Operation Review
Overview
For the year ended 31 December 2008 (FY2008), the Group reported a net loss of US$3.7 million as compared to a net profit of US$12.1 million in FY2007. Total income increased by 92% during the year from US$21.2 million to US$40.6 million.
The increase in total income was primarily due to the consolidation of Capital Advisers during the period. Since January 2008, the Group increased our equity ownership in Capital Advisers, engaged in hotel and residential investment / management in Japan, from 44.8% to 92.7%. As Capital Advisers' business model is one of high-volume and low-margin compared to Uni-Asia Finance Corporation, the impact was reflected in the Group consolidated financial statements. The Group's Income is classified under (i) fee income (ii) hotel income (iii) investment returns (iv) interest income and (v) other income.
(a) Fee Income
Breakdown of fee income| Full year | |||
|---|---|---|---|
| 2008 US$'000 |
2007 US$'000 |
Change % |
|
| Arrangement & agency fee | 2,525 | 7,957 | (68%) |
| Brokerage commission | 1,337 | 1,532 | (13%) |
| Incentive fee | 1,858 | 817 | 127% |
| Asset management & administration fee * | 5,989 | 1,360 | 340% |
| Charter income | - | 346 | N/M |
| 11,709 | 12,012 | (3%) | |
*Includes income earned by Capital Advisers as the asset manager of hotels and residential projects of US$4.6 million.
Fee income dropped by 3% from US$12.0 million in FY2007 to US$11.7 million in FY2008 primarily due to a drop in arrangement fee income offset by the consolidation of Capital Advisers' asset management fee income from hotel and residential projects. A description of the Group fee income is summarised below:
- Arrangement and agency fee refers to income for the arrangement of syndicated loans or debt financing and for the Group's agency duty in finance arrangement transactions. Finance arrangement and agency fee income dropped by 68% to US$2.5 million in FY2008 due to the slowdown in finance arrangement activities and the completion of fewer transactions compared to FY2007.
- Brokerage commission refers to commission from brokering ship charters on behalf of ship-owners and the income is recurrent for the duration of the charter period / agreement. Brokerage commission totalled close to US$1.3 million in FY2008.
- Incentive fee refers to the fee received when the assets managed by the Group are divested with a gain and is based on a predetermined profit sharing ratio, in the event the disposal gain exceeds the hurdle rate. Incentive fee income increased by 127% to US$1.9 million in FY2008 due to the disposal of the last vessel under Searex.
- Asset management and administration fee is the fee for the administration and management of funds / investments in shipping, properties and distressed assets as well as for Capital Advisers as the asset manager of hotels and residential propertiesin Japan. The fee of US$6.0 million is recurrent until maturity of the fund / project and increased by over three folds due primarily to maiden contribution from our hotel and property business arising from the consolidation of Capital Advisers during the year and the launch of Akebono fund.
(b) Hotel Income
Hotel income refers to all income related to Capital Advisers' hotel business. Capital Advisers currently owns and / or manages 16 limited-service hotels in Japan with over 2,263 rooms. The limited service hotels target the business or leisure segment. The Group recognised maiden contribution from Capital Advisers' hotel operation with income totaling close to US$26.5 million. Hotel income would include a hotel operator fee and all income received from hotels owned and leased by the Group. Due to the launch of three new hotels over the past 12 months, Capital Advisers experienced startup losses from its hotel operations business.
(c) Investment Returns
Breakdown of investment returns| Full year | |||
|---|---|---|---|
| 2008 US$'000 |
2007 US$'000 |
Change % |
|
| Interest on performance notes - shipping # | 5,595 | 1,875 | 198% |
| Interest on performance notes - distressed debt | 25 | 35 | (29%) |
| Realised gain on investment - shipping | - | 4,907 | N/M |
| Realised gain on investment - hotel & residential | 352 | - | N/M |
| Realised gain on interest rate swap contracts | - | 89 | N/M |
| Property rental income | 496 | - | N/M |
| Fair value adjustment on investment properties | 405 | 434 | (7%) |
| Fair value adjustment on investment - hotel & residential | (886) | - | N/M |
| Fair value adjustment on investment - shipping ^ | (2,794) | 484 | (677%) |
| Fair value adjustment on investment - others | - | (191) | N/M |
| Fair value adjustment on performance notes - hotel & residential | (87) | - | N/M |
| Fair value adjustment on performance notes - shipping @ | 166 | 1,974 | (92%) |
| Fair value adjustment on performance notes - distressed debt | (444) | (102) | (335%) |
| Fair value adjustment on listed shares - hotel | (306) | - | N/M |
| Fair value adjustment on listed shares - others | (75) | - | N/M |
| Fair value adjustment on a forward currency contract | 734 | - | N/M |
| Fair value adjustment on an interest rate swap contract | - | (2,752) | N/M |
| Write down of properties for sale to net realisable value - hotel & residential ~ | (2,762) | - | N/M |
| 419 | 6,753 | (94%) | |
# Includes interest from Searex Fund.
^ Includes fair valuation loss from a shipping investment which has entered into interest rate hedging contracts.
@ Fair value adjustment on performance notes - shipping includes fair value gain from Akebono fund and fair value loss from Searex arising from the sale of the vessel.
~ Includes write down of value on Hotel Vista Kumamoto and other residential properties.
The Group's investment returns dropped from US$6.8 million in FY2007 to US$0.4 million in FY2008 due primarily to negative fair value adjustment on our investments in ships and properties in Japan. During the year, Searex I fund disposed of the last remaining vessel and recognised interest on performance notes of US$4.9 million, or net gain on investment of US$2.7 million. Other major investment returns recognised in FY2008 include interest on performance notes from Akebono of US$0.7 million, rental income of US$0.5 million from the Group's office, residential and hotel properties and realised gain from investments of US$0.4 million arising from the Group's hotel and residential investments.
Due to the downturn of the economy towards the end of the year, the Group recognised negative fair value adjustment on shipping investments and performance notes of US$2.6 million and negative fair value adjustment on residential and hotel properties in Japan of US$3.7 million. Fair value adjustment from the Group's office investment in China was US$0.4 million.
(d) Group Expenses
Employee benefit expenses grew by 176% from US$6.8 million in FY2007 to US$18.7 million in FY2008 as a result of the consolidation of Capital Advisers. Capital Advisers' staff cost represented over 76% of the Group's employee benefits expense.
Other operating expenses grew by 666% from US$2.9 million in FY2007 to US$22.5 million in FY2008 due also to the consolidation of Capital Advisers. Capital Advisers' operating expenses represented over 85% of the Group's total operating expenses. Hotel leases, hotel sub-operator fee and hotel operating expenses represented close to 62% of the Group's other operating expenses.
Finance cost rose by 1,590% from US$0.1 million in FY2007 to US$1.4 million in FY2008 as a result of the consolidation of Capital Advisers
(e) Profitability
Contribution from our associated company dropped from US$0.3 million in FY2007 to a net loss of US$0.02 million in FY2008 given Capital Advisers is no longer equity accounted for and the Group recognised share of losses from Capital Advisers' associates.
(f) Profit / (Loss) for the Year
In summary, the Group's net result for the year dropped from a profit of US$12.1 million in FY2007 to a loss of US$3.7 million in FY2008.
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