HSBC GLOBAL PAYMENTS AND CASH MANAGEMENT

Asia-Pacific Hospitality and Lodging industry Banking Solution Suite

PREPARED FOR: ASP PCM DATE: February 2009

Contents
1. Research Background 2. Hospitality and Lodging Industry The Basics 3. Trends and Opportunities 4. Banking Requirements 5. Solution Suite

1. Research Background

1. Research Background
In view of cash management opportunity based on two recent wins in the sector (JW Marriot Sky City and Starwood Group), this project was commissioned with the objectives to:  Understand better how the Hospitality and Lodging industry operates  Review major trends / issues affecting the industry  Perform opportunity analysis of the top ten hotel operators in the region  Design packaged solution for Hotel Operators in a combined proposition across Cash, Merchant Card Acquiring, and Personal Financial Services (PFS - Co-branded cards and ATM service) Researches comprising significant breath and depth was conducted to collate the necessary information and analysis into this Asia-Pacific Hotel Industry Cash Management Suite:  Primary research, interviews with: Industry consultants Group Treasurer of the Intercontinental Hotels Group (IHG)  Secondary research, information from: Hotel Groups Annual reports and press releases External reviews and analysis from various media (press, internet, etc.) Internal reviews, reports, business analysis and industry experiences

2. Hospitality and Lodging Industry The Basics

2.1 Industry Players

VENDORS / SUPPLIERS

HOTELS TRAVEL AGENTS

CUSTOMERS

Operator Owned Hotels (5%) Operator Managed Hotels (10%) Franchised Hotels (85%)

Business

Energy, Catering, Cleaning, Toiletries ...... etc.

INTERNET MARKETS

Vacation

2.2 The 3 Business Models

Operator Owned Hotels (less than 5%)
Flagship hotels that Hotel Operators (e.g. IHG) own and manage (e.g. Intercontinental Hong Kong) All cash management / back office management are run by operators Highly capital intensive for Operators

Operator Managed Hotels (10-15%)

Owned by 3rd party owners separate from the operator or potentially joint ventures with a local player Typical owner profile can vary from large property developer to individual entrepreneur/owner/group of investors Operators typically provide management including the General Manager, Financial Controller, and other back office processes such as a finance team and other hotel management expertise while the owners provide the capital funding and local operating expertise and knowledge

Franchised Hotels (85-90%)

Owned by 3rd party owners separate from the operator Independently operated via certain rules and guidelines stipulated in franchise agreement Operator provides brand and access to international reservation system, which can generate up to 1/3 of all bookings revenue for the franchised hotel Franchisees own and operate on their own with little interference from operators OWNING, MANAGING & FRANCHISING A Case Study of Intercontinental Hotel Group (IHG) Brand Owned Managed Franchised IHG IHG IHG Marketing & Distribution IHG IHG IHG Staff IHG IHG supply General Managers as a minimum Third Party Ownership IHG Third Party Third Party Capital High Low/none None IHG Income All Revenue Fee% of total revenue plus % of profit Fee% of rooms revenue 7

2.3 Transactional flow structure

Operator Owned Hotel
Centralised Liquidity Funding / Defunding

External Capital Funding Receipts from global 3rd party travel agent

Local Vendors Overseas Vendors Cost of Sales expenses Payroll Energy etc.

Hotel Operator E.g. IHG

Hotel Owner (Managed Hotel)

Management Fees (LCY / USD / EUR) Royalty Fees (LCY / USD / EUR) System Fees

Dividends, share repurchase Taxes CapEx Centralised cost of sales

Hotel Owner (Franchised Hotel)

Management Fees (LCY / USD / EUR) Royalty Fees (LCY / USD / EUR)

Customer receipts (Credit Card, cash, cheques) Local travel agents

Fundamentally, the operating model in a cash management context is sound and runs fairly smoothly, especially at the Hotel Operator level where sophisticated cash management techniques are engaged including cash pooling arrangements with banks, internal house bank for FX management and leading/lagging and other netting techniques are employed globally

3. Trends and Opportunities

3.1 Major Market Trends

WHATS POSITIVE  Across the industry 1 million additional rooms required by 2012.  Hotel operators divesting in owned hotels and focusing on growth through franchises and management fees  New markets travelling e.g. China, Russia, Macau: China to grow into biggest in-bound travel traffic in the next 10 to 15 years while outbound trips will grow tenfold in the next 10 years (from 10 million to 100 million) Gaming revenues in Macau continue to grow rapidly, posting a 52% growth rate during the eight months ended August 2008 WHATS CHALLENGING  Global recession to hit vacation travel demand hard and many pipeline projects on hold as supply is being reared in due to slowdown in demand globally  Tightening credit environment will hamper hotel growth plans as capital markets dry up  From perspective of hotel operators, franchise and management contracts with real estate / property owners may become less favourable as operators will need to compete for equity capital from hotel owners  Trademark protection an issue in countries with less developed legal system (e.g. China, India)  The Chinese government tightening visa restrictions in recent months, which threatens to stifle the rapid growth in Macau.  Increasing use of third party online reservation channels will put pressure on hotel bottom line

 Branded hotels growing at three times the pace of non-branded hotels while bargain hunters go down value chain to look for lower tier hotels  Growth in internet usage is making travel more accessible

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3.2 Industry Statistics

Total Sales in Asia Pacific Revenue Per Available Room in Asia Pacific
1, 600, 000

$2,500,000,000

1, 400, 000 1, 200, 000 1, 000, 000

$2,000,000,000

800, 000 600, 000 400, 000

$1,500,000,000

200, 000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

$1,000,000,000

Aust ralia Hong Kong Indonesia Malaysia Pakist an Singapore Taiwan

2004 2005 2006 2007 2008

China India Japan New Zealand Philippines Sout h Korea Thailand

$500,000,000

$0

Viet nam

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3.3 Top 10 Players in Asia Pacific Hospitality and Lodging

(in US$000) Accor Intercontinental Hotel Group Starwood Hotels & Resorts Global Hyatt Corporation Hilton International(1) Marriot International Wyndham Worldwide Choice Hotels International Carlson Hotels Worldwide Best Western Category Gold Silver Silver Silver Unprioritised Gold Unprioritised Estimated ASP Wallet 1,225 1,000 732 521 460 419 413 307 307 266 Annualized ASP PCM OI (2008) 1,246 54 184 18 0 674 62 0 0 0 % of OI against Wallet 101.69% 5.40% 25.09% 3.45% 0.00% 161.11% 15.09% 0.00% 0.00% 0.00%

(1) Hilton International is marked as former client on CV. 12

3.4 Opportunity Focus Operator Owned Hotels

 From a corporate banking opportunity perspective, it is in our opinion that the majority of our opportunity will come from Operator-owned Hotels, although they account for a relatively low percentage of the total hotels in operation (~5%)

 Managed hotels are typically owned by property developers who have strong existing banking relationship on a group/company level, which would not be the most effective point of entrance  Franchised hotels are typically locally owned, with strong relationships with local bankers which have likely provided the financing to build the hotel initially, and breaking into this relationship would be extremely difficult, given the operators limited ability to influence Franchisees bank of choice  Around 90% of franchised hotels are single-owner owned, and at onset it may seem there could be a quick win opportunity in providing a simple packaged product (such as core cash), the amount of effort and investment in educating this subset would likely significantly reduce the attractiveness of this opportunity, without consideration into the difficulties of breaking into these relationships for above mentioned reasons and franchisee owners have 100% veto towards which banks they choose as their operating bank  Additionally, many managed hotels hold accounts jointly with their Operator, where the Operator, within certain limits, is able to draw out funding for fees owed in the form of franchising and overhead fees, so this could be a good relationship entry point

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4. Banking Requirements

4.1 Banking Requirements

BANKING APPROACH  Global overlay bank with regional bank coverage and local banks to fill in the gaps

 As hotel operators run finances very centrally, payments and receipts are both fairly straightforward Payments:  Tax authorities (LCY)  Dividend payments mostly USD/EUR)  Limited vendor payments (LCY)  Payroll (LCY) PAYMENTS & COLLECTIONS  Other overhead payments (LCY) Collections  Managed and Franchised Hotels:  Franchise fees (mostly USD/EUR)  Systems fee (mostly USD/EUR)  Royalties (mostly USD/EUR)  Daily Revenue feeds (mostly USD/EUR)  3rd party travel agency - most hotel operators work with 1 global partner (mostly LCY)  Travelers (mostly LCY)  Number of transactions (e.g. incoming and outgoing TT) could be quite large in volume (e.g. with the 4000 hotels of IHG, at minimum one transfer per month or more for the different fees assessed)  For the daily revenue feeds from managed/franchised hotels, all transactions are routed through back office accounting system that routes daily revenue feeds to H.O., which needs to reconcile this data on a monthly basis to incoming electronic payments. These processes are typically outsourced to shared service centers
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4.1 Banking Requirements (contd)

 Further study: Operators and Owners Dynamics  Certain levels of bureaucracy and distrust exist between the Hotel Operators and Owners due to the differing agendas and conflicts of interest  Operators have limited access to draw out fees from the Hotel owners operating accounts. However this process is not always completely well defined. In many cases Owners will defund the account to prevent this (this may have been a JV structure employed in China)  At the owners level:  There exist many layers of authorizations required before a payment is processed. For example, an invoice coming through for a payment, managed hotel finance staff and financial controller will approve it but then evaluation and approval is needed again from the operator  Inconsistent payment tools utilised (paper / cheques are very prevalent)  This is extremely important for hotels and the hotel industry as over 90% of customer receipts is in credit card payments. From a hotel operators perspective, a good proposition needs to be provided for their franchisees and managed hotels CARD ACQUIRING  The speed of the POS (point of sales) Service device is not essential for hotels as there are numerous administrative steps occur concurrently while the hotel staff is dealing with payment arrangements  FOREX at reasonable rates is important as hotel guests bear the cost of the exchange  Pre-authorisation of credit cards artificially draw hotel guests credit card limit to ensure payment when the guest checks out. It can take up to a month to uplift the limit earmark due to batch processing of these offline payments
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PAYMENTS & COLLECTIONS

4.1 Banking Requirements (contd)

GLOBAL LIQUIDITY STRUCTURE  Global hotel operators and large regional players control funding very centrally  IHG as an example, has already achieved full visibility of its cash flows, and has the cash pooling and concentration structures in place across Europe, US, and Asia to achieve near same day value for most funds  Global operators are able to do this because they manage very few hotels world wide, and most franchising fees are conducted in USD and other freely tradable currencies and are received as incoming telegraphic transfers as opposed to drawing money out of an entity which brings forth many taxation and other regulatory issues LIQUIDITY MANAGEMENT  Fundamentally, a liquidity management solution with Head Office multi-currency accounts sitting in a friendly domiciled location for pooling / cash con would be fairly effective for most hotel operators, although further analysis of each hotel operator should be conducted at a more bespoken level

DOMESTIC LIQUIDITY REQUIREMENTS  If hotel is new, typically cash hotel is cash strapped as it is funding debt repayments from initially building of the hotel, so first few years of liquidity management will be aimed towards lowering cost of debt, which a simple cash concentration structure can provide  As hotel pays off its debts, and becomes more cash rich, focus changes to repatriation of funds to owner, or to actively manage and ensure operating funds are making a return

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5. Solution Suite

5.1 Integrated Payment Solutions

Payments at a glance
Dividends, share repurchase Tax CapEx Centralised payments Overheads Payroll Vendors Suppliers Payroll Overheads Tax

Operator Owned Hotel

Centralised Liquidity Funding / Defunding

Hotel Operator

Hotel Owner (Managed Hotel)

Hotel Owner (Franchised Hotel)

 Head office are cost centers, while owned hotels are profit centers  Funding and defunding between head office and owned hotels  Both head office and owned hotels require various payments capabilities  Payment volumes and values are higher for owned hotels  Number of users will be higher for owned hotels

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HSBCs Integrated Payment Solutions

fully support every payment need of hotel operators, at both head office and operation levels
Dividends, Share Repurchase Tax CapEx Centralised Payments Overheads Payroll
Payment types Dividends / share repurchase Tax CapEx Beneficiary Shareholders

Funding / Defunding

Hotel Operator

Operator Owned Hotel

Vendors Suppliers Payroll Overheads Tax

Method Cheque ACH HSBC

Method TT ACH

HSBC

Payment types Outsourcing

Beneficiary Vendors

            

        

Tax authorities Owned Properties

ACH TT Inter-account Transfer

Purchasing

Suppliers

Cheque ACH

Payroll Overheads Tax Funding / defunding

Staff

ACH ACH

Centralised payments

Vendor / Suppliers

TT Cheque RTGS

Tax authorities HO

ACH TT Inter-account Transfer

Overheads Payroll Staff

ACH ACH TT

Funding / defunding

Owned Properties

TT Inter-account Transfer

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Payments Summary
Payment advising Hotel Operator
International Wire transfer Book transfer Domestic RTGS ACH Book transfer

Payment advising

Suppliers Vendors Employees Shareholders Overheads Tax Authorities

Operator Owned Hotel

Cheque Outsourcing Services (CO, DD, etc.)

 HSBCnet is HSBCs global internet banking platform, which can be accessed across multiple geographies through internet browser  Real-time information available on the platform  Integration capabilities with systems such as enterprise resource planning (ERP) and treasury management system (TMS)  Payments of different currencies, from different account and of different payment types all in one instruction file

 HSBCnet provide a single log-in to ALL payment types for ALL countries  Flexible payment authorisation matrix can be set up for control purpose  Remote payment authorisation capability to give convenience  HSBCnet also provides access to other value-added services like Cheque Outsourcing Service and Payments Advising

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Cheque Outsourcing Service

Streamlining your cheque payment procedures to free you from intensive manual tasks
Cheques can be labour intensive, time-consuming and expensive. HSBCs Cheque Outsourcing Services (COS) enables you to outsource your local and foreign currency cheque payment production and issuance to HSBC
1. Input & upload data

COS delivers:Cheque items printed with company logo Payments warehousing, allowing payments to be futuredated

2. Authorise & send file

Automated accounts payable reconciliation Comprehensive online enquiry capabilities An online stop-cheque service subject to local regulations

3. Processing

HSBCs back office system

Print & mail to the beneficiary or back to the hotel

Benefits   Reduce administrative effort and costs Increase internal control

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Payment Advising
Delivering comprehensive information to your suppliers, vendors and employees
Hotel operators makes a significant number of payments to suppliers and vendors for their goods and services HSBCs Payment Advising solutions ensure delivery of comprehensive information to your beneficiaries

Short Advice
Payment Amount Charges Details Value Date Remitter Remitting Bank HSBC Transaction Reference Other Reference

Payments Advising offers:Customised advices incorporating enriched remittance information Multiple invoce advising to support delivery to multiple recipients (3-6 advices per transaction) Real-time advice issuance via email (fascimile and mail) Benefits

Long Advice
Additional payment details in free text or tabular format

  

Better credit relationship with suppliers and vendors Goods and services forwarded earlier Reduce time spent on answering payee queries on payment status

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Payments Capabilities Summary

Electronic Payments (via HSBCnet) Countries Cross-Border Telegraphic Transfers                    Domestic Real Time Payments (RTGS)  N/A N/A        N/A       N/A Domestic batched payments (ACH / Giro)  In-house In-house       In-house  In-house       In-house Paper-based Payments Cheques Outsourcing (via HSBCnet)               Paper Cheque Book                    Payment Advising (via HSBCnet)                    25

Australia Bangladesh Brunei China Hong Kong India Indonesia Japan Korea Macau Malaysia Mauritius New Zealand Philippines Singapore Sri Lanka Taiwan Thailand Vietnam

5.2 Integrated Receivables Solutions

Collections at a glance
External Capital Funding Receipts from global 3rd party travel agent Customer receipts (Tourists / Companies) Local travel agents Rental Fees (Shops)

Operator Owned Hotel

Funding / Defunding

Hotel Operator E.g. IHG

Hotel Owner (Managed Hotel)

Management Fees (LCY / USD / EUR) Royalty Fees (LCY / USD / EUR) System Fees

Hotel Owner (Franchised Hotel)

Management Fees (LCY / USD / EUR) Royalty Fees (LCY / USD / EUR)

 Head office has simple collection requirements it receives mainly electronic payments from various parties  Owned hotels, as profit centers, have more complex collection requirements receipts predominantly cash and credit cards

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HSBCs Integrated Receivables Solution

fully support every collections need of hotel operators, at both head office and operation levels
Surplus revenue Management Fees Royalty Fees System Fees Global Travel Agent Receipts

Hotel Operator E.g. IHG

Operator Owned Hotel

Customer Receipts Local Travel Agent Receipts Rental Fees

Collections type Management Fees Royalty Fees System Fees Global Travel Agent Receipts

From Managed / Franchised hotels Managed / Franchised hotels Managed hotels Global Travel Agents

Method TT TT TT TT

HSBC

Collections type Customer Receipts

From Tourist / Companies

Method Credit Card Cash Cheque

HSBC Card Acquiring Cash Pick-up / Deposit Cheque Pick-up / Deposit

   

Local Travel Agents Receipts Rental Fees

Local Travel Agents Shops

RTGS ACH Cheque ACH

 
Cheque Pick-up / Deposit

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At Corporate Head Office Level

Corporate office receives revenue feeds, management fees, royalty fees and system fees from owned / managed / franchised hotels all over the region Also receives funds from global 3rd party travel agencies Transactions by cross-border telegraphic transfers  Incoming TT fully supported by HSBC in the region

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At Local Operation Level

Tourists

Credit card / Cash / Cheque Card acquiring Cash / cheque deposit Business travelers Operator-owned hotel Travel agencies Electronic payments (e.g. ACH) Credit card / Cash (Cash / cheque pick-up)

Cheque

Your collections a/c Electronic payments (e.g. ACH) Shops (within the hotel)

Account Reporting

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Card Acquiring
Leading Asia Pacific merchant acquirer with world-class infrastructure expertise
     HSBC provides Credit and Debit Card Acceptance & Point-of-Sales solutions World-class, web-based card payments processing platform to be deployed across the Asia Pacific region Internet-enabled chargeback management system Online reporting tool for merchants card activity Highly secure with real-time fraud monitoring system
India Country Australia Bangladesh Brunei China Hong Kong Card Acquiring


-

    
-

Point-of-Sales (POS) Solutions

Stand-alone POS terminals POS Network in a LAN environment POS integrated with Electronic Cash Registers Wireless POS Terminals GRPS WiFi

Indonesia Japan Korea Macau Malaysia Mauritius New Zealand Philippines Singapore Sri Lanka Taiwan Thailand Vietnam

 
-

    
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Contactless Tap and Go Fully-integrated POS solutions

Paper-based Collections
Extensive branch and alliance network coverage in the region
Alliance Outlets 800 784 75,700 906 14,201 458 30 290 1991 145 10,601 9,385 812 32 Country Australia Bangladesh Brunei China Hong Kong India Indonesia Japan Korea Macau Malaysia Mauritius New Zealand Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Branches 24 9 10 67 143 47 14 6 11 3 40 12 4 8 11 14 33 1 1

Convenient cash / cheque deposit to the nearest branch / HSBC alliance collection points

19 countries / 458 branches

Extensive alliance network with more than 100,000 collection points

Cash / cheque pick-up arrangements available, subject to client requirements & security considerations

Courier Pick-up
A value-added service for those out of reach
HSBC also offers courier pick-up services for hotels situated in places where there is no HSBC branch / alliance nearby Subject to customer requirement and security considerations
Courier Pick-up Country Cash Australia Bangladesh Brunei China Hong Kong Cheque


Conditional -


Conditional


N/A

   
Referral only Referral only

  
Referral only Referral only

Branch

India Indonesia

Hotel

Cash / cheque picked up by vendors (e.g. security companies) assigned by HSBC

Japan Korea Crediting Macau Malaysia Mauritius New Zealand Philippines


-


-

     

     
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Your collections a/c

Singapore Sri Lanka Taiwan Thailand Vietnam

Collections Capabilities Summary

Countries Australia Bangladesh Brunei China Hong Kong India Indonesia Japan Korea Macau Malaysia Mauritius New Zealand Philippines Singapore Sri Lanka Taiwan Thailand Vietnam HSBC Branch 24 9 10 67 143 47 14 6 11 3 40 12 4 8 11 14 33 1 1 Alliance Network 800 784 75,700 906 14,201 458 30 290 1991 145 10,601 9,385 812 Inward Electronic Collections                    Card Acquiring              Courier Pick-up Cash  Conditional     Referral only Referral only        Cheque  Conditional  N/A    Referral only Referral only        34

5.3 Integrated Delivery Channel

eChannel
YOUR NEEDS OUR SOLUTION - HSBCnet

  

Operations in different locations across various time zones would lead to information gaps Funding and liquidity mismatches might be caused A good Management Information System is needed so that quantum and timing of funding can be determined accurately Tools to operationalise the decisions

A secured banking platform which provides multiple levels of accessibility, visibility and control over the accounts of different stakeholders (e.g. owned / managed / franchised hotels) in different countries     All information on one single platform to achieve global monitoring, regional oversight and local control Access to cash management services for execution of time-critical decisions Flexible configuration (e.g. authorisation level) at global / regional / local level Easy access via Internet

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5.4 Integrated Liquidity Solutions

Liquidity Management
The Challenge
 Due to business nature, hotels have large fluctuation in cash flows (highly dependent on number of visitors in different seasons)
Revenue

HSBCs Liquidity Solutions

Flexible account structures to meet business needs across geographies Automated multi-country platform that supports extensive and consistent cash concentration features for physical consolidation of cash balances Expanding notional pooling platform to optimise interest returns on the net aggregate pool position, on a multi-country, multi-currency level

Time

A full range of investment services for domestic or offshore deposits Consolidated enquiry and reporting to provide visibility at a liquidity management level

Also, the geographic spread and time zone difference of hotels make control and monitoring at head office level difficult

     Idle funds not being optimised 

Visibility and control Idle funds at different locations minimised Excess surplus concentrated for better management Debit interest costs reduced Investment of surplus funds to maximise yield

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Roadmap to Effective Liquidity Management

y Step 1 - In-country visibility & control

All in-country accounts with HSBC All accounts linked and reporting to HSBCnet Visibility of all account positions locally and at regional treasury level

y Step 2 - Optimise in-country account balances and positions

Create in-country pooling or sweeping structures Local Currency & USD currency accounts Automatically sweep balances between accounts Optimise in-country investment options for surplus funds

y Step 3 - Optimise regional account balances and positions

Aggregate & manage surplus country balances at regional treasury level Regional overview and ownership of cash position and liquidity management

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Liquidity Capabilities Summary

In-country notional pooling Countries Australia Bangladesh China Hong Kong India Indonesia Japan Korea Macau Malaysia Mauritius New Zealand Philippines Singapore South Africa Sri Lanka Taiwan Thailand Vietnam Local Currency         Foreign Currency         In-country cash concentration Local Currency                Foreign Currency            Cross-border cash concentration Local Currency       Foreign Currency          40

Summary

HSBCs offering

Payables

Flexible, automated and scalable end-to-end payments solutions across the region, enabling prompt electronic payments, payment advising, and outsourcing of cheque payment issuing.

Collections

With more than 100,000 collection point, extensive courier and card acquiring service in the region, HSBC fully supports every collection needs of hotel clients.

Channels

HSBCnet provides real-time visibility of accounts and transactions, with secure access/control from any computer across the globe.

Liquidity

Effective use of surplus cash via in-country and cross-border liquidity management. Real-time visibility offered by HSBCnet enables optimal investment decisions to be made.

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