Melco China Resorts (Holding) Limited (TSX VENTURE:MCG), which is to be renamed as Mountain China Resort (Holding) Limited subject to final approval by the TSXV, today reported its financial results for the three and six-month periods ended June 30, 2010. The Company reports in Canadian Dollars.
Corporate Developments
The Company obtained its shareholders' approval and endorsement for its change of name from Melco China Resorts (Holding) Limited to Mountain China Resorts (Holding) Limited at the Annual General Meeting held on June 1st 2010. Such change of name was certified by the Registrar of Companies, Province of British Columbia Canada on June 7th, 2010 and is subject to final approval by the TSX Venture Exchange. The change of name recognizes and emphasizes the Company's primary focus on the mountain resort industry in China and its premier and peak position. Following the Annual General Meeting, Mr. Graham Kwan tendered his resignation as CEO and director of the Company. In addition, Mr. Danny Liu tendered his resignation as CFO of the Company. Mr. Zhenhua Mao was appointed as Chief Executive Officer, Mr. Gang Han as Chief Financial Officer, and Mr. Wang Lian as Director of Corporate Finance & Investor Relations. Furthermore, all other proposed resolutions were approved including the reappointment of Deloitte Touche Tohmatsu as the auditors of the Company.
MCR is pleased to announce that Mr. Gang Han and Mr. Jianyue Huang are appointed as Vice Presidents of MCR effective on 19 August 2010 subject to approval of the TSX Venture Exchange. Mr. Han currently holds the position of Director and CFO of MCR. Mr. Huang is the General Manager of Sun Mountain Yabuli Resort and will be responsible for the resort operation of MCR. Mr. Huang has held a number of senior positions in Chinese commercial corporations over the past 10 years. Mr. Huang holds a Postgraduate degree in Economic Statistics from the Renmin University of China.
Financial Results
Total revenue and the net results were from resort operations with no real estate sales activities being undertaken during the Reporting Period. For the three-month period ended June 30, 2010, the Company generated revenues from resort operations of $0.06 million and a net loss of $4.12 million or $0.03 per share. The loss in the second quarter was primarily due to reduced revenue from ski operations as the resorts closed at the end of their respective ski seasons in late March or early April.
For the six month period ended June 30, 2010, the Company generated revenues from resort operations of $2.37 million and a net loss of $8.57 million, or $0.06 per share. Resort operations were severely limited in both 2009 and 2010 due to MCR's financial constraints caused by the global financial crisis. The Company dramatically reduced expenditures on marketing and promotion as part of a cash conservation strategy in order to continue the development of its premiere Sun Mountain Yabuli Resort. Sun Mountain Yabuli Resort's skiing season ended on April 4th, 2010; winter season operations will resume in November 2010. The hotels, ski lifts, and sliding slope of the Resort operate normally during the summer. Operating EBITDA for the 2010 first six months was negative $0.65 million (RMB 4.35 million) compared to negative $3.59 million (RMB 19.9 million) over the same period in 2009.
Cash and cash equivalents totaled $5.77 million and working capital was negative $0.12 million as at June 30, 2010. Capital expenditures were minimal in the quarter.
Operations
Sun Mountain Yabuli
Sun Mountain Yabuli Resort opened for winter operations on November 18, 2009 and closed for operations on April 4, 2010 for a 138 day operating season. Revenue at the Yabuli Resort for the second quarter and the six-month period ended June 30, 2010 was $0.01 million and $1.77 million respectively. EBITDA was negative $0.62 million in the second quarter and negative $0.71 million in the first half of 2010.
Sun Mountain Yabuli - Real Estate
Since May 2010, the Company has been working on the exterior decoration of the 55 homes (a total of 75 homes) of which three were completed with interior finishing. Four homes are currently in the process of refining the interior finishing to be fully completed in September 2010. The Company has been working extensively during Q2 2010 on supporting facilities for the homes which include road pavement, landscaping, as well as water and electricity facilities construction within the community. The sales team is in the process of expanding in order to market the homes extensively across the country.
Sun Mountain Yabuli- Future Developments
In the near future, the Company has been advised that it is expected that Harbin official transport department will open an express train line from Beijing to Mu Dan Jiang (a major city of Harbin) with a stop in Yabuli. It is expected that this expedient new express train differs from the current train lines in that it will reduce a considerable amount of travel time and attract additional visitors from major cities such as Beijing and Tianjin.
Changchun Resort
Changchun Resort opened after winter operations on November 21st, 2009 and closed for operations on March 7th, 2010 for a 108 day operating season. Revenue at the Changchun Resort for the second quarter and the six-month period ended June 30, 2010 was $0.05 million and $0.60 million respectively. EBITDA was negative $0.06 million in the second quarter and $0.06 million in the first half of 2010. The resort primarily services a regional market from the city of Changchun and was originally purchased as a feeder resort to drive traffic to the Company's larger destination resorts of Yabuli and Beidahu.
As previously announced, the Company is in discussions regarding the possible divestment of the Changchun Resort so as to limit its ongoing capital expenditures and reduce debt. Current debt attributed to this resort is $3.72 million (RMB 25million) and is repayable on demand.
No real estate development, construction or sales activities were undertaken at the Changchun Resort for the 2010 period to date.
Financial Highlights
Summary Financial Results
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For the For the
(in thousands of three-month three-month For the six- For the six-
Canadian dollars period ended period ended month period month period
except for per June 30, June 30, ended June ended June
share data) 2010 2009 30, 2010 30, 2009
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Revenue $ 61 $ 72 $ 2,370 $ 1,664
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Operating expenses (735) (1,878) (3,023) (5,252)
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Other income 6 1 15 1
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General and
administrative
expenses (867) (1,567) (1,535) (6,402)
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Depreciation and
amortization (1,974) (2,351) (4,196) (3,788)
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Operating loss (3,509) (5,723) (6,369) (13,777)
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Total non-operating
income and expenses (664) (1,203) (2,235) (4,337)
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Recovery
of/(provision for)
future income taxes 13 30 31 60
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Net loss $ (4,160) $ (8,517) $ (8,573) $ (20,145)
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Net loss per share
(Basic and Diluted) (0.03) (0.10) (0.06) (0.23)
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Weighted average
number of shares
outstanding (Basic
and Diluted) 133,295,698 87,439,344 133,295,698 87,439,344
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(in thousands of Canadian dollars except for ratios) June 30, 2010
Current Ratio(1) 0.99:1
Free Cash 5,765
Working Capital(2) (115)
Total Assets 194,284
Total Debt(3) 115,730
Total Equity(4) 78,554
Total Debt to Total Equity Ratio 1.47:1(1) Current ratio is defined as total current assets divided by total
current liabilities
(2) Working capital is defined as total current assets less total
current liabilities
(3) Total debt is defined as total current liabilities plus total
non-current liabilities
(4) Total equity is equal to the total shareholders' equity
About MCR
MCR is the premier developer of four season destination ski resorts in China. MCR is transforming existing China ski properties into world-class, four seasons luxury mountain resorts with excellent real estate investment opportunities for discerning buyers. In February 2009, the Company's Sun Mountain Yabuli Resort was awarded Best Resort Makeover in Asia by TIME Magazine. Yabuli is also the permanent home of the China Entrepreneur's Forum the leading and most influential community of China's most distinguished and successful entrepreneurs and business leaders with over 5,000 members from across a variety of key industries.
Melco China Resorts (Holding) Limited
(To be renamed as Mountain China Resorts (Holding) Limited subject to final
approval by TSX Venture Exchange)
Management's Discussion and Analysis
Second Quarter, Fiscal 2010
Ended June 30th, 2010
Prepared by Management
August 27th, 2010
The following Management's Discussion and Analysis ("MD&A") of the financial condition of Melco China Resorts (Holding) Limited (to be renamed as Mountain China Resorts (Holding) Limited subject to final approval by TSXV), (the "Company" or "MCR") should be read in conjunction with our unaudited interim financial statements for the three-month and six-month periods ended June 30th, 2010 and accompanying notes included therein, and also the MD&A and Annual Audited Consolidated Financial Statements for the year ended December 31st, 2009 and accompanying notes included therein. The statements made in this MD&A may contain forward-looking information about our future operations, financial results and objectives that involves risks and uncertainties. All statements, other than statements of historical facts, which address MCR's expectations, should be considered forward-looking statements. Such statements are based on management's exercise of business judgment as well as assumptions made by and information currently available to management. When used in this document, the words "may", "will", "anticipate", "believe", "estimate", "expect", "intend" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated, expressed or implied by such forward-looking statements. Implicit in this information are assumptions regarding future operations, plans, expectations, anticipations, estimates and intentions, such as the plans to develop the ski resorts in China and the ability of the Company to obtain additional financing. These assumptions, although considered reasonable by MCR at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of MCR are subject to a number of risks and uncertainties that could cause actual results to differ materially from the forward looking information, including general economic, market and business conditions, uncertainty relating to land use rights, adverse industry events for the ski and real estate industries, MCR's ability to make and integrate acquisitions, the requirements of recent Chinese regulations relating to cross-border mergers and acquisitions, changes to government policies, the inability to obtain required approvals or approvals may be subject to conditions that are unacceptable to the parties, changing industry and government regulation, as well as MCR's ability to implement its business strategies, dispose of assets or raise sufficient capital or secure sufficient liquidity, seasonality, weather conditions, competition, currency fluctuations and other risks. For a further description of material factors that could cause our actual results to differ materially from the forward looking statements in this MD&A, please see the "Risk Factors" section.
Forward-looking information and future-oriented financial information contained in this MD&A is based on current estimates, expectations and projections, which MCR believes are reasonable as of the date of this MD&A. MCR uses forward-looking information because it believes such statements provide useful information with respect to the operation and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. Readers should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While MCR may elect to, it does not undertake to update forward looking information at any particular time except as required by securities regulations.
All amounts are in Canadian dollars unless otherwise noted (tabular amounts are in thousands of Canadian dollars) and prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). We use non-GAAP measures to assess our financial performance, such as operating EBITDA(1). Such measures do not have a standardized meaning prescribed by GAAP and they may not be comparable to similarly titled measures presented by other companies. We have provided reconciliations between any non-GAAP measures mentioned in this MD&A and the closest GAAP measure, if applicable. These non-GAAP measures are referred to in this document because we believe they are indicative measures of a company's performance and are generally used by investors to evaluate companies in the resort operations and resort development industries.
Reference should also be made to the Company's filings with Canadian securities regulatory authorities, which are available at www.sedar.com. The date of this MD&A is August 27th, 2010.
1. Operating EBITDA is defined as operating revenues less operating
expenses from continuing operations and therefore reflects earnings
before interest, income tax, depreciation and amortization, non-
controlling interest and any non-operating and non-recurring items.
MCR was incorporated under the Business Corporations Act (British Columbia) on February 6th, 2008. The Company had no significant assets and did not have any results of operation and cash flow during the period from February 6th, 2008 (date of incorporation) to May 27th, 2008. On May 27th, 2008, the Company entered into a sale and purchase agreement with the shareholders of Melco China Resort Investment Limited (renamed as Mountain China Resorts Investment Limited on July 21st, 2010) ("MCR Cayman") and agreed to purchase 100% of the equity interests of MCR Cayman. The acquisition was completed on the same day and upon completion it entitled the Company to own 100% of the assets and operations of MCR Cayman. On May 28th, 2008, the Company completed the reverse takeover by way of amalgamation with Virtual China Travel Services Co., Ltd. to form a listed issuer on the TSX Venture Exchange under the symbol "MCG".
The Company obtained its shareholders' approval and endorsement for its change of name from Melco China Resorts (Holding) Limited to Mountain China Resorts (Holding) Limited at the Annual General Meeting held on June 1st 2010. Such change of name was certified by the Registrar of Companies, Province of British Columbia Canada on June 7th, 2010 and is subject to final approval by TSXV. The change of name recognizes and emphasizes the Company's primary focus on the mountain resort industry in China and its premier and peak position. Following the Annual General Meeting, Mr. Graham Kwan tendered his resignation as CEO and director of the Company. In addition, Mr. Danny Liu tendered his resignation as CFO of the Company. Mr. Zhenhua Mao was appointed as Chief Executive Officer, Mr. Gang Han as Chief Financial Officer, and Mr. Wang Lian as Director of Corporate Finance & Investor Relations. Furthermore, all other proposed resolutions were approved including the reappointment of Deloitte Touche Tohmatsu as the auditors of the Company.
As at June 30th, 2010, the Company owned 100% of the issued share capital of MCR Cayman, which in turn owned 100% of the following subsidiaries: (i) Melco China Resort Limited (renamed as Mountain China Resorts Limited on July 9th, 2010) ("MCR HK"); (ii) Heilongjiang Yabuli On Snow Asian Game Village Hotel Co., Ltd. ("Yabuli Resort"); (iii) Heilongjiang Yabuluoni Zhiye Co., Ltd. ("Zhiye"); (iv) Changchun Lianhua Mountain Skiing Field Co., Ltd. ("Changchun Resort"); (v) Jilin Melco Sky Mountain Beidahu Ski Resort Co., Ltd. ("Beidahu Resort"), (vi) Jilin Melco Sky Mountain Beidahu Real Estate Co., Ltd., ("Beidahu Real Estate") and (vii) Melco China Resort Travel Consultancy (Beijing) Co., Ltd. ("MCR Beijing"), among which Beidahu Resort, Beidahu Real Estate and MCR Beijing are dormant as of the balance sheet and report dates.
MCR, through its operating subsidiaries, that include the Yabuli Resort and Changchun Resort, (collectively referred to as the "Group") are in the process of developing existing ski areas in China into world class resort destinations with new lifts, snowmaking and trails, hotels, conference and skier services, dining, shopping, spa and entertainment. MCR expects that the development of its properties into resort centered lifestyle experiences will allow it to attract a disproportionate share of the Chinese ski market. As the skill level and expectations of skiers develop in China, they are expected to increasingly seek more advanced ski experiences and engaging destination resort locations.
The Company currently owns and operates the largest existing destination ski resort in the People's Republic of China ("PRC" or "China"), Sun Mountain Yabuli in Heilongjiang Province ("Sun Mountain Yabuli Resort") which successfully hosted the 2009 World Winter University Games. This property enjoys favorable mountain terrain directly connected to flat land at their base for real estate development, excellent water supply, freeway and international airport access, proximity to both major regional drive markets and major destination fly markets, and government support for tourism and winter sports development. The Sun Mountain Yabuli Resort also facilitates with two luxury, 5 star hotels, restaurants, spa, retail, and conference facilities together with on mountain facilities with new trails, lifts and snowmaking.
The successful combination of resort operations and real estate development in MCR's resort centered business model is based on the traditional European alpine pedestrian village which has also been utilized by other resort developers outside of China in both North America and Europe. The resort centered model creates superior value by:
-- increasing the market positioning, distinct image and reputation of the
resorts;
-- attracting a disproportionate share of the market and extending the
customer's length of stay which in turn results in higher overall
revenue per visit;
-- providing recurring earning streams in both hotel and condo-hotel
operations, as well as commercial operations (retail, food and beverage,
spa, attractions and entertainment);
-- attracting the interest of resort home buyers purchasing "trophy"
properties that in turn may enhance the status and reputation of the
resorts.
New RMB 150 million Loan with Harbin Bank
On February 12th, 2010, the Company's indirectly wholly owned subsidiary, Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. Ltd., successful repaid a RMB 120 million ($18.15 million) loan to the Harbin Bank due on February 15th, 2010 and arranged a new loan facility of RMB 150 million ($22.69 million) with the same bank for a two-year term with a maturity date of February 9th, 2012, and with a fixed annual interest rate of 5.94%. This new loan was facilitated by a short term bridge loan of RMB 74 million ($11.19 million) provided by Wisecord Holdings Limited ("WHL") on February 11th, 2010. The bridge loan had a term of 60 days with a loan fee of 4.6% for each 30 day period on the principal amount drawn down and was fully repaid by April 6th, 2010.
Club Med Resorts Appointed as Manager at the Sun Mountain Yabuli Resort
On February 17th, 2010, the Company announced that it has entered into definitive management agreements (the "Agreements") with Club Med Asie S.A. ("Club Med") to operate and manage two hotels at the Sun Mountain Yabuli Resort ("Club Med Yabuli Resort"). Club Med will provide marketing and sales services for the Club Med Yabuli Resort. The Agreements have renewable initial terms of ten years with performance management fees tied to gross operating profit. As well, Club Med will provide funding of up to US$3 million ($3.10 million) for additions to the Club Med Yabuli Resort so as to include facilities and refinements to meet Club Med's brand and operating standards. These improvements will be undertaken prior to the resort re-opening for winter operations in November 2010.
Strategic Relationship with the China Entrepreneurs' Forum
On March 1st, 2010, the Company announced that it has entered into a strategic relationship agreement with the China Entrepreneurs' Forum ("CEF") under which the CEF has agreed to hold all of its future Annual Forums at the Sun Mountain Yabuli Resort. In addition, CEF and MCR both agree to establish a "CEF Founders Club" that actively promotes the resort vacation homes situated in the Sun Mountain Yabuli Resort for purchase by CEF members, as well as work with its 5,000 member companies to select Sun Mountain Yabuli Resort as the site for their corporate meetings and retreats.
Final Payment to Zhiye Completed
The Company completed all of its payment obligations for the acquisition of Heilongjiang Yabuluoni Zhiye Co. Ltd. on April 12th, 2010 with a final payment of RMB 35 million ($5.29 million). Zhiye was acquired in August of 2008 for a total consideration of RMB 55 million ($8.32 million) wherein the acquisition included 144.6 hectares of development land at its Sun Mountain Yabuli Resort. An initial payment of RMB 20 million ($3.03 million) was made in March 2009. The second and final installment of RMB 35 million ($5.29 million) was required to be deferred as the Company managed its cash resources over the last twelve months to combat the worldwide economic downturn. With the completion of the Private Placement (as defined in the below section), this amount has now been fully paid and satisfied.
Fiscal 2010 Financing and Going Concern Update
The Company has completed a number of financings in order to meet its working capital requirements.
Completion of $15 million Private Placement with Wisecord Holdings Limited
On April 9th, 2010, the Company successfully completed its private placement with WHL in which WHL subscribed for 100,000,000 common shares at a subscription price of $0.15 per common share for a total subscription price of $15 million (equivalent to RMB 102.93 million at the then CAN/ RMB exchange rate) (the "Private Placement"). WHL subscribed for approximately 49.4% of the equity interest of the Company (on a fully diluted basis and after the conversion of MCR's outstanding Class B non-voting shares and the conversion of two- thirds of the existing US$1.5 million ($1.55 million) loan from Melco Leisure and Entertainment Group Limited ("MLE"), a beneficial shareholder of the Company). Details of the conversion of Class B non-voting shares and loan from MLE are given in the following paragraphs.
Upon closing of the Private Placement, the Company established (in consultation with WHL) that: the board of the Company be set at nine (9) MCR board members in total, comprising of six (6) non-independent directors and three (3) independent directors; the resignation of two of the four existing executive directors of the Company who have been replaced with 2 new directors nominated by WHL; and the appointment of an additional two (2) directors of the Company nominated by WHL. As at June 30th 2010, the composition of the board is five (5) non-independent directors and three (3) independent directors.
Revised Terms of Shareholder Loans and Call Option with MLE
In connection with the completion of the Private Placement, MLE, WHL and MCR entered into a supplemental loan agreement (the "Shareholder Loans Agreement") under which MLE has extended the maturity of its existing US$23 million ($23.74 million) aggregate principal amount in loans to the Company (the "Shareholder Loans") to June 30th, 2013 such that the Shareholder Loans are no longer due on demand and accrue interest at the rate of 3% per annum. Pursuant to the Shareholder Loans Agreement, at any time before June 30th, 2013, if the Company's 30 consecutive day weighted average trading price exceeds $1.00 per common share, WHL has the right, subject to any applicable regulatory approvals, to require MLE to convert all or part of the Shareholder Loans into common shares (the "Converted Shares") at a 50% discount plus accrued interest at a price (the "Conversion Price") equal to (a) 70% of the said weighted average trading price or (b) $1.00, whichever is greater. Further, WHL will have a call option to buy one-third of the Converted Shares from MLE at the Conversion Price within 30 days of the conversion (the "Call Option").
In addition, MLE, WHL and MCR executed a binding agreement in relation to the settlement of US$1.5 million ($1.55 million) loan provided by MLE to the Company (the "Loan Settlement Agreement"). Pursuant to the Loan Settlement Agreement, US$1 million ($1.03 million) principal amount of the loan was settled by way of conversion of the said US$1 million ($1.03 million) principal amount at a price of $0.15 per common share into 6,686,666 common shares, issued in the name of Melco (Luxembourg) S.A.R.L. ("ML Luxco"). The remaining US$0.5 million ($0.52 million) principal amount of the loan has been repaid to MLE in cash upon the completion of the Private Placement.
Conversion of Class B Non-Voting Shares
ML Luxco also converted its 8,437,565 Class-B non-voting shares in the capital of the Company into common shares in accordance with the terms of the Loan Settlement Agreement.
Going Concern Update
Through the completion of the Company's Private Placement refinancing and revised terms of the Shareholder Loans with MLE, the Company has significantly reduced and satisfied its immediate and current financial obligations. The Company's ability to operate as a going concern is dependent upon its ability to generate funds from resort operations and resort real estate activities and/or on borrowing from third parties.
Summary of Overall Performance
THREE-MONTH PERIOD ENDED JUNE 30TH, 2010 (THE "2010 PERIOD") COMPARED WITH THREE- MONTH PERIOD ENDED JUNE 30TH, 2009 (THE "2009 PERIOD")
2010 2nd Quarter 2009 2nd Quarter
$'000 RMB'000 $'000 RMB'000
Continuing Operations
Resort Operations Revenue 61 407 72 405
Resort Operations Expenses (735) (4,900) (1,878) (10,574)
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Resort Operations EBITDA (674) (4,493) (1,806) (10,169)
Add: Other Income 6 40 1 6
Less: Corporate General and
Administrative Expenses (867) (5,813) (1,567) (8,823)
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Total Operating EBITDA from
Continuing Operations (1,535) (10,266) (3,372) (18,986)
Add: Interest Income 8 53 155 873
Add/(Less): Exchange Gain/(Loss),
net 285 1,900 210 1,182
Less: Depreciation and
Amortization (1,974) (13,158) (2,351) (13,237)
Less: Finance Costs (957) (6,379) (1,568) (8,829)
Add: Recovery of Future Income
Taxes 13 120 30 169
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Loss from Continuing Operations (4,160) (27,730) (6,896) (38,828)
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Resort operations expenses from continuing operations totaled $0.74 million (RMB 4.9 million) for the 2010 2nd Quarter compared to $1.88 million (RMB 10.57 million) in the 2009 2nd Quarter.
Corporate general and administrative expenses ("G&A expenses") totaled $0.87 million (RMB 5.81 million) for the 2010 2nd Quarter compared to $1.57 million (RMB 8.82 million) in the 2009 2nd Quarter. This amount mainly comprised executive employee costs, public company costs, audit and legal fees, corporate information technology costs, Beijing head office occupancy costs. The Company reduced corporate staff, compensation and other related costs throughout the 2009 year and the 2010 Period at the Beijing and Hong Kong offices.
Operating EBITDA from continuing operations for the 2010 2nd Quarter after corporate G&A expenses was negative $1.54 million (RMB 10.27 million) compared to negative $3.37 million (RMB 18.99 million) during the 2009 2nd Quarter.
Minimal capital expenditures of $3,000 were incurred during the 2010 2nd quarter per cash flow. The capital expenditures for resort and hotel operations assets of the Group were included in Properties under Development (PUD).
Depreciation and Amortization
Depreciation and amortization expense totaled $1.97 million (RMB 13.16 million) for the 2010 2nd Quarter compared to $2.35 million (RMB 13.24 million) in the 2009 2nd Quarter. The depreciation and amortization charges are provided using the straight-line method over the estimated useful lives of each asset category and the term of land use rights under the Group's accounting policies.
Finance Costs
The Group incurred interest expenses of $0.96 million (RMB 6.38 million) during the 2010 2nd Quarter compared to $1.57 million (RMB 8.83 million) during the respective period in 2009. The proceeds of the RMB 250 million bank loan were primarily utilized on redevelopment works at the Sun Mountain Yabuli Resort. On February 12th, 2010, the Company's indirectly wholly owned subsidiary, Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. ltd., successfully repaid a RMB 120 million (18.15 million) loan to the Harbin Bank due on February 15th, 2010. Heilongjiang Yabuli then arranged a new loan facility of RMB 150 million ($22.69 million) with the same bank for a two year term with a maturity date of February 9th, 2012, and with a fixed annual interest rate of 5.94%. A short term bridge loan of RMB 74 million ($11.19 million) provided by WHL on February 11th, 2010, facilitated this new loan. The bridge loan had a term of 60 days with a loan fee of 4.6% for each 30 day period on the principal amount drawn down and was fully repaid by April 6th, 2010.
Second Quarter Fiscal 2010 Review of Resort Operations
The key drivers of resort operations are skier visits, revenue per visit and margins. Skier visits are impacted by many factors including the quality of the on-mountain and resort center facilities, weather conditions, snow quality, the accessibility of the resort and the cost to the visitor. MCR's strategy to increase skier visits is primarily focused on upgrading the on-mountain facilities and building animated resort centers that provide accommodation and add amenities to attract a broader range of guests. The resort centers also help to extend the length of stay and spread visits more evenly during the week and during the season. Apart from a drop in skier visits in 2006 due to a warm winter, the trend of skier visits has been positive due to the growing popularity of skiing in China. Revenue per visit is primarily driven by entrance fees and the attraction of facilities provided, such as quality ski clothing rentals, ski lessons provided by professional instructors, hotel accommodation and the quality of food and beverage offerings. In 2008 we completed our initial upgrades to rental ski clothing and equipment, and the quality and selection of food and beverage offerings. By upgrading the resort facilities and service, management expects to be able to increase prices and enhance margins.
The current revenue stream from resort and hotel operations is seasonal and mostly generated in the first quarter during the ski season (i.e., the January to March period). Revenue totaled $0.06 million (RMB 0.41 million) for 2010 2nd quarter compared to $0.15 million (RMB 0.84 million) during 2009 2nd quarter.
The following table summarizes the results of Resort Operations from continuing operations (before corporate G&A expenses) for the 2010 and 2009 2nd quarter:
2010 2nd quarter 2009 2nd quarter
$'000 RMB'000 $'000 RMB'000
Resort Operations Revenue
Yabuli Resort 13 84 11 59
Changchun Resort 48 323 61 346
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Total Resort Operations Revenue 61 407 72 405
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Resort Operations EBITDA
Yabuli Resort (616) (4,105) (1,653) (9,306)
Changchun Resort (58) (388) (153) (863)
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Total Resort Operations EBITDA (674) (4,493) (1,806) (10,169)
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MCR's Sun Mountain Yabuli Resort opened for winter operations on November 18th, 2009 and closed for operations on April 4th, 2010 for a 138 day operating season. The winter season operations will resume in November 2010. The hotels, ski lifts, and sliding slope operated normally during the summer. The principal revenue stream during the 2010 2nd quarter was generated from hotel accommodations, food and beverage offerings, ski lifts and sliding slope. Revenue in the Yabuli Resort for the 2010 2nd quarter was $0.013 million (RMB 0.08 million) with EBITDA of negative $0.62 million (RMB 4.10 million).
The resort attracted both regional and destination visitors from city ski clubs as well as independent travelers. Consistent with the response from conference and event attendees, visitors consistently ranked the Sun Mountain Yabuli Resort the superior ski experience in China. This exceeded both expatriate and domestic market expectations.
With the completion of the Private Placement during the second quarter of 2010, the Company can now focus on implementing enhanced marketing and sales programs to drive revenue while maintaining discipline over its operating cost base. In the near future, the Company has been advised that it is expected that Harbin official transport department will open an express train line from Beijing to Mu Dan Jiang (a major city of Harbin) with a stop in Yabuli. It is expected that this expedient new express train differs from the current train lines in that it will reduce a considerable amount of travel time and attract additional visitors from major cities such as Beijing and Tianjin.
Second Quarter Fiscal 2010 Changchun Resort Operations
MCR's Changchun Resort ("Changchun Resort") opened for winter operations on November 21st, 2009 and closed for operations on March 7th, 2010 for a 108 day operating season. Revenue at the Changchun Resort for the 2010 2nd quarter was $0.05 million (RMB 0.32 million) with operations EBITDA of negative $0.06 million (RMB 0.39 million).
The resort primarily serves a regional market from the city of Changchun and was originally purchased as a feeder resort to drive traffic to the Company's larger destination resort of Yabuli Resort. The resort hosted a number of events, themed ski days and corporate functions throughout the winter that aimed to draw traffic from the local market. As previously announced in 2009 and 2010, the Company is involved in ongoing discussions regarding the possible divestment of the Changchun Resort so as to limit its ongoing capital expenditures and reduce debt. Current debt attributed to this resort is $3.72 million (RMB 25 million) and is repayable on demand.
Second Quarter Fiscal 2010 Review of Resort Real Estate Development
MCR's resort real estate development activities are focused on the development of four and five-star hotel rooms and suites together with luxury resort vacation homes. The hotel units are usually built over ground-floor commercial space that MCR either retains for its own operations or leases out to third-party tenants. In order to broaden market appeal, the resort vacation home units are sold with Club Member Services(2) allowing owners to be rewarded and recognized within the properties as VIP customers and receive premium services when they stay at their properties including provisioning, house-keeping and executive chef services.
MCR's business strategy for resort real estate has two major elements: (i) to maximize profits from the sale of real estate units; and (ii) to maximize accommodation inventory for destination visitors to stay at the resort. The Company has significant flexibility over its profitability from real estate activities in its resorts that include:
-- The development for sale of resort vacation homes that can be
constructed within a 9 - 12 month development cycle and where sales
pricing can be increased based on development density, proximity to
resort amenities (ski-in / ski-out locations, golf course fairway
frontage, etc.), size and configuration of unit;
-- The two hotels which completed in 2009 were transferred from
Construction in Progress to operating fixed assets within Buildings.
-- The development for sale condohotel units has not been commenced. Such
development can be constructed within an 18 - 24 month development cycle
and where sales pricing can be increased based on amenities offered
within each development (e.g. spa) and proximity to resort amenities,
size and configuration of unit, and rental returns since these units are
included within the rental pool of units under MCR's management; and
-- The joint venture development for sale of land parcels with other
developers that allow the company to pass on construction, sales and
capital risk to others and where profitability can be regulated by the
number and size of units developed in such an arrangement.
For the Sun Mountain Yabuli Resort, MCR controls Granted LURs of approximately 220.3 hectares which includes 127.5 hectares at the base of the mountain available for real estate development and approximately 92.8 hectares on the mountain.
2. Club Member Services revenue is driven by the completion of the resort
development improvements and resort vacation homes. As resort vacation
homes are yet to be completed in the resorts no Club Member Services
operations are being undertaken at this time.
Since May 2010, the Company has been working on the exterior decoration of the 55 homes (a total of 75 homes) of which three were completed with interior finishing. Four homes are currently in the process of refining the interior finishing to be fully completed in September 2010. The Company has been working extensively during the 2010 2nd quarter on supporting facilities for the homes which include road pavement, landscaping, as well as water and electricity facilities construction within the community. The sales team is in the process of expanding in order to market the homes extensively across the country.
Second Quarter Fiscal 2010 Overview of Changchun Resort Real Estate Development
No real estate development, construction or sales activities were undertaken at the Changchun Resort for the 2010 Period.
Second Quarter Fiscal 2010 Review of Corporate Operations
Fluctuations in Foreign Exchange
MCR earns all of its revenue in Chinese RMB. Accordingly, reported revenue will fluctuate with changes in the exchange rate to Canadian dollars. The average exchange rate for the second quarter of 2010 and closing exchange rate as at June 30th, 2010 was $0.15002 and $0.15126 to 1 RMB, respectively.
Income Tax
Under the Law of the People's Republic of China on Enterprise Income Tax (the "EIT Law") and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is 25% from January 1st, 2008 onwards. During the period from January 1st, 2010 to June 30th, 2010, there is no material income tax effect.
Legal Proceedings
MCR currently, and from time to time, is involved in litigation in the ordinary course of its business. The Company does not believe that it is involved in any litigation that will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations or cash flows.
MCR's resorts can be subject to lawsuits with respect to personal injury claims related principally to skiing activities at each resort. The Company maintains liability insurance that it considers adequate to insure claims related to usual and customary risks associated with the operation of a ski resort.
There are no financially material environmental protection requirements in connection with MCR's resort operations.
SIX-MONTH PERIOD ENDED JUNE 30 TH, 2010 (THE "2010 1ST HALF") COMPARED WITH SIX- MONTH PERIOD ENDED JUNE 30 TH, 2009 (THE "2009 1ST HALF")
2010 1st Half 2009 1st Half
$'000 RMB'000 $'000 RMB'000
Continuing Operations
Resort Operations Revenue 2,370 15,663 1,664 9,230
Resort Operations Expenses (3,023) (20,016) (5,252) (29,133)
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Resort Operations EBITDA (653) (4,353) (3,588) (19,903)
Add: Other Income 15 99 1 6
Less: Corporate General and
Administrative Expenses (1,535) (10,245) (6,402) (35,513)
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Total Operating EBITDA from
Continuing Operations (2,178) (14,499) (9,989) (55,410)
Add: Interest Income 14 92 322 1,786
Add/(Less): Exchange Gain/(Loss),
net 402 2,627 137 760
Less: Depreciation and
Amortization (4,196) (27,843) (3,788) (21,013)
Less: Finance Costs (2,651) (17,578) (4,796) (26,604)
Add: Recovery of Future Income
Taxes 31 238 60 333
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Loss from Continuing Operations (8,573) (56,963) (18,054) (100,148)
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Resort operations expenses totaled $3.02 million (RMB 20.02 million) for the 2010 1st Half compared to $5.25 million (RMB 29.13 million) in the 2009 1st Half. Resort operations were severely limited in both 2009 and 2010 Periods due to MCR's financial constraints caused by the global financial crisis. The Company dramatically reduced expenditures. Before the completion of the Private Placement, the Company maintained discipline over its operating cost base.
Corporate G&A expenses totaled $1.54 million (RMB 10.25 million) for the 2010 1st Half compared to $6.40 million (RMB 35.51 million) over the same period in 2009. This amount was mainly comprised of executive employee costs, public company costs, audit and legal fees, corporate information technology costs, Beijing head office occupancy costs. The Company reduced corporate staff, compensation and occupancy costs throughout the 2009 year and the 2010 Period due to the reduction of MCR's resort portfolio following the divestment of Beijing Lianhua Mountain Skiing Field Co. Ltd. ("Beijing Resort") and Jilin Lianhua Mountain Skiing Field Co. Ltd. ("Jilin Resort") on December 12th 2008, the discontinued operations of the Beidahu Resort in mid-August 2009 and the ongoing discussions to divest the Changchun Resort and the decision to forego major capital projects continued in 2009 and 2010. G&A expenses for the 2009 Period also included a one-time charge of $2.72 million (RMB 14.85 million) for transaction fees pertaining to the new RMB 250 million bank loan.
The Company dramatically reduced expenditures on marketing and promotion as part of a cash conservation strategy in order to continue the development of its premiere Sun Mountain Yabuli Resort. The decrease was primarily due to the decrease of corporate staff, compensation and occupancy costs due to the reduction of MCR's resort portfolio following the divestment of the Jilin Resort and Beijing Resort in the last quarter of 2008, the ongoing discussions to divest the Changchun Resort and the decision to forego major capital projects continued in 2009.
The minimal capital expenditure totaled $11,000 for the 2010 1st Half, which were also constrained under the same circumstances as other expenses. Capital expenditures totaled $18.10 million for the 2009 1st Half, which included progress payments for the initial and major improvements at the Yabuli Resort.
Depreciation and Amortization
Depreciation and amortization expense totalled $4.20 million (RMB 27.84 million) for the 2010 1st Half compared to $3.79 million (RMB 21.01 million) in the 2009 1st Half. The depreciation and amortization charges are provided using the straight-line method over the estimated useful lives of each asset category and the term of land use rights under the Group's accounting policies.
Finance Costs
The Group incurred interest expenses of $2.65 million (RMB 17.58 million) during the 2010 1st Half, compared to $4.8 million (RMB 26.6 million) during the respective period in 2009. The decrease was due to additional bank loan secured by the Group and shareholder loans in 2009 and a $2.24 million (RMB12.25 million) one-time charge related to finance arrangement fee and transaction costs pertaining to the new RMB 250 million bank loan. The proceeds were primarily employed in the redevelopment works at Yabuli Resort. There was a short term bridge loan of RMB 74 million ($11.01 million) provided by WHL on February 11th, 2010. The bridge loan had a term of 60 days with a loan fee of 4.6% for each 30 day period on the principal amount drawn down and was fully repaid by April 6th 2010.
Given the early stage nature of the Company's redevelopment of its resorts, the current revenue stream from resort and hotel operations is seasonal and mostly generated in the first quarter during the ski season (i.e., the January to March period). Revenue from operations totaled $2.37 million (RMB 15.66 million) for the 2010 1st Half. Operating expenses within the resorts were mainly attributable to snow making, grooming, staffing, fuel and utilities, which also include the G&A expenses relating to these resorts' senior management, marketing and sales, information technology, insurance and accounting.
First Half Fiscal 2010 Review of Resort Operations
Revenue was constrained as the Company was required to maintain cash reserves and limit all expenditures prior to the completion of the Private Placement. As such the Company did not implement any major marketing campaigns and limited all advertising expenses with the exception of corporate sales and functions and season pass sales to major ski clubs in Harbin, Changchun and Beijing.
On February 17th, 2010, the Company entered into definitive management agreements with Club Med to operate and manage two hotels at the Sun Mountain Yabuli Resort ("Club Med Yabuli Resort"). Club Med will also provide all marketing and sales services for the Club Med Yabuli Resort at their cost under a commission arrangement. The Agreements have renewable initial terms of ten years with performance management fees tied to gross operating profit. As well, Club Med will provide funding of up to US$3 million ($3.10 million) for additions to the Club Med Yabuli Resort so as to include facilities and refinements to meet Club Med's brand and operating standards.
During 2010 2nd quarter, Club Med started construction refinements from June 2010 and plans to finish construction on September 15th 2010 to be ready for the November 2010 winter opening.
The Club Med Yabuli Resort marks China's first Club Med collaboration. Located in Heilongjiang Province, this winter ski resort sits atop a breathtaking mountain. This new Club Med resort will provide clients with "an all- inclusive" luxury resort experience. Open all year, the resort boasts 284 luxurious guest rooms including 27 with full room service in Mountain View Suites, 22 deluxe rooms, and 235 superior rooms. The resort also provides daytime supervised facilities such as the Petit Club and the Mini Club which offer a place for young adults and children to relax.
On March 1st, 2010, the Company entered into a strategic relationship agreement with the China Entrepreneurs' Forum ("CEF") under which the CEF has agreed to hold all of its future Annual Forums at the Sun Mountain Yabuli Resort. CEF and MCR have established a "CEF Founders Club". This prestigious club actively promotes the resort vacation homes situated in the Sun Mountain Yabuli Resort for purchase by CEF members. Furthermore, the Club works with its 5,000 member companies to select Sun Mountain Yabuli Resort to host their corporate meetings and retreats.
When the standard of these improved amenities and in resort lodging are combined with marketing activities that increase and position attendance and drive demand throughout the overall ski season, we anticipate advanced bookings, revenue per guest and length of stay to increase throughout the winter months. The Company shall also implement additional summer attractions as well as marketing to corporate and incentive group segments to increase attendance throughout the summer months.
The following table summarizes the results of Resort Operations (and before corporate G&A expenses) for the 2010 1st Half:
2010 1st Half 2009 1st Half
$'000 RMB'000 $'000 RMB'000
Resort Operations Revenue
Yabuli Resort 1,770 11,697 926 5,137
Changchun Resort 600 3,966 738 4,093
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Total Resort Operations Revenue 2,370 15,663 1,664 9,230
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Resort Operations EBITDA
Yabuli Resort (713) (4,755) (3,613) (20,042)
Changchun Resort 60 402 25 139
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Total Resort Operations EBITDA (653) (4,353) (3,588) (19,903)
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Revenue in Yabuli Resort for the 2010 1st Half was $1.77 million (RMB 11.70 million) with EBITDA of negative $0.71 million (RMB 4.76 million).
As before noted revenue at Yabuli was constrained as the Company was required to maintain cash reserves and limit all expenditures prior to the completion of the Private Placement. As such the Company did not implement any major marketing campaigns and limited all advertising expenses with the exception of corporate sales and functions and season pass sales to major ski clubs in Harbin, Changchun and Beijing.
Such corporate functions included the 10th China Entrepreneurs Forum held at the resort from February 26th to 28th, 2010. This major conference was attended by over 500 of the country's most prominent business leaders and senior executives from industries ranging from banking, real estate, insurance and manufacturing. This was the 10th Forum that had been held at the Sun Mountain Yabuli Resort. The overall consensus from all attendees was exceptionally positive in regards to MCR's operations at the resort. Subsequent to the event on March 1st, 2010, MCR announced that it has entered into a strategic relationship agreement with the CEF under which the CEF agreed to hold all of its future Annual Forums on a permanent basis at the Sun Mountain Yabuli Resort. In addition, both parties also agreed to establish a "CEF Founders Club" that actively promotes the resort vacation homes situated in the Sun Mountain Yabuli Resort for purchase by CEF members, as well as work with its 5,000 member companies to select the Sun Mountain Yabuli Resort as the site for their corporate meetings and retreats. Other corporate events were held throughout the season with such organizations as major luxury automobile companies, financial institutions and sporting groups.
The resort attracted both regional and destination visitors from city ski clubs as well as independent travelers. Consistent with the response from conference and event attendees, visitors consistently ranked the Sun Mountain Yabuli Resort the superior ski experience in China which exceeded both the expatriate and domestic market expectations. The ski season at the resort runs from November to April. As China's most extensive ski resort, Sun Mountain Yabuli boasts 17 different trails with varying levels of difficulty for a total length of 31,075 meters. In addition to skiing, other outdoor sports such as sledding and skating are accessible. The resort is outfitted with first- class ski equipment available for leasing.
With the completion of the Private Placement subsequent to the second quarter of 2010, the Company can now focus on implementing enhanced marketing and sales programs to drive revenue while maintaining discipline over its operating cost base.
As before noted, the Company has entered into definitive management agreements with Club Med to operate and manage two hotels at the Sun Mountain Yabuli Resort. Club Med will also provide all marketing and sales services for the Club Med Yabuli Resort at their cost under a commission arrangement. Management anticipates that with the inclusion of Club Med the resort shall benefit with increased revenue per guest due to the "all inclusive" pricing of Club Med vacations and advanced sales prior to the winter season. The all-inclusive experience at Club Med Yabuli Resort includes ski-related services, ski tickets, ski schools, professional training, high-quality ski equipment, children's clubs, gourmet cuisine, the services of staff specializing in hospitality, and a friendly comfortable atmosphere.
From March 20th to 21st, 2010 Club Med held a major international media event at the resort launching the marketing of Club Med Yabuli Resort for the 2010/11 winter season. The event was attended by leading international travel and leisure media representatives from Europe, Asia, Australia, and China and included a taste of what the new Club Med Yabuli Resort will include when operational for the coming winter season. Guests to the event experienced the finest ski conditions in China complimented with international and local cuisine, live entertainment, and Club Med's extraordinary hospitality provided by their over 50 international GO's (Club Med's signature Gentils Organisateurs resort managers) who were on hand for the event.
First Half Fiscal 2010 Changchun Resort Operations
MCR's Changchun resort ("Changchun Resort") opened for winter operations on November 21st
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