwide, whilst MICE demand is likely to increase at major cities offering world-class facilities. Finally, leisure demand is expected to increase throughout the country, following improved international and domestic accessibility, and improved tourism marketing and advertising strategies. International events such as the 2008 Olympic Games in Beijing or the 2010 World Expo in Shanghai are likely to contribute to growth in this segment.

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CHINA’S LEADING The following sections analyse the ten leading destinations in China TOURISM that are listed below. DESTINATIONS · Beijing; · Chengdu; · Dalian; · Guangzhou; · Guilin; · Hainan Island; · Hong Kong; · Shanghai; · Shenzhen; · Wuhan.

The Country Map, overleaf, sets out the location of these destinations.

For each of the ten markets we have analysed arrival trends, total hotel supply and demand. Moreover, we have analysed the performance of five-star hotels and new hotel supply in each destination. We have also commented on the outlook of each respective destination.

LOCATION MAP

Subject Property 1 Condominiums 3 1. Andama n Cove 2. The Breakers

Lower Tier Villas Cities 3. Lakesho re Villas 1. Beijing 4. Laguna 8 2. Chengdu 3. Dalian 2 10 4. Guangzhou 5. Guilin 6. Hainan Island 5 7. Hong Kong 8. Shanghai 9 9. Shenzhen 4 10. Wuhan 7

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BEIJING Beijing is situated in the northeastern part of China, at an elevation of 43.5 m above sea level. Divided into 18 districts, the city has approximately 13.8 million inhabitants, making it the third most populated city in China after Chongqing and Shanghai. Beijing is the capital city of the People’s Republic of China and, along with Shanghai, Tianjin and Chongqing, is one of the four centrally administrated municipalities. Moreover, the city is a political, economic and cultural hub to the country. The city’s main tourist attractions include: The Forbidden City, Tiananmen Square, Heaven’s Temple, the Summer Palace and The Great Wall. In 2008, Beijing will host the Olympic Games.

Access The accessibility to Beijing is good. The city is accessible by rail, road and air.

Rail – Beijing is accessible by train from most parts of the country. Railway lines provide access to major cities, such as Hong Kong and Shanghai, but also to international destinations such as North Korea, Russia and Mongolia.

Road – The capital city of China, Beijing is accessible by road from most parts of the country. New expressways have been constructed to meet the increasing traffic demands, including a major expressway to Tianjin, an important port city located approximately 90 km (55 miles) southeast of Beijing.

Air – Beijing International Airport is 35 km from the city centre. Excluding Hong Kong airport, Beijing airport is the busiest airport in China. Between 1996 and 2002, total passenger movements increased by approximately 8.8% per annum from 16 million passengers in 1996 to 27 million passengers in 2002. At present, the city is served by 37 international airlines, which provide direct access to most parts of Asia, the key cities in Europe (Paris, London, Rome and Frankfurt), the USA (Los Angeles, San Francisco and New York) and the Middle East. Furthermore, Beijing International Airport provides the base for , China’s national carrier – the largest airline in terms of passenger traffic and it has the second largest fleet.

Beijing International Airport has plans to expand its facility to meet the anticipated levels of future demand. The expansion plan includes a new terminal building and a new runway; the local government is also planning construction of a second airport by 2010.

Tourism Overview Table 3 sets out international arrivals at accommodation establishments in Beijing from 1996 to 2002 and year-to-date August (‘YTD’) 2003.

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Table 3 International Arrivals at Accommodation, Beijing 1996-2002, YTD August 2002 and 2003

January to August % of Total CAAG* 1996- % Nationality 1996 1997 1998 1999 2000 2001 2002 2002 02 2002 2003 Change Key Asian Feeder Markets Japan 429,506 430,439 435,156 456,451 543,319 506,662 564,546 21% 5% 325,652 151,495 -53% Korea 179,781 193,733 81,825 191,539 278,055 327,494 380,123 14% 13% 266,979 124,145 -54% Malaysia 96,177 111,947 74,084 109,546 105,312 68,918 77,299 3% -4% 42,970 18,075 -58% Philippines 8,510 11,293 9,698 11,760 8,267 11,503 13,159 0% 8% 9,147 2,444 -73% Singapore 85,690 82,676 68,228 72,824 73,111 70,850 80,002 3% -1% 47,084 19,923 -58% Thailand 45,339 31,384 25,542 41,113 43,844 39,229 41,823 2% -1% 27,169 10,336 -62% Total 845,003 861,472 694,533 883,233 1,051,908 1,024,656 1,156,952 43% 5% 719,001 326,418 -55% % Change — 2% -19% 27% 19% -3% 13%

Key North American Feeder Markets USA 185,019 216,813 231,662 240,924 310,515 330,698 373,558 14% 12% 234,811 101,611 -57% Canada 39,009 40,762 47,874 54,498 52,310 51,820 60,818 2% 8% 36,138 19,014 -47% Total 224,028 257,575 279,536 295,422 362,825 382,518 434,376 16% 12% 270,949 120,625 -55% % Change — 15% 9% 6% 23% 5% 14%

Key European Feeder Markets UK 74,861 90,402 88,054 88,148 96,827 111,129 129,475 5% 10% 75,932 49,297 -35% France 66,153 65,158 69,413 78,772 95,831 101,536 113,247 4% 9% 73,437 32,038 -56% Germany 99,878 91,305 112,580 105,305 121,091 123,485 122,393 5% 3% 76,244 32,591 -57% Russia 69,169 65,207 61,555 47,537 38,678 48,584 51,825 2% -5% 31,106 26,267 -16% Total 310,061 312,072 331,602 319,762 352,427 384,734 416,940 16% 5% 256,719 140,193 -45% % Change — 1% 6% -4% 10% 9% 8%

Australia 33,947 43,486 46,473 48,537 45,045 48,608 56,234 2% 9% 34,452 17,729 -49% % Change — 28% 7% 4% -7% 8% 16%

Other 348,569 393,965 429,656 505,205 567,434 558,274 600,033 23% 9% 373,879 365,035 -2% % Change — 13% 9% 18% 12% -2% 7%

Total 1,761,608 1,868,570 1,781,800 2,052,159 2,379,639 2,398,790 2,664,535 100% 7% 1,655,000 970,000 -41% % Change — 6% -5% 15% 16% 1% 11%

*Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 3, international arrivals at accommodation in Beijing increased from approximately 1.8 million in 1996 to 2.7 million in 2002, which equates to an annual growth of 7%.

Key feeder markets include Japan, Korea and the USA, which accounted respectively for 21%, 14% and 14% of total arrivals in 2002. As Beijing relies heavily on these feeder markets, it is relatively vulnerable to the economic performance and political stability of these markets. In 1998, arrivals at accommodation declined by 5% as Asian feeder markets were negatively impacted by the Asian financial crisis. Furthermore, in 2001 arrivals at accommodation increased only marginally as tourism from North America and Europe was negatively effected by the terrorist attacks in the USA. However, in both 1999 and 2002, the market has proved resilient and has demonstrated strong recoveries in arrivals at accommodation.

Year-to-date 2003 statistics show the significant impact of SARS on international tourism in the region with international accommodated

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demand declining by 41.4% year-to-August 2003 versus the same period in 2002.

Seasonality Table 4 sets out the seasonality of international arrivals at accommodation in Beijing in 2001 and 2002.

Table 4 Beijing Seasonality by International Arrivals at Accommodation 2001-02

330,000 280,000 230,000 180,000 130,000 80,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

2001 2002

Source: China National Tourism Administration

As China’s capital city, political hub and the site of many of the country’s famous tourist attractions, Beijing enjoys solid commercial and leisure demand all year round. Peak seasons correspond to spring and autumn when commercial activity is strongest and when the climate conditions are the most favourable for tourism. On the other hand, arrivals are typically lower during winter months, corresponding to commercial holiday seasons in most feeder markets. Furthermore, as winter is generally very cold in Beijing, leisure arrivals also tend to be lower during these months.

The Hotel Market Table 5 sets out the characteristics of the total hotel market in Beijing from 1998 to 2002.

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Table 5 Beijing Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 64,066 68,510 76,699 92,800 103,000 13% % Change — 7% 12% 21% 11%

Occupancy Rate 55% 56% 61% 63% 62% 3% Accommodated Demand 12,814,481 14,003,444 17,049,037 21,339,360 23,308,900 16% % Change — 9% 22% 25% 9%

Average Length of Stay/Days 4.47 4.49 4.28 4.41 4.50 0%

* Compound Average Annual Growth

Source: China National Tourism Administration

From 1998 to 2002, total room supply in Beijing increased by approximately 13% per annum. The increase in room supply has been absorbed by the increase in demand, which recorded a higher growth rate of 16% per annum. With demand outpacing supply, marketwide occupancy levels improved, increasing from 55% in 1998 to 62% in 2002.

Average length of stay as illustrated in Table 5 includes domestic and international visitors to Beijing. Domestic and regional tourists typically stay for shorter period of time, ranging from two to four days, whilst long-haul tourists from Europe and North America typically stay for longer periods, ranging from five to ten days.

FIVE-STAR HOTEL Table 6 lists the five-star hotels in Beijing from 1998 to 2002. MARKET

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Table 6 Five-Star Hotel, Beijing 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

Jianguo 1979 461 461 461 461 461 Great Wall Sheraton 1984 846 846 846 846 846 Grand Hotel Beijing 1985 285 285 285 285 285 Shangri-La 1986 657 657 657 657 657 The Peninsula Beijing 1987 530 530 530 530 530 China World 1989 738 738 738 738 738 Harbour Plaza 1989 414 414 414 414 414 Swissôtel 1990 434 434 434 434 434 Hilton 1990 363 363 363 363 363 Gloria Plaza 1990 423 423 423 423 423 Holiday Inn Crowne Plaza 1991 372 372 372 372 372 Kempinski 1992 486 486 486 486 486 ANA New Century 1992 649 649 649 649 649 The St Regis 1997 273 273 273 273 273 Kerry Centre 1999 — 487 487 487 487 Radisson 2000 — — 165 355 355 Grand Hyatt 2001 — — — 496 595 Marco Polo 2002 — — — — 300

Total 6,931 7,418 7,583 8,269 8,668 % Change — 7% 2% 9% 5% Compound Average Annual Growth Rate 1998-02 6%

Source: HVS International 16-Oct

The five-star hotel market in Beijing is relatively well developed, with 18 hotels and a total of 8,668 rooms. International branded hotels have a strong presence in the market, accounting for approximately 80% of total five-star room supply. Five-star room supply recorded an annual growth of 6% per annum between 1998 and 2002, with the opening of the Kerry Centre, The Radisson, The Grand Hyatt and The Marco Polo hotels.

New Supply Five-star hotel supply in Beijing is anticipated to increase significantly over the next five years, with more than 1,300 rooms due to enter the market. Currently, there are four confirmed new five-star hotel projects. These include a yet-to-be-branded, 300-room hotel, due to open in 2004; the 330-room Marco Polo Hotel; the 250-room Park Hyatt and the 350-room InterContinental Hotel in 2006. In addition to these projects, numerous sites have been rumoured for five-star hotel development, including sites in He Hua, the Xicheng District, Eaglerun Plaza and Sunny Plaza.

Five-Star Hotel Table 7 sets out the performance characteristics of the five-star hotel Performance market in Beijing from 1999 to 2002.

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Table 7 Five-Star Hotel Performance, Beijing 1999-02

CAAG* 1999 2000 2001 2002 1999-02

Occupancy Rate 68% 73% 65% 67% 0% Accommodated Demand 1,841,148 2,020,490 1,961,716 2,129,567 5% % Change — 10% -3% 9%

Average Room Rate (RMB) 643 651 712 692 3% % Change — 1% 9% -3%

Average Room Rate (US$) 77 78 86 83 3% % Change — 1% 9% -3%

RevPAR (RMB) 437 475 463 466 2% % Change — 9% -3% 1%

RevPAR (US$) 53 57 56 56 2% % Change — 9% -3% 1%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS International

During the period 1999 to 2002, five-star hotel supply increased by 6% per annum whilst demand increased by 5% per annum, with supply marginally outpacing demand, the marketwide occupancy decreased from 68% in 1999 to 67% in 2002. It should be noted that between 1999 and 2002 marketwide occupancy fluctuated significantly. With almost stable supply in 1999-00 and strong growth in demand, five-star hotels’ marketwide occupancy increased from 68% in 1999 to 73% in 2000. However, following the opening of new properties in 2000-01, supply outpaced demand resulting in marketwide occupancy coming under pressure and declining from 73% in 2000 to 65% in 2001.

With strong growth in supply, competition within the five-star hotel market increased substantially. As such, average room rate (ARR) growth between 1999 and 2002 was marginal, at 3% per annum, approximately in line with inflation.

With marketwide occupancy declining from 68% in 1999 to 67% in 2002, but ARR increasing by 3% per annum during the same period, five-star hotels’ revenue per available room (RevPAR) increased by 2% per annum, from RMB437 in 1999 to RMB466 in 2002.

Market Segmentation Table 8 sets out the approximate market segmentation for five-star hotels in Beijing during 2002.

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Table 8 Market Segmentation of Five-Star Hotels in Beijing 2002

Leisure 35%

Corporate MICE 60% 5%

Source: HVS International Research

Five-star hotels in Beijing tend to accommodate primarily international guests. With strong economic growth and numerous tourism attractions, hotels benefit from both commercial and leisure demand. However, with the entry of China into the WTO and strong economic growth rates, commercial demand has become increasingly important. Furthermore, although leisure demand also increased significantly, five- star hotels increasingly find newly opened, internationally branded, four-star hotels competing in this segment, especially for group leisure business. As such, in 2002 the prime source of business for five-star hotels was corporate demand, accounting for approximately 60% of total accommodated demand.

Outlook Beijing’s long-term outlook is positive. Corporate demand is expected to increase significantly in line with the economic development of the city. At the same time, leisure demand is likely to experience significant growth with numerous tourism projects planned, including the 2008 Olympic Games. Consequently, we anticipate demand for hotel accommodation to recover rapidly from SARS and to increase in line with historical trends. However, with five-star hotel supply expected to increase significantly, we anticipate five-star hotels’ marketwide occupancy to increase moderately in the short term. Similarly, with incoming competition in the market, average room rate growth is likely to be moderate.

CHENGDU Chengdu is located in southwest China, in the west Sichuan plain, at the confluence of the Nan and Fu rivers. Sichuan is one of the largest provinces in China with a total area roughly the size of France. With five districts and 12 counties under its jurisdiction, Chengdu has a population of approximately 10 million.

Chengdu is the capital city of the Sichuan province and it has been the economic, political and military hub of southwest China since it was earmarked by central government as the main base for the ‘go-west’ campaign’. The campaign is China’s attempt to develop the western

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part of the country. Under this campaign, the government grants preferential policies to Western China with respect to investment, banking and credit support, taxation, land and natural resources for ten years, effective from January 2001. Foreign investment in the region is highly encouraged in agriculture, hydraulic engineering, ecology, transportation, energy and utility, environmental protection, mining and exploration, and tourism.

Chengdu is also a hub for tourists visiting the Sichuan province, as well as for tourists on their way to Tibet. The city’s main attractions include JiuZhai Gou (Nine Village Valley), Grand Buddha, Mount Emei and giant pandas.

Access Accessibility to Chengdu is good. The city is accessible by rail, road and air.

Rail – Rail access is good with four trunk railways: Chengdu-Baoji, Chengdu-Chongqing, Chengdu-Kunming and Chengdu-Dazhou.

Road – The Chengdu road network is well developed with several expressways linking the city with Chongqing (southeast), Mianyang (north), Leshan (south), Yaan (southwest) and Dujiangyan (west). Furthermore, new roads are being built, including an expressway linking Chengdu with Nanchong, to the east.

Air – Chengdu Shuangliu International Airport, located 18 km from the city, is the fourth largest airport in China, with total passenger traffic exceeding 6 million passengers in 2001. The airport was renovated in 2001 to increase its capacity to 15 million passengers per annum. Furthermore, the government has plans to build a new runway or a second airport in Chengdu between 2006 and 2010. Chengdu airport is connected to most parts of China with numerous daily flights to Shanghai, Beijing and Hong Kong. Furthermore, with the development of Chengu as a platform for development in Western China, new direct international routes were recently established, including flights to Singapore, Bangkok, Kuala Lumpur, Seoul, Tokyo, Fukuoka, Kathmandu and Osaka. Moreover, international direct flights to India, Turkey, Vietnam and Cambodia are planned in 2005.

Tourism Overview Table 9 sets out international arrivals at accommodation in Chengdu from 1996 to 2002.

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Table 9 International Arrivals at Accommodation, Chengdu 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 23,229 29,827 19,073 22,132 33,354 55,171 85,958 33% 24% Korea 3,091 2,795 1,848 2,228 3,198 8,930 14,338 6% 29% Malaysia 3,644 7,784 1,829 3,931 4,497 5,192 10,334 4% 19% Philipines 460 1,044 463 561 821 2,147 1,521 1% 22% Singapore 7,296 8,767 11,747 13,213 6,986 9,217 14,611 6% 12% Thailand 3,864 2,869 5,257 10,121 8,386 16,001 29,645 11% 40% Total 41,584 53,086 40,217 52,186 57,242 96,658 156,407 61% 25% % Change — 28% -24% 30% 10% 69% 62%

Key North American Feeder Markets USA 10,982 24,475 17,263 16,924 25,201 30,427 35,798 14% 22% Canada 1,697 2,468 2,262 2,521 3,656 5,145 6,734 3% 26% Total 12,679 26,943 19,525 19,445 28,857 35,572 42,532 16% 22% % Change — 113% -28% 0% 48% 23% 20%

Key European Feeder Markets UK 3,266 3,511 4,665 3,929 5,005 6,364 7,283 3% 14% France 3,152 7,938 3,690 3,699 4,699 5,515 6,170 2% 12% Germany 3,998 6,577 4,380 4,348 6,042 6,243 8,184 3% 13% Russia 284 110 808 366 467 519 618 0% 14% Total 10,700 18,136 13,543 12,342 16,213 18,641 22,255 9% 13% % Change — 69% -25% -9% 31% 15% 19%

Australia 1,876 2,047 2,108 2,554 2,706 4,430 4,500 2% 16% % Change — 9% 3% 21% 6% 64% 2%

Others 14,985 — 20,955 18,057 22,492 33,074 32,809 13% 14% % Change — — — -14% 25% 47% -1%

Total 81,824 100,212 96,348 104,584 127,510 188,375 258,503 100% 21% % Change — 22% -4% 9% 22% 48% 37%

* Compound Average Annual Growth

Source: China National Tourism Administration

Table 9 illustrates that, during the period 1996 to 2002, international arrivals at accommodation in Chengdu increased by approximately 21% per annum, from 81,824 in 1996 to 258,503 in 2002, the highest number ever reported. The main international feeder markets for accommodation in Chengdu are Asian countries; specifically, Japan and Thailand, which accounted for 33% and 11% of total arrivals in 2002, respectively. Key non-Asian feeder markets include primarily the USA, accounting for 14% of total arrivals at accommodation in 2002.

Due to Chengdu reliance on Asian feeder markets, international arrivals at accommodation declined in 1998, following the regional currency crisis of 1997. However, with the recovery of feeder markets, arrivals at accommodation in Chengdu rebounded strongly with a growth rate of 35% per annum between 1999 and 2002.

Seasonality Table 10 sets out the seasonality of international arrivals at accommodation in Chengdu in 2002.

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Table 10 Chengdu Seasonality by International Arrivals at Accommodation 2002

38,000 33,000 28,000 23,000 18,000 13,000 8,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

The main hub in southwest China, international arrivals to Chengdu are strong for most parts of the year, the high season spreads typically from March to mid-October with a peak in early October due to the holiday season in China. However, as many international tourists to Chengdu also visit, or are on their way to, other cities in Sichuan and Tibet, demand for hotel accommodation typically declines significantly during the winter months when the average temperature is low.

The Hotel Market Table 11 sets out the characteristics of the total Chengdu hotel market from 1998 to 2002.

Table 11 Chengdu Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 13,238 13,010 14,043 16,037 17,674 7% % Change — -2% 8% 14% 10%

Occupancy Rate 46% 51% 56% 57% 60% 7% Accommodated Demand 2,217,828 2,417,063 2,860,138 3,324,791 3,844,802 15% % Change — 9% 18% 16% 16%

Average Length of Stay/Days 2.18 2.04 2.18 2.42 2.44 3%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 11, during the period from 1998 to 2002, hotel supply in Chengdu increased by approximately 7% per annum. During the same period, demand for hotel accommodation increased by 15% per annum. As a result, with demand outpacing supply, marketwide occupancy increased from 46% in 1998 to 60% in 2002.

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Average length of stay as illustrated in Table 11 includes domestic and international visitors to Chengdu. Domestic visitors’ average length of stay is typically short as demand is primarily commercial. Furthermore, although a high proportion international visitors to China go to Chengdu, average length of stay is also typically short as Chengdu is mainly a stopover destination to visit other parts of Sichuan or Tibet. As such, the average length of stay from 1998 to 2002 has remained broadly similar.

FIVE-STAR HOTEL Table 12 lists the five-star hotels in Chengdu from 1998 to 2002. MARKET Table 12 Five-Star Hotels, Chengdu 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

JinJiang Hotel Chengdu 1958 541 541 541 541 541 Crowne Plaza Chengdu 1996 434 434 434 434 434 Sheraton Chengdu Lido Hotel * 2000 — — 236 402 402

Total 975 975 1,211 1,377 1,377 % Change — 0% 24% 14% 0% Compound Average Annual Growth Rate 1998-02 9% Compound Average Annual Growth Rate 2000-02 7%

* Opened in May 2000

Source: HVS International

As illustrated in Table 12, five-star hotel supply in Chengdu is limited, with only three properties in the market. Only one new international hotel opened over the past five years: the Sheraton Chengdu Lido Hotel. As such, the five-star hotel supply increased by 9% per annum during the period 1998 to 2002.

New Supply We are not aware of any confirmed five-star hotel projects in Chengdu. However, with the development of Chengdu as a regional hub in southwest China and the existing demand patterns, we expect developers’ interest in five-star hotels is likely to increase during the next five years. Additional hotels are thus anticipated to break ground.

Five-Star Performance Table 13 sets out the performance characteristics of the five-star hotel market from 2000 to 2002.

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Table 13 Five-Star Hotel Performance, Chengdu 2000-02 ¹

CAAG2 2000 2001 2002 2000-02

Occupancy Rate 66% 63% 69% 2% Accommodated Demand 292,628 315,435 346,546 9% % Change — 8% 10%

Average Room Rate (RMB) 584 573 521 -6% % Change — -2% -9%

Average Room Rate (US$) 70 69 63 -6% % Change — -2% -9%

RevPAR (RMB) 387 359 359 -4% % Change — -7% 0%

RevPAR (US$) 47 43 43 -4% % Change — -7% 0%

Exchange Rate RMB:US$ 8.3 8.3 8.3

¹ Previous years' data are not available ² Compound Average Annual Growth

Source: HVS International

Between 2000 and 2002, five-star hotel supply increased by 7% per annum whilst demand increased by 9% per annum. As such, five-star marketwide occupancy increased from 66% in 2000 to 69% in 2002. It should be noted that the opening of the Sheraton in 2000-01 has had a significant impact on the market performance. With the Sheraton opening resulting in an increase in supply of approximately 40%, marketwide occupancy declined from 66% in 2000 to 63% in 2001. However, as illustrated in Table 13, strong growth in demand absorbed relatively rapidly the increase in supply with marketwide occupancy recovering in 2002.

Marketwide five-star hotels’ ARR declined by approximately 6% per annum between 2000 and 2002. Strong growth in supply is the main reason for this decline. In particular, the opening of the newly built, internationally branded Sheraton hotel has put pressure on existing local hotels. To keep their market share, these properties lowered ARR.

With marketwide occupancy increasing from 66% in 2000 to 69% in 2002, but ARR declining by 6% per annum during the same period, five-star hotels’ RevPAR declined from RMB387 in 2000 to RMB359 in 2002.

Market Segmentation Table 14 sets out the market segmentation for five-star hotels in Chengdu during 2002.

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Table 14 Market Segmentation of Five-Star Hotels in Chengdu 2002

Corporate 43%

Leisure 55% MICE 2%

Source: HVS International Research

Demand for five-star hotel accommodation consists primarily of international travellers. The majority of these tourists are visiting Chengdu as part of a tour of China including Sichuan and/or Tibet. Historically, demand for five-star hotel accommodation has been driven by the leisure segment. However, with the development of Chengdu into the economic hub of southwest China, the number of foreign business travellers visiting this part of China has increased significantly. Therefore, corporate demand for five-star hotel accommodation is increasingly important. Furthermore, we anticipate demand from this segment to represent an increasing proportion of total demand for five- star hotel accommodation in Chengdu.

Outlook We consider Chengdu’s outlook to be good. Earmarked by the Chinese government to lead the ‘go-west’ campaign in southwest China, Chengdu is likely to experience significant economic development. Corporate demand for hotel accommodation is thus likely to increase. Moreover, with numerous leisure attractions, leisure demand is also likely to increase. Consequently, with limited supply, we anticipate five-star hotels’ marketwide occupancy and ARR to increase in the short term.

DALIAN The city of Dalian is located in Liaoning province, on the eastern bank of the Eurasian continent and the southern most point of the Liaodong peninsula in the northeastern part of China. Dalian is facing the with direct access to Korea Bay to the east and Bo Hai Bay to the west. As such, Dalian is in close proximity to Japan and Korea, with Fukuoka and Seoul lying 1,000 km and 500 km to the southeast, respectively. Consequently, the city has historically had close ties with both countries.

Divided into six districts with a total area of 12,574 km², the city has approximately 5.9 million inhabitants. Owing to its strategic location, Dalian is the key marine gateway to northeast China and an important industrial, trade and tourism hub.

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Known as a ‘garden city’, Dalian is also a popular leisure destination. The city has several tourist attractions such as Bangchuidao Scenic Area, Bingyu Valley, Lushun (Port) and Xinghai Square. Furthermore, following the completion of a new convention centre in 2000, Dalian has become an important convention venue hosting many major events throughout the year, such as the Dalian International Fashion Festival, Dalian International Marathon, Flower Festival, Export Commodities Fair and International Garment Fair.

Access Accessibility to Dalian is good. Dalian is accessible by rail, road, sea and air with each mode of transport contributing significantly towards the economic growth of the city.

Rail – Dalian is directly linked to Beijing and most cities in the northeast of China including Changchun, Shenyang, Qiqihar, Jilin and Harbin.

Road – Several highways connect Dalian to other cities. These include Hada Highway (Harbin to Dalian), Heda Highway (Hegang to Dalian) and Shenda Highway (Shenyang to Dalian).

Sea – There is an international boat service to Incheon, South Korea, and a domestic boat service to Weihai and Yantai (in the Shangdong province), Qinhuangdao and Shanghai.

Air – Dalian International Airport, located at Zhoushuizi, 15 km from the city centre, is one of the most important airports in northeast China. The airport’s maximum passenger capacity is approximately 8 million. In 2002, total arrivals at Dalian International Airport reached 3.3 million passengers, the highest number ever reported. At present, there are 65 domestic air routes and nine international air routes operating in the airport. International direct routes include flights to Tokyo, Nagoya, Osaka, Toyama, Hiroshima, Fukuoka, and Seoul.

Tourism Overview Table 15 sets out international arrivals at accommodation establishments in Dalian from 1996 to 2002.

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Table 15 International Arrivals at Accommodation Dalian 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 77,924 72,029 78,870 99,774 150,627 180,053 233,550 56% 20% Korea 25,707 57,431 40,338 64,647 80,664 99,304 101,071 24% 26% Malaysia 1,025 1,306 1,384 1,760 2,443 3,179 6,383 2% 36% Philipines 665 651 758 983 1,228 1,437 2,406 1% 24% Singapore 1,952 2,535 3,086 2,666 3,436 4,716 7,057 2% 24% Thailand 443 358 497 608 1,260 1,156 2,102 1% 30% Total 107,716 134,310 124,933 170,438 239,658 289,845 352,569 84% 22% % Change — 25% -7% 36% 41% 21% 22%

Key North American Feeder Markets USA 4,546 4,384 5,808 5,801 7,463 8,785 13,011 3% 19% Canada 812 1,182 1,383 1,599 1,972 2,382 3,338 1% 27% Total 5,358 5,566 7,191 7,400 9,435 11,167 16,349 4% 20% % Change — 4% 29% 3% 28% 18% 46%

Key European Feeder Markets UK 977 1,218 1,650 1,462 1,893 2,327 3,674 1% 25% France 791 988 1,195 937 1,271 1,693 1,889 0% 16% Germany 1,529 1,690 2,045 2,101 2,534 3,047 4,461 1% 20% Russia 4,216 2,816 3,156 3,143 7,519 9,310 13,647 3% 22% Total 7,513 6,712 8,046 7,643 13,217 16,377 23,671 6% 21% % Change — -11% 20% -5% 73% 24% 45%

Australia 783 1,001 1,361 1,606 1,786 2,108 3,998 1% 31% % Change — 28% 36% 18% 11% 18% 90%

Others 6,305 9,514 12,524 12,818 14,296 44,055 23,238 6% 24% % Change — 51% 32% 2% 12% 208% -47%

Total 127,675 157,103 154,055 199,905 278,392 363,552 419,825 100% 22% % Change — 23% -2% 30% 39% 31% 15%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 15, international arrivals at accommodation in Dalian increased significantly by 22% per annum between 1996 and 2002, from 127,675 in 1996 to 419,825 in 2002, the highest number ever recorded. In 2002, approximately 84% of total arrivals at accommodation to Dalian were from Asian countries. Due to Dalian’s numerous economic ties and proximity to Japan and Korea, arrivals from these countries are particularly important, accounting for 56% and 24% of total arrivals, respectively. Key non-Asian feeder markets include the USA and Russia, each accounting for 3% of total arrivals.

Seasonality Table 16 sets out the seasonality of international arrivals at accommodation in Dalian in 2001.

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Table 16 Dalian Seasonality 2001*

38,000

33,000

28,000

23,000

18,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

* 2002 data is not available

Source: China National Tourism Administration

Being a key marine gateway to northeast China, Dalian enjoys strong commercial and leisure demand for most of the year. The high season is typically during the summer months (June to September), with a peak in September when Dalian hosts the International Fashion Festival. Winter months (January and February) tend to be low season months with few conventions and less commercial activity during festivities.

The Hotel Market Table 17 sets out the characteristics of the total hotel market in Dalian from 1998 to 2002.

Table 17 Dalian Hotel Market 1998-02

CAAG ² 1998 1999 2000 2001 2002 ¹ 1998-02

Number of Rooms 11,500 13,822 14,780 20,100 22,639 18% % Change — 20% 7% 36% 13%

Occupancy Rate 50% 54% 57% 53% 56% 3% Accommodated Demand 2,111,343 2,739,451 3,074,979 3,888,345 4,627,350 22% % Change — 30% 12% 26% 19%

Average Length of Stay/Days 3.94 3.69 3.66 3.67 3.7 -2%

¹ HVS Estimate ² Compound Average Annual Growth

Source: China National Tourism Administration 1.96858261

As illustrated in Table 17, hotel supply increased by 18% per annum between 1998 and 2002, whilst demand for hotel accommodation increased by 22% per annum during the same period. Consequently, with demand outpacing supply, marketwide occupancy increased from 50% in 1998 to 56% in 2002.

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Average length of stay in Table 17 includes domestic and international arrivals to Dalian. Average length of stay is relatively long as Dalian benefits from strong MICE demand as well as leisure demand.

FIVE-STAR HOTEL Table 18 sets out the five-star hotels in Dalian from 1998 to 2002. MARKET Table 18 Five-Star Hotels, Dalian 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

Dalian Harbour View Hotel 1998 100 100 100 100 100 Furama Hotel Dalian 1988 778 778 778 778 778 Shangri-La Hotel 1998 563 563 563 563 563 Swissôtel Dalian 1998 327 327 327 327 327 Golden Pebble Beach Convention Centre 2000 — — 110 110 110 Hilton Dalian 2000 — — 372 372 372 Furama Nanshan Garden Hotel 2001 — — — 200 200 Central Plaza Hotel 2002 — — — — 286

Total 1,768 1,768 2,250 2,450 2,736 % Change — 0% 27% 9% 12% Compound Average Annual Growth Rate 1998-02 12% Compound Average Annual Growth Rate 2000-02 10%

Source: HVS International

The five-star hotel market is reasonably well developed in Dalian with eight hotels and a total of 2,736 rooms in the market. As illustrated in Table 18, internationally branded hotels have reasonable presence in the market, accounting for 46% of total supply. These include the Swissôtel, Shangri-la and Hilton. Supply increased significantly between 1998 and 2002, with the opening of six new properties resulting in an average increase in supply of approximately 12% per annum.

New Supply Five-star hotel supply is anticipated to increase significantly over the next four years with more than 1,000 rooms due to enter the market. New hotels include a 320-room InterContinental Hotel in late 2003, a 368-room Sheraton Hotel in 2004 and a 350-room Marriott Hotel in 2005/06. Moreover, a four-star Holiday Inn with 320 rooms is due to open in 2003.

Five-Star Hotel Table 19 sets out the performance characteristics of the five-star hotel Performance market in Dalian from 2000 to 2002.

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Table 19 Five-Star Hotel Market, Dalian 2000-02 ¹

CAAG ² 2000 2001 2002 2000-02

Occupancy Rate 61% 58% 63% 2% Accommodated Demand 500,963 518,665 629,143 12% % Change — 4% 21%

Average Room Rate (RMB) 480 507 495 2% % Change — 6% -2%

Average Room Rate (US$) 58 61 60 2% % Change — 6% -2%

RevPAR (RMB) 293 294 312 3% % Change — 0% 6%

RevPAR (US$) 35 35 38 3% % Change — 0% 6%

Exchange Rate RMB:US$ 8.3 8.3 8.3

¹ Previous year's data not available ² Compound Average Annual Growth

Source: HVS International

Between 2000 and 2002, supply increased by 10% per annum whilst demand increased by 12% per annum. Consequently, marketwide occupancy increased from 61% in 2000 to 63% in 2002.

It should be noted that, in 2001, five-star hotels’ marketwide occupancy declined by three percentage points compared to 2000. We consider this to be the result of very strong growth in supply (with the opening of the Convention Centre Hotel, the Hilton Dalian and the Furama Hotel), outpacing demand. However, it should be noted that the majority of new supply was absorbed into the market relatively quickly. With a strong increase in supply, five-star hotels’ marketwide ARR increased moderately by 2% per annum between 2000 and 2002.

With marketwide occupancy increasing from 61% in 2000 to 63% in 2002 and ARR increasing by 2% per annum during the same period, five-star hotels’ RevPAR increased from RMB293 in 2000 to RMB312 in 2002.

Market Segmentation Table 20 sets out the market segmentation of five-star hotels in Dalian during 2002.

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Table 20 Market Segmentation of Five-Star Hotels in Dalian 2002

Leisure 40%

Corporate 55% MICE 5%

Source: HVS International Research

Demand for five-star hotel accommodation consists primarily of international tourists, the majority of which travel for business-related purposes. As such, we estimate that commercial demand accounts for approximately 55% of total demand for accommodation at five-star hotels.

Outlook Dalian’s outlook is positive. The city is the key marine gateway to northeast China and has strong ties with neighbouring economic powerhouses, Japan and South Korea. As such, Dalian is likely to experience strong economic growth, generating corporate demand for hotel accommodation. Furthermore, with a new international convention centre, Dalian is likely to increasingly become a meeting venue in northeast China. MICE demand for hotel accommodation is thus likely to increase. Finally, with a reasonable number of attractions and the reputation of being a ‘garden city’, Dalian is likely to continue to attract leisure tourists. However, with hotel supply also expected to increase significantly over the next few years, we anticipate moderate growth in five-star hotels’ marketwide occupancy and ARR.

GUANGZHOU Guangzhou is located at the north of the Pearl River Delta, 182 km northwest of Hong Kong. It is the capital city of the Guangdong province, the powerhouse of southern China. With an area of over 16,000 km² and a population of 6.7 million, Guangzhou is one of China’s largest and most prosperous cities.

Guangzhou is a key component of the Pearl Delta sub-region, which also includes Hong Kong, Macao, Shenzhen, Zhuhai, Foshan, Jiangmen, Dongguan, Zhongshan, Huizhou and Zhaoqing. Since Hong Kong was handed over to China in 1997, the consolidation of this sub- region has been a priority of China’s central government. The objective is to create a vast urban region, with an interactive open market economy competing with other economic powerhouses in the Asia Pacific region. As such, major infrastructure projects, such as new

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ports, airports and expressways, have been developed or are under development to improve the accessibility both to and within the region. Furthermore, key industries have been earmarked for priority development, including high-tech light industry, communications and transportation, commodities trading, financial and insurance services, construction and real estate, and tourism. In addition, the government has plans for a new automotive town, which will include a vehicle production zone, an auto industrial park, and an auto trade and service zone.

Although Guangzhou has limited historic and cultural tourism attractions, the city has several man-made attractions enabling the city to attract a reasonable level of MICE/leisure demand. These attractions include an international-standard convention and exhibition venue. As such, numerous national conventions and exhibitions are held in Guangzhou, the most famous being the Chinese Export Commodities Fair (Canton Fair). Held every spring and autumn since 1957, it is China’s most important trade fair with the largest attendance (more than 250,000 delegates per annum). Other tourism attractions include the Southern Yue Tomb Museum and the Bright Filial Piety Temple.

Access Accessibility to Guangzhou is excellent. The city is accessible by rail, road, sea and air.

Rail – Guangzhou is a major hub and distribution centre of south China’s railway network. Guangzhou is directly linked to several major cities in China, including Beijing, Shanghai and Hong Kong. Through these main axes, the city is connected to most parts of China. The Guangzhou-Maomin Railway also connects Guangzhou to Vietnam. In addition, as part of the Pearl River Delta consolidation project, railways are being built to Macao, Zhuhai, Foshan and Shenzhen and are anticipated to be in operation by 2010.

Road – Guangzhou’s road network is well developed, with four major national highways interconnected by three ring roads providing easy access to Hong Kong and most part of the Pearl River Delta.

Sea – Guangzhou is a major port on China’s southern coast. There are two main passenger terminals: Zhoutouzui wharf, on the southern arm of the Zhu Jiang, and Dashatou wharf, on the north shore. Regular ferry services are provided to most parts of the Pearl River Delta, whilst high-speed catamarans provide services to Hong Kong and Macao.

Air – Guangzhou Baiyun International Airport, one of China’s busiest airports, is located 20 km north of the city centre. There are 90 domestic air routes and 23 international air routes operating in and out of Guangzhou airport, including flights to the Philippines, Thailand, Singapore, Australia, Indonesia, Malaysia, Vietnam and Hong Kong. Guangzhou Baiyun International Airport is also the joint base (with

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Shenzhen airport) of ; China’s largest airline in terms of passenger traffic and carrier fleet. Guangzhou is thus accessible to and from most parts of China.

In order to meet future passenger traffic, a new US$2.3 billion airport is being developed, with the first phase of the construction to be completed in 2003. The New Baiyun International Airport is 28 km from downtown Guangzhou and 17 km from the Guangzhou Baiyun International Airport. When fully completed in 2005, the three-runway airport will have a capacity of 80 million passengers per year. The new airport will be linked to downtown via a high-speed Metro (currently under construction) and a three-lane freeway (already in use).

Tourism Overview Table 21 sets out international arrivals at accommodation establishments in Guangzhou from 1996 to 2002 and available year-to-date 2003 statistics.

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Table 21 International Arrivals at Accommodation, Guangzhou 1996-02, YTD August 2003

January to August % of Total CAAG* % Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 2002 2003 Change Key Asian Feeder Markets Japan 77,413 83,668 104,856 125,643 133,295 160,153 210,750 16% 18% 123,291 107,765 -13% Korea 14,959 13,046 10,435 14,123 15,714 24,107 34,216 3% 15% 20,877 20,035 -4% Malaysia 54,576 51,465 31,388 39,157 41,699 42,984 63,917 5% 3% 37,582 22,342 -41% Philipines 8,620 7,542 5,616 7,984 8,253 7,966 9,598 1% 2% 6,281 4,015 -36% Singapore 27,266 25,279 21,240 25,900 27,970 30,572 36,720 3% 5% 23,227 12,067 -48% Thailand 15,760 10,606 9,383 13,520 17,293 18,151 25,471 2% 8% 15,441 8,375 -46% Total 198,594 191,606 182,918 226,327 244,224 283,933 380,672 30% 11% 226,699 174,599 -23% % Change — -4% -5% 24% 8% 16% 34%

Key North American Feeder Markets USA 57,758 55,042 62,779 72,775 75,054 86,428 104,432 8% 10% 64,973 39,768 -39% Canada 19,878 16,829 17,593 17,383 14,251 16,771 20,386 2% 0% 11,575 7,782 -33% Total 77,636 71,871 80,372 90,158 89,305 103,199 124,818 10% 8% 76,548 47,550 -38% % Change — -7% 12% 12% -1% 16% 21%

Key European Feeder Markets UK 18,131 20,017 19,835 20,290 20,003 21,059 22,808 2% 4% 13,364 8,727 -35% France 22,397 18,456 20,249 23,481 26,503 24,126 25,099 2% 2% 15,477 5,658 -63% Germany 17,953 14,494 19,093 28,831 28,172 30,663 28,240 2% 8% 16,102 8,632 -46% Russia 2,409 3,587 1,975 1,756 4,616 3,967 7,333 1% 20% 4,152 3,384 -18% Total 60,890 56,554 61,152 74,358 79,294 79,815 83,480 6% 5% 49,095 26,401 -46% % Change — -7% 8% 22% 7% 1% 5%

Australia 12,646 14,168 14,126 14,208 15,484 17,988 20,507 2% 8% 12,747 8,020 -37% % Change — 12% 0% 1% 9% 16% 14%

Others 255,587 301,990 276,632 270,519 483,065 618,895 679,123 53% 18% 37,481 14,494 -61% % Change — 18% -8% -2% 79% 28% 10%

Total 605,353 636,189 615,200 675,570 911,372 1,103,830 1,288,600 100% 13% 754,912 519,614 -33% % Change — 5% -3% 10% 35% 21% 17%

* Compound Average Annual Growth

Source: China National Tourism Administration

Table 21 illustrates that international arrivals at accommodation in Guangzhou increased by approximately 13% per annum, from 605,353 in 1996 to 1,288,600 in 2002, the highest number ever recorded. The main feeder markets for accommodation in Guangzhou are Asian countries, and in particular Japan, which accounted for 16% of total arrivals in 2002. Key non-Asian feeder markets include the USA and Europe, which accounted for 8% and 6% of total arrivals in 2002.

International arrivals at accommodation declined by 3% in 1998 due to the impact of the Asian financial crisis in 1997 and the subsequent downturn in feeder markets’ economies. However, the market proved to be resilient, with rapid recoveries in arrivals registering an increase of 24% per annum between 1999 and 2002.

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Year-to-date 2003 statistics show the significant impact of SARS on international tourism in the region, with visitor arrivals to Guangzhou declining by 33% year-to-August 2003 versus the same period in 2002.

Seasonality Table 22 sets out the seasonality of marketwide hotel occupancy in Guangzhou in 2002.

Table 22 Guangzhou Seasonality by Occupancy 2002

80.0%

70.0%

60.0%

50.0%

40.0%

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

As an important business centre, international arrivals to Guangzhou are strong for most parts of year with peaks in April and October. The peak months are resulting from the Chinese Export Commodities Fair held in April and October each year.

The Hotel Market Table 23 sets out the characteristics of the total Guangzhou hotel market from 1998 to 2002.

Table 23 Guangzhou Hotel Market, 1998-02

CAAG * 1998 1999 2000 2001 2002 1996-02

Number of Rooms 119,689 111,778 109,200 102,100 98,886 -5% % Change — -7% -2% -7% -3%

Occupancy Rate 61% 62% 62% 62% 62% 0% Accommodated Demand 26,648,756 25,336,160 24,672,102 23,056,784 22,424,823 -4% % Change — -5% -3% -7% -3%

Average Length of Stay/Days 2.61 2.42 2.38 2.2 2.4 -2%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 23, during the period 1998 to 2002, hotel supply decreased by approximately 5% per annum. During the same period,

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demand for hotel accommodation decreased by 4% per annum. As supply declined relatively in line with demand, marketwide occupancy remained constant during the same period.

Average length of stay, as illustrated in Table 23, includes domestic and international visitors to Guangzhou. Average length of stay is relatively short as demand is primarily commercially orientated.

FIVE-STAR HOTEL Table 24 lists the five-star hotels in Guangzhou during the period 1998 MARKET to 2002.

Table 24 Five-Star Hotels, Guangzhou 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

DongFang Hotel 1965 1,100 1,100 1,100 1,100 1,100 White Swan Hotel 1982 843 843 843 843 843 Marriott China Hotel 1984 1,013 1,013 1,013 1,013 1,013 The Garden Hotel 1985 1,000 1,000 1,000 1,000 1,000 Asia International Hotel 2000 — — 442 442 442

Total 3,956 3,956 4,398 4,398 4,398 % Change — 0% 11% 0% 0% Compound Average Annual Growth Rate 1998-02 3%

Source: HVS International

As illustrated in Table 24, there are only five five-star hotels in Guangzhou. However, with a high average room count (880 rooms per hotel), total five-star room inventory is relatively well established with 4,400 rooms in the market. Domestic companies operate the majority of these hotels, with only one international brand present in the market: Marriott International. Between 1998 and 2002, one hotel entered the market, the Asia International Hotel, resulting in an 11% increase in five-star hotel supply.

New Supply We are not aware of any new confirmed five-star hotel projects in Guangzhou. However, several hotels have been confirmed in the four- star segment, including the 350-room Tianlun Dynasty Hotel opened in September 2003 and a 200-room Holiday Inn to open in 2004. Furthermore, other hotel chains, such as Shangri-La, have been rumoured to be reviewing opportunities in the market.

Five-Star Performance Table 25 sets out the performance characteristics of the five-star hotel market from 1998 to 2002.

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Table 25 Five-Star Hotel Performance, Guangzhou 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 62% 64% 62% 65% 66% 2% Accommodated Demand 888,745 925,566 998,077 1,043,265 1,065,257 5% % Change — 4% 8% 5% 2%

Average Room Rate (RMB) 550 580 610 594 610 3% % Change — 5% 5% -3% 3%

Average Room Rate (US$) 66 70 73 72 73 3% % Change — 5% 5% -3% 3%

RevPAR (RMB) 339 372 379 386 405 5% % Change — 10% 2% 2% 5%

RevPAR (US$) 41 45 46 47 49 5% % Change — 10% 2% 2% 5%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Annual Average Growth

Source: HVS Estimates

Between 1998 and 2002, five-star hotel supply increased by 3% per annum, whilst demand increased by 5% per annum. As such, five-star marketwide occupancy increased from 62% in 1998 to 66% in 2002. During this period, five-star marketwide occupancy fluctuated. The opening of the Asia International Hotel in 2000 resulted in supply increasing by 11%; whil e demand enjoyed its largest percentage increase over the last five years in 2000, 8%, it was not enough to offset the increase in supply, and five-star marketwide occupancy declined from 64% in 1999 to 62% in 2000.

With limited growth in supply and demand, average room rates achieved by five-star hotels in Guangzhou increased marginally by 3% per annum between 1998 and 2002.

With marketwide occupancy increasing from 62% in 1998 to 66% in 2002 and ARR increasing by 3% per annum during the same period, five-star hotels’ RevPAR increased from RMB339 in 1998 to RMB405 in 2002.

Market Segmentation Table 26 sets out the market segmentation for five-star hotels in Guangzhou during 2002.

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Table 26 Market Segmentation of Five-Star Hotels in Guangzhou 2002

Leisure 10% MICE 20%

Corporate 70%

Source: HVS International Research

An industrial and trading town, demand for five-star hotels in Guangzhou is primarily driven by commercially related demand. MICE demand also accounts for a significant proportion of demand thanks to numerous large-scale conventions held in Guangzhou every year.

Outlook Guangzhou’s outlook is good. The development of the Pearl River Delta sub-region is likely to have a positive impact on the local economy. Corporate demand for five-star hotel accommodation is thus likely to improve. Furthermore, the Chinese Export Commodities Fair is likely to remain a strong generator for MICE demand for five-star hotel accommodation. As such, with limited confirmed new supply, five-star hotels’ marketwide occupancy and ARR are likely to remain stable.

GUILIN Guilin is located in the northeastern corner of the Guangxi Zhuang Autonomous Region, approximately 520 km west of Hong Kong, 1,300 km southwest of Shanghai and 150 km southwest of Nanning, the capital city of Guangxi. Divided into five districts and 12 counties, Guilin has a population of approximately 1.34 million. A relatively small city by China’s standards, Guilin’s key developments include the Guilin National Hi-Tech Industrial Development Zone, south of the city. The zone spans over a total area of 80 km2 and focuses on three main sectors: high-tech industries, construction and development, and tourism attraction development.

More importantly, Guilin was among the first listed by the State Council as a city of historic and cultural significance. As such, the city of Guilin was designated as a scenic and tourist city in 1979, and since then, tourism has been the main engine responsible for economic growth in Guilin. Substantial efforts were made to sustain development in this sector, including a new convention centre in 2000, new infrastructures to improve accessibility, and man-made tourism attractions such as the proposed Aquatic Amusement and Wildlife Park. Today, Guilin is the main tourist attraction in Guangxi and one of China’s most visited cities. Famous for its green hills, clear water and

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spectacular rocks, Guilin’s best known attractions include Diecai Hill, Elephant Trunk Hill, Lijiang River Scenery, Reed Flute Cave and Duxiu Feng, Fubo Shan, Qixing Gongyuan and Yangshuo City.

Access Accessibility to Guilin is reasonable. Guilin is accessible by rail, road and air.

Rail – The Guilin Railway Station has two branches: the North Railway Station and the South Railway Station. Guilin is linked to 28 destinations daily, including major cities such as Beijing, Shanghai, Hengyang, Nanning, Liuzhou, Guangzhou, Kunming and Xian.

Road – There are several expressways in Guilin connecting the city to Liuzhou, Nanning, Beihai, Wuzhou and Yangshou.

Air – Guilin Liangjiang International Airport is a modern international airport established in 1996. The airport is located 28 km from the city centre and can accommodate up to 5 million passengers per annum. There are currently forty domestic routes (including Hong Kong and Macao) and two international routes to Fukuoka (Japan) and Seoul (South Korea) operating to and from the airport. Moreover, it is the base of Guangxi Airlines, a subsidiary of China Southern Airlines – China’s largest airline.

Tourism Overview Table 27 sets out international arrivals at accommodation establishments in Guilin from 1996 to 2002.

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Table 27 International Arrivals at Accommodation, Guilin 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 83,485 65,543 56,217 74,611 82,667 82,223 103,132 21% 4% Philippines 1,388 1,388 804 1,769 1,759 2,712 1,659 0% 3% Singapore 4,231 3,871 3,230 4,164 4,388 3,709 3,345 1% -4% Thailand 4,164 2,189 1,260 4,258 6,010 10,977 10,609 2% 17% Korea 29,583 22,833 6,186 34,317 85,966 101,190 115,036 24% 25% Total 122,851 95,824 67,697 119,119 180,790 200,811 233,781 48% 11% % Change — -22% -29% 76% 52% 11% 16%

Key North American Feeder Markets USA 35,954 36,130 37,280 45,087 52,831 50,515 54,869 11% 7% Canada 5,550 4,960 5,372 5,624 5,270 6,405 10,778 2% 12% Total 41,504 41,090 42,652 50,711 58,101 56,920 65,647 13% 8% % Change — -1% 4% 19% 15% -2% 15%

Key European Feeder Markets UK 13,836 11,817 12,291 12,704 14,344 14,443 19,186 4% 6% France 21,960 21,393 20,148 25,101 32,068 29,742 32,898 7% 7% Germany 20,717 18,702 16,589 20,332 26,535 29,013 33,057 7% 8% Russia 425 476 224 188 277 244 86 0% -23% Total 56,938 52,388 49,252 58,325 73,224 73,442 85,227 17% 7% % Change — -8% -6% 18% 26% 0% 16%

Australia 4,888 5,845 5,871 6,675 6,386 7,134 9,204 2% 11% % Change — 20% 0% 14% -4% 12% 29%

Others 84,294 98,636 60,912 63,970 87,910 82,523 94,001 19% 2% % Change — 17% -38% 5% 37% -6% 14%

Total 310,475 293,783 226,384 298,800 406,411 420,830 487,860 100% 8% % Change — -5% -23% 32% 36% 4% 16%

* Compound Average Annual Growth

Source: China National Tourism Administration

Table 27 illustrates that arrivals at accommodation in Guilin increased by approximately 8% per annum, from 310,475 in 1996 to 487,860 in 2002. Key feeder markets include Japan, Korea and the USA, which accounted for 21%, 24% and 11% of total arrivals in 2002, respectively. It should also be noted that Hong Kong (which is not listed in Table 27) is also an important feeder market due to the convenient accessibility to the city by air. Tourists from Japan, Korea and Hong Kong typically travel to Guilin for long weekends due to the good accessibility. On the other hand, tourists from the long haul markets, such as the USA and Europe, typically travel to Guilin as part of a larger China tour, using Guilin as a stopover destination.

As Guilin relies heavily on Asian feeder markets, international arrivals declined 5% in 1997 and a further 23% in 1998, due to the impact of the Asian financial crisis in 1997.

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Seasonality Table 28 sets out the seasonality of total arrivals at accommodation in Guilin 2002.

Table 28 Guilin Seasonality by Total Arrivals* at Accommodation 2002

1,500,000 1,400,000 1,300,000 1,200,000 1,100,000 1,000,000 900,000 800,000 700,000 600,000 500,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

* Including domestic arrivals Source: China National Tourism Administration

Table 28 shows the total arrivals (domestic and international) to Guilin. Being a popular leisure destination, Guilin is primarily driven by leisure demand. As such, arrivals to Guilin show important seasonality patterns.

Peak seasons typically correspond to national holidays: the May Labour holidays and the October national holidays. Arrivals are also strong during summer months, which correspond to the holiday seasons of the international feeder markets. On the other hand, arrivals are lowest during winter months when weather conditions are not suitable to visit Guilin’s attractions.

The Hotel Market Table 29 sets out the characteristics of the total hotel market in Guilin from 1998 to 2002.

Table 29 Guilin Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 6,245 6,506 6,506 6,831 7,464 5% % Change — 4% 0% 5% 9%

Occupancy Rate 57% 64% 66% 64% 62% 2% Accommodated Demand 1,287,875 1,522,176 1,557,797 1,590,555 1,682,180 7% % Change — 18% 2% 2% 6%

Average Length of Stay/Days 2.0 1.7 1.6 1.5 1.6 -5%

* Compound Average Annual Growth

Source: China National Tourism Administration

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During the period 1998 to 2002, room supply in Guilin increased by 5% per annum whilst demand increased by 7% per annum. With demand outpacing supply, the marketwide hotel occupancy increased from 57% in 1998 to 62% in 2002.

Average length of stay in Guilin is relatively short as most tourists travel either on tours (where Guilin is only a stopover destination with a one day visit) or for weekends.

FIVE-STAR HOTEL Table 30 sets out the five-star hotels in Guilin between 1998 and 2002. MARKET Table 30 Five-Star Hotels, Guilin 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

Sheraton Guilin Hotel 1987 430 430 430 430 430 Guilin Royal Garden Hotel 1989 333 333 333 333 333

Total 763 763 763 763 763 % Change — 0% 0% 0% 0% Compound Average Annual Growth Rate 1998-02 0%

Source: HVS International

As illustrated in Table 30, five-star hotel supply in Guilin is limited, with only two properties in the market: the Sheraton Guilin Hotel and Guilin Royal Garden Hotel. Both hotels opened in the late 1980s and five-star hotel supply has remained stable ever since.

New Supply We are not aware of any confirmed five-star hotel projects in Guilin. However, it is rumoured that a 300-room hotel was proposed in the vicinity of the convention centre, and there has been some speculation with regard to a boutique spa-orientated resort hotel.

Five-Star Hotel Table 31 sets out the five-star hotel market performance characteristics Performance for the period 1998 to 2002.

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Table 31 Five-Star Hotel Market Performance, Guilin 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 51% 70% 76% 71% 75% 10% Accommodated Demand 140,697 194,458 211,186 197,731 208,871 10% % Change — 38% 9% -6% 6%

Average Room Rate (RMB) 374 398 423 385 386 1% % Change — 7% 6% -9% 0%

Average Room Rate (US$) 45 48 51 46 47 1% % Change — 7% 6% -9% 0%

RevPAR (RMB) 189 278 321 273 290 11% % Change — 47% 15% -15% 6%

RevPAR (US$) 23 34 39 33 35 11% % Change — 47% 15% -15% 6%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS International

Supply remained constant between 1998 and 2002, whilst accommodated demand at five-star hotels increased by 10% per annum. Consequently, with demand outpacing supply, the five-star hotel marketwide occupancy increased from 51% in 1998 to 75% in 2002.

In 1999, as feeder markets recovered from the Asian financial crisis, demand for five-star hotel accommodation increased by 38%, increasing the five-star hotels’ occupancy significantly from 51% in 1998 to 70% in 1999. Five-star hotel occupancy dropped from 76% in 2000 to 71% in 2001 due to the negative effect of the 11 September attack in New York on US demand and Japanese demand.

Marketwide five-star hotels’ ARR increased marginally by 1% per annum between 1998 and 2002.

With marketwide occupancy increasing from 51% in 1998 to 75% in 2002 and ARR increasing by 1% per annum during the same period, five-star hotels’ RevPAR increased from RMB189 in 1998 to RMB290 in 2002.

Market Segmentation Table 32 sets out the market segmentation for five-star hotels in Guilin during 2002.

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Table 32 Market Segmentation of Five-Star Hotels in Guilin 2002

Corporate MICE 10% 5%

Leisure 85%

Source: HVS International Research

Primarily a leisure destination, demand for five-star hotel accommodation is driven by the leisure segment. As such, leisure demand accounts for approximately 85% of the total demand, whilst business-related demand accounts for a marginal 15% of total demand.

Outlook Guilin’s outlook is good. The Guilin government has developed and maintained its tourism attractions to sustain future development. This development means Guilin is likely to remain an important tourism destination in China. Leisure demand for hotel accommodation is thus likely to experience further growth. Moreover, with the establishment of the new convention centre as an important convention venue, MICE demand for hotel accommodation is likely to improve. Finally, as the Guilin National Hi-Tech Industrial Development Zone develops, corporate demand is likely to be more significant. With limited new supply, we anticipate that five-star hotels’ marketwide occupancy and ARR levels are likely to remain strong.

HAINAN ISLAND Known as the ‘Hawaii of the Orient’, Hainan Island is located in the South China Sea, approximately 11 nautical miles south of the continent. It is China’s largest island and the country’s only well- developed beach resort destination. In fact, earmarked in 1988 as a Special Economic Zone, priority was given to tourism development. Today the tourism sector accounts for 80% of the provincial GDP.

Divided into 16 counties, the island has a population of 7.4 million. There are two major cities on the island: Sanya and Haikou. Haikou is Hainan’s capital city. It lies on the northern coastline at the mouth of the river Nandu Jiang. The city has a population of approximately 514,000. It is the island’s main economic and political hub.

Sanya is located at the southern tip of Hainan Island and consists primarily of a hub to access and supply the neighbouring beach resorts. The city has a population of 440,000.

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Access Accessibility to Hainan Island is reasonable. Access to the island is via sea or air.

Sea – Hainan Island comprises several ports. However, the main access route for passenger boats is located at Haikou, which is the closest city to the continent. Numerous ferries cross the peninsula daily to Hai’an and Zhanjiang, where railway connections to Guangzhou are available. Although cruise facilities are unavailable so far on the island, an international ferry terminal is planned on a reclaimed island near Sanya. The terminal will be able to handle up to 600,000 passengers per year and operate transoceanic ships.

Air – Hainan Island has two airports: Haikou Melian International Airport (north) and Sanya Phoenix airport (south).

Haikou airport is the main gateway to Hainan Island. It opened in May 1999 and is located 25 km from the city. The airport can accommodate approximately 6 million passengers per annum. In 2002, there were 5.5 million passengers arriving at the airport. The base of , it is accessible from 30 domestic destinations including Hong Kong and . In 2002, Thai Airways was the first foreign carrier to operate international flights to Haikou airport, with the inauguration of the Hainan Island-Bangkok route.

Sanya Phoenix Airport is 18 km north of Sanya. With a capacity of 6.5 million passengers but only 1.45 million passenger arrivals in 2002, the airport has significant potential for development, especially as Haikou airport is already reaching its maximum capacity. So far, routes include flights to Hong Kong, Shenzhen, Guangzhou, Beijing, Shanghai, Hong Kong and Macao. As for Haikou airport, there is, at present, only one international route, which is to Seoul.

In addition to international accessibility, the internal road network on Hainan is well developed and enables ease of transportation around the island.

Tourism Overview Table 33 sets out international arrivals at accommodation establishments in Hainan Island from 1996 to 2002.

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Table 33 International Arrivals at Accommodation, Hainan Island 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 15,212 28,530 30,938 23,489 24,314 29,102 28,071 17% 11% Korea 1,211 15,297 1,760 2,812 18,401 34,455 50,274 30% 86% Malaysia 5,000 14,944 9,323 7,491 9,785 11,060 10,112 6% 12% Philipines 451 574 987 1,322 819 974 611 0% 5% Singapore 15,236 14,253 11,852 10,106 10,876 14,363 13,995 8% -1% Thailand 3,664 2,751 1,909 2,089 3,157 4,398 5,181 3% 6% Total 40,774 76,349 56,769 47,309 67,352 94,352 108,244 66% 18% % Change — 87% -26% -17% 42% 40% 15%

Key North American Feeder Markets USA 3,396 4,503 4,561 3,918 5,401 6,874 6,524 4% 11% Canada 886 1,062 985 954 1,446 2,396 1,850 1% 13% Total 4,282 5,565 5,546 4,872 6,847 9,270 8,374 5% 12% % Change — 30% 0% -12% 41% 35% -10%

Key European Feeder Markets UK 978 1,012 1,264 681 1,367 1,552 2,117 1% 14% France 922 846 816 583 976 1,241 1,513 1% 9% Germany 2,664 2,357 1,666 1,886 2,804 3,359 3,873 2% 6% Russia 880 700 808 373 2,187 3,159 7,902 5% 44% Total 5,444 4,915 4,554 3,523 7,334 9,311 15,405 9% 19% % Change — -10% -7% -23% 108% 27% 65%

Australia 846 651 973 513 1,067 2,280 1,865 1% 14% % Change — -23% 49% -47% 108% 114% -18%

Others 18,997 12,864 19,260 17,069 11,223 14,411 31,345 19% 9% % Change — -32% 50% -11% -34% 28% 118%

Total 70,343 100,344 87,102 73,286 93,823 129,624 165,233 100% 15% % Change — 43% -13% -16% 28% 38% 27%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 33, international arrivals at accommodation increased by 15% per annum between 1996 and 2002, from 70,343 in 1996 to 165,233 in 2002, the highest number ever recorded. It is important to note, however, that due to the limited international accessibility to Hainan Island, international arrivals at accommodation are limited. We anticipate the total number of foreign visitors to increase significantly once new direct international air routes are established. It is also important to note that since the opening of a direct route to and from Seoul, arrivals from South Korea have increased significantly: from 18,000 in 2000 to 34,500 in 2001 and 50,000 in 2002. As such, South Korea was the key international feeder market for hotels in Hainan Island in 2002.

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Seasonality Table 34 sets out the seasonality of international arrivals at accommodation in Hainan in 2002.

Table 34 Hainan Island Seasonality by International Arrivals at Accommodation 2001-02

28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

Primarily a leisure destination, arrivals to Hainan Island show strong seasonality patterns. Peak season months include December and February, which correspond to year-end/Chinese New Year holidays. Low season months typically spread from June to September, which constitute the typhoon season.

The Hotel Market Table 35 sets out the performance characteristics of the total hotel market on Hainan Island from 1998 to 2002.

Table 35 Hainan Island Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 20,014 26,329 28,479 30,852 33,561 14% % Change — 32% 8% 8% 9%

Occupancy Rate 46% 54% 55% 59% 58% 6% Accommodated Demand 3,323,825 5,208,666 5,758,739 6,610,195 7,092,614 21% % Change — 57% 11% 15% 7%

Average Length of Stay/Days 1.61 1.73 1.69 1.51 1.36 -4%

* Compound Average Annual Growth

Source: China National Tourism Administration

Table 35 illustrates that room supply increased by 14% per annum during the period 1998 to 2002. During the same period, demand increased even more significantly by 21% per annum. As such, with

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demand outpacing supply, the marketwide occupancy increased from 46% in 1998 to 58% in 2002.

Average length of stay, as illustrated in Table 35, includes domestic and international visitors to Hainan Island. The average length of stay is short as demand is primarily driven by the domestic market, which typically travels to Hainan for weekends and short vacations (such as the Chinese New Year, China National Day and Labour Day).

FIVE-STAR HOTEL Table 36 sets out the five star hotels on Hainan Island during the period MARKET 1998 to 2002.

Table 36 Five-Star Hotels, Hainan Island 1998-02

Year Haikou Open 1998 1999 2000 2001 2002

Hainan Mandarin 1998 318 318 318 318 318 Boao Golden Coast Hot Spring 2000 — — 336 336 336 Crowne Plaza Spa & Beach Resort 2002 — — — — 333

Subtotal 318 318 654 654 987 % Change — 0% 106% 0% 51% Compound Average Annual Growth Rate 1998-02 33%

Sanya

Gloria Resort Hotel 1997 403 403 403 403 403 Resort Horizon 1998 359 359 359 359 359 Tian Hong Hotel 2000 — — 35 35 35 Palm Beach Resorts and Spa 2001 — — — 350 350 Holiday Inn Resort 2001 — — — 358 358 HNA Hotel 2002 — — — — 347 Universal Resort 2002 — — — — 208 Sheraton Hotel * 2003 — — — — —

Subtotal 762 762 797 1,505 2,060 % Change — 0% 5% 89% 37% Compound Average Annual Growth Rate 1998-02 28%

Total 1,080 1,080 1,451 2,159 3,047 % Change — 0% 34% 49% 41% Compound Average Annual Growth Rate 1998-02 30%

* Opened early 2003 with 510 rooms

Source: HVS International

Five-star hotel supply has developed significantly over the last five years, with an inventory as of 2002 comprising ten hotels and 3,047 rooms. The majority (67%) of five-star hotels are located in Sanya. It is also interesting to note that five-star hotels in Sanya consist exclusively of beach resorts, whilst five-star supply in Haikou comprises primarily

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city hotels. Furthermore, with the development of new properties between 1998 and 2002, international brands such as Starwood (Sheraton) and InterContinental (Crowne Plaza) entered the market. We consider that this will contribute to the establishment of Hainan as an international resort destination.

New Supply Five-star hotel supply in Hainan Island is anticipated to increase significantly during the upcoming years. In Haikou, a 437-room Sofitel opened in April 2003, and a 364-room Shangri-La has been confirmed for 2004. In Sanya, more hotels are also anticipated, including the 350- room Hyatt Regency (2004), the 555-room Shangri-La’s Sunny Bay Resort (2005), a 400-room Marriott Hotel (2005) and a 180-room Meritus Wanjia (2005). In total, approximately 2,250 rooms are confirmed to enter the market. Furthermore, with strong growth potential, we anticipate more hotels to enter the market. This is supported by various other rumoured developments in the market.

Five-Star Hotel Table 37 sets out the performance characteristics of the five-star hotel Performance market in Hainan from 1998 to 2002.

Table 37 Five-Star Hotel Market, Hainan Island 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 46% 54% 55% 59% 58% 6% Accommodated Demand 179,361 213,656 293,407 462,577 643,938 38% % Change — 19% 37% 58% 39%

Average Room Rate (RMB) 420 400 400 425 450 2% % Change — -5% 0% 6% 6%

Average Room Rate (US$) 51 48 48 51 54 2% % Change — -5% 0% 6% 6%

RevPAR (RMB) 191 217 222 249 261 8% % Change — 13% 2% 13% 4%

RevPAR (US$) 23 26 27 30 31 8% % Change — 13% 2% 13% 4%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS International

During the period 1998 to 2002, Hainan Island’s five-star hotel market has experienced a significant growth. It should be noted that Sanya has experienced stronger growth in comparison to Haikou. Following improved infrastructure developments, including improved accessibility, the demand for hotels has increased significantly from some 180,000 in 1998 to approximately 640,000 in 2002, representing an increase of approximately 40% per annum. ARR between the same

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period have remained relatively stagnant, as existing hotels have reduced rates in an attempt to maintain market share, which has put downward pressure on the marketwide ARR.

Market Segmentation Table 38 sets out the market segmentation of five-star hotels on Hainan Island during 2002.

Table 38 Market Segmentation of Five-Star Hotels on Hainan Island 2002

Corporate 10% MICE 15%

Leisure 75%

Source: HVS International Research

A beach destination, demand to Hainan Island is predominantly driven by the leisure market, which accounts for 65% of total demand for accommodation at five-star hotels. MICE demand is also an important demand segment as Hainan Island has developed into an important convention centre. Furthermore, hotels accommodate a significant proportion of incentives meetings.

Outlook The outlook for Hainan Island is positive. Domestic leisure demand is likely to increase further as standards of living continues to improve in China and consequently demand for holidays increases. Furthermore, new international routes to destinations in Southeast Asia are anticipated to be established over the coming years. As such, Hainan Island is likely to increasingly benefit from international leisure demand – typically longer staying and higher paying than domestic demand. The government has also put tremendous efforts into improving the island’s infrastructures, including the construction of a US$14.5 million exhibition centre to host high-profile events, such as Miss World in 2003. MICE demand is thus likely to increase significantly. With a strong demand growth outlook, new hotel supply is thus anticipated to be absorbed relatively rapidly and marketwide occupancy and ARR are thus likely to remain stable.

HONG KONG Hong Kong is located on the southeast coast of China, at the mouth of the Pearl River Delta. It consists of three main parts: the New Territories and Kowloon on the mainland, and Hong Kong Island opposite the Kowloon peninsular.

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With a population of 6 million, Hong Kong is a key international financial, service, trade and tourism centre. Under British administration until July 1997, Hong Kong experienced exceptional growth during the 1980s and 1990s. During this period, Hong Kong developed into a major trading and financial centre and became the base from which companies sought business opportunities in China. However, in 1997-98, the Asian financial crisis hit Hong Kong’s trade- dependent economy significantly. More importantly, Hong Kong’s position as the ‘door to China’ is increasingly challenged following China’s entry to the WTO in 2001. Nevertheless, the Hong Kong economy retains key strengths, which are likely to secure growth in the long term. These include a favourable location in Asia in general and in the Pearl Delta region in particular, excellent well-developed infrastructures, high literacy rate, respected rule of law and a well- established/regulated financial market.

A business centre, Hong Kong is also a major convention venue in Asia. In addition to the world-class Hong Kong Convention and Exhibition Centre, a new exhibition centre has been proposed at Hong Kong International Airport.

Hong Kong is also a tourism destination with numerous attractions, such as Ocean Park, Victoria Peak Garden, Lan Kwai Fong, Po Lin Monastery and shopping malls. In addition, a Disneyland park is being developed in the vicinity of the airport. Due to open in 2005, the park is likely to attract a significant number of tourists from China and Southeast Asia alike.

Access Hong Kong benefits from excellent accessibility. It is accessible by rail, road, sea and air, with each access route plays a significant role in the economic growth.

Road – The city has developed a significant number of freeways and highways in recent years to increase overall accessibility to and from the city. The Eastern Corridor Island Road is the major highway serving Hong Kong Island, while the Tuen Mun Road serves the New Territories. Moreover, a Hong Kong-Macao-Zhuhai Bridge proposal is under consideration. With the creation of this bridge, travelling times between Hong Kong and the west coast of China will be shortened, boosting the economic development of cities in the west coast. Furthermore, construction of the Hong Kong-Shenzhen corridor is due to be completed in 2005.

Rail – Hong Kong has a good train network, including an underground city centre loop and tramways. Moreover, the Kowloon-Canton Railway connects Hong Kong to mainland China, with direct access to Shenzhen and Guangzhou.

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Sea – The has been a key factor in its development and prosperity. It is also one of the busiest ports in terms of vessel arrivals and departures as well as cargo and passenger throughput. Further developments include new container terminals and a new cruise ship terminal.

Air – Hong Kong International Airport is among the busiest airports in the world and contributes to Hong Kong’s position as a key transportation hub. The airport is located 40 km west of the city. The airport opened in 1998 with an annual capacity of 45 million passengers. In 2002, total passenger movements were recorded at 33.5 million. There are 77 airlines operating through Hong Kong International Airport, which connects all over the world. Moreover, the airport is the base of Airlines, Asia’s fifth largest airline, and Dragon Air, a leading airline servicing mainland China.

Tourism Overview Table 39 summarises arrivals to Hong Kong by region of origin over the period 1996 to 2002 and year-to-date 2003.

Table 39 International Arrivals to Hong Kong by Region of Origin 1996-02 and YTD August 2003

January to August % of Total CAAG* % Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 2002 2003 Change

Southeast Asia 1,551,117 1,402,578 1,149,284 1,449,963 1,679,038 1,746,558 1,905,208 12% 3% 1,170,376 697,103 -40.4% Taiwan 1,820,335 1,883,514 1,794,771 2,028,369 2,356,528 2,418,827 2,428,776 15% 5% 1,616,569 1,123,858 -30.5% North Asia 2,427,241 1,662,397 1,120,115 1,419,492 1,727,718 1,762,270 1,852,458 11% -4% 1,197,456 730,273 -39.0% USA/Canada 1,063,778 1,029,138 1,014,438 1,127,626 1,280,177 1,258,567 1,346,840 8% 4% 871,411 510,697 -41.4% Europe/Middle East/Africa 1,717,844 1,521,066 1,398,567 1,493,756 1,536,045 1,171,386 1,263,115 8% -5% 783,607 496,504 -36.6% Australasia 344,678 323,863 326,990 353,701 410,227 386,750 410,196 2% 3% 259,801 168,380 -35.2% Macau 540,290 370,728 168,136 269,644 303,388 532,391 534,590 3% 0% 363,607 283,060 -22.2% Mainland China 2,237,452 2,212,977 2,602,410 3,185,721 3,766,356 4,448,583 6,825,199 41% 20% 4,110,047 4,874,490 18.6%

Total 11,702,735 10,406,261 9,574,711 11,328,272 13,059,477 13,725,332 16,566,382 100% 6% 10,372,874 8,884,365 -14.4% % Change — -11% -8% 18% 15% 5% 21%

* Compound Average Annual Growth

Source: Hong Kong Tourist Association

As illustrated in Table 39, international visitor arrivals increased by approximately 6% per annum between 1996 and 2002, from 11,702,735 in 1996 to 16,566,382 in 2002. It is important to note that the growth was boosted primarily by arrivals from mainland China, which increased substantially since the handover on 1 July 1997. Although residents of mainland China require tourist visas to visit Hong Kong, the quota has been increased and the requirements have been relaxed. As such, between 1996 and 2002, arrivals from mainland China increased by approximately 20.4% per annum.

Key international feeder markets to Hong Kong (excluding mainland China) are Taiwan, Southeast Asia and North Asia, which accounted for 38% of total arrivals in 2002. It should be noted that arrivals from

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Taiwan include tourists transferring to mainland China as there are no direct routes between mainland China and Taiwan.

The Americas and Europe are the key non-Asian feeder markets due to Hong Kong’s establishment as a key international financial centre and stepping stone to the China market.

Year-to-date 2003 statistics show the significant impact of SARS on international tourism in the region, with visitor arrivals to Hong Kong declining by 14.4% year-to-August 2003 compared to the same period in 2002. We expect visitor arrivals in 2003 will be broadly in line with 2002 levels, as a result of the increase in arrivals from mainland China, following the recent relaxation on individual traveler restriction from Shenzhen, Zhuhai, Guangdong, HuiZhou, Beijing and Shanghai in August 2003.

Seasonality Table 40 sets out the seasonality of international arrivals at accommodation in Hong Kong in 2002.

Table 40 Hong Kong Seasonality by International Arrivals at Accommodation 2002

1,800,000

1,700,000

1,600,000

1,500,000

1,400,000

1,300,000

1,200,000

1,100,000

1,000,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

As an international financial, trade and tourism centre, Hong Kong’s arrival numbers are strong throughout the year. Peak season spreads typically from October to December during festivities such as China National Day and Christmas holidays. January and February tend to be low season months as commercial activities slow down during the Chinese New Year.

The Hotel Market Table 41 sets out the characteristics of the total hotel market in Hong Kong from 1998 to 2002.

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Table 41 Hong Kong Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 37,544 37,581 41,491 41,842 43,634 4% % Change — 0% 10% 1% 4%

Occupancy Rate 76% 79% 83% 79% 78% 1% Accommodated Demand 10,414,706 10,836,481 12,569,698 12,065,141 12,422,600 5% % Change — 4% 16% -4% 3%

Average Length of Stay/Days 3.1 3.4 3.0 3.1 3.3 2%

* Compound Average Annual Growth

Source: China National Tourism Administration

During the period 1998 to 2002, hotel supply recorded an annual growth rate of 4% per annum, whilst demand increased by 5%per annum. This resulted in marketwide occupancy increasing from a healthy annual 76% in 1996 to 78% in 2002.

Average length of stay in Hong Kong is short, ranging from 3.0 days to 3.4 days. We consider this to be the result of a high proportion of commercial demand in Hong Kong, as well a higher proportion of stop- over leisure demand that typically visit other destinations in Asia as well as Hong Kong.

FIVE-STAR HOTEL Table 42 lists the five-star hotels in Hong Kong from 1998 to 2002. MARKET

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Table 42 Five-Star Hotels, Hong Kong 1998-02

Year Hotel Open 1998 1999 2000 2001 2002

Peninsula 1928 300 300 300 300 300 Mandarin Oriental 1963 542 542 542 542 542 Hyatt Regency 1967 723 723 723 723 723 Marco Polo Hong Kong 1969 665 665 665 665 665 Sheraton 1974 780 780 780 780 780 Park Lane 1975 792 792 792 792 792 Hong Kong InterContinental 1980 602 602 602 602 602 Kowloon Shangri-La 1981 725 725 725 725 725 Marco Polo Gateway 1982 496 496 496 496 496 Marco Polo Prince 1984 345 345 345 345 345 Regal Riverside 1986 833 833 833 833 833 Grand Hyatt 1989 572 572 572 572 572 Great Eagle 1989 488 488 488 488 488 JW Marriott 1989 602 602 602 602 602 Renaissance Harbourview 1989 860 860 860 860 860 Conrad International 1990 513 513 513 513 513 Island Shangri-La 1991 565 565 565 565 565 Ritz-Carlton 1993 216 216 216 216 216 Grand Standford InterContinental 1995 579 579 579 579 579 Harbour Plaza Hong Kong 1995 416 416 416 416 416 Regal Airport 1999 — 1,103 1,103 1,103 1,103 Harbour Plaza Resort 2000 — — 1,102 1,102 1,102 Harbour Plaza North Point 2000 — — 266 266 266

Total 11,614 12,717 14,085 14,085 14,085 % Change — 9% 11% 0% 0% Compound Average Annual Growth Rate 1998-02 5%

Source: HVS International

The five-star hotel market is well developed in Hong Kong, with 23 hotels and a total 14,085 rooms. International brands have a strong presence in the market, with 60% of total room supply branded. The supply of five-star hotel rooms increased from 11,614 in 1998 to 14,085 in 2002, or 5% per annum. It is important to note that the opening of two large properties primarily drove growth: the Regal Airport Hotel and the Harbour Plaza Resort. Both properties are located on the outskirts of the city, and, thus, supply within the central business district (CBD) has actually remained relatively stable during this period.

New Supply During 2003 the 173-room Meridien Cyberpoint opened in the dynamic hi-tech business park of Hong Kong. There are several confirmed new five-star hotel projects in Hong Kong. These include the 400-room Four Seasons Hotel (2004), which also has some 600 serviced apartments, and the 118-room boutique Mandarin Oriental Hotel (2006). Moreover, a new 300-room five-star hotel is anticipated to open at the Hong Kong Disneyland Park in 2005. Numerous other projects have been proposed; however, most are to be positioned in the budget/economy segment.

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These include a 600-room hotel developed by Magnificent Estates (2005), and a 500-room hotel in Tsim Sha Tsui developed by New World Development (2005). Hotel sites have also been proposed in the vicinity of the Disneyland Park as well as in Kwun Tong and Sun Po Kang.

Five-Star Hotel Table 43 sets out the performance characteristics of the five-star hotel Performance market in Hong Kong from 1998 to 2002.

Table 43 Hong Kong Five-Star Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 56% 65% 74% 63% 67% 5% Accommodated Demand 2,373,902 3,017,108 3,804,359 3,238,846 3,444,487 10% % Change — 27% 26% -15% 6%

Average Room Rate (HK$) 1,803 1,588 1,652 1,722 1,623 -3% % Change — -12% 4% 4% -6%

Average Room Rate (US$) 232 204 212 221 209 -3% % Change — -12% 4% 4% -6%

RevPAR (HK$) 1,010 1,032 1,222 1,085 1,087 2% % Change — 2% 18% -11% 0%

RevPAR (US$) 130 133 157 139 140 2% % Change — 2% 18% -11% 0%

Exchange Rate HK$:US$ 7.78 7.78 7.78 7.78 7.78

* Compound Average Annual Growth

Source: HVS International

As illustrated in Table 43, demand for hotel accommodation at five-star hotels increased by 10% per annum between 1998 and 2002. With supply increasing by only 5% per annum during the same period, marketwide occupancy increased from 56% in 1998 to 67% in 2002. In 2001, demand for accommodation at five-star hotels declined by 15% as a result of lower levels of demand from long-haul feeder markets following the terrorist attack in September 2001. As such, the occupancy rate decreased from 74% in 2000 to 63% in 2001.

Between 1998 and 2002, five-star hotels’ ARR declined by approximately 3% per annum. Several events have had a negative impact on the ARR. In 1999, in order to recover levels of demand after the 1997-98 financial crisis, hotels lowered their rates to capture demand from an increasing number of sources. In 2002, with demand from the higher-paying, long- haul markets (the USA and Europe, for example) declining due to the global economic slowdown, five-star hotels accommodated an increasing proportion of lower-paying guests from mainland China. In both cases, this resulted in a decline of marketwide ARR.

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With marketwide occupancy increasing from 56% in 1998 to 67% in 2002, but ARR decreasing by 3% per annum, five-star hotels’ RevPAR increased marginally from HK$1,010 in 1998 to HK$1,087 in 2002.

Market Segmentation Table 44 sets out the market segmentation for five-star hotels in Hong Kong during 2002.

Table 44 Market Segmentation of Five-Star Hotels in Hong Kong 2002

Leisure 30%

Corporate 55% MICE 15%

Source: HVS International Research

A key commercial hub in the Asia Pacific region, demand for five-star hotel accommodation in Hong Kong is primarily driven by business- related demand, which accounts for approximately 70% of total marketwide demand.

Outlook Hong Kong’s outlook is positive. Despite the increasing competition challenges from cities on the mainland, Hong Kong has excellent attributes to remain one of the key business centres in Asia. As such, levels of corporate demand for hotel accommodation are expected to remain strong. MICE demand is also anticipated to remain strong as new exhibition space is likely to enhance Hong Kong’s capability to attract large events. Similarly, the opening of the Disneyland theme park is likely to boost significantly leisure demand. As such, we anticipate marketwide five-star hotel occupancy to increase gradually. However, we anticipate moderate growth in ARR as the typically high- paying feeder markets, such as the USA and Europe, are anticipated to increase at a lower pace than lower paying feeder markets such as mainland China.

SHANGHAI Shanghai is located in east China, and is bordered by the provinces of and Zhejiang. The city is situated on the River Delta, which opens into the South China Sea and occupies a central location along China’s coastline.

Shanghai has two distinct zones: Puxi and Pudong, which are divided by the Huangpo River. Puxi is the historic centre of Shanghai and comprises four districts: Huangpo (also known as The Bund area),

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Luwan (surrounded by Huaihai Middle Road), Jingan and Hongqiao. Pudong is a new development zone, which is earmarked to be the financial, industrial and technological centre of China by 2020. Moreover, the city records a population of 14.2 million, which rates as one of the highest population densities in China.

In recent decades, Shanghai has developed into China’s main commercial and trading hub, as well as a strong industrial base. As such, Shanghai has attracted large numbers of foreign direct investment, in particular since China’s entry into the WTO in 2001. China’s main business hub, Shanghai is also home to the country’s main convention venues, with state-of-the-art conference and meeting centres. Furthermore, the first phase of the Shanghai International Expo Centre in Pudong was launched in 2002 and will be fully completed in 2005. By 2010, Shanghai aims to become one of the world’s most important exhibition centres, hosting the high-profile World Expo.

The city’s main attractions include The Bund, Oriental Pearl Tower and Yu Yuan Botanical Gardens. Moreover, several tourist attractions have been proposed in Shanghai, which are likely to boost leisure demand in the city. These include a Formula 1 Grand Prix circuit to be built in 2004 and Universal Studio (Television and Media) in 2006.

Access Accessibility to Shanghai is excellent. The city is accessible by rail, road, sea and air with each access route playing a significant role towards the economic growth of the city.

Rail – Shanghai is at the junction of the Beijing-Shanghai and Beijing- Hangzhou train lines. As such, Shanghai is accessible from most parts of China by train. In addition, a rapid railway has been proposed to link Shanghai to Beijing, which would cut travelling time by about two hours to four hours. The 1,463 km line, with an estimated cost of US$15 billion, is among a number of major rail projects to be implemented in the country’s 2001-05 five-year economic plan. Within the city, a comprehensive subway provides easy access to the major districts in Shanghai.

Road – New expressways have been built in recent years in order to ease access to and from Shanghai’s neighbouring cities, such as , Zhejiang, Jiading, Hangzhou, Ningbo and Beijing. Traffic in downtown Shanghai is busy and congestion is commonplace.

Sea – A commercial hub, Shanghai is also the largest port in China. The port is located to the east of Pudong, along the Huangpu River, and is considered to be one of the largest in the world, handling over 200 million tonnes of cargo per annum. It is also anticipated that by 2020 Shanghai will have developed an additional significant shipping port, located at the Yang Shan Port District, which is likely to attract trade

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into China from the Pacific region and from other parts of Asia. The district is to be located south of Pudong International Airport.

Air – The city has two airports located in Hongqiao and in Pudong. International flights are operated from Pudong International Airport whilst Hongqiao Airport is used primarily for domestic destinations.

Shanghai’s largest international airport, Pudong International Airport opened in November 1999 and is located approximately 30 km from the city. A maglev railway links Pudong Airport with the Pudong financial district. The airport can accommodate between 140 and 160 aircraft a day, representing over 20 million passengers a year. It is anticipated that by 2005, following further expansion, the airport will have the capacity to accommodate approximately 80 million passengers a year. There are 32 international routes operating to and from the airport and providing access to Asia, Europe, the USA, Australia and the Middle East. Pudong airport is also the base of and , providing access to most parts of China as well as to numerous destinations in the Asia Pacific region.

Hongqiao Airport is located in Puxi, approximately 14 km from the city. The former main air hub of Shanghai until the opening of Pudong airport, Hongqiao Airport is now primarily used as a domestic airport as all international carriers have relocated to Pudong airport.

Tourism Overview Table 45 sets out international arrivals at accommodation establishments in Shanghai from 1996 to 2002.

Table 45 International Arrivals at Accommodation, Shanghai 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02

Japan 562,700 599,700 508,921 498,935 538,000 561,000 823,000 30% 7% Singapore 41,200 53,000 47,445 49,968 53,000 54,000 79,000 3% 11% Germany 41,100 53,300 56,845 64,599 71,000 73,000 102,000 4% 16% France 34,200 39,100 40,003 43,767 54,000 55,000 72,000 3% 13% United Kingdom 26,600 32,800 37,439 33,120 17,000 21,000 18,000 1% -6% Italy 14,000 19,500 21,511 19,145 19,000 18,000 25,000 1% 10% Canada 15,600 19,300 20,417 19,784 22,000 24,000 39,000 1% 16% United States 98,300 124,100 130,465 124,582 138,000 146,000 218,000 8% 14% Australia 16,300 29,000 34,868 31,318 32,000 33,000 44,000 2% 18% Other 392,500 469,100 473,400 485,000 870,000 1,058,000 1,305,000 48% 22%

Total 1,242,500 1,438,900 1,371,314 1,370,218 1,814,000 2,043,000 2,725,000 100% 14% % Change — 16% -5% 0% 32% 13% 33%

* Compound Average Annual Growth

Source: China National Tourism Administration 23%

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As illustrated in Table 45, international arrivals at accommodation in Shanghai increased by approximately 14% per annum between 1996 and 2002, from 1,242,500 in 1996 to 2,725,000 in 2002. The main international feeder markets are Japan and the USA, which accounted for 30% and 8% of total arrivals in 2002, respectively.

Due to Shanghai’s reliance on Asian feeder markets, international arrivals at accommodation declined in 1998 and remained constant in 1999, following the 1997 Asian financial crisis. However, arrivals from all feeder markets recovered strongly in 2000, resulting in total arrivals increasing by approximately 23% per annum between 2000 and 2002. This was a result of increased commercial- and leisure-related activities in and around the city.

Seasonality Table 46 sets out the seasonality of international arrivals at accommodation in Shanghai in 2002.

Table 46 Shanghai Seasonality by International Arrivals at Accommodation 2002

290,000 270,000 250,000 230,000 210,000 190,000 170,000 150,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

As China’s main commercial, trade and industrial centre, arrivals to Shanghai are relatively strong throughout the year. The high season spreads typically from March to mid November with peak months in April, September and October when large fairs and exhibitions are held in the city (such as the Shanghai International Yarn Trade Fair in April, the China Auto Industry Expo in September and the International Exhibition for Energy, Management, Technology and Renewable Energy in October). January and February are low season months, as commercial activities tend to slow down during year-end holidays and the Chinese New Year.

The Hotel Market Table 47 sets out the characteristics of the total hotel market in Shanghai from 1998 to 2002.

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Table 47 Shanghai Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 30,987 38,940 46,715 50,966 53,769 15% % Change — 26% 20% 9% 5%

Occupancy Rate 57% 56% 64% 68% 72% 6% Accommodated Demand 6,446,845 7,959,336 10,912,624 12,649,761 14,130,493 22% % Change — 23% 37% 16% 12%

Average Length of Stay/Days 3.8 3.8 3.7 3.5 3.6 -1%

Note: * Compound Average Annual Growth Rate

Source: China National Tourism Administration

As illustrated in Table 47, between 1998 and 2002 total hotel supply increased significantly by 15% per annum. However, during the same period, demand for accommodation increased even more rapidly by approximately 22% per annum. As such, despite unprecedented growth, supply was absorbed resulting in marketwide occupancy increasing from 57% in 1998 to 72% in 2002.

As illustrated in the table, the average length of stay for both international and domestic visitors declined by approximately 1.0% per annum between 1998 and 2002. This decrease may be attributable to the increase in domestic travel within China, with both Chinese and expatriates living in China travelling to Shanghai for business purposes and a shorter average length of stay. Furthermore, the relatively short period of stay is indicative that Shanghai, today, is predominantly a commercial destination.

FIVE-STAR HOTEL Table 48 lists the five-star hotels in Shanghai from 1998 to 2002. MARKET

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Table 48 Five-Star Hotels Shanghai 1998-02

Hotel Year Open 1998 1999 2000 2001 2002

Jinjiang Hotel 1959 640 640 640 640 640 Hua Ting Hotel & Towers 1986 770 770 770 770 770 Hilton International 1989 772 772 772 772 772 Okura Garden Hotel 1989 500 500 500 500 500 Portman Ritz-Carlton 1990 564 564 564 564 564 JC Mandarin 1990 600 600 600 600 600 Yangtze Renaissance 1991 554 554 554 554 554 Sheraton Tai Ping Yang 1992 576 576 576 576 576 InterContinental Hotel 1996 442 442 442 442 442 Regal International East Asia 1997 300 300 300 300 300 Shangri-La Pudong 1998 257 612 612 612 612 Grand Hyatt 1999 — 418 555 555 555 Marriott Hongqiao 2000 — — 96 315 315 St Regis 2001 — — — 133 318 Four Seasons* 2002 — — — — 369 Sofitel Jin Jiang** 2002 — — — — 414 Westin*** 2002 — — — — 76

Total 5,975 6,748 6,981 7,333 8,377 % Change — 13% 3% 5% 14% Compound Average Annual Growth Rate 1998-02 9%

* Opened 1 March 2002. Total inventory is 440 rooms. ** Opened 1 April 2002. Total inventory is 549 rooms. *** Opened 27 September 2002. Total inventory is 305 rooms.

Source: HVS International

The five-star hotel market is relatively well developed in Shanghai, with 17 hotels and a total of 8,377 rooms in 2002. Moreover, international branded hotels have a strong presence in the market, accounting for approximately 75% of total supply. Five-star hotel room supply recorded a 9% increase per annum during the period 1998 to 2002. Prior to 1995, the supply of internationally branded five-star hotels was limited; however, along with the level of commercial activity in Shanghai, investors and developers have demonstrated a strong appetite to develop hotels in this area.

New Supply Five-star hotel supply in Shanghai is anticipated to increase significantly over the next five years. A 342-room JW Marriott opened in 2003. Confirmed new five-star hotel projects include a 363-room Renaissance Pudong (2004), a 369-room extension of the Shangri-La Pudong (2005), the 722-room Le Royal Meridien (2005) and a new 640- room Shangri-La hotel in Puxi (2005). In addition, unnamed confirmed five-star hotels are under development, including a 315-room hotel on the Bund, a 200-room hotel at the Shanghai World Financial Centre, and a 300-room hotel in Xintiandi. Unconfirmed projects include proposed hotels at Lujiazhui in Pudong, along the Bund, the area to the

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north of the Bund and the re-branding/repositioning of the Peace Hotel on the Bund into a five-star, de luxe hotel, possibly to be managed by the Mandarin Oriental Hotel Group.

Five-Star Hotel Table 49 sets out the performance characteristics for the five-star hotel Performance market in Shanghai from 1998 to 2002.

Table 49 Five-Star Hotel Performance Shanghai 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 61% 62% 67% 67% 72% 4% Accommodated Demand 1,330,231 1,527,107 1,707,153 1,793,358 2,201,378 13% % Change — 15% 12% 5% 23% —

Average Room Rate (RMB) 938 838 822 938 1,021 2% % Change — -11% -2% 14% 9% —

Average Room Rate (US$) 113 101 99 113 123 2% % Change — -11% -2% 14% 9% —

RevPAR (RMB) 572 520 551 628 735 6% % Change — -9% 6% 14% 17% —

RevPAR (US$) 69 63 66 76 89 6% % Change — -9% 6% 14% 17% —

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS International

Between 1998 and 2002, the strong growth in five-star hotel supply was absorbed by even stronger growth in demand. Whilst five-star hotel supply increased by 9% per annum during this period, demand increased by 13% per annum. Consequently, five-star hotels’ marketwide occupancy increased from 61% in 1998 to 72% in 2002.

During the same period, five-star hotels’ ARR fluctuated as new supply significantly increased competition in the market. Furthermore, new hotels opened at significantly different room rate positioning to existing supply, thereby impacting the marketwide average rates for five-star hotels. In 1999 and 2000, the successive openings of five-star, de luxe, internationally branded hotels such as the Shangri-La Pudong and the Grand Hyatt resulted in existing five-star hotels lowering their rates to remain competitive, in particular as international demand was still relatively weak after the 1997 financial crisis. Consequently, marketwide ARR declined by 11% in 1999 and 2% in 2000. However, in 2001 and 2002, five-star, de luxe hotels (led by the Grand Hyatt) managed to increase their ARR despite strong growth in supply (the opening of the St Regis, Four Seasons and Westin), capitalising on the full recovery of

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international demand. Consequently, five-star hotels’ market wide ARR was positively impacted, increasing by 14% in 2001 and 9% in 2002.

With marketwide occupancy increasing from 61% in 1998 to 74% in 2002, whilst ARR increased by 2% per annum during the same period, five-star hotels’ RevPAR increased from RMB572 in 1998 to RMB735 in 2002. Market Segmentation Table 50 sets out the market segmentation for five-star hotels in Shanghai during 2002.

Table 50 Market Segmentation of Five-Star Hotels in Shanghai 2002

Leisure 25%

MICE Corporate 10% 65%

Source: HVS International Research

As China’s main commercial hub, demand for five-star hotel accommodation in Shanghai is primarily business-driven. As such, we estimate that corporate and MICE demand accounted for approximately 75% of total demand in 2002.

Outlook Shanghai’s outlook is excellent. With its entry into the WTO, the economic activity of China’s most important business hub is likely to continue growing at levels far above the national average of 7-8%. As such, commercial demand for five-star hotel accommodation is expected to increase significantly. Moreover, with the completion of the Shanghai International Expo Centre in Pudong in 2005 and the city’s preparation to host the World Expo in 2010, Shanghai is likely to consolidate its position as a key worldwide convention venue. Consequently, MICE demand for accommodation at five-star hotels is likely to also increase significantly. Finally, with an increasing number of attractions in Shanghai, such as a Formula 1 Grand Prix circuit, a theme park and shopping centres, leisure demand is anticipated to increase significantly. We consider the potential for further hotel development exists; however, in some tiers of the five-star segment the threat of oversupply looms.

SHENZHEN Shenzhen is located on the middle of the south coast of the Guangdong province. It is a coastal city a few kilometres north of Hong Kong and south of Guangzhou. Shenzhen has a population of over 7 million and

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is one of the Special Economic Zones in China, which provides significant tax concessions to foreign investors.

Shenzhen is a manufacturing and export centre. In particular, Shenzhen has developed in recent years into a prime manufacturing centre for high-tech products. In 2002, this segment accounted for 46% of the city’s total output, ranking Shenzhen among China’s top three high-tech development centres. Apart from industrial development, efforts have also been made by Shenzhen to upgrade the capability and standard of its logistics sector, and to establish itself as a sourcing centre for multinational companies.

Shenzhen’s tourist attractions are limited, and include Splendid China, Window of the World and China Folk Culture Villages.

Access Shenzhen’s accessibility is good. In its effort to become an important logistics centre in China, the city has developed its infrastructure significantly and can be accessed by rail, road, sea and air.

Rail – Shenzhen’s railway system is well developed. It is connected to Guangzhou, from which the national railway network provides access to most parts of China. In addition, the Kowloon-Canton Railway (KCR) offers easy access to Hong Kong.

Road – Shenzhen has a good road network, with nearly 100 main highways and a number of flyover crossings. These include the Guangzhou-Shenzhen Highway links to the national highway system and the Shenzhen-Shantou Expressway, which is an important section of the State Trunk Highway. Moreover, construction of the Hong Kong-Shenzhen corridor, which is expected to boost economic development of the mainland, is due to be completed in 2005.

Sea – Located in the vicinity of Hong Kong, Shenzhen has significantly developed its ports to compete with the former British colony, providing fast and economical services. Shenzhen’s share of deep-water container movement has increased every year; in 2000, the port only handled 25% of China’s deep-water container movement, but by 2002, it had jumped to 39% and is on track to beat Kaohsiung in Taiwan as the world’s fifth largest port. In addition, Shenzhen provides eight harbours for passenger liners and regular services to Guangzhou, Zhuhai, Jiangmen, Zhongshan, Hong Kong and Macao. The newly built Huanggang Port is the largest open port for passenger and cargo transportations in China, and also the largest land port in Asia.

Air – Shenzhen Baoan Airport is located 45 km from the city and has an annual passenger capacity of 4.3 million. The airport is the base of and China Southern Airlines (together with Guangzhou airport), China’s largest airlines in terms of passengers’ traffic. As such, access to and from most parts of China is excellent,

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with 76 domestic flight routes operating from Shenzhen Baoan Airport. Although there are no international routes operating at the airport, a route to Singapore is expected to be established by January 2004, and it is likely that further international routes will develop over time.

Tourism Overview Table 51 sets out international arrivals at accommodation establishments in Shenzhen from 1996 to 2002.

Table 51 International Arrivals at Accommodation, Shenzhen 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 83,203 78,076 104,856 109,598 150,479 197,847 245,265 30% 20% Korea 32,015 30,731 10,435 17,586 27,612 45,172 65,443 8% 13% Malaysia 24,430 22,822 31,388 66,009 50,537 42,174 50,516 6% 13% Philipines 3,134 3,253 5,616 5,440 9,158 12,461 15,108 2% 30% Singapore 19,024 19,284 21,240 27198 42,264 53,788 59,668 7% 21% Thailand 8,550 6,117 4,793 7,179 6,531 18,344 29,367 4% 23% Total 170,356 160,283 178,328 233,010 286,581 369,786 465,367 58% 18% % Change — -6% 11% 31% 23% 29% 26%

Key North American Feeder Markets USA 39,173 32,260 39,878 40,047 64,083 75,328 104,130 13% 18% Canada 6,936 6,048 8,882 9,433 11,431 14,092 16,356 2% 15% Total 46,109 38,308 48,760 49,480 75,514 89,420 120,486 15% 17% % Change — -17% 27% 1% 53% 18% 35%

Key European Feeder Markets UK 10,820 8,919 10,584 13,809 17,728 20,916 23,925 3% 14% France 4,265 1,659 6,725 7,272 10,529 15,722 15,331 2% 24% Germany 5,234 4,741 6,552 7,451 9,015 11,337 13,848 2% 18% Russia 656 1,934 874 827 2,102 3,227 3,514 0% 32% Total 20,975 17,253 24,735 29,359 39,374 51,202 56,618 7% 18% % Change — -18% 43% 19% 34% 30% 11%

Australia 6,205 5,394 7,155 8,898 10,985 12,796 15,201 2% 16% % Change — -13% 33% 24% 23% 16% 19%

Others 106,184 174,359 120,922 125,265 198,446 156,296 148,265 18% 6% % Change — 64% -31% 4% 58% -21% -5%

Total 349,829 395,597 379,900 446,012 610,900 679,500 805,937 100% 15% % Change — 13% -4% 17% 37% 11% 19%

* Compound Average Annual Growth

Source: China National Tourism Administration

Table 51 illustrates that during the period 1996 to 2002, arrivals at accommodation in Shenzhen increased by approximately 15% per annum, from 349,829 in 1996 to 805,937 in 2002. Neighbouring countries are the key feeder markets, accounting for 58% of total demand in 2002. In particular, arrivals from Japan are significant, accounting for 30% of total demand. Key non-Asian feeder markets include primarily the

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USA, accounting for approximately 13% of total arrivals in 2002. With regional economies in turmoil following the Asian financial crisis in 1997, international demand for accommodation in Shenzhen declined by 4% in 1998. However, the market rebounded rapidly, with an annual growth rate of 21% between 1999 and 2002.

Seasonality Table 52 sets out the seasonality of international arrivals at accommodation in Shenzhen in 2002.

Table 52 Shenzhen Seasonality by International Arrivals at Accommodation 2002

110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

International arrivals to Shenzhen consist primarily of business travellers. Therefore, seasonality of arrivals is relatively limited, with the low season typically in line with the holiday season (such as the Chinese New Year).

The Hotel Market Table 53 sets out the characteristics of the total Shenzhen hotel market from 1998 to 2002.

Table 53 Shenzhen Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 24,936 26,861 26,410 27,901 28,640 4% % Change — 8% -2% 6% 3%

Occupancy Rate 55% 59% 63% 71% 70% 6% Accommodated Demand 5,042,309 5,735,495 6,034,421 7,184,920 7,346,372 10% % Change — 14% 5% 19% 2%

Average Length of Stay/Days — — 2.4 2.08 2.36 -1%

* Compound Average Annual Growth

Source: China National Tourism Administration

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During the period 1998 to 2002, hotel supply increased by approximately 4% per annum, whilst demand increased by 10% per annum. As such, marketwide occupancy increased from 55% in 1998 to 70% in 2002.

The average length of stay as illustrated in Table 47 includes domestic and international visitors to Shenzhen. Average length of stay in Shenzhen is relatively short as demand for hotel accommodation is primarily commercially driven.

FIVE-STAR HOTEL Table 54 lists the five-star hotels in Shenzhen during the period 1998 to MARKET 2002.

Table 54 Five-Star Hotels, Shenzhen 1998-02

Hotel Year Open 1998 1999 2000 2001 2002

Nan Hai Hotel 1986 368 368 368 368 368 Sunshine Hotel 1991 374 374 374 374 374 Shangri-La 1992 553 553 553 553 553 The Landmark Hotel 1994 351 351 351 351 351 Mission Hills Resort 1995 419 419 419 419 419 Grand View Hotel 1999 — 221 221 221 221 The Panglin 2000 — — 527 527 527

Total 2,065 2,286 2,813 2,813 2,813 % Change — 11% 23% 0% 0% Compound Average Annual Growth Rate 1998-02 8%

Source: HVS International

Shenzhen’s five-star hotel supply is relatively limited, with seven properties and 2,813 rooms. Furthermore, international brand distribution is also limited, with only one internationally branded hotel: the Shangri-La. Between 1998 and 2002, five-star hotel supply has increased with the opening of two new properties, resulting in an annual increase in supply of 8% during this period.

New Supply We are not aware of any confirmed five-star hotel projects in Shenzhen. However, it is rumoured that Shangri-La is considering opening a second hotel in Shenzhen by 2005/06.

Five-Star Performance Table 55 sets out the performance characteristics of the five-star hotel market from 1998 to 2002.

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Table 55 Five-Star Hotel Performance, Shenzhen 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 55% 60% 65% 68% 72% 7% Accommodated Demand 414,549 500,634 667,384 698,187 739,256 16% % Change — 21% 33% 5% 6%

Average Room Rate (RMB) 585 655 565 572 622 2% % Change — 12% -14% 1% 9%

Average Room Rate (US$) 71 79 68 69 75 2% % Change — 12% -14% 1% 9%

RevPAR (RMB) 322 393 367 389 448 9% % Change — 22% -6% 6% 15%

RevPAR (US$) 39 47 44 47 54 9% % Change — 22% -6% 6% 15%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS International

Accommodated demand has increased strongly between 1998 and 2002. During this period demand growth has consistently outpaced supply growth. Despite strong demand growth ARR have remained stagnant and the market has become relatively price competitive.

Market Segmentation Table 56 sets out the market segmentation for five-star hotels in Shenzhen during 2002.

Table 56 Market Segmentation of Five-Star Hotels in Shenzhen 2002

MICE 15% Leisure 10%

Corporate 75%

Source: HVS International Research

Primarily a manufacturing base and logistics hub, demand for five-star hotels in Shenzhen is primarily driven by commercial-related demand, which account for approximately 90% of total arrivals. Due to the city’s

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lack of well-known attractions, leisure demand accounts for a marginal 10% of total arrivals.

Outlook Shenzhen’s outlook is reasonable. As the city consolidates its position as a main manufacturing base and a logistics hub in south China, commercial demand for hotel accommodation is likely to increase. However, with few attractions and limited facilities, limited growth in leisure and MICE demand is anticipated. As such, despite limited new supply, we anticipate moderate growth in five-star hotels’ marketwide occupancy and ARR.

WUHAN Wuhan, the capital of the Hubei province, is located at the confluence of the Yangtze (Chang Jiang) and Hanshui rivers. Over 6,300 km long, the Yangtze River is the longest river in China and the third longest in the world. Hubei comprises two different areas: the eastern area is a low-lying plain drained by the Yangtze River and its main northern tributary, the Han Shui; while the western area is an area of rugged highlands with small cultivated valleys and basins.

Wuhan consists of the three towns of Wuchang, Hanyang and Hankou, covering an area of 8,400 km² and with a population of 7.2 million. Wuhan is a key economic, cultural and political hub in central China. Moreover, the city is a major junction of traffic and communication in Inner China. Its main industries include metallurgy, automobiles and machinery. Wuhan is the second most important producer of steel in China and the third most important centre for shipbuilding in the country. Furthermore, in addition to these traditional activities, Wuhan has attracted new industries such as telecom, electronic information, integration of machinery and pharmaceuticals.

The main tourist attractions in Wuhan include cruises on the Yangtze River, Yellow Crane Tower, Guiyuan Temple, East Lake, Mount Wudang and Hubei Provincial Museum.

Access Accessibility to Wuhan is good. Wuhan is accessible by rail, road, river and air.

Rail – Wuhan is one of the most important railway hubs in China. There are two railway stations: Wuchang South Railway Station and Hankou Railway Station, with a capacity of 30 million passengers per annum. Major trunk railways connect Wuhan to Beijing, Shanghai, Guangzhou, Chengdu, Kunming, Xian, and Jiujiang. Moreover, a new railway along the Yangtze River is being developed and will provide access to various provinces and municipalities, including Sichuan, Hubei, Jiangxi, Anhui, Jiangsu, Chongqing and Shanghai. This new infrastructure aims to consolidate the economic development of cities along the Yangtze River. Wuhan economic development is thus likely to benefit from this improved accessibility.

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Road – Wuhan road networks are well-developed and the city is connected to different destinations across China. Moreover, the construction of a ring expressway around Wuhan is expected to be completed by 2005.

River – Wuhan has two ports: Wuhan Port and Qingshan Port. Wuhan Port is one of the major ports on the Yangtze River and handles most of the passenger traffic (5.6 million passengers in 2002). The new Qingshan Port is a commercial port with regular lines to 14 countries and regions, including Russia, Japan, Singapore, Hong Kong and Macao.

Air – Wuhan Tianhe International Airport is located 26 km northwest of the city. It is the biggest airport in central China, with the annual passenger traffic volume reaching 4.2 million passengers. At present, there are 127 domestic routes and three international routes: Hong Kong, Seoul (South Korea) and Fukuoka (Japan). Direct flights to Bangkok have been cancelled due to the SARS epidemic in March, April and May 2003. The airport is also the base of Wuhan Airlines.

Tourism Overview Table 57 sets out arrivals at accommodation establishments in Wuhan from 1996 to 2002.

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Table 57 International Arrivals at Accommodation, Wuhan 1996-02

% of Total CAAG* Nationality 1996 1997 1998 1999 2000 2001 2002 2002 1996-02 Key Asian Feeder Markets Japan 36,163 59,819 25,695 25,282 28,061 24,975 43,203 18% 3% Korea 2,256 2,421 1,131 1,633 1,874 2,444 10,903 5% 30% Malaysia 6,337 5,673 1,552 1,345 1,342 1,339 2,609 1% -14% Philipines 806 1,886 289 475 205 192 466 0% -9% Singapore 5,385 5,312 1,972 1,779 2,037 1,581 2,308 1% -13% Thailand 2,725 1,982 108 541 889 1,041 954 0% -16% Total 53,672 77,093 30,747 31,055 34,408 31,572 60,443 26% 2% % Change — 44% -60% 1% 11% -8% 91%

Key North American Feeder Markets USA 16,322 24,488 23,438 37,477 34,258 55,782 45,841 19% 19% Canada 1,777 2,285 2,676 3,933 4,297 3,362 3,227 1% 10% Total 18,099 26,773 26,114 41,410 38,555 59,144 49,068 21% 18% % Change — 48% -2% 59% -7% 53% -17%

Key European Feeder Markets UK 2,754 3,415 6,241 7,249 10,654 9,008 10,183 4% 24% France 6,168 6,354 5,636 6,627 11,583 6,151 8,940 4% 6% Germany 5,533 7,520 7,478 10,019 33,345 28,385 31,839 13% 34% Russia 143 298 116 215 185 515 571 0% 26% Total 14,598 17,587 19,471 24,110 55,767 44,059 51,533 22% 23% % Change — 20% 11% 24% 131% -21% 17%

Australia 1,641 1,734 1,943 3,789 2,359 2,157 4,280 2% 17% % Change — 6% 12% 95% -38% -9% 98%

Others 44,458 61,321 26,747 18,141 44,552 88,981 71,008 30% 8% % Change — — — -32% 146% 100% -20%

Total 132,468 123,187 105,022 118,505 175,641 225,913 236,332 100% 10% % Change — -7% -15% 13% 48% 29% 5%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 57, arrivals at accommodation in Wuhan increased by approximately 10% per annum, from 132,468 in 1996 to 236,332 in 2002. The main international feeder markets for accommodation in Wuhan include Japan, the USA and Germany, which accounted for 18%, 19% and 13% per annum of the market in 2002, respectively.

Seasonality Table 58 sets out the seasonality of international arrivals at accommodation in Wuhan in 2002.

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Table 58 Wuhan Seasonality by International Arrivals at Accommodation 2002

100,000

80,000

60,000

40,000

20,000

—

Jul Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec

Source: China National Tourism Administration

As illustrated in Table 58, seasonality in Wuhan is in line with climatic specificities. As such, the best time for a Yangtze River cruise is from May to June and September to October. The low season months are in winter (December to February), when the water level of Yangtze River is too low for a cruise, and in summer (July and August) as Wuhan, which is in central China, is known as one of China’s ‘Three Furnaces’, along with the cities of Chongqing and Nanjing.

The Hotel Market Table 59 sets out the characteristics of the total Wuhan hotel market from 1998 to 2002.

Table 59 Wuhan Hotel Market 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Number of Rooms 9,197 9,478 12,971 12,536 12,100 7% % Change — 3% 37% -3% -3%

Occupancy Rate 47% 46% 52% 57% 63% 8% Accommodated Demand 1,564,318 1,601,735 2,447,693 2,624,025 2,782,395 15% % Change — 2% 53% 7% 6%

Average Length of Stay/Days 2.24 2.75 2.58 2.2 1.9 -4%

* Compound Average Annual Growth

Source: China National Tourism Administration

As illustrated in Table 59, supply increased by approximately 7% per annum during the period 1998 to 2002, whilst demand increased by approximately 15% per annum during the same period. As a result, with demand outpacing supply, the marketwide occupancy increased from 47% in 1998 to 63% in 2002.

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Average length of stay, as illustrated in Table 59, includes domestic and international visitors to Wuhan. It should be noted that average length of stay is relatively short as a significant proportion of demand is commercial. Furthermore, tourists travelling to Wuhan for leisure typically only stop over in the city before visiting neighbouring attractions.

FIVE-STAR HOTEL Table 60 lists the five-star hotels in Wuhan during 1998 to 2002. MARKET Table 60 Five-Star Hotels, Wuhan 1998-02

Hotel Year Open 1998 1999 2000 2001 2002

Oriental Hotel 1997 400 400 400 400 400 Shangri-La Wuhan * 1999 — 314 505 505 505

Total 400 714 905 905 905 % Change — 79% 27% 0% 0% Compound Average Annual Growth Rate 1998-02 23%

* Opened in May 1999

Source: HVS International

As illustrated in Table 60, five-star hotel supply in Wuhan is limited, with only two hotels in the market. Only one new hotel opened over the past five years: the Shangri-La Wuhan Hotel. The Wuhan hotel market is primarily dominated by four-star hotels, which include Wuhan Lake View Garden Hotel, two Holiday Inn hotels, the Wuhan Asia Hotel and the Best Western Mayflower Wuhan.

New Supply We are not aware of any confirmed five-star hotel projects in Wuhan. However, rumoured hotel developments that are expected to enter the market include a Crowne Plaza, a Hilton and a Novotel.

Five-Star Performance Table 61 sets out the performance characteristics of the five-star hotel market from 1998 to 2002.

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Table 61 Five-Star Hotel Performance, Wuhan 1998-02

CAAG* 1998 1999 2000 2001 2002 1998-02

Occupancy Rate 60% 55% 60% 55% 60% 0% Accommodated Demand 87,600 143,349 198,195 181,679 198,195 23% % Change — 64% 38% -8% 9%

Average Room Rate (RMB) 438 444 444 435 437 0% % Change — 1% 0% -2% 0%

Average Room Rate (US$) 53 53 53 52 53 0% % Change — 1% 0% -2% 0%

RevPAR (RMB) 263 244 266 239 262 0% % Change — -7% 9% -10% 10%

RevPAR (US$) 32 29 32 29 32 0% % Change — -7% 9% -10% 10%

Exchange Rate RMB:US$ 8.3 8.3 8.3 8.3 8.3

* Compound Average Annual Growth

Source: HVS Estimate

During the period 1998 to 2002, five-star hotel supply and demand increased at the same level, by 23% per annum. As such, five-star hotel marketwide occupancy growth remained constant during the same period. Over the period 1998 to 2002, five-star marketwide occupancy fluctuated between 55% and 60%. Five-star marketwide occupancy dropped from 60% in 1998 to 55% in 1999 due to the opening of Wuhan Shangri-La Hotel. The Shangri-La Wuhan has also induced significant demand to Wuhan.

Marketwide five-star hotels’ ARR and RevPAR remained constant during the period 1998 to 2002. ARR remains low as the five-star hotels accommodate the domestic market as well, which is a low end segment.

Market Segmentation Table 62 sets out the market segmentation for five-star hotels in Wuhan during 2002.

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Table 62 Market Segmentation of Five-Star Hotels in Wuhan 2002

Corporate Leisure 35% 45%

MICE 20%

Source: HVS International Research

Being a key economic, cultural and political hub in central China, Wuhan’s five-star hotel demand is primarily driven by business-related demand, which accounts for 55% of total demand, whilst leisure demand makes up 45%. It should be noted that the proportion of MICE is relatively high owing to its central location within China, good accessibility from and to other parts of China, and the opening of the Wuhan International Convention and Exhibition Centre in 2001.

Outlook Wuhan’s outlook is good. As an important commercial area in central China, Wuhan is developing into a modern industrial city. As such, Wuhan is likely to experience significant economic development. Corporate demand for hotel accommodation is thus likely to increase.