UNAUDITED FINANCIAL STATEMENT FOR THE PERIOD ENDED 30 SEPTEMBER 2008
Income Statement
Balanced Sheet
Click here for the complete Third Quarter 2008 Financials
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Review of Performance
Overview
Since January 2008, Capital Advisers, engaged in hotel and residential investment and management in Japan, has been consolidated into the Group accounts after our equity ownership increased from 44.8% to 92.7%. Due to the sluggish property market in Japan, startup losses from hotel operation and in the absence of hotel disposals, Capital Advisers registered net losses. Furthermore, as Capital Advisers' business model is one of high-volume and low-margin compared to Uni-Asia Finance Corporation, the impact would be reflected on the Group consolidated financial statements. Moreover, Capital Advisers has recently completed a cost and investment rationalization programme to reduce headcount, cut overall operating expenses and limit new investments in the near term.
The major highlights during the interim period include:
- Disposal of the last vessel held under Searex fund, capturing net gain on investment of $2.7 million and incentive fee of $1.8 million
- Completion of the acquisition of the last vessel by Akebono Fund
- Recognition of fair value gain on shipping investments during the period due to cashflow from charterhire, capital appreciation of vessels held by the Akebono Fund and a good proportion of medium to long term charter hires in the bulk carrier and container markets
- lnvestment in a 29,200 dwt bulk carrier with delivery in June 2009
- The Group entered into five-year time charters for two newbuilds, 33,400 dwt handy size bulk carriers, with delivery in 2010 and 2011
- Consolidation of Capital Advisers. Capital Advisers' income, operating loss and net loss totalled $23.6 million, ($1.5 million) and ($2.7 million) respectively during the period
- Hotel Vista Kumamoto Airport, wholly owned by Capital Advisers, opened for business in January 2008
- Capital Advisers entered into a lease contract to operate a new 304 room hotel in Osaka
- Completion of staff retrenchment programme by Capital Advisers
- The average occupancy of the Capital Advisers' hotels improved on a quarterly basis from 70% in 1Q08 to 71 % in 2Q08 to 75% in 3QFY08.
Review of Income Statement
Due primarily to net losses from Capital Advisers, higher operating expenses and a slowdown in finance arrangement activities, the Group's profit for the period dropped by 60% from $10.5 million in 3QFY07 to $4.2 million in 3QFY08. Total income increased from $17.7 million in 3QFY07 to $38.2 million in 3QFY08 as a result of the consolidation of Capital Advisers' income from property investment and management and hotel operation and strong investment contribution from the Group's shipping activities. lnvestment returns grew by 28% due to the disposal of a vessel and fair value adjustment on the shipping portfolio. The shipping market remained quite firm in the first nine months of the year.
The Group's income is classified under fee income, hotel operation, investment return, interest income and other income. Fee income rose by 6% from $8.7 million in 3QFY07 to $9.2 million in 3QFY08 due primarily to the consolidation of Capital Advisers' asset management fee income from hotel and residential projects and an increase in incentive fee from the disposal of a vessel under Searex, offset by a drop in arrangement fee (Refer to l(a) NOTES [l]fo r breakdown of fee income). A description of the Group fee income is summarized below:
- Asset management and administration Fee is the fee for the administration and management of fundslinvestments in shipping, properties and distressed assets as well as for Capital Advisers as the asset manager of hotels and residential projects in Japan. The fee of $4.4 million is recurrent until maturity of the fundlproject and increased by over three folds due primarily to the launch of Akebono fund and maiden contribution from our hotel and property business arising from the consolidation of Capital Advisers during the period.
- Brokerage commission refers to commission from brokering ship charters on behalf of shipowners and the income is recurrent for the duration of the charter periodlagreement. Brokerage commission totalled close to $1 million in the first nine months of 2008.
- 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 dropped by 66% to $2.0 million in 3QFY08 due to the close and completion of fewer transactions as compared to 3QFY07.
- 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 exceeded the hurdle rate. Incentive fee increased by 139% to $1.8 million as a result of the disposal of the last vessel under Searex.
Hotel operation refers to all income related to Capital Advisers' hotel business. Capital Advisers currently owns andlor manages 14 limited service hotels in Japan with over 1,750 rooms. The limited service hotels target the business or leisure segment focusing on affordability and convenience. Furthermore, the new hotels recently opened place great emphasis on style and design. The Group recognized maiden contribution from Capital Advisers' hotel operation with income totalling over $18.4 million. Income from hotel operation would include hotel operator fee (fee as operator of the hotel) and hotel income received from hotels owned and leased by the Group. Due to the launch of two new hotels over the past 12 months, Capital Advisers experienced startup losses from its hotel operation. The average occupancy of the hotels has, however, seen an improvement in the third quarter of 2008.
The Group's investment return increased from $7.3 million in 3QFY07 to $9.3 million in 3QFY08 due to fair value adjustment on performance notes from shipping arising from Akebono fund and the disposal of the last vessel under Searex fund (Refer to la NOTES [2] for breakdown of investment return). During the year, Searex I fund disposed of the last remaining vessel and recognized net gain on investment of $2.7 million. Other major investment returns recognized include fair value gain on shipping investments and performance notes of $2.8 million and fair value gain of $1.1 million on residential and office properties in Japan and China. The amount of fair value adjustment to be recognized would be highly dependent on market conditions at the time of reporting.
The rise in overall Group expenses was a major contributor to the drop in Group profit for the period. Employee benefits expenses grew by 184% as a result of the consolidation of Capital Advisers. Capital Advisers' staff cost represented close to 70% of the Group's employee benefits expense. Other operating expenses grew by over seven times due also to the consolidation of Capital Advisers. Capital Advisers' operating expenses represented over 85% of the Group's total operating expenses. Capital Advisers intends to increase the number of hotels under management, increase overall occupancy rates for the hotels and to build the 'Vista' brand. Hotel leases, hotel sub-operator fee and hotel operating expenses represented close to 62% of the Group's other operating expenses.
Finance cost rose as a result of the consolidation of Capital Advisers. Contribution from our associated company dropped from $0.6 million in 3QFY07 to a net loss of $0.05 million in 3QFY08 given Capital Advisers is no longer equity accounted for and the Group recognized share of losses from Capital Advisers' associates. In summary, our net profit for the year decreased by 60% from $10.5 million in 3QFY07 to $4.2 million in 3QFY08.
Refer to l(b) (i) NOTES for commentaries on balance sheet and l(c) NOTES for commentaries on cashflow statement.
Commentary
- Structured Finance Arrangement
The financial crisis caused the credit crunch in the global financial market. Should such credit crunch continue, our ship financing arrangement business may be affected due to the lack of sufficient finance providers. - Maritime Investment I Management
The charter hire of bulk carriers has declined substantially and the value of bulk carriers is also expected to drop in the near term. The charter hire and value of container vessels are under downward pressure from the decline of freight rate due to the drop in cargo traffic. However, the charter hire and the value of product tankers remain stable.
The Company is currently investing in and providing asset management service for 14 vessels. With the exception of two new buildings including a product tanker to be delivered in the year 2010 and a bulk carrier to be delivered in 2012, the Group has secured employment for all 12 vessels. The charter period of these 12 vessels will expire between the fourth quarter of 2009 and 2018. Our current charter contracts have been locked in based on the higher charter hire entered into earlier.
Based on the current market conditions, the fair value of our investment in vessels may be impaired.
One wholly-owned 4,300 TEU containership to be delivered in December 2008 or January 2009 is financed partly by Yen denominated loan. On exercising the exchange swap contract, the Group will realize any gain or loss from the derivative financial instrument directly on the income statement. The rapid appreciation of Japanese Yen against US currency may result in translation losses on Yen borrowings.
The Company has no new acquisition plan for vessels at this moment. - Property Investment I Management in Japan
Despite the sluggish property market in Japan, our current asset management fee income and dividend income from our investment in property funds have not been affected significantly. However, in the event the current market conditions persist, the fair market value of our investment in property funds may be impaired. - Hotel Operation in Japan
Capital Advisers focuses on the business or leisure segment and emphasizes on affordability and convenience. The expected global recession may bode well for budget and limited-service hotel operators, as in the case of Capital Advisers.