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Tax and skulduggery deliver Millennium a loss

Thursday 5th August 2010

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Depreciation tax changes and a debacle over its Chinese investments pushed Millennium & Copthorne Hotels New Zealand to a $20.2 million loss in the six months to June 30, despite improved revenue and occupancy in its local hotels, and a pre-abnormal operating profit.

The largest impact by far was a $26.8 million one-off, non-cash hit to reported earnings caused by changes announced in the May Budget to the way depreciation of commercial buildings will be treated for tax. 

However, the group also booked losses of $5.3 million, representing its share of write-offs on "fees and monies believed to have been misappropriated" by Cheung Ping Kwong, the former chief executive of the Idea Valley group of companies, Millennium's partner in hotel and other property developments undertaken in China by First Sponsor Capital (FSCL). 

Further larger write-offs also loom if Millennium, a 34% shareholder in FSCL, fails in its bid to overturn and have funds returned from various property sales that Cheung affected during a bizarre flurry of events in March and April.

"FSCL Group's exposure to the four assets illegally disposed is approximately US$44.9 million or approximately 28% of its net assets," said chairman Wong Hong Ren to the NZX. Of this, US$14.4 million (NZ$21.5 million) is Millennium's share of the exposure.

No provision for losses on those assets has been made in the period under review.

"However, as the success of the asset recovery efforts of FSCL and the Idea Valley Group continue to be heavily dependent on the assistance and cooperation from all the relevant official authorities, this position will be reviewed on an ongoing basis," said Wong. 

Assets sold by Cheung include a Hainan province hotel project, and shares in development land and projects in Dongguang and Huizhou, and a landscaping business.

Meanwhile, Millennium says that the depreciation tax changes in New Zealand only affect deferred tax liabilities and have no impact on the group's cash position. But it still fears additional tax to pay of up to $2 million a year in the future, half of which could come from the as yet undetermined treatment of hotel fixture depreciation.

"Refurbishment and development is critical not only for the company's medium to long-term growth but also impacts on the company's ability to attract guests to our New Zealand hotels now and in the future," said managing director B K Chiu.

He feared "any gains from the 2% reduction in corporate tax are completely wiped out" and the group would be forced to re-evaluate its New Zealand investment and refurbishment plans.

Shorn of the various negatives affecting the result, Millennium's underlying performance showed improved revenues from New Zealand hotels and other activity of $61.0 million ($54.5 million in the same period a year earlier), and occupancy of 68.1% in its owned and leased properties, compared with 63% occupancy for the prior corresponding period.

That produced a profit before income tax and non-controlling interests of $4.54 million, compared with $8 million in the first half of the previous year, and gross operating profit increased 13% to $34.5 million.

"The board is therefore disappointed to announce a loss," said Chiu.

Key international tourist markets remained soft, but Millennium was finding some improvement in the domestic tourism market, despite ongoing price competition, particularly in the South Island.

"While the New Zealand hotel operations ... will continue to show some improvement and remain profitable," Wong said the group's outlook for the full financial year was heavily dependent on the outcome of efforts to restore ownership of assets illegally sold in China and the review of depreciation rules in New Zealand.

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