Four Fun CIMA Global Business Challenge 孔庆元 Lucas 赵珠芳 Summer 范子立 Liz 柯云欢 Snoopy 广东外语外贸大学 Guangdong University of Foreign Studies Team: Four

Four Fun

CIMA Global Business Challenge

孔庆元Lucas

赵珠芳Summer

范子立Liz

柯云欢Snoopy

广东外语外贸大学广东外语外贸大学Guangdong University of Foreign Guangdong University of Foreign StudiesStudies

Team: Four Fun

Four Fun

SolberriSolberriCIMA Global Business ChallengeCIMA Global Business Challenge

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Conclusion

Recommendations

Issues Analysis

SWOT Analysis and Issue Prioritization

Solberri Background


The presentation is divided into 5 parts

IntroductionIntroduction

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Established

a high level of booking

a forecast cash surplus

of €59 million

Became listed

falling customer numbers

disappointing customer feedback

losses in 2005 and 2006

BackgroundBackground

changed its pricing structure

launched a refurbishment

program

1980’s 1998 2003 20082007

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ThreatThreat

SWOTSWOTAnalysisAnalysis

OpportunityOpportunity

StrengthStrength WeaknessWeakness


•Successful refurbishment program

•Many experienced long-term employees

•Stable co-operation with travel agents

•Strong sense of Corporate Social Responsibility

•Large cash surplus forecast

Good reputation with a long history

World class spa facilities

•Experienced board directors

•Winner of a holiday award

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•Poor customer service

•Low level of repeat booking

•Lack of motivation of short-term employees

Weakness


•Relatively lagging IT system •Irrational financial structure

•General manager overworked

•Restrictive loan covenant

•Resignation of Finance Director

•Current share price is substantially lower than the highest

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High level of bookings and a forecast cash surplus of €59 million

Opportunity


Huge potential market for Spa service.

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•Understaffing and poor service to meet the high level booking Threat


•Reputation may be damaged due to poor customer service

•Fall in spa revenues of one “premier” hotel

•Competitive hotel industry

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Top priority – Poor customer service and relevant HR issues.

Issue PrioritizationIssue Prioritization

2nd priority – Choose an investment proposal

3rd priority – Finance Director resigns

4th priority – Ethical issues

5th priority – Loan covenant restriction

6th priority – Fall in revenues in a “Premier” hotel

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Rated as “Excellent” by customers

III. ISSUES ANALYSISIII. ISSUES ANALYSISOnly the top five issues will be discussed in this partOnly the top five issues will be discussed in this part


Results of customer feedback survey 2007

A B C DA B C D

18% 11%

50%

60%

A. Level of overall customer service you received in the hotel in 2007

B. Overall standard of the spa facilities in 2007

C. Level of overall customer service received in the hotel expected in 2010

D. Overall standard of the spa facilities expected in 2010

ISSUE 1 - POOR CUSTOMER SERVICEISSUE 1 - POOR CUSTOMER SERVICE

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Lack of skills

Poor customer service

Lack of motivation

ISSUE 1ISSUE 1 - Poor Customer - Poor Customer ServiceService

Too many temporary employees

Lack of training

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ERG Theory

Senior employees

Long-term employees

Temporary or low level employees

Growth

Relatedness

Existence

Issue 1 - Poor Customer Issue 1 - Poor Customer ServiceService

Four Fun Issue 2 - Choose an Investment Issue 2 - Choose an Investment ProposalProposal


—Cash generated from operation

€59 million

€59 million

—Finance cost

€3.93 million€3.93 million

—

Tax expense €12.7 million€12.7 million

=Dividend €4 million€4 million

Cash retained for investment

€38.4 million€38.4 million

Four Fun Issue 2 - Choose an Investment Proposal


Proposal D

Proposal D

Proposal C

Proposal C

(€6 million+ €9 million)

(€9 million *4)

(€6 million * 8)

(€5 million+ €16 million+ €3 million)

Proposal AProposal A

Proposal BProposal B

Total Costs €123 million

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Issue 2 - Choose an Investment Proposal

Too risky due to

the large scale

Occupancy level not

guaranteed

ProposalA

Add another 200 rooms and supporting facilities to each of the four “Premier” hotels

Positive NPV (€40 million)

Hotel more crowded and less

comfortable

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Improve profit margin

Grab the Blue Ocean market

ProposalB

Refurbish and extend spa facilitiesat the remaining 8 hotels

Relatively little risk

due to experience

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Return on Equity (ROE) 0.0568

Return on Assets (ROA) 0.3086 × Equity Multiplier (EM) 1.8409

Profit Margin 0.0314 ×Total Asset Turnover 0.9815 1 / （ 1—Debt Ratio 0.4568 ）

Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total Assets

DuPont Model of Solberri 2007

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*Reference: the 2007 annual report of Shangri-la Asia Limited

Return on Equity (ROE) 0.1046

Return on Assets (ROA) 0.1029 × Equity Multiplier (EM) 1.016

Profit Margin 0.3069 ×Total Asset Turnover 0.3354 1 / （ 1—Debt Ratio 0.0159 ）

Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total Assets

DuPont Model of Shangri-la Asia Limited 2007

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Close rooms in “Super Plus” hotels

Improve profit margin

Grab the Blue Ocean market

ProposalB

Refurbish and extend spa facilitiesat the remaining 8 hotels

Relatively little risk

due to experience

Insufficient money

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Positive NPV(€39.2 million)

Low breakeven occupancy level

High initial cost (€24 million)

ProposalC

Acquire an additional resort hotel

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Rather

expensive

Foster a goodcorporate

image

ProposalD

Invest in environmentally friendly initiatives Installation of solar panelsOther initiatives

Save electricity costUsually unprofitable

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Proposal A B C D

Advantages1.Positive NPV (€40 million in total for 5 years)

1.Relatively little risk due to experience

2.Grab the Blue Ocean market

3.Improve profit margin

1.Positive NPV(€39.2 million in total for 10 years)

2.Achievable breakeven occupancy level (60%)

1.Save electricity cost

2.Foster a good corporate image

Disadvantages

1.More crowded and

less comfortable

2.Occupancy level not guaranteed

3.Too risky due to the large scale

1.Insufficient money

2. Close rooms in “Super Plus” hotels

1.High initial cost (€24 million in total);

1.Usually unprofitable

2.Rather expensive

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Internal finance director

External finance director

The finance director resigned and left Solberri

Permanent appointment

Issue 3 - Finance Director Issue 3 - Finance Director ResignsResigns

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Poor treatment of General

Managers and senior

employees

Only the first two ethical issues will be discussed.

Investment in unprofitable

environmentally friendly

initiatives

Misdistribution of tips

Issue 4 - Ethical Issue 4 - Ethical IssuesIssues

Four Fun Poor Treatment of General Poor Treatment of General Managers and Senior EmployeesManagers and Senior Employees


Work long hours

Work under high stress

No compensation

Shortage of senior

employees

Four Fun Misdistribution of TipsMisdistribution of Tips


Collected all the tips

Distributed to all employees evenly

Transparency

Fairness

Four Fun Issue 5 - Loan Covenant Issue 5 - Loan Covenant RestrictionRestriction


Private placement

Private placement

NegotiationNegotiation Public offeringPublic offering

a probable capital shortage for its future development

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RECOMMENDATIONSRECOMMENDATIONS


Four Fun Recommendations – Poor Customer Service


Immediately work out a plan for

recruitment and training

Short-term

Enlarge long-term employee proportion

Long-term

Improve employee skills Improve motivation

• Recognition• Participative management• Job enrichment• Flextime

•Service-based wage• Bonus• Profit sharing• Fringe benefits

Temporary employees

Long-term or senior

staff

Total cost for the above HR reforms: €7.5 million

Four Fun Recommendations – Choose an Investment ProposalChoose an Investment Proposal


two “Superior” hotels €12 million one “Super Plus” hotel €6 million

solar panels at all 12 hotels €6 million postpone the other initiatives

solar panels at all 12 hotels €6 million postpone the other initiatives

Total CostsTotal Costs €24 million€24 million

Cash RetainedCash Retained€6.9 million€6.9 million

Proposal BProposal B

Proposal DProposal D

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Temporary Appointment

Permanent Appointment

Recommendations – Finance Director ResignsFinance Director Resigns

Internal FDInternal FD

External FDExternal FD

Well familiar with Solberri

Get Soberri through the coming peak season

Well familiar with Solberri

Get Soberri through the coming peak season

Rich experience of other fields

Bring innovation and fresh blood

Rich experience of other fields

Bring innovation and fresh blood

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Reserve Sufficient

Elites


Recommendations – Ethical IssuesEthical Issues

Ethical Issue Ⅰ: Poor treatment of employees

Compensate Overwork

Reduce Workload

IMMEDIATELY

Four Fun Recommendations – Ethical Ethical IssuesIssues


Ethical Issue Ⅱ: Misdistribution of TipsEthical Issue Ⅱ: Misdistribution of Tips

Traditional

Distribution

Traditional

Distribution

Controversial

Distribution

Controversial

Distribution

Four Fun Recommendations – Ethical Ethical IssuesIssues


Ethical Issue : Misdistribution of LipsⅡEthical Issue : Misdistribution of LipsⅡ

Facing Customer

Non-Facing

Customer

CustomersCustomers

EmployeesEmployees

EmployeesEmployees

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www.themegallery.com

Recommendations - Loan Covenant RestrictionLoan Covenant Restriction

NegotiateWith Bank

Private Placement

Control The

Costs

Four Fun ConclusionConclusion


Success!Success!

!!Success!Success!

!!

High High

Booking Booking

LevelLevel

AnalysisAnalysis

RecommendationRecommendation

Four Fun

We play not just for fun, but also for success.We play not just for fun, but also for success.

Four Fun Ａｐｐｅｎｄｉｘ1.1.1 Finance costa. €12 million loan at 10% repayable in December 2007 As its repayable date is in December 2007, the interest expense

incurred in this accounting period is only for three months (October 2007 to December 2007).

€12 million*10%*3/12 = €0.3 millionb. €6 million loan at 8% repayable in September 2010 €6 million*8% = €0.48 millionc. €15 million loan at 11% repayable in June 2012 €15 million*11% = €1.65 milliond. €20 million loan at 10% beginning in January 2008 and repayable

in December 2014 As this loan began in January 2008, the interest expense incurred in

this accounting period is only for nine months (January 2008 to September 2008).

€20 million*10%*9/12 = €1.5 million

Therefore, total finance cost = €0.3 million + €0.48 million + €1.65 million + €1.5 million = €3.93 million

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1.1.2 Tax expense

As stated in the case, the post-tax profit for the year ended September 2008 will be €27 million. Based on the tax rate of 32%, the taxable income = €27 million/(1-32%) = €39.7 million

Therefore, the tax expense = €39.7 million*32% = €12.7 million

Four Fun Ａｐｐｅｎｄｉｘ1.1.3 DividendsIn 2005 and 2006, Solberri incurred losses, so it’s probable

that it paid no dividends to its shareholders. So it’s necessary for Solberri to compensate its shareholders this year when it is doing so well.

In 2007, Solberri made a profit of €5 million and paid €2

million for dividends, which equals a dividend per share of €0.083.

It’s recommended that Solberri double the DPS this year, making the total dividends expenditure as much as €4 million.

Four Fun Ａｐｐｅｎｄｉｘ1.1.4 Additional operation costAs is mentioned before, the high occupancy level

this year will incur additional operational cost due to the employee recruitment, training and motivation. It’ estimated to be around €7.5 million based on an estimated 12% increase compared with 2007 when the staff costs were €62 million.

In summary, the cash available for investment = €59 million –€3.93 million –€12.7 million –€4 million –€7.5 million = €30.9 million

Four Fun Ａｐｐｅｎｄｉｘ1.2. Total cost for all four investment

proposals

Total cost for Proposal A = investment cost per hotel*number of hotels = €9 million*4=€36 million

Total cost for Proposal B = investment cost per hotel*number of hotels = €6 million*8 = €48 million

Total cost for Proposal C = acquiring cost + refurbishing cost + marketing cost = €5 million +€16 million+€3 million = €24 million

Total cost for Proposal D = €15 million

Therefore, total cost for all four proposals = €36 million + €48 million + €24 million + €15 million = €123 million

Four Fun Ａｐｐｅｎｄｉｘ1.3. Expected NPV of Proposal C

As is shown in the case, when occupancy level equals 95%, the NPV will be €100.0 million. When it’s 80%, the NPV will be €35 million. When it’s 50%, the NPV will be –€25 million. And their probabilities are 25%, 60% and 15% respectively.

Therefore, the weighted average NPV = €100.0 million*25% + €35.0 million*60% + （ -€25 million ） *15% = €42.2 million

However the marketing cost of €3 million is excluded in the above NPV, so the expected NPV of Proposal C = €42.2 million – €3 million = €39.2 million

Four Fun Ａｐｐｅｎｄｉｘ1.4. Breakeven occupancy level of

Proposal C When occupancy level equals 95%, the NPV will be €97

million. When it’s 50%, the NPV will be -€28 million. Thus, when the occupancy level decreases by 1%, the NPV will decrease by €2.78 million.

[€97 million - (-€28 million)] / (95-50) = €2.78 million　In this way, when the occupancy level changes by about 35%

(97/2.78), the NPV will decrease to zero.

Therefore, the breakeven occupancy level is around 60%.

Documents

Four Fun CIMA Global Business Challenge 孔庆元 Lucas 赵珠芳 Summer 范子立 Liz 柯云欢 Snoopy 广东外语外贸大学 Guangdong University of Foreign Studies Team: Four