eee.indd 1 9/1/2014 18:48:43
IMPORTANT
Ifyouareinanydoubtaboutanyofthecontentsofthislistingdocument,youshouldobtainindependentprofessionaladvice.
LIVZON PHARMACEUTICAL GROUPINC.*
(a joint stock company incorporated in thePeople’s Republic of China with limited liability)
Stock Code: 1513
LISTING OF THE OVERSEAS LISTED FOREIGN SHARES
BY WAY OF INTRODUCTION
ON THE MAIN BOARD OF
THE STOCK EXCHANGE OF HONG KONG LIMITED
Sole Sponsor
Financial Adviser
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this listing document, make no representation as to its accuracy or completenessandexpresslydisclaimanyliabilitywhatsoeverforanylosshowsoeverarisingfromorinrelianceuponthewholeor anypartofthecontentsofthislistingdocument.
ThislistingdocumentispublishedinconnectionwiththelistingbywayofintroductionontheMainBoardofTheStockExchange ofHongKongLimitedoftheoverseaslistedforeignsharesoftheCompany(the“HShares”),whichwill,duetothechangeofthe listingvenue,beconvertedfromthedomesticallylistedforeignsharesoftheCompany(the“BShares”)listedontheShenzhenStockExchange.TheCompany’sordinarysharesdenominatedinRenminbi(the“AShares”)currentlyinissuearelistedontheShenzhen StockExchange.ThislistingdocumentcontainsparticularsgivenincompliancewiththeRulesGoverningtheListingofSecurities onTheStockExchangeofHongKongLimitedandtheSecuritiesandFutures(StockMarketListing)Rules(Chapter571Vofthe LawsofHongKong)forthepurposeofgivinginformationwithregardtotheCompanyanditssubsidiaries.
Thislistingdocumentdoesnotconstituteanofferof,norisitcalculatedtoinviteoffersfor,thesharesorothersecuritiesof theCompany,norhaveanysuchsharesorothersecuritiesbeenallottedwithaviewtoanyofthembeingofferedforsaleto or subscription by members of the public. No shares in the share capital of the Company will be allotted and issued in connectionwith,orpursuantto,thepublicationofthislistingdocument.
Yourattentionisdrawntothesectionheaded“RiskFactors”inthislistingdocument.TheCompanyisincorporated,anditsmainbusinessesarelocated,inthePeople’sRepublicofChina(the“PRC”).PotentialinvestorsintheCompanyshouldbeawareofthe differencesinthelegal,economicandfinancialsystemsbetweenthePRCandHongKongandthattherearedifferentriskfactors relatingtoinvestmentsinPRCincorporatedbusinesses.Potentialinvestorsshouldalsobeawarethattheregulatoryframeworkin thePRCisdifferentfromtheregulatoryframeworkinHongKongandshouldtakeintoconsiderationthedifferentmarketnatureof thesharesoftheCompany.Suchdifferencesandriskfactorsaresetoutinthesectionheaded“RiskFactors”inthislistingdocument. Information regarding the proposed arrangements for the listing of, and dealings and settlement of dealings in, the H Shares followingcompletionoftheListingissetoutinthesectionheaded“Listings,Registration,DealingsandSettlement”inthislisting document.
* For identification purpose only
EXPECTED TIMETABLE
Last day of dealings in B Shares. . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 20 December 2013 Suspension of trading in B Shares . . . . . . . . . . . . . . . . . . . . . . .Monday, 23 December 2013 Removal of B Shares from the system of the CSDC. . . . . . . . . . . . .Friday, 10 January 2014 Announcement of (i) the closing price of A Shares on
13 January 2014 and 14 January 2014 and the closing
price of B Shares on 20 December 2013, being the last
trading day of B Shares; and (ii) the price per B Share
paid by the Cash Option Providers to B Shareholders
pursuant to the Cash Option on the websites of the Shenzhen
Stock Exchange, the Hong Kong Stock Exchange
and the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 14 January 2014 Announcement of (i) obtaining the final listing approval
from the Hong Kong Stock Exchange; (ii) the closing
price of A Shares on 15 January 2014 and the closing price of
B Shares on 20 December 2013, being the last trading day
of B Shares; and (iii) the price per B Share paid by
the Cash Option Providers to B Shareholders pursuant to
the Cash Option on the websites of the Shenzhen
Stock Exchange, the Hong Kong Stock Exchange
and the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 15 January 2014 Despatch of H Share certificates . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 15 January 2014 Listing of H Shares on the Main Board of
the Hong Kong Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 16 January 2014 Notes:
(1) AlltimesanddatesrefertoHongKonglocaltimesanddates,exceptasotherwisestated.DetailsoftheListing, including its conditions, are set out in the section headed “Information about this Listing Document and the Listing” in this listing document.
(2) The H Share certificates are expected to be despatched on Wednesday, 15 January 2014. The H Share certificates will only become valid if the Listing becomes unconditional. In the event the Listing does not become unconditional, dealings in the H Shares will not commence on Thursday, 16 January 2014. In such event, we will make an announcement of the above and, if necessary, of a revised timetable. Investors who trade in the H Shares prior to the receipt of the H Share certificate do so entirely at their own risk.
– i–
CONTENTS
IMPORTANT NOTICE TO INVESTORS
We have not authorised anyone to provide you with information or representation
that is different from what is contained in this listing document in respect of the Listing.
Any such information or representation must not be relied on by you as having been
authorised by us, the Sole Sponsor, any of our or their respective directors, officers or
representatives or any other person involved in the Listing.
Page Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [i] Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ii] Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [1] Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [21] Glossary of Technical Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [30] Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [34] Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [36] Waivers from Strict Compliance with the Hong Kong Listing Rules . . . . . . . . . . [67] Information about this Listing Document and the Listing. . . . . . . . . . . . . . . . . . . [76] Directors, Supervisors and Parties Involved in the Listing . . . . . . . . . . . . . . . . . . [80] Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [85] Industry Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [88] Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [98] History and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[118] Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[130] Relationship with Our Controlling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .[228]
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CONTENTS
Connected Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[247] Directors, Supervisors and Senior Management. . . . . . . . . . . . . . . . . . . . . . . . . . .[253] Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[271] Reasons for the Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[346] Substantial Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[347] Share Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .[348] Listings, Registration, Dealings and Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . .[350] Appendix I Accountants’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 Appendix II Profit Estimate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Appendix III Summary of PRC and Hong Kong Principal Legal and
Regulatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Appendix IV Summary of Articles of Association . . . . . . . . . . . . . . . . . . . . IV-1 Appendix V Taxation and Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . V-1 Appendix VI Statutory and General Information . . . . . . . . . . . . . . . . . . . . VI-1 Appendix VII Documents Available for Inspection . . . . . . . . . . . . . . . . . . . . VII-1
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SUMMARY
OVERVIEW
WeareaPRCbasedpharmaceuticalcompanywhichisprincipallyengagedintheresearch and development, production and sales of pharmaceutical products. Our headquarters in Zhuhai,thePRC,areresponsiblefortheoverallsalesandmarketingstrategyofourGroup.Our distribution network spreads across the PRC with 42 local offices and was managed and supported by 1,295 sales staff as at 30 September 2013. Our sales staff at our local offices are primarily responsible for the sales and distribution of our products in the PRC. Our overseas salesareoverseenbyourheadquarterswiththesupportofouroverseasagentsandouroverseas office in Vietnam.As at the Latest Practicable Date, our products covered (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment. Our major products in various product segments are mainly categorised as follows:
Forthe ninemonths Product Salesanddistribution Majortypesof ended segments channels products(Note1) Keyendcustomers Fortheyearended31December 30September 2010 2011 2012 2013%ofoperating%ofoperating%ofoperating%ofoperating incomeunder incomeunder incomeunder incomeunder principal principal principal principal activities activities activities activities Drug • Wesellourdrug Westerndrug
preparation preparation preparationproducts
products productstoend • BismuthPotassium • OTCpharmacies 3.93 3.48 3.07 2.75 customersthrough: CitrateGranules(
(a)pharmaceutical )
productsdistributors • Ilaprazole( ) • Hospitals 0.27 0.52 0.84 1.42 uponwhichwedo
• Voriconazolefor • Hospitals 1.29 1.71 1.56 1.62 notrelyontheir
Injection( )
marketingand
• CefodizimeSodium • Hospitals 3.74 2.87 1.61 2.01 promotion
forInjection( )
capabilitiesbut
• Urofollitropinfor • Hospitals 4.07 5.36 6.12 6.89 typicallywith
Injection( )
marketingsupport
• Menotropinsfor • Hospitals 2.67 2.95 2.63 2.91 fromourown
Injection( )
salesteamsorthird-
partysales
Chinesedrugpreparation
representatives;and
products
(b)pharmaceutical
• ShenqiFuzheng • Hospitals 12.68 19.95 25.85 28.38 productsdistributors
Injection(
uponwhichwerely
)
ontheirmarketing
• Anti-viralGranules • OTCpharmacies 4.27 5.84 5.73 5.10 andpromotion
( )
capabilities.
– 1–
SUMMARY
Forthe ninemonths Product Salesanddistribution Majortypesof ended segments channels products(Note1) Keyendcustomers Fortheyearended31December 30September 2010 2011 2012 2013%ofoperating%ofoperating%ofoperating%ofoperating incomeunder incomeunder incomeunder incomeunder principal principal principal principal activities activities activities activities Bulk • Wesellourbulk • CeftriaxoneSodium • Pharmaceutical 8.53 4.29 3.85 1.98 medicines medicinesand ( ) production
and intermediatesdirectly• Phenylalanine( enterprises( 4.99 5.50 2.91 1.55 intermediates topharmaceutical ) )
production • Mevastatin( 2.28 2.99 3.27 2.25 enterprises( )
)etc.
• Colistin( ) 3.00 3.03 3.08 2.28 Diagnostic • Weselldiagnostic • ELISAHIVTesting • Hospitals,centresfor 1.00 0.97 0.87 0.79 reagents reagentsand Reagents(HIV diseasecontroland
and equipmenttoend ) prevention(
equipment customerseither • MYCOIITesting )and 1.08 1.05 1.07 1.08 (Note2) directlyorthrough Reagent( departmentofhealth
medicaldevice ( ( )
distributorstypically ))
withmarketing • TPPATesting 1.16 1.27 1.26 1.08 supportfromourown Reagent(
salesteamsorthird- (
partysales ))
representatives.
Notes:
(1) Majorproductsareselectedbasedon(a)theamountofcontribution(intermsofsalesvalue)ofthoseproducts in the respective product segment and/or sub-segment; (b) our major innovative products; and (c) the positioning of our products in their respective markets.
(2) Apart from diagnostic reagents, we also sell medical-related equipment which are mainly produced by third-party suppliers. Such equipment mainly include quantitative monitoring analysers and automated analysis systems which are used by hospitals.
– 2–
SUMMARY
Our Sales and Distribution Models
(a) Drug preparation products
We have different sales channels for the sale of our drug preparation products. The diagram below illustrates our sales and distribution model for our drug preparation products in the PRC:
Our Group
Products Payment Payment Products
||||
|-|-|-|
|(up|Pharmaceutical products distributorson which we do not rely on their marketand promotion capabilities)(Note 2)|ing|

||
|-|
|Third-party sales representativesor our own sales teams(Note 3)|

Market Promotion
information activities
End customers (including
hospitals, clinics and
OTC pharmacies)
Notes:
(1) As at 30 September 2013, we had established relationship with 1,155 pharmaceutical products distributorsuponwhichwerelyontheirmarketingandpromotioncapabilitiestopromoteourproducts andamajorityofthesepharmaceuticalproductsdistributorsenterintodistributionagreementswithus. We pre-set an annual purchase requirements of our products from these pharmaceutical products distributors.
(2) Asat30September2013,wehadestablishedrelationshipwith811pharmaceuticalproductsdistributors upon which we do not rely on their marketing and promotion capabilities to promote our products and amajorityofthesepharmaceuticalproductsdistributorsenterintoadhocsalesandpurchaseagreements with us. We do not set any annual purchase requirements of our products from these pharmaceutical products distributors.
(3)Asat30September2013,wehadenteredintocontractualarrangementswithapproximately99.80%of third-party sales representatives.
(4) Service fees are only paid to third-party sales representatives.
(5) Pharmaceutical products distributors upon which we do not rely on their marketing and promotion capabilitiestopromoteourproductsaregenerallysupportedbyourownsalesteamsorthird-partysales representatives who are independent from the pharmaceutical products distributors and us.
(6) Wehave,onaverage,abusinessrelationshipoffiveyearswitheachofourfivelargestpharmaceutical
products distributors during the Track Record Period.
– 3–
SUMMARY
The table below sets out a breakdown of our operating income from sales of drug preparation products for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating%of Operating%of Operating%of Operating%of Operating%of income total income total income total income total income totalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Salesgeneratedbyourown
salesteams(Note1) 284,314 18.34 358,961 17.22 418,104 15.21 326,087 15.83 321,429 13.23 Salesgeneratedbythird-
partysales
representatives 1,102,798 71.16 1,551,584 74.45 2,167,539 78.89 1,623,216 78.77 2,019,365 83.14 Salesgeneratedby
pharmaceuticalproducts
distributorsuponwhich
werelyontheir
marketingandpromotion
capabilities 162,651 10.50 173,721 8.33 162,055 5.90 111,316 5.40 88,144 3.63 Total 1,549,763 100.00 2,084,266 100.00 2,747,698 100.00 2,060,619 100.00 2,428,938 100.00 Note:
(1) This includes overseas sales of drug preparation products.
(b) Bulk medicines and intermediates
All our sales of bulk medicines and intermediates (including domestic and overseas sales) areconductedbyoursalesstaff.Thediagrambelowillustratesoursalesanddistributionmodel for bulk medicines and intermediates:
Our Group
Payment Products Products
End customers
(Pharmaceutical production Internal production purposes
enterprises(藥品生產企業) etc.)
Note:
(1) We have, on average, a business relationship of seven years with each of our five largest pharmaceutical production enterprises ( ) customers.
– 4–
SUMMARY
(c) Diagnostic reagents and equipment
We have different sales channels for the sale of our diagnostic reagents and equipment. The diagram below illustrates our sales and distribution model for our diagnostic reagents and equipment in the PRC:
Our Group
Payment Products
Market Service Medical device distributors
information fee(Note 1)
Order, Third-party sales representatives Order,
Products Products
Payment or our own sales teams Payment
Market Promotion
information activities
End customers (including hospitals,
centres for disease control and
prevention(疾病預防控制中心) and
department of health(衛生部門)
Notes:
(1) Service fees are only paid to third-party sales representatives.
(2) Medical device distributors upon which we do not rely on their marketing and promotion capabilities to promote our products are generally supported by our own sales teams or third-party sales representatives who are independent from the medical device distributors and us.
(3) We have, on average, a business relationship of ten years with each of our five largest medical device distributors during the Track Record Period.
– 5–
SUMMARY
The table below sets out a breakdown of our operating income from sales of diagnostic reagents and equipment for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of income total income total income total income total income totalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Salesgeneratedbyour
ownsalesteams(Note1) 53,985 24.15 62,912 22.90 79,194 23.21 49,406 21.69 50,878 19.67 Salesgeneratedbythird-
partysales
representatives 12,509 5.60 16,958 6.17 18,592 5.45 13,929 6.12 13,366 5.17 Salesgeneratedbymedical
devicedistributors 156,986 70.25 194,897 70.93 243,375 71.34 164,421 72.19 194,451 75.16 Total 223,480 100.00 274,767 100.00 341,161 100.00 227,756 100.00 258,695 100.00 Note:
(1) This includes overseas sales of diagnostic reagents and equipment.
Changes in the Selling Prices of our Products in the Track Record Period
The PRC Government imposes retail price controls over a wide range of drug preparation products in the PRC, whereas the bulk medicines and intermediates together with diagnostic reagents and equipment which we sell are not subject to any price controls and we could freely determine the selling price. During the Track Record Period and up to the Latest Practicable Date, the PRC Government has reduced the maximum retail price on pharmaceutical products on several occasions. Furthermore, following the introduction of the Notice on theAdjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012, the maximum retail prices of antibiotics related drug preparation products have been lowered and the use of antibiotics has been restricted in the PRC. Since we have been reforming our sales strategy involving increased reliance on our own sales teams or third-party sales representatives to promote our drug preparation products, such as Voriconazole for Injection ( ) and Cefodizime Sodium for Injection ( ), such reform has to a certain extent countered the negative effect on our selling prices to our pharmaceutical products distributors brought about by the introduction of the above notice and measures. We sell our drug preparation products as finished products to our pharmaceutical products distributors at wholesale prices. However, the decrease in the average wholesale prices charged by us for most of our major drug preparation products were in many instances less (on a percentage basis) than the decrease in retail ceiling prices imposed by the PRC Government. This was mainly due to the fact that the financial impact of these reductions in retail prices was shared among the pharmaceutical products distributors, independent third- partysalesrepresentatives(ifapplicable)andendcustomers.Assuch,wehavenotexperienced
– 6–
SUMMARY
any material change to the selling prices of drug preparation products sold by us to our pharmaceutical products distributors. However, the price of our antibiotics related bulk medicines (such as cephalosporins category ( )) has experienced a decline of more than30%duringtheTrackRecordPeriodasaresultoftheintroductionofsuchnoticeandmeasures. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately15.40%,5.33%,5.00% and3.67% of our operating income were contributed from our production and/or sales of bulk medicines belonging to the cephalosporins category ( ).
In addition, the selling prices of our Colistin ( ) have experienced a decline of more than40%, such decline was mainly caused by intensified market competition. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30September2013,approximately3.00%,3.03%,3.08%and2.28%ofouroperatingincomewere contributed from our production and/or sales of Colistin ( ).
Save for the aforesaid, there had not been material changes to the prices of our major products during the Track Record Period.
Our Production, Production Plants and Plantation Bases
During the Track Record Period, we manufactured substantially all of our drug preparation products as well as bulk medicines and intermediates ourselves. The raw materials and packaging materials for our production were generally sourced from various third-party suppliers in the PRC, except for certain raw materials which are supplied by the Joincare Group. In addition, we also imported certain diagnostic reagents and equipment from overseas suppliers for distribution in the PRC.
Our production plants and herbal medicine plantation bases are all located in the PRC.As at the Latest Practicable Date, we owned and operated (a) four production plants for the production of drug preparation products; (b) four production plants for the production of bulk medicines and intermediates; (c) one production plant for the production of diagnostic reagents and equipment; and (d) three herbal medicine plantation bases. In addition, we had four new production plant projects under construction and three major expansion or technology advancement projects covering three bulk medicines production plants and two drug preparation products production plants as at the Latest Practicable Date. As advised by ourPRClegaladvisers,King&WoodMallesons,wehaveobtainedallnecessaryandrelevantPRC production approvals and permits in relation to our business.
– 7–
SUMMARY
Our Intellectual Property Rights
We value the intellectual property rights of our products and are committed to their protection. As at the Latest Practicable Date, we had 168 patents registered with the PRC Intellectual Property Office ( ), 17 patents registered overseas and had 44 patent applications pending registration in the PRC. We also had 502 registered trademark certificates, of which there were 480 registered trademark certificates in the PRC and 22 international certificates (including Hong Kong, Macau and Taiwan). The principal trademark of our Company, “Livzon ” (“ ”), was awarded the China Famous Brand (
) in 1999.
FINANCIAL INFORMATION AND OPERATING DATA
The tables below summarise our consolidated financial information for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013. We have derived the summary from our financial information set forth in theAccountants’ Report in Appendix I to this listing document. The consolidated financial information contained in theAccountants’ Report has been prepared in accordance with the CASBE issued by the Ministry of Finance of the PRC and the Reporting Accountants had conducted their audit in accordance with China Standards on Auditing for Certified Public Accountants. The summaries below should be read together with the financial information in theAccountants’ Report in Appendix I to this listing document, including the accompanying notes, and the information set out in the section headed “Financial Information” in this listing document on pages[271] to[345].
Consolidated Balance Sheet
As at As at 31 December 30 September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Total current assets 2,155,724 2,907,995 2,973,876 3,093,169 Total non-current assets 1,506,268 1,694,914 2,659,878 3,411,413 Total assets 3,661,992 4,602,909 5,633,754 6,504,582 Total current liabilities 925,214 1,521,046 2,376,186 2,403,857 Total non-current liabilities 97,627 70,245 77,449 620,199 Total liabilities 1,022,841 1,591,291 2,453,635 3,024,056 Totalshareholders’(owners’) equity 2,639,151 3,011,618 3,180,119 3,480,526
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SUMMARY
Consolidated Income Statement
Forthe yearended Fortheninemonthsended 31 December 30 September
2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Total operating income 2,726,719 3,162,915 3,943,525 2,909,014 3,233,360 Total operating costs 2,219,805 2,720,601 3,445,291 2,493,758 2,785,505 Operating profit 516,415 429,745 518,753 421,725 448,136 Profit before income tax 533,667 463,151 560,313 435,757 478,045 Net profit forthe year 452,490 387,798 475,223 365,041 398,527 Consolidated Cash Flow Statement
Fortheninemonthsended Forthe yearended 31 December 30 September
2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Net cash inflows from operating activities 633,296 708,201 593,965 529,219 359,415 Net cash outflows from investing activities (330,494) (422,269) (895,490) (742,387) (684,523) Net cash (outflows)/inflows from financing
activities (14,118) 304,090 47,205 94,608 161,270 Our net cash inflow from operating activities kept fairly stable in the range of approximately RMB600.00 million to RMB700.00 million from 2010 to 2012. Compared with 30 September 2012, our net cash inflow from operating activities for the nine months ended 30 September 2013 decreased by approximately RMB169.80 million. The decrease was mainly attributable to the combined effect of decrease in prepayment made by our customers and increase in use of bank acceptance bills by our customers to settle their trade debts due to us.
– 9–
SUMMARY
Summary Breakdown of Operating Income from Principal Activities and Gross Margin by Product Segment
Fortheyearended31December Fortheninemonthsended30September
2010 2011 2012 2012 2013
Gross Gross Gross Gross Gross Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Income Total Margin Income Total Margin Income Total Margin Income Total Margin Income Total MarginRMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%) (unaudited)
Operatingincomeofeachproduct
segmentunderprincipalactivities
(I) Drugpreparationproducts
(a) Westerndrugpreparation
products 994,402 36.97 69.77 1,152,423 36.75 70.56 1,364,449 34.77 71.94 1,029,532 35.56 71.59 1,243,430 38.64 74.18 (b) Chinesedrugpreparation
products 555,361 20.64 77.66 931,843 29.71 73.59 1,383,249 35.26 78.55 1,031,087 35.62 78.88 1,185,508 36.84 79.72 1,549,763 57.61 72.60 2,084,266 66.46 71.91 2,747,698 70.03 75.27 2,060,619 71.18 75.23 2,428,938 75.48 76.89 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(II) Bulkmedicinesand
intermediates 916,953 34.08 19.36 777,307 24.78 14.78 834,638 21.27 14.71 606,339 20.95 14.84 530,492 16.48 10.73 (III) Diagnosticreagentsand
equipment 223,480 8.31 53.53 274,767 8.76 52.86 341,161 8.70 53.56 227,756 7.87 54.62 258,695 8.04 55.47 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00
Sales of drug preparation products is the largest contributor to our operating income from principal activities. Sales of our drug preparation products was approximately RMB1,549.76 million, RMB2,084.27 million, RMB2,747.70 million and RMB2,428.94 million for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounting for approximately57.61%,66.46%,70.03% and75.48% of our operating income from principal activities of the relevant periods. During the Track Record Period, the gross profit margin increased from approximately72.60% for the year ended 31 December 2010 to approximately76.89% for the nine months ended 30 September 2013. The increase in sales and gross profit margin of our drug preparation products during the Track Record Period was mainly driven by sales of high margin products, such as our Chinese drug preparation products, Shenqi Fuzheng Injection ( ) and our western drug preparation product, Urofollitropin for Injection ( ).
During the Track Record Period, the sales and gross profit margin of bulk medicines and intermediates were adversely affected by the introduction of the Notice on the Adjustment of Maximum Retail Price for CertainTypes of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012. As a result, the sales of our bulk medicines and intermediates decreased from approximately RMB916.95 million for the year ended 31 December 2010 to approximately RMB834.64 million for the year ended 31 December 2012
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SUMMARY
and approximately RMB530.49 million for the nine months ended 30 September 2013, and the gross profit margin of our bulk medicines and intermediates decreased from approximately19.36% for the year ended 31 December 2010 to approximately10.73% for the nine months ended 30 September 2013.
Sales of our diagnostic reagents and equipment increased steadily from approximately RMB223.48 million in 2010 to approximately RMB341.16 million in 2012, while the gross profit margin of these products was kept at approximately53% to56% throughout the Track Record Period.
Major Financial Ratios
The table below summarises our key financial ratios during the Track Record Period: As at/ For the nine months ended Asat/Fortheyearended31December 30 September 2010 2011 2012 2013 Return on equity Netprofit/Shareholders’ 17.15% 12.88% 14.94% 11.45% equity x100%
Return on total Net profit/Total assets x 12.36% 8.43% 8.44% 6.13% assets 100%
Current ratio Current assets/Current 2.33 1.91 1.25 1.29 liabilities
Quick ratio Current assets– 1.84 1.63 1.02 1.02 Inventories/Current
liabilities
Gearing ratio1 Totaldebt/Shareholders’ 13.06% 21.68% 38.39% 46.12% equity x100%
Debt to equity Netdebt2/Shareholders’ -19.68% -26.39% -0.02% 15.74% ratio equity x100%
Note 1:During the Track Record Period, our indebtedness increased significantly from approximately RMB344.66 million as at 31 December 2010 to approximately RMB1,605.03 million as at 30 September 2013, and our gearing ratio increased significantly from approximately13.06% as at 31 December 2010 to approximately46.12% as at 30 September 2013. The increase was mainly attributable to an increase in borrowings to replenish our working capital and support our business growth.
Note2:NetdebtsrepresentourGroup’sborrowingsnetofourcashandcashequivalents.Asat31December 2010, 2011 and 2012, our cash and cash equivalents were more than our debts.
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SUMMARY
RECENT DEVELOPMENT
Basedonourunauditedconsolidatedfinancialstatementsfortheyearended31December 2013, we recorded an operating income from principal activities of approximately RMB4,569.39 million and a gross profit from principal activities of approximately RMB2,916.00 million. Compared with 2012, our operating income from principal activities and gross profit from principal activities increased by approximately16.46% and22.85%, respectively. The increase was mainly driven by an increase in the sales volume of Shenqi Fuzheng Injection ( ) and Urofollitropin for Injection ( ) by approximately26.00% and26.96%, respectively. The increase in sales volume reflected the continued increase in demand for those products. Our gross profit margin from principal activities increased from approximately60.50% for the year ended 31 December 2012 to approximately63.81% for the year ended 31 December 2013. The increase was attributable to an increasing percentage of our operating income came from the sale of high margin products (such as Shenqi Fuzheng Injection ( ) and gonadotropic hormones).
Our Directors have confirmed that, since 30 September 2013 and up to the date of this listing document, there had been no material adverse change in (a) ourGroup’s financial position or prospects and no event had occurred that would materially and adversely affect the information shown in the consolidated financial information in Appendix I to this listing document; (b) the regulatory environment which we are subject to; and (c) the market for our major products.
COMPETITIVE STRENGTHS
Our Directors believe that our historical success and future prospects are underpinned by a combination of competitive strengths including:
• a diversified portfolio of products;
• a comprehensive sales network with established promotion capabilities; and
• strong research and development capabilities and proven track record of new product development.
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SUMMARY
BUSINESS STRATEGIES
Our goals are to (a) consolidate our leading position in auxiliary reproductive drugs (
) and Chinese medicines for anti-tumour in the form of large-volume liquid for injection ( ) in the PRC; (b) continue to enhance our competitive advantages in other drug preparation products so as to increase our sales in potential drug preparation products; (c) accelerate the development of biological drug preparation products ( ); and (d) become an industry leader in the PRC pharmaceutical industry. To achieve these goals, we will pursue the following strategies:
• to expand and consolidate our sales and distribution network and strengthen our marketing efforts;
• to integrate our research and development platform and to accelerate the pace of our research and development in various areas;
• to accelerate our expansion through acquisition, strategic collaboration and joint ventures; and
• to expand and enhance our production capacity and capability.
INTERNAL CONTROLAND RISK MANAGEMENT
The Zhuhai Livzon Diagnostic Reagents Inc. Incident
In 2010, Zhuhai Livzon Diagnostic Reagents Inc. ( ) (“Livzon Diagnostic Reagents”) intended to organise an academic conference with Shanghai Clinical LaboratoryCentre( )(“SCLC”)wherebyLivzonDiagnosticReagentswas responsible for the expenses of the conference. The then local manager of Livzon Diagnostic Reagents stationed in Shanghai (the “Manager”) was responsible for organising the academic conference. In accordance with our internal policies, the Manager submitted a budget for the conference showing, among others, estimated accommodation expenses for experts, catering expenses and transportation fees, and applied for an advancement for the conference. The vice general manager of Livzon Diagnostic Reagents, Mr. Shi Jianfeng ( ), approved the conference advancement of RMB100,000.00 and hence we remitted such sum to theManager’s personal account. As represented by the Manager, subsequently an officer of SCLC (the “SCLC Officer”) requested the Manager to give him the sum in advance so that he could facilitate the organisation of the conference. Upon the request of the SCLC Officer, the Manager withdrew the sum from his personal account and released it in cash to the SCLC Officer without authorisation from Livzon Diagnostic Reagents. According to our internal policies, the representatives of our Group who are responsible for organising conferences were only allowed to use the conference advancements to pay the conference expenses directly, but not to release such sum to any other third parties.Apparently, the Manager in this incident was in breach of our above internal policies. Upon receipt of such sum, the SCLC Officer deposited it into his personal account.According to a judgment issued by the Shanghai PudongPeople’s
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SUMMARY
Court ( ) dated 5 July 2010, the court convicted the SCLC Officer of receiving bribe. However, neither Livzon Diagnostic Reagents nor the Manager was held liable. According to the news entitled “3 (Three pharmaceutical and equipment suppliers prohibited in the Shanghai market)” published on the websiteoftheNewsCentreoftheShanghaiMunicipalHealthBureauon15February2011,the Shanghai Municipal Health Bureau decided that (a) health authorities in Shanghai were prohibited from purchasing any equipment and other products from, among the other two enterprises,LivzonDiagnosticReagentsfortwoyearscommencingfrom16February2011;(b) all relevant subsisting sales contracts were terminated and all liabilities arising from such termination were to be borne by the enterprises being listed in the commercial bribery record; and (c) all tender associations in Shanghai should not accept the participation of, among the other two enterprises, Livzon Diagnostic Reagents in the tender activities for pharmaceutical or equipment purchase in Shanghai for two years commencing from 16 February 2011.As the pharmaceutical supervisory authority in Shanghai, the Shanghai Municipal Health Bureau has the sole discretion pursuant to the Shanghai Municipal HealthBureau’sAdvice on Establishing the Required Records of Commercial Bribery in the Sale and Purchase of Pharmaceutical Products ( <
> ) to impose prohibitions on medical and health institutions at all levels in Shanghai from purchasing pharmaceutical products, medical devices, medical equipment or accessories (collectively, “Relevant Products”) from those enterprises which are engaging in the production and/or sale of the Relevant Products which it thinks are implicated in commercial bribery. As at the Latest Practicable Date, our Group had not received any document of punishment from the Shanghai Municipal Health Bureau. Livzon Diagnostic Reagents had resumed its participation in the pharmaceutical market in Shanghai after the two-year prohibition period expired on 15 February 2013. We cannot assure you that similar incidents will not happen in the future. Please refer to the sections headed “Risk Factors– Risks Relating to Our Business” and “Business– Legal and Compliance” in this listing document for further details of this incident and the associated risks.
RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
Upon Listing, each of Joincare, Shenzhen Baiyeyuan, Mr. Zhu and Ms. Liu will be regarded as a Controlling Shareholder of our Company. Joincare is a joint stock company incorporated in the PRC and was listed on the Shanghai Stock Exchange in 2001. It is principally engaged in three major business segments, namely (a) the production and sales of drug preparation products; (b) the production and sales of bulk medicines and intermediates; and (c) the research, production and sales of healthcare products. Mr. Zhu and Ms. Liu, our Directors, are also directors of Joincare as well as the ultimate beneficial owners of Joincare. During the Track Record Period, we had entered into various transactions in the ordinary course of our business with the Joincare Group, some of which are expected to continue following the Listing. In particular, Jiaozuo Joincare was our single largest supplier, supplying 7-ACAto us for each of the three years ended 31 December 2010, 2011 and 2012. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the total amount paid by us to the Joincare Group in relation to the purchase of products
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SUMMARY
and raw materials from the Joincare Group amounted to approximately RMB235.53 million, RMB86.47 million, RMB84.63 million and RMB89.11 million, respectively. The decrease in our purchases from the Joincare Group for 2011 and 2012 was mainly due to the shrinking demand for our antibiotics related drug preparation products due to the restriction of use of antibiotics in the PRC following the introduction of the Notice on theAdjustment of Maximum Retail Price for CertainTypes of Microbial and Circulatory System Drugs issued by the NDRC ( ) in 2011 and theAdministrative Measures for the ClinicalApplication ofAntibiotics (
) in 2012.
On 10 January 2014, our Company entered into an agreement with Joincare, pursuant to which the Joincare Group shall sell certain products and raw materials which are mainly used for the production of antibiotics related drug preparation products, such as voriconazole itraconazole ( ), 7-ACA, D7-ACA, acetonitrile ( ), 100ml moulded bottles, rubber plugs to such members of our Group from time to time in accordance with the terms thereof for a period commencing from the Listing Date and ending on 31 December 2015 (the “Joincare Purchases Agreement”). We estimate the total purchase under the Joincare Purchases Agreement for each of the two years ending 31 December 2014 and 2015 will not exceed RMB156.00 million and RMB187.20 million, respectively. The proposed annual caps for each of the two years ending 31 December 2014 and 2015 have been determined with reference to (a) the internal projection of the development of ourGroup’s business; (b) the prevailing market condition and demand for ourGroup’s products; (c) the historical growth of the PRC pharmaceutical industry; (d) the prevailing market prices for the relevant raw materials; (e) inflation; (f) the business development plans of our Group; (g) the implementation by ourCompany’s subsidiary Zhuhai FTZ Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) (“Zhuhai Hecheng”) of its recent in-depth reform in terms of, among other things, salary incentive and staff performance assessment, aimed at increasing the sales income of Zhuhai Hecheng; and (h) ourGroup’s potential in increasing our market share in the area of bulk medicine (including cephalosporins category ( )) and intermediates. From the publication of the 2012 Notice on Governance of Corporates Engaging in Illegal Waste Emission and Protection of Public Health and Environment ( 2012
) and the 2013 Notice on Governance of Corporates Engaging in Illegal Waste Emission and Protection of Public Health and Environment ( 2013
) by the relevant PRC Government authorities, our Company expects that the supervision of pharmaceutical enterprises on environmental aspects will become more stringent. Because of this, our competitors who are using production methods or equipment that do not satisfy the current required standards may lose out on their supply to the market. Further, since we believe our Group is more advanced in environmental control and governance than our competitors, we expect ourGroup’s market share may increase by taking up the market share which our competitors may be losing out.
Please refer to the sections headed “Relationship with Our Controlling Shareholders” and “Connected Transactions” in this listing document for further details.
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SUMMARY
RISK FACTORS
Therearerisksassociatedwithanyinvestment.Someoftheparticularrisksofinvestment in our H Shares are set out in the section headed “Risk Factors” in this listing document. You shouldreadtheentiresectioncarefullytogetherwithalloftheinformationsetoutinthislisting document, prior to making any investment decision.
The nature of our business exposes us to the risks of product liability, personal injury or wrongful death claims that are inherent in the research and development, manufacturing, marketing and sales of pharmaceutical products. Pharmaceutical products may be rendered unfit for consumption due to product contamination or degeneration, illegal tampering by unauthorised third parties or other problems arising during the various stages of procurement, production, transportation and storage processes. The occurrence of these incidents may result in customer complaints or adverse publicity causing serious damage to our reputation and brand images, as well as product liability claims against us which may result in a loss in our turnover.
Besides, pharmaceutical products which are listed on the National Medicine Catalogue, the Provincial Medicine Catalogue or the National List of Essential Drugs or those pharmaceutical products which are deemed by the PRC Government to be drugs whose production and trading tend to create monopolies are subject to price control in the form of fixed retail prices or maximum retail prices.As at the Latest Practicable Date, 68 types of drug preparation products sold by us were listed on the National Medicine Catalogue or the Provincial Medicine Catalogue, of which 11 types were also included in the National List of Essential Drugs and therefore are subject to such price controls. Retail price controls indirectly affect the wholesale prices of our drug preparation products at which we sell the products to pharmaceutical products distributors. In the event that the cost of manufacturing or selling our products increases and we are not able to pass such increased costs to our end customers as a result of the price control, our results of operations could be adversely affected.
In addition, our B Shareholders should be aware of the risks and special notes to the investors set out in the Implementation Plan, which was published by our Company on 31 January 2013 and approved by our Shareholders at the extraordinary general meeting on 20 February 2013. The full version of the Implementation Plan is available at the following website:
For the Chinese version:
http://www.cninfo.com.cn/finalpage/2013-01-31/62087805.PDF
For the English version:
http://www.cninfo.com.cn/finalpage/2013-01-31/62087806.PDF
In accordance with relevant PRC laws and regulations, PRC Shareholders are not allowed to purchase overseas securities. Upon and after the Listing, our domestic investors and domestically-trading overseas investors can only hold or sell the H Shares held by them but
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SUMMARY
cannot purchase any additional H Shares or any other securities listed on the Hong Kong Stock Exchange. All proceeds from the sale of the H Shares owned by our domestic investors and domestically-trading overseas investors must be remitted into the PRC as soon as practicable upon the sale.
DIVIDEND POLICY
SubjecttoapprovalbyourShareholders,ourDirectorsmaydeclaredividendsaftertaking into account, among other things, ourGroup’s results of operations, cash flows and gearing, working capital and capital expenditure requirements, the amount of distributable profits based on CASBE, theArticles ofAssociation, the Company Law, applicable laws and regulations and other factors that our Directors consider relevant. In particular, under applicable PRC laws and the Articles of Association, our Company can only distribute dividends out of ourGroup’s after-tax profit after the following allocations have been made: (i) recovery of accumulated losses, if any; (ii) mandatory allocations to the statutory common reserve fund equivalent to10% of ourGroup’s after-tax profit, unless the common reserve fund reaches50% of ourCompany’s registered capital or above; and (iii) allocations to discretionary common reserve fund, subject to ourShareholders’ approval at theShareholders’ meeting.
Our Company declared and paid cash dividends in the amount of RMB29.57 million, RMB147.86 million and RMB147.86 million in respect of the three years ended 31 December 2010, 2011 and 2012, respectively, representing RMB0.10, RMB0.50 and RMB0.50 per Share. Our Shareholders will have an equal right to distributable profit in respect of the year ended 31December2013andthereafter.PursuanttotheArticlesofAssociation,thecumulativeprofit distribution in cash by us for any last three-year period shall not be less than30% of the average annual distributable profits for the same three-year period. Dividends paid in prior years may not be indicative of future dividend payments. We cannot guarantee when, if and in what form dividends will be paid in the future.
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SUMMARY
SHAREHOLDER INFORMATION
As at the Latest Practicable Date, the following shareholders directly controlled, or were entitled to control the exercise of, more than5% of our issued Shares:
Approximate percentage of No. of Shares Held share capital Joincare 77,510,167 A Shares 26.21% 5,892,943 A Shares(Note 1) 1.99% 6,059,428 A Shares(Note 2) 2.05% 50,660,052 B Shares(Note 3) 17.13% Topsino(Note 3) 50,660,052 B Shares 17.13% Notes:
(1) These 5,892,943AShares were held by Shenzhen Haibin, a wholly-owned subsidiary of Joincare.
(2) On2January2004,Begol,ZhuhaiLishiInvestmentCo.,Ltd.( )andJoincare entered into a share transfer and custody agreement and a share pledge agreement, pursuant to which the 6,059,428 A Shares held by Begol has been transferred to, held in custody by and pledged to Joincare.
(3) Topsino is a wholly-owned subsidiary of Joincare.
(4)Pleaserefertothesectionheaded“HistoryandDevelopment–OurShareholdingandGroupStructure” in this listing document for further details on the shareholding information of our Company.
REASONS FOR THE LISTING
WehavenotedthatthetradingofBShareshashistoricallybeenratherinactiveinthePRC securities market. The B Share market lacks liquidity and the B Shareholders may find it difficult to fully realise the value of their investment in our Company. As at the date of this listing document, the total number of issued Shares of our Company was 295,721,852 Shares, comprising 183,728,498 A Shares and 111,993,354 B Shares, respectively. Although the total number of B Shares in issue is approximately60.96% of the total number ofAShares in issue, the trading of the B Shares is far less active compared to that of theAShares.As a result, the B Share price had been substantially lower than the A Share price during the Track Record Period.
The current status of the B Share market affects the valuation of our B Shares adversely, which is not in line with the interests of our B Shareholders as a whole. Our Company intends to convert the B Shares into H Shares which will be listed by way of introduction on the Main Board of the Hong Kong Stock Exchange.We believe that the Listing may provide our existing B Shareholders more liquidity in the Shares held by them and more opportunities to realise the value of their investment in our Company. Furthermore, we expect that the Listing will enable
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SUMMARY
us to promote our international presence, attract investors with different profiles, thereby widening the investor base of our Company. In particular, the Listing will enable us to benefit from exposure to a wider range of private and institutional investors. In addition, upon the completion of the Listing, our Company is expected to have direct access to the international capital markets from which we hope to increase our fund raising capacity and improve our competitiveness in the international market.
THE ARRANGEMENT
Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares) ofHK$37.92, the market capitalisation of the 61,333,302 H Shares to be held by public H Shareholders is expected to be approximatelyHK$2.33 billion. Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares)ofHK$37.92,theclosingpriceofASharesofRMB41.00on9January2014andthetranslation of Renminbi into HK dollars at the rate of RMB0.78769 toHK$1.00, the market capitalisation of ourCompany’s total issued Shares of 295,721,852 Shares is expected to be approximatelyHK$13.81 billion. The market capitalisation of ourCompany’s total issued H Shares of 111,993,354 H Shares is expected to be approximatelyHK$4.25 billion. Accordingly, our Company expects to be able to meet the market capitalisation requirement under Rule 8.09(1), (2) and (3) of the Hong Kong Listing Rules.
As at 9 January 2014, there were at least 432 public beneficial B Shareholders with securities accounts opened in Hong Kong with Guosen HK Brokerage or other eligible Hong Kong or overseas securities corporations holding in aggregate 23,088,652 B Shares, representing approximately20.62% of the total number of issued B Shares and approximately7.81% of the total number of issued Shares, who are ready to trade their H Shares on the Hong Kong Stock Exchange upon the commencement of trading of H Shares on the Listing Date. Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares) ofHK$37.92, the market capitalisation of the 23,088,652 B Shares held by such 432 public beneficial B Shareholders is approximatelyHK$875.52 million, which is already larger than the entire market capitalisation of a large number of Hong Kong-listed companies. Therefore, our Company expects that there will be adequate liquidity of H Shares upon the Listing.
Upon Listing, the Cash Option Providers will hold in total 10,806,916 H Shares (including19,570SharesacquiredbyGaolingFundand19,569SharesacquiredbyGuosenHK Asset Management upon exercise of the Cash Option by the B Shareholders). Such H Shares arenotsubjecttoanylock-upperiodandcanbetradedontheHongKongStockExchangeonce Listing occurs.
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SUMMARY
In addition, our Company intends to make the following announcements:
• an announcement on the websites of the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and our Company on Tuesday, 14 January 2014 on (i) the closing price ofAShares on 13 January 2014 and 14 January 2014 and the closing price of B Shares on 20 December 2013 (being the last trading day of B Shares); and (ii) the price per B Share payable by the Cash Option Providers to B Shareholders pursuant to the Cash Option; and
• an announcement on the websites of the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and our Company on Wednesday, 15 January 2014 on (a) obtaining the final listing approval in writing from the Hong Kong Stock Exchange; (b) the closing price of A Share on 15 January 2014 and the closing price of B Shares on 20 December 2013 (being the last trading day of B Shares); and (iii) the price per B Share payable by the Cash Option Providers to B Shareholders pursuant to the Cash Option.
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DEFINITIONS
In this listing document, unless the context otherwise requires, the following expression shall have the following meanings.
“A Share(s)” ordinaryshare(s)issuedbyourCompanyinthePRCwith anominalvalueofRMB1.00each,whicharelistedonthe Shenzhen Stock Exchange and traded in Renminbi
“A Shareholder(s)” holder(s) of our A Shares
“Arrangement” the measures taken by our Company and Guosen HK Brokerage aiming to attain the public float of our H Shares to be traded on the Hong Kong Stock Exchange as set out in the section headed “Listings, Registration, Dealings and Settlement” in this listing document
“Articles of Association” or the articles of association of our Company, the current “Articles” version of which was adopted by our Shareholders at the extraordinary general meeting on 20 February 2013 and amended on 30 August 2013, 16 September 2013 and 6 November 2013, respectively, which will become effective upon the listing of our H Shares on the Hong Kong Stock Exchange, as the same may be amended, supplemented or otherwise modified from time to time “associate(s)” has the meaning ascribed to it under the Hong Kong Listing Rules
“Audit Committee” the audit committee of our Board
“B Share(s)” domestically listed foreign share(s) issued by our Company in the PRC with a nominal value of RMB1.00 each listed on the Shenzhen Stock Exchange and traded in HK dollars
“B Shareholder(s)” holder(s) of our B Shares
“Banking Ordinance” theBankingOrdinance(Chapter155oftheLawsofHong Kong), as amended, supplemented or otherwise modified from time to time
“Begol” Guangzhou Begol Trading Corporation (
), a company established in the PRC on 13 March 1985
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DEFINITIONS
“Biaodian” Guangzhou Biaodian Medical Information Co., Ltd. (
), which is principally engaged in publishing and information management and is a service provider of information gathering, research and analysis of the pharmaceutical industry. Biaodian is directly controlled by the SFDA and an Independent Third-Party which is indirectly owned by Southern Medicine Economic Research Institute
“Biaodian Report” the industry report titled “Research Report onPRC’s Pharmaceutical Industry and Market Analysis on theCompany’s Major Products” prepared and issued by Biaodian in January 2014
“Board” or “Board of Directors” the board of Directors
“Business Day” a day on which licenced banks in Hong Kong are generally open for business to the public and which is not a Saturday, Sunday or public holiday in Hong Kong
“CASBE” Accounting Standards for Business Enterprises– Basic Standard and 38 Specific Standards issued by the Ministry of Finance of the PRC, and application guidance, bulletins and other relevant accounting regulations issued subsequently (collectively referred to as “China Accounting Standards for Business Enterprises”)
“Cash Option” the cash option provided by the Cash Option Providers to all our B Shareholders (other thanTopsino, Gaoling Fund and Sunrise Palace Limited) atHK$29.09 per B Share under the Implementation Plan
“Cash Option Provider(s)” Gaoling Fund and Guosen HKAsset Management or any one of them
“CCASS” the Central Clearing and Settlement System established and operated by HKSCC
“China” or “PRC” thePeople’sRepublicofChinaexcluding,forthepurpose of this listing document, Hong Kong, the Macau Special Administrative Region of thePeople’s Republic of China and Taiwan
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DEFINITIONS
“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time
“Company” Livzon Pharmaceutical Group Inc. (
), a joint stock company incorporated in the PRC withlimitedliabilityon26January1985andlistedonthe Shenzhen Stock Exchange (Shenzhen stock code: for A Shares: Livzon Group (000513); for B Shares: Livzon B (200513))
“Company Law” (the Company Law of the PRC) as enacted by the Standing Committee of the NationalPeople’s Congress on 29 December 1993, which became effective on 1 July 1994, and as amended by the Standing Committee of the NationalPeople’s Congress on 27 October 2005, which amendment became effective on 1 January 2006, as amended, supplemented or otherwise modified from time to time
“connected person(s)” has the meaning ascribed to it under the Hong Kong Listing Rules
“Controlling Shareholder(s)” has the meaning ascribed to it under the Hong Kong Listing Rules and, in the context of this listing document, means the controlling shareholder(s) of our Company, being Mr. Zhu, Ms. Liu, Shenzhen Baiyeyuan and Joincare. Please refer to the section headed “Relationship with our Controlling Shareholders” in this listing document for further details
“CSDC” (China Securities Depository and Clearing Corporation Limited)
“CSRC” (China Securities Regulatory Commission)
“Director(s)” director(s) of our Company
“EIT Law” (the Enterprise Income Tax Law of the PRC)
“Euro” the lawful currency of the participating member states of the European Union
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DEFINITIONS
“Gaoling Fund” Gaoling Fund, L.P., a limited partnership which as at the Latest Practicable Date was interested in approximately3.65%ofourtotalissuedShares,allofwhichwereBShares. GaolingFundismanagedbyHillhouseCapitalManagement, Ltd., an exempted company incorporated in the Cayman Islands with limited liability
“Group”, “we”, “our” or “us” our Company and its subsidiaries
“Guosen HKAsset Management” Guosen Securities (HK) Asset Management Company Limited ( ) , a licenced corporation under the SFO to carry on type 1 (dealing in securities),type4(advisingonsecurities),type5(advisingon futures contracts) and type 9 (asset management) regulated activities
“Guosen HK Brokerage” Guosen Securities (HK) Brokerage Company Limited
( ) , a licenced corporation under the SFOtocarryontype1(dealinginsecurities),type2(dealing in futures contracts), type 4 (advising on securities) and type 5 (advising on futures contracts) regulated activities
“Guosen HK Capital” or “Sole GuosenSecurities(HK)CapitalCompanyLimited
Sponsor” ( ) , a licenced corporation under the SFO tocarryontype1(dealinginsecurities)andtype6(advising on corporate finance) regulated activities
“Guosen Securities” Guosen Securities Co., Ltd. , a securitiescompanyincorporatedinthePRC,engagedbyour Company to act as our financial adviser to the Implementation Plan, and the ultimate holding company of the Sole Sponsor
“H Share(s)” overseaslistedforeignshare(s)issuedbyourCompany,with anominalvalueofRMB1.00each,whicharetobelistedand tradedinHKdollarsontheHongKongStockExchangeupon the Listing
“H Share Registrar” Tricor Investor Services Limited
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DEFINITIONS
“H Share Transaction Cost” the transaction costs of dealings in H Shares on the Hong Kong Stock Exchange, which will include a trading fee of0.005%chargedpersideoftheconsiderationofatransaction, an SFC transaction levy of0.003% charged per side of the consideration of a transaction and ad valorem stamp duty onboththebuyerandthesellerchargedattherateof0.1%each of the consideration of the H Shares transferred
“H Shareholder(s)” holder(s) of our H Shares
“HK$” or “HK dollars” or “HKD” Hong Kong dollars, the lawful currency of Hong Kong
“HKSCC” Hong Kong Securities Clearing Company Limited
“Hong Kong” the Hong Kong Special Administrative Region of thePeople’s Republic of China
“Hong Kong Listing Rules” the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as the same may be amendedandsupplementedorotherwisemodifiedfromtime to time
“Hong Kong Stock Exchange” The Stock Exchange of Hong Kong Limited
“Hong Kong Takeovers Code” theCodesonTakeoversandMergersandShareRepurchases “Implementation Plan”
(the Implementation Plan in Relation to the Proposed Listing) published by us on the website of the Shenzhen Stock Exchange on 31 January 2013 and approved by our Shareholders at the extraordinary general meeting on 20 February 2013, the full text of which is available in Chinese at http://www.cninfo.com.cn/finalpage/ 2013-01-31/62087805.PDF and in English at http://www.cninfo.com.cn/finalpage/2013-01-31/62087806.PDF “Independent Third-Party(ies)” apersonorpersonsoracompanyorcompaniesthatisnotor are not our connected person(s)
“Jiaozuo Joincare” (Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd.), a company established in the PRC on 21 July 2005 and is a wholly- owned subsidiary of Joincare
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DEFINITIONS
“Joincare” (Joincare Pharmaceutical Industry Group Co., Ltd.) (Shanghai Stock Exchange stock code: 600380), a joint stock company incorporated in the PRCon18December1992andlistedontheShanghaiStock Exchange in 2001 and one of our Controlling Shareholders “Joincare Group” Joincare and its subsidiaries (other than our Group) at the relevantpointoftimeor,wherethecontextsorequires,in respect of the period before Joincare became the holding company of its present subsidiaries, the present subsidiaries of Joincare
“Latest Practicable Date” 10 January 2014, being the latest practicable date for the inclusion of certain information in this listing document before its publication
“Listing” thelistingofourHSharesontheMainBoardoftheHong Kong Stock Exchange by way of introduction
“Listing Committee” theListingCommitteeoftheHongKongStockExchange “Listing Date” the date on which dealing in the H Shares commences on the Hong Kong Stock Exchange
“Mandatory Provisions” (the Mandatory Provisions forArticles ofAssociation of Companies to be Listed Overseas) for inclusion in the articles of association of companies incorporated in the PRC to be listed overseas, which were promulgated by the former State Council Securities Commission and the former State Commission for Restructuring the Economic System of the PRC on 27 August 1994, as the same may be amended and supplemented or otherwise modified from time to time
“MOFCOM” , Ministry of Commerce of the PRC
“MOH” , National Health and Family Planning Commission of the PRC (formerly known as , Ministry of Health of the PRC)
“MOP” Macau Pataca, the lawful currency of Macau
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DEFINITIONS
“Mr. Zhu” Mr. Zhu Baoguo ( ), our Chairman and a non-executive Director, the spouse of Ms. Liu and one of our Controlling Shareholders
“Ms. Liu” Ms. Liu Guangxia ( ), our vice chairman and a non-executive Director, the spouse of Mr. Zhu and one of our Controlling Shareholders
“NDRC” (the National Development and Reform Commission of the PRC)
“Nomination Committee” the nomination committee of our Board
“PBOC” (thePeople’s Bank of China)
“PRC Government” or “State” the central government of the PRC and its political subdivisions, including provincial, municipal and other regional or local government bodies or, as the context requires, any of them
“Remuneration and Assessment the remuneration and assessment committee of our Board Committee”
“RMB” or “Renminbi” Renminbi, the lawful currency of the PRC
“SAFE” (the State Administration of Foreign Exchange of the PRC)
“SAIC” (the State Administration of Industry and Commerce of the PRC) “SAT” (the State Administration of Taxation of the PRC)
“SD&C” (China Securities Depository and Clearing Corporation Limited (Shenzhen branch)), being a branch office of CSDC in Shenzhen
“SFC” the Securities and Futures Commission of Hong Kong “SFDA” (the State Food and Drug Administration of the PRC), a governmental authority responsible for the regulation of food and drugs
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DEFINITIONS
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as the same may be amended and supplemented or otherwise modified from time to time “Shanghai Stock Exchange” (the Shanghai Stock Exchange)
“Share(s)” share(s) in the share capital of our Company, with a nominal value of RMB1.00 each, comprising our A Shares, B Shares or H Shares
“Shareholder(s)” holder(s) of our Shares
“Shenzhen Baiyeyuan” (Shenzhen Baiyeyuan Investment Co., Ltd.), a company established in the PRC on 21 January 1999 and one of our Controlling Shareholders
“Shenzhen Haibin” (Shenzhen Haibin Pharmaceutical Co., Ltd.), a company established in the PRC on 22 August 1989 and as at the Latest Practicable Date, was directly interested in approximately1.99% of our total issued Shares, all of which were A Shares. Shenzhen Haibin is a direct wholly-owned subsidiary of Joincare
“Shenzhen Listing Rules” (the Stock Listing Rules of the Shenzhen Stock Exchange)
“Shenzhen Stock Exchange” (the Shenzhen Stock Exchange)
“sq.m.” square metres
“SSSCC” (Shenzhen Securities Communication Co., Ltd.)
“State Council” (the State Council of the PRC) “Strategic Committee” the strategic committee of our Board
“subsidiary(ies)” has the meaning ascribed to it under the Hong Kong Listing Rules
“Substantial Shareholder” has the meaning ascribed to it under the Hong Kong Listing Rules
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DEFINITIONS
“Supervisor(s)” the member(s) of the Supervisory Committee
“Supervisory Committee” the supervisory committee of our Company established pursuant to the Company Law, as described in Appendix III to this listing document
“Topsino” (Topsino Industries Limited), a company incorporated in Hong Kong on 3 October 2001 and which, as at the Latest Practicable Date, was directly interested in approximately17.13% of our total issued Shares, all of which were B Shares. Topsino is a wholly-owned subsidiary of Joincare
“Track Record Period” the period comprising the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013
“Transaction Guide” , the transaction guide compiled by the CSDC and published by our Company on 22 October 2013 on the websites of the Shenzhen Stock Exchange and our Company to provide investors with guidance on trading in our H Shares
“U.S.” or “United States” the United States of America
“U.S. FDA” the Food and Drug Administration of the United States“US$” or “U.S. dollars” or United States dollars, the lawful currency of the United “USD” States
“VAT” value-added tax; all amounts are exclusive of VAT in this listing document except indicated otherwise
“Yen” Japanese Yen, the lawful currency of Japan
“%” per cent.
The names of companies and entities established in the PRC and the laws and regulations in the PRC have been included in this listing document both in English and Chinese. Unless such companies, entities, laws and regulations have an English name as part of their legal name, all English translations of official Chinese names are for identification purposes only. IntheeventofanyinconsistencybetweentheChinesenamesandtheirEnglishtranslations,the Chinese name shall prevail.
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GLOSSARY OF TECHNICAL TERMS
This glossary of technical terms used in this listing document relate to our business. As such, these terms and their meanings may not always correspond to the standard industry meaning or usage of these terms.
“7-ACA” 7-amino-cephalosporanic acid
“AIDS” acquired immunodeficiency syndrome
“API” active pharmaceutical ingredient, the biologically active substance in a pharmaceutical product which is responsible for the therapeutic effect of a drug
“bulk medicine” includes bulk medicine and pharmaceutical intermediates “CAGR” compound annual growth rate
“capsule” a form of medicine sealed in a gelatin capsule for oral administration
“cardio-cerebral-vascular” relating to or affecting the brain, heart, blood vessels or circulatory systems
“Chinese medicine” or a compound derived from plant, animals and mineral “traditional Chinese medicine” according to certain principles, which helps to restore the balance between the human body and the environment or human organs
“Class I hospitals” local hospitals with small capacity designated as class I hospitals by the MOH hospital classification system that provideonecommunitywithelementarymedicalservices “Class II hospitals” regional hospitals with minimum capacity designated as class II hospitals by the MOH hospital classification systemthatprovidemultiplecommunitieswithintegrated medial services and undertake certain educational and scientific research missions
“Class III hospitals” multi-regional hospitals with large capacity designated as class III hospitals by the MOH hospital classification system that provide multiple regions with high-quality professional medical services, undertake higher education and scientific research initiatives and are followed by lower ranked class II and class I hospitals
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GLOSSARY OF TECHNICAL TERMS
“clinical trial” a research study for validating or finding the therapeutic effectsandside-effectsoftestdrugsinordertodetermine the therapeutic value and safety of such drugs
“D7-ACA” 3-deacetyl-7-amino-cephalosporanic acid
“drug preparation” a medical substance made ready for use
“ELISA” enzyme-linked immunosorbent
“first-to-market generic drug(s)” first generic drug(s) that receive approval to be marketed “GDP” gross domestic product
“generic drugs” drugs which use the same active ingredients as the original products and are generally available in the same strengths and dosage forms as the original
“GMP” or “Good Manufacturing a set of guidelines and regulations issued from time to Practise” time pursuant to the Law on the Administration of Pharmaceuticals of the PRC (
) as part of quality assurance to ensure that pharmaceutical products subject to those guidelines and regulations are consistently produced and controlled to the quality and standards appropriate for their intended use
“granule(s)” a granular form medicine for oral administration
“GSP” or “Good Supply a set of guidelines and regulations issued from time to Practise” time pursuant to the Law on the Administration of Pharmaceuticals of the PRC (
) as part of quality assurance to ensure that pharmaceutical distribution enterprises distribute pharmaceutical products in compliance with those guidelines and regulations
“HMG” 3-hydroxy-3-methyl-glutaryl
“HRP” horseradish peroxidase
“innovative drug(s)” drug(s) that are new chemical or biochemical entities and are different from existing options to treat diseases
“MYCO II” mycoplasma pneumoniae II
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GLOSSARY OF TECHNICAL TERMS
“national 1.1 class” a recognition awarded by the Centre for Drug Evaluation ofChinaDrugandFoodAdministration(
) in respect of a drug preparation product which has not been previously launched in both PRC and international markets. In order to be eligible for the recognition, the applicant has to submit the relevant documents as stipulated under the Measures for the Administration of Drug Registration (
)andtheSpecialProvisionsontheAdministrationof Examination and Approval of New Drug Registration ( )
“National List of Essential , a list of drugs promulgated by Drugs” the MOH to promote essential medicines to be sold to consumers at fair prices and to ensure equal access by the general public
“National Medicine Catalogue” , a catalogue of the list of pharmaceutical products under the National Basic Medical Insurance and Work-Related Injury Insurance of the PRC (
) as determined by the PRC state level authorities for general application throughout the PRC. The National Medicine Catalogue is divided into two parts, Part A and Part B
“new drug” a drug which has not previously been marketed in the PRC and which is required to be registered as a new pharmaceutical product in accordance with applicable rules and regulations in the PRC as summarised in the section headed “Regulations” in this listing document
“OTC” or “over-the-counter” over-the-counter pharmaceutical products which may upon receiving the approval of the SFDA approval, be sold over the counter in pharmacies or other retail outlets without requiring a prescription by a medical practitioner “PMTCT” prevention of mother to child transmission
“preclinical trial” a laboratory test of a new drug on animal subjects, conducted to gather evidence justifying a clinical trial
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GLOSSARY OF TECHNICAL TERMS
“Provincial Medicine Catalogue” a list of pharmaceutical products under Part B of the National Medicine Catalogue as varied with limited changes by the different provincial level authorities with respect to the medicines that are included in that Part. This results in some regional variations between different provinces with respect to the medicines that are included under the Provincial Medicine Catalogue of the respective provinces
“suppository” a drug delivery system that is inserted into the rectum (rectal suppository), vagina (vaginal suppository) or urethra (urethral suppository), where it dissolves or melts “tablet(s)” a tablet form medicine for oral administration
“TPPA” treponema pallidum particle agglutination
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FORWARD-LOOKING STATEMENTS
This listing document contains forward-looking statements that are, by their nature, subject tosignificantrisksanduncertainties,includingtheriskfactorsdescribedinthislistingdocument. These forward-looking statements include, but are not limited to, statements relating to:
• our operations and business prospects;
• future developments, trends and competition in the pharmaceutical industry in the PRC and elsewhere;
• products under development or planning;
• our strategy, business plans, objectives and goals;
• our capital expenditure plans;
• our dividend distribution plans;
• the prospective financial information regarding our business;
• our future financial condition and results of operations;
• the amount and nature of, and potential for, future development of our business;• general economic, market and business conditions in the world and in the PRC; and• changes to regulatory and operating conditions in the markets in which we operate. In some cases we use words such as “believe”, “seek”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “will”, “may”, “should”, “expect” and other similar expressions to identify forward-looking statements. All statements other than statements of historical facts included in this listing document, including statements regarding our future financial position, strategy, projected costs and plans and objectives of management for future operations,areforward-lookingstatements.Althoughwebelievethattheexpectationsreflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct, and you are cautioned not to place undue reliance on such statements.
Furthermore, these forward-looking statements merely reflect our current view with respect to future events and are not a guarantee of future performance. Our financial condition may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, factors disclosed under the section headed “Risk Factors” and elsewhere in this listing document and the following:
• demand for our products;
• changes in the general operating environment of the pharmaceutical industry in the PRC;
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FORWARD-LOOKING STATEMENTS
• general economic, market and business conditions in the PRC and globally;
• effects of competition on the demand for and the prices of our products;
• the development of new products or technologies affecting our current or future business;
• changes or volatility in interest rates, foreign exchange rates, equity prices or other rates or prices; and
• other factors beyond our control.
Subject to the requirements of applicable laws, rules and regulations, we do not have any obligation and do not intend to update or otherwise revise the forward-looking statements in this listing document, whether as a result of new information, future events or otherwise. Because of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this listing document might not occur in the way we expect, or atall.Accordingly,youshouldnotplaceunduerelianceonanyforward-lookingstatements.All forward-lookingstatementscontainedinthislistingdocumentarequalifiedbyreferencetothis cautionary statement.
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RISK FACTORS
Investing in and holding our H Shares are subject to a number of risks.Accordingly,
you should carefully consider the risks described below, together with all of the
information set out in this listing document prior to making any investment in or holding
our H Shares. Our business, results of operations and financial condition could be
materially and adversely affected by any of the risks and uncertainties described below
andthetradingpriceofourHSharescoulddeclinesignificantly,asaresultofwhich,you
may lose all or part of your investment.
We believe that there are certain risks and uncertainties involved in our operations, some of which are beyond our control. We have categorised these risks and uncertainties into: (a) risks relating to our business; (b) risks relating to our industry; (c) risks relating to conducting business in the PRC; (d) risks relating to the Listing; and (e) risks relating to statements made in this listing document.
RISKS RELATING TO OUR BUSINESS
Product liability, personal injury and wrongful death claims, customer complaints, product tampering, quality control concerns or adverse publicity in relation to our products, which may materially and adversely affect our business, reputation, financial condition and results of operations.
The nature of our business exposes us to the risk of product liability, personal injury or wrongful death claims that are inherent in the research and development, manufacturing, marketing and sale of pharmaceutical products. Using products under development in clinical trials also exposes us to product liability claims such as unsafe, ineffective or defective products, the improper filling of or labelling of prescriptions, adequacy of warnings and unintentionaldistributionofcounterfeitmedicines.Theserisksaregreaterforourproductsthat receive regulatory approval for commercial sale. Even if a product is approved for commercial use by an appropriate governmental agency, there is no assurance that users will not claim that effects other than those intended resulted from the use of our products. Certain PRC laws relating to product liability and protection of consumers are set out in the section headed “Regulations” in this listing document.
Pharmaceutical products may also be rendered unfit for consumption due to product contamination or degeneration, illegal tampering by unauthorised third parties or other problems arising during the various stages of procurement, production, transportation and storage processes. In 2012, there were news articles which reported that, among other things, Jiaozuo Joincare, one of our 7-ACA suppliers, purchased soybean oil which contained low quality refined oil ( ) from Henan Huikang Oil Co., Ltd. ( ) (“Henan Huikang”). Please refer to the section headed “Business– The Low Quality Refined OilIncident”inthislistingdocumentforfurtherdetailsofthisincident.Theoccurrenceofsuch similar incidents may result in customer complaints or adverse publicity causing serious damagetoourreputationandbrandimages,aswellasproductliabilityclaimsagainstuswhich may result in a loss in our turnover. Under certain circumstances, for example, where there are
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RISK FACTORS
allegations that any of our products are harmful, we may experience reduced demand for our products or we may be required to recall our products. There is no assurance that we will not face any product liability claims or a product recall in the future. We may also be forced to defend lawsuits and, if unsuccessful, to pay damages. Although no product recall or claim for personal injury resulting from allegedly defective products has been brought against us in the past, a substantial claim or a substantial number of claims, if successful, could have a material adverse effect on our business, financial condition and results of operations. Lawsuits may divert the attention of our management from the implementation of our business strategies and may be costly to defend. In addition, product liability insurance for pharmaceutical products is currently not available in the PRC.
Furthermore, adverse publicity about the above concerns, whether valid or not, may adversely undermine the overall pharmaceutical industry, consumer confidence in our products and our sales. Notwithstanding that a product liability claim against us is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products are of substandardqualityorcausedpersonalinjuryorillnessmaymateriallyandadverselyaffectour reputation, brand names and goodwill. If there is a decrease in consumer confidence in our products as a result of health concerns or adverse publicity on our products, our business, reputation, financial condition and results of operations may be materially and adversely affected.
We are subject to environmental regulations and may be exposed to liability and potential costs for environmental compliance which may materially affect our business, financial condition and results of operations.
We are subject to the PRC laws and regulations concerning the discharge of effluent water andsolidwasteduringourmanufacturingprocessesandthecontrolleduse,storage,handlingand disposal of hazardous materials and chemicals. We are required to obtain certain clearances and authorisations from government authorities for the treatment and disposal of any discharge.Any violation of these regulations may result in fines, criminal sanctions, revocation of operating permits, shutdown of our facilities and obligation to take corrective measures. For each of the threeyearsended31December2010,2011,2012andninemonthsended30September2013,we incurred approximately RMB18.47 million, RMB25.23 million, RMB30.08 million and RMB21.01 million, respectively, as our costs for environmental protection in order to comply with the relevant current and future environmental protection laws and regulations, and there is no assurance that we will not incur future obligations or material liabilities resulting from the compliance with these laws and regulations.
The government may also take steps towards the adoption of more stringent environmental regulations. Due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incuradditionalcapitalexpendituresto,amongotherthings,install,replace,upgradeorsupplement ourequipmentrelatingtopollutioncontrolandtheuse,storage,handlinganddisposalofhazardous materials and chemicals, or make operational changes to limit any adverse impact or potential
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RISK FACTORS
adverseimpactontheenvironmentinordertocomplywithnewenvironmentalprotectionlawsand regulations. If such costs become prohibitively expensive, we may be forced to modify, curtail or cease certain of our business operations which may materially affect our business, financial condition and results of operations.
There are no assurance that our products will continue to be, or new products developed by us will be, listed on the National Medicine Catalogue, the Provincial Medicine CatalogueandtheNationalListofEssentialDrugs,failureofwhichcouldhaveamaterial adverse effect on our business, financial condition, results of operations and prospects. In the PRC, eligible participants in the governmental basic medical insurance programme purchasing pharmaceutical products which are listed on the National Medicine Catalogue, the Provincial Medicine Catalogue and the National List of Essential Drugs are entitled to reimbursement of all or a portion of their purchase costs from the social medical fund. Consequently, pharmaceutical products which are listed on the National Medicine Catalogue, the Provincial Medicine Catalogue and the National List of Essential Drugs are generally more competitive in terms of pricing than competing products in the market.
The National Medicine Catalogue, the Provincial Medicine Catalogue and the National List of Essential Drugs are subject to review by the relevant government authorities from time to time based on various factors, including treatment requirements, frequency of use, efficacy and price. As at the Latest Practicable Date, among the drug preparation products sold by us, 68typeswerelistedontheNationalMedicineCatalogueortheProvincialMedicineCatalogue, of which 11 types were also included in the National List of Essential Drugs.We cannot assure you that our existing products that are currently admitted in the National Medicine Catalogue, the Provincial Medicine Catalogue and the National List of Essential Drugs will continue to be included in the catalogues and list. The removal of our products from the catalogues and list may significantly reduce the sales of such products. In addition, there is a high level of uncertainty regarding the insurance coverage and reimbursement of newly approved pharmaceutical products. The commercial success of our new products is substantially dependent on whether reimbursement is available to hospitals ordering these products for use by their patients. Any non-inclusion of our new products in the National Medicine Catalogue, theProvincialMedicineCatalogueandtheNationalListofEssentialDrugswhichisnotwithin our control may have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to win the statutory tender process, or fail to secure orders from hospitals or other medical institutions, our business may be materially and adversely affected.
During the Track Record Period, a majority of our operating income was derived from sales to hospitals and other medical institutions in the PRC. The purchase of pharmaceutical products by government owned or controlled hospitals is generally subject to an annual statutory tender process run by the relevant local governments. With the recent introduction of a more centralised statutory tender system for essential drugs, which may lead to increasing competition among suppliers of essential drugs, the PRC Government is expected to bring
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RISK FACTORS
further downward pricing pressure on pharmaceutical product manufacturers. Please refer to the section headed “Regulations” in this listing document for details of such statutory requirements. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, we achieved an approximate72.60%,54.44%,52.90% and40.86% success rate in the statutory tender process during the respective periods. The decline in the historical success rate in statutory tender process was mainly attributable to the intensified competition in the PRC pharmaceutical industry whereby pharmaceutical production enterprises of a smaller-scale are able to offer competitive prices to win tenders. In respect of our major products, we achieved an approximate86.73%,73.74%,79.55% and90.00% success rate in the statutory tender process for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013. However, our historical success rates are not indicative of our ability to achieve similar success rates in the future. We may fail to win the statutory tender process if our prices are not competitive, drug preparation products are less clinically effective than competing products, our reputation were adversely affected by unforeseen events, or for other reasons. Even if we win the statutory tender process, the relevant hospitals and other medical institutions may place orders with other suppliers who are also successful in the statutory tender process. If we fail to win orders from hospitals or other medical institutions through the statutory tender process, we will not be able to sell our products to them, our business will suffer, and our profitability could be materially and adversely affected.
A major portion of our operating income from principal activities are derived from our major products and the recent growth in operating income from principal activities and our gross profit margin were attributable to the sales of a few major products of our Group including Shenqi Fuzheng Injection ( ). Our business, financial condition and results of operations may be materially and adversely affected if such growth in operating income from principal activities could not be maintained.
Our operating income from principal activities for each of the three years ended 31 December 2010, 2011 and 2012 was approximately RMB2,690.20 million, RMB3,136.34 million and RMB3,923.50 million, respectively, representing a CAGR of approximately20.77% from 2010 to 2012.Whilst we currently manufacture and/or sell 230 types of products, for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately54.96%,61.78%,63.72% and62.09% of our operating income from principal activities are derived from our 15 major products, respectively. In addition, since 2008, we have put effort in promoting our major drug preparation products (especially, Shenqi Fuzheng Injection ( )). Coupled with the increase in market demand for these products, we experienced a significant increase in our operating income from principal activities. Furthermore, since the gross profit margin attributable to the sales of Shenqi Fuzheng Injection ( ) is higher as compared to other products, we also experienced an increase in our gross profit margin from principal activities during the Track Record Period. Our gross profit margin from principal activities was approximately52.87%,56.08%,60.50% and64.26% for each of the three years ended 31 December 2010, 2011, 2012 and nine months ended 30 September 2013, respectively. However, we cannot assure you that the demand for our major products, including Shenqi Fuzheng Injection ( ) will be sustained or continue to grow in the future. There is also no assurance that we will be able
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RISK FACTORS
to maintain a high gross profit margin for the sales of these major products. If there is a change in the market demand or a deterioration in the gross profit margin for these major products, our business, financial condition and results of operations may be materially and adversely affected.
We rely on our distributors and third-party sales representatives.
We sell our drug preparation products and certain diagnostic reagents and equipment to pharmaceutical products distributors and medical devices distributors, respectively, who in turn sell our products to our end customers. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, we had established business relationships with 2,708, 2,490, 1,915 and 1,966 pharmaceutical products distributors and 818, 999, 1,190 and 1,271 medical device distributors, respectively. We enter into standard distribution agreements with a majority of our distributors on an annual basis. Our distributors are, in general, supported by sales representatives who are given dedicated responsibilities to promote the sale of or solicit customers for our products. We do not sell our products directly to the sales representatives. The sales representatives consist of individuals who are independent from our distributors and us. They are not our employees. As at 30 September 2013, we had contractual arrangements with approximately99.80% of such third-party sales representatives to monitor their performance. Where we do not have formal contracts with the third-party sales representatives, we may not be able to monitor their performance effectively. There is no assurance that our third-party sales representatives will abide by the terms and conditions of our agreements with them at all times nor is there any assurance that they will not engage in any illegal or improper behaviour. If any of the third-party sales representatives is in breach of the agreement or engage in any illegal or improper behaviour, this may have a material adverse effect on our business, financial condition and results of operations. Furthermore, there is no assurance that our distributors or the third-party sales representatives will continue their business relationships with us or renew their contracts with us.There is also no assurance that our distributors will continue to purchase our products at current volumes or prices in the future. In the event that any of our major distributors or a significant number of our distributors cease or reduce their purchase of our products, or if the respective distribution agreements or sales representative relationships are terminated for any reason, or the third-party sales representatives fail to provide our distributors the marketing support necessary for the effective distribution of our products, our business, financial condition and results of operations could be materially and adversely affected.
Corrupt practises in the pharmaceutical industry could adversely affect our sales and reputation.
Corrupt practises may exist in the pharmaceutical industry, including, among others, acceptance or giving of kickbacks or other illegal gains or benefits by or to the hospitals and medical practitioners from pharmaceutical distributors or manufacturers in connection with the prescription of a certain drug. In 2010, Zhuhai Livzon Diagnostic Reagents Inc. (
) (“Livzon Diagnostic Reagents”) intended to organise an academic
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RISK FACTORS
conference with Shanghai Clinical Laboratory Centre ( ) (“SCLC”) whereby Livzon Diagnostic Reagents was responsible for the expenses of the conference. The then local manager of Livzon Diagnostic Reagents stationed in Shanghai (the “Manager”) was responsible for organising the academic conference. In accordance with our internal policies, the Manager submitted a budget for the conference showing, among others, estimated accommodation expenses for experts, catering expenses and transportation fees, and applied for an advancement for the conference. The vice general manager of Livzon Diagnostic Reagents, Mr. Shi Jianfeng ( ), approved the remittance of the conference advancement of RMB100,000.00 and hence we remitted such sum to theManager’s personal account. As represented by the Manager, subsequently an officer of SCLC (the “SCLC Officer”) requested the Manager to give him the sum in advance so that he could facilitate the organisation of the conference. Upon the request of the SCLC Officer, the Manager withdrew the sum from his personal account and released it in cash to the SCLC Officer without authorisation from Livzon Diagnostic Reagents. According to our internal policies, the representativesofourGroupwhoareresponsiblefororganisingconferenceswereonlyallowed to use the conference advancements to pay the conference expenses directly, but not to release such sum to any other third parties. Apparently, the Manager in this incident was in breach of our above internal policies. Upon receipt of such sum, the SCLC Officer deposited it into his personal account.According to a judgment issued by the Shanghai PudongPeople’s Court (
) dated 5 July 2010, the court convicted the SCLC Officer of receiving bribe. Neither Livzon Diagnostic Reagents nor the Manager was held liable by the court. However, we cannot assure you that our distributors, our third-party sales representatives or our employees will not engage in any prohibited practises by giving kickbacks or other illegal gains or benefits to hospitals or medical practitioners to promote our products in the future. If the government takes enforcement actions against us, our distributors, our third-party sales representatives or our employees, our products sold to the hospitals, medical institutions and OTCpharmaciesallegedtobeinvolvedincorruptpractisesmaybeseizedandourperformance under existing contracts with such customers alleged to be involved in corrupt practises may be suspended pending government investigation into such corrupt practises. If any of these events occurs, our business, financial condition, results of operations and reputation may be materially and adversely affected.
Our product development and research efforts may not result in the production of commercially successful pharmaceutical products which may adversely affect our business, financial condition and results of operations.
The success and growth of pharmaceutical companies depends, to a large extent, on the ability to develop and commercialise new products in a timely fashion. Therefore, one of our business strategies is to accelerate the pace of our research and development.We cannot assure you that our product development and research effort will result in the development of successful pharmaceutical products or innovative production technologies that lead to production technology breakthroughs, be completed on time or that any such research projects will generate expected benefits. Furthermore, we cannot assure you that we will be able to acquirethesoleintellectualpropertyrightsoverourresearcheffortalthoughitwouldgenerally be a requirement that the intellectual property rights are to be transferred to us or to be
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RISK FACTORS
co-owned by us pursuant to these co-operation arrangement or any newly developed pharmaceutical products will receive the requisite regulatory approvals or that such products willbecommerciallysuccessful.Whetherapharmaceuticalproductiscommerciallysuccessful depends on a number of factors, such as the absence of other products with similar therapeutic effects and the effectiveness of our sales and marketing and distribution effort. If our product development and research effort fail to develop commercially successful products, our business, financial condition and results of operations may be adversely affected.
Wecooperatewithanumberofresearchinstitutions,universitiesandhospitalsinthePRC to manage clinical trials of some of our pharmaceutical products to develop and commercialise new products. We cannot assure you that we will be able to enter into similar co-operative relationships with other such institutions, universities and companies for the above purposes. Any deterioration in our relationships with these institutions to meet the relevant research objectives, misappropriation of the research results or failure by us to enter into cooperative research relationship with suitable research institutions, universities and companies on viable terms to us for future research and development projects, may have an adverse effect on our ability to launch and develop new products and on our business prospects.
Our newly launched products may not be well received by the market which may adversely affect our business, financial condition and results of operations.
The success of a pharmaceutical company depends, to a large extent, on whether the productsitintroducestothemarketarewellreceivedbythemarket.Theprimaryfactorswhich may affect the acceptance of our products by the market include efficacy, quality, price, purchasing trends of our customers, distributors and their customers. In particular, the introduction of new products requires substantial investment of capital resources in our research and development effort. If any of our new products is not well received by the market because its efficacy is not as good as expected, it is too expensive compared to other substitutes, or for any other reason, we may not be able to recoup the investment we have made in developing such new products, in which case our business, financial condition and results of operations may be adversely affected.
All of ourdrug preparation products must undergo a clinical trial process before they can be introduced into the market for commercial sale. The process is expensive, lengthy and uncertain which may adversely affect the results of operations in our business.
Generally, we have to provide regulatory authorities with clinical data that demonstrates thesafetyandeffectivenessofourpharmaceuticalproductsinordertoobtainapprovalfortheir commercial sale. The clinical trial process, which involves preclinical trial and clinical development, can take several years to complete and the outcome of such process is uncertain. Product testing can fail at any stage of the clinical trial. Success in preclinical trial and early clinical trials does not ensure that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. It is not unusual for companies to suffer significant setbacks in advanced clinical trials, even after promising results in earlier trials. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent further testing or regulatory approval.
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Furthermore, the duration of a clinical trial generally varies substantially with the type, complexity, novelty and intended use of the product. Clinical trials may be delayed or need to be repeated for many reasons, such as negative or inconclusive results, adverse medical events, ineffectiveness of the study compound, inability to manufacture sufficient quantities of the compound for use in clinical trials and failure of the regulatory authority to approve our clinical trial protocols. Our clinical trials may be suspended at any time if we or the regulatory authorities believe the patients participating in our studies are exposed to unacceptable health risks.
We do not know whether planned clinical trials will begin on time or whether any of our clinical trials will be completed on schedule, or at all. Our product development costs would likelyincreaseifweencounterdelaysintestingorobtainingapprovalsorifweneedtoperform more or larger clinical trials than planned. If the delays are significant, the commercial prospects for some of our pharmaceutical products will be harmed, which will adversely affect the results of operations in our pharmaceutical business. Our business may also be adversely affectedifafterwedevotesignificanttimeandexpenseontheclinicaltrialprocess,theproduct under development fails to be approved for commercial sale.
We are exposed to credit risk of our customers which may adversely affect the financial position, profitability and cash flow of our Group.
Our accounts receivables as at 31 December 2010, 2011, 2012 and 30 September 2013 amountedtoapproximatelyRMB438.76million,RMB562.15million,RMB774.02millionand RMB911.54 million, respectively, accounted for approximately11.98%,12.21%,13.74% and14.01% of ourGroup’s total assets, respectively, which were on an increasing trend. As at 31 December 2010, 2011, 2012 and 30 September 2013, thedebtors’ turnover days were approximately 54.3 days, 57.8 days, 61.8 days and 70.4 days, respectively.As noted above, we have experienced an increase indebtors’ turnover days during the Track Record Period. We normally grant credit terms ranging from 30 to 90 days to our customers.
Given that both the amount of our accounts receivables and thedebtors’ turnover days were on an increasing trend during the Track Record Period, should the credit worthiness of our customers deteriorate or should a significant number of our customers fail to settle their accounts receivables in full for any reason, we may incur impairment losses and our results of operations and financial position could be materially and adversely affected. In addition, theremaybeariskofdelayinpaymentbyourGroup’scustomersfromtheirrespectivecreditperiod, which in turn may also result in an impairment loss provision. There is no assurance that we willbeabletofullyrecoverouraccountsreceivablesfromthecustomersorthattheywillsettle accounts receivables in a timely manner. In the event the settlements from the customers are not made on a timely manner, the financial position, profitability and cash flow of our Group may be adversely affected.
Potential changes or discontinuation of the favourable tax treatments in the PRC currently available to the Group may have a material adverse effect on our business, financial condition and results of operations.
The major operating entities of our Group including, but not limited to, our Company, Livzon Group Livzon Pharmaceutical Factory ( ), Sichuan Guangda Pharmaceutical Manufacturing Co., Ltd. ( ) and Livzon Group Limin
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PharmaceuticalManufacturingFactory( )werequalifiedas“highandnew technology enterprises strongly supported by the State” and were entitled to the preferential enterprise income tax rate of15% during the Track Record Period. The income tax rates applicable to the entities of our Group are disclosed in Note III to theAccountants’Report in Appendix I to this listing document.
Under the EIT Law and its implementation rules, the enterprises that are qualified as “high and new technology enterprises strongly supported by the State” are entitled to enjoy a preferential enterprise income tax rate of15%, however, the high and new technology qualification is subject to review and approval by the relevant approval authorities every three years.There can be no assurance that the current favourable tax policies available to our Group will not be withdrawn or revoked by the PRC Government or become less favourable. If the current favourable tax treatments are reduced or are no longer available in the future, ourGroup’s business, financial condition and results of operations in the future may be adversely affected.
We may fail to obtain sufficient capital resources for future growth and other operational needs which may materially and adversely affect our business prospects.
We require additional capital resources to pursue our growth strategy through organic expansion as well as strategic investments and acquisitions and to remain competitive by responding in a timely manner to technological changes or market demand. In particular, we require significant capital to build, maintain, operate and expand our production facilities, engage in research and development activities and to expand our distribution network.
We expect to meet our funding needs through cash flows from operations, securities offerings, bank borrowings and other external financing sources. Our ability to obtain additional financing will depend on a number of factors, including our financial condition, results of operations and cash flows, thePRC’s economic condition, costs of financing including changes in interest rates, prevailing conditions in the capital markets and regulatory requirements. If we cannot obtain sufficient funding on acceptable terms or, to the extent required, receive necessary approvals for our financing plans from the regulatory authorities, we may not be able to successfully implement our business strategies, and our business prospects could be materially and adversely affected.
Any prolonged or significant disruption to our manufacturing operations may adversely affect our business, financial condition and results of operations.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately93.69%,93.27%,92.92% and94.46% of our products (based on operating income) were manufactured in our own production facilities, respectively. Our manufacturing operations are therefore an important part of our business and any prolonged or significant disruption to our manufacturing operations would have a material adverse effect on our business, financial condition and results of operations. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September
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2013, we recorded a loss of approximately RMB19.73 million, RMB26.56 million, RMB19.35 million and RMB21.78 million, respectively, in respect of losses on suspension of operations. Such losses represent the expenses recognised during the period of temporary suspension of our production for technological advancement, regular repair and maintenance and relocation of production facilities. In addition, our manufacturing operations are subject to a number of risks, such as fire, theft, machinery breakdowns, sub-standard performance of our manufacturing equipment, natural disasters, outage of power, shortage of water and fuel gas, the occurrence of any of which may severely disrupt our manufacturing operations. Although we maintain insurance coverage for certain of our manufacturing equipment and machinery, there is no certainty that such insurance will adequately compensate us for any losses arising from any damage or disruption relating to our manufacturing operations.
In addition, the manufacture of pharmaceutical products requires precise and reliable controls and regulatory authorities in the PRC have imposed significant regulatory requirements and compliance obligations to regulate the industry. For example, all facilities and manufacturing techniques used for the manufacture of pharmaceutical products must be operated in conformity with GMP standards and manufacturing facilities may be subject to periodic unannounced inspections by the SFDA and other regulatory authorities. Compliance with such regulatory requirements may result in delays in our manufacturing operations which would have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain inventory levels in line with the approximate level of demand for our products could cause us to lose sales or face excess inventory risks and holding costs, either of which could have a material adverse effect on our business, financial condition and results of operations.
To operate our business successfully and meet ourcustomers’demands and expectations, we must maintain a certain level of finished goods inventory for all of our products to ensure immediate delivery when required. Furthermore, we are required to maintain an appropriate level of inventory of our raw materials for our production process. However, forecasts are inherently uncertain. If our forecast demand is lower than actual demand, we may not be able to maintain an adequate inventory level of our products or produce our products in a timely manner, and may lose sales and market share to our competitors. On the other hand, we may also be exposed to increased inventory risks due to accumulated excess inventory of our products or raw materials. Excess inventory levels may increase our inventory holding costs, risk of inventory obsolescence or write-offs.
We may not be able to implement our business strategies on schedule or within budget or at all which may adversely affect our business, financial condition and results of operations.
We may not be able to fully implement our business strategies or implement them on schedule or within budget or at all. Our strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and could delay or increase the costs of implementation. Such potential events which may affect
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our expansion plans include, but are not limited to, labour disputes, changes in costs or requirements related to compliance with environmental or other laws and regulations, delays in securing the necessary governmental approvals and land use rights, a downturn in the economy, and changes to plans for additional facilities necessitated by changes in market conditions. Delays in the expansion of our production facilities could result in the loss or delayed receipt of revenue, an increase in financing costs, or a failure to meet profit and earnings projections, any of which may adversely affect our business, financial condition and results of operations.
Our success is dependent on our reputation and our corporate brand name, sales of our existing and future products could be negatively affected if ourreputation orbrand name are tarnished.
The principal trademark of our Company, “Livzon ” (“ ”), was awarded the China Famous Brand ( ) in 1999. We therefore believe that the maintenance and enhancement of our reputation, our corporate brand name, “Livzon ” (“ ”), are critical to the success of our business. If any events or circumstances that tarnish our reputation or brandnameoccur,salesofourexistingandfutureproductscouldbenegativelyaffected,which would adversely affect our business, financial condition and results of operations.
We may not be able to adequately protect our intellectual property rights which may result in a negative impact on our operating income, brand, reputation, business and results of operations.
Our success depends in part on our ability to protect our intellectual property rights. We rely primarily on trademarks, patents, unpatented proprietary technologies, processes and know-how and other contractual provisions to protect our intellectual property rights. However, these may not be adequate to protect our rights to our existing products as well as those products under development.Athird-party could imitate or use our intellectual property rights without authorisation and policing the unauthorised use of intellectual property can be difficult, time consuming and expensive. Our competitors or other third parties may also independently develop proprietary technologies similar to ours, introduce counterfeits of our products, misappropriate our proprietary information or infringe on our brand names or trademarks. Counterfeit pharmaceutical products are generally sold at lower prices than authentic pharmaceutical products due to their low production costs and may cause confusion to our customers because, in some cases, they have a very similar appearance and use very similar packaging as authentic pharmaceutical products. Although the PRC Government has been increasingly active in policing counterfeit pharmaceutical products, there is not yet an effective counterfeit pharmaceutical regulation control and enforcement system in the PRC. The proliferation of counterfeit pharmaceutical products has grown in recent years and may continue to grow in the future. Any such increase in the sales and production of counterfeit pharmaceutical products in the PRC, or the technological capabilities of the counterfeiters, could negatively impact our operating income, brand, reputation, business and results of operations. In addition, any misappropriation of our intellectual property rights may impair the pricing for our products and adversely affect our reputation. Our efforts to protect our intellectual property may not be adequate and we may be unable to identify any unauthorised use of our intellectual property or to take appropriate steps to enforce our rights on a timely basis.
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While we are not aware of any infringement of our intellectual property rights during the Track Record Period, there is no assurance that our intellectual property or other rights available under PRC laws will not be misappropriated or infringed in the future. In the event that any misappropriation or infringement occurs, we may need to protect our intellectual property or other ownership rights through litigation. The resulting diversion of financial and management resources to enforce such rights could have a material adverse effect on our business and financial condition.
We may be exposed to infringement claims if we infringe third-party proprietary or intellectual property rights, which may result in a material adverse effect on our business and financial condition.
In the course of developing new products, we may be unaware that some third parties have patented similar processes or obtained regulatory protection of similar products and, as a result, unknowingly infringe on some third-party proprietary or intellectual property rights. We also enter into collaboration and/or technology transfer agreements with our research partners or third parties to acquire and/or use their technologies or methods for the production of new pharmaceutical products, as well as production agreements with third-party subcontracting manufacturers to produce some of our products. Although we are not aware of any infringement claims against us, we have been the subject of infringement claims in the past, and we may be exposed to infringement claims by third parties in the future. From time to time, we may also purchase bulk medicines or other intermediates from third parties for our manufacturing operations or undertake the distribution of thirdparties’products. If such bulk medicines, intermediates or thirdparties’ products infringe the intellectual property rights of other third parties which is not within our knowledge, we could also be exposed to infringement claims.
Furthermore,certainofouremployeesandconsultantswerepreviouslyemployedatother pharmaceutical companies, including our competitors or potential competitors, or at universities or other research institutions.Although no claims against us are currently pending, we may be subject to claims that we, our employees or our consultants have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.
If we are subject to claims relating to infringement of intellectual property rights or wrongful use or disclosure of trade secrets, we would need to defend ourselves and could become involved in litigation. Even if we are successful in defending against these claims, litigation could result in substantial costs and divert the attention of our management from our business operations. If we fail to defend such claims, we may pay monetary damages or lose valuable intellectual property rights, which could then have a material adverse effect on our business and financial condition.
Our business, financial condition and results of operations may be materially and adversely affected if we are unable to compete effectively in the PRC pharmaceutical industry.
ThePRCpharmaceuticalindustryishighlycompetitive.Wefaceintensecompetitionfrom both domestic and international pharmaceutical companies. Many of our existing and potential competitors have greater financial, technical, manufacturing or other resources than us. In
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addition, many of our competitors may have better brand name recognition, more established distribution network, larger customers base or more extensive knowledge of our customer groups. Certain of our competitors may also adopt low-margin sales strategies and compete against us based on lower prices. We may experience increased competition in the future resulting in price reductions, reduced profit margins or loss of market share. Any of these factors could have an adverse effect on our results of operations or financial condition.
Our business, financial condition and results of operations may be materially and adversely affected if the supply of raw materials is disrupted or if there is an increase in the prices of our raw materials.
Our principal raw materials are bulk medicines which are used to manufacture pharmaceutical products. The major packaging materials that we purchased included glass ampoule injection products and gelatine capsule shells, as well as the external packaging and the printed instructions on all of our products. We place a strong emphasis on quality control and have adopted a comprehensive quality control system designed according to the GMP standards and requirements. For each of the three years ended 31 December 2010, 2011, 2012 and nine months ended 30 September 2013, the total purchase of our raw materials amounted to approximately RMB1,004.11 million, RMB879.78 million, RMB1,113.56 million and RMB809.79 million, respectively. We typically do not enter into long-term supply agreements with our major suppliers. We cannot assure you that our existing suppliers will continue to supply materials to us at prices and on terms and conditions acceptable to us in the future. The availabilityandmarketpricesofourrawmaterialsmaybeadverselyaffectedbyfactorsbeyond our control, such as weather conditions, natural disasters or a sudden surge in demand.Any of the foregoing factors can affect the supply of our raw materials or increase our raw material costs. During the Track Record Period, the average unit purchase unit prices of two of our raw materials, namely, codonopsis ( ) and astragalus ( ), increased by approximately257.89% and70.20%, respectively. If the supply of raw materials is disrupted or if there is an increase in the prices of our raw materials, our business, financial condition and results of operations may be materially and adversely affected.
Our right to occupy and use some of our land and buildings is subject to legal uncertainties which may materially affect our business operations and financial condition.
We face several legal uncertainties in our continued occupation of some of the properties we currently use. First, as at the Latest Practicable Date, we had not obtained valid title certificates, such as real estate title certificates ( )/building ownership certificates ( ) (as the case may be), for eight properties which had an aggregate gross floor area of approximately 740.80 sq.m. As at the Latest Practicable Date, these properties were used by us as staff quarters. Our rights in relation to such properties, including the rights of occupation, utilisation, profit and disposal, may not be recognised and protected under PRC laws until we obtain the relevant title certificates from the relevant PRC authorities. We are in theprocessofapplyingfortherelevanttitlecertificatesfortheabovementionedproperties.We cannot assure you that we will be able to obtain all necessary title certificates for each of these properties which are subject to the approval of the relevant PRC authorities.
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Moreover, our PRC legal advisers, King& Wood Mallesons, confirm that the use of a parcel of allocation land with a site area of approximately 17,656.67 sq.m. in Zhuhai held by our Group does not comply with the relevant requirements of the Land Administration Law ( )andtheCatalogueofAllocationLand( )anditistherefore subject to a risk of being recovered without compensation by the relevant government of the cityorcountylevel.Wehavenotconstructedanybuildingsonsuchlandparcel,andithasbeen a vacant land and a green land since the land was allocated by the Guangdong ProvincePeople’s Government ( ) to our Group.
Furthermore, the current use by our Group of a further parcel of land with an area of 190,237 sq.m. in Shaoguan (the “Limin Allocation Land”) as production plant does not comply with the relevant requirements of the Land Administration Law ( ) and the Catalogue of Allocation Land ( ). Pursuant to the Approval on Agreeing the Merger of Guangdong Limin Factory to Livzon Group by Way of Share Conversion (Shao Fu Fu[1996] No. 31 document) ( (
[1996]31 )) issued by the ShaoguanPeople’s Government ( ) dated 18 November 1996, ShaoguanPeople’s Government agreed, among other things, to allow Livzon Group Limin Pharmaceutical Factory ( ) (“Limin Factory”) to continue to use the Limin Allocation Land subject to the payment of land use taxes to the relevant tax bureau in accordance with the relevant regulations and standards applicable to State-owned land.As such, we have not taken any rectification measures in respect of the LiminAllocation Land until recently. Therefore, the Limin Allocation Land is subject to a risk of being recovered without compensation by the relevant government of the city or county level. In the event that the LiminAllocation Land is recovered by Shaoguan Land Resources Bureau (
) and the relocation of our production facilities located on the Limin Allocation Land is required, we will, among other things, (a) liaise with the relevant government bodies to formulate a reasonable relocation arrangement and timeframe; and (b) implement transitional arrangements such as utilising the unused production capacities of our other production plants and/or engaging third-party subcontracting manufacturers to produce those products currently produced by Limin Factory to ensure that we can still meet ourcustomers’ demand during the relocation. During the implementation of the above transitional arrangements, we expect that the potential loss may amount to approximately RMB199.30 million which mainly includes loss of revenue, the cost of buildings, construction costs and costs related to construction-in-progress incurred in relation to the Limin Allocation Land. Please refer to the section headed “Business– Properties– Owned Properties” in this listing document for further details of such legal uncertainties.
The relocation of our production facilities to Jinwan District, Zhuhai, the PRC may materially and adversely affect our business operations and financial condition.
As part of the Construction Project of Livzon Pharmaceutical Jinwan Factory (
), we have commenced the relocation plan of our production plants in Zhuhai, the PRC during the Track Record Period. As at the Latest Practicable Date, the new production plant was still under construction and only the first two lyophilised powder for injectionproductionlineshavebeenbuilt.Theremainingworkshopsincludingnon-lyophilised powder for injection production line and solid drug preparation products production line
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(including tablets, capsules and granules) and automatic warehouse and research and development centres are expected to be completed by the end of March 2014. As part of this relocation project, we are unable to manufacture certain products and have to enter into subcontracting arrangements. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the costs incurred by our Group in relation to all subcontract processing was approximately RMB7.59 million, RMB2.81 million, RMB7.11 million and RMB1.97 million, respectively. In addition, the costs incurred by our Group in relation to all subcontract processing was approximately RMB5.36 million for the three months ended 31 December 2013. We cannot assure you that we could be able to find suitable subcontractors to manufacture our products. Furthermore, there is no assurance that our relocation arrangements could be conducted smoothly or as scheduled. If there is any delay or issues arising from the relocation arrangements, our business operations and financial condition may be materially and adversely affected.
Our insurance coverage may not completely cover the risks related to our business and operations which may have a material adverse effect on our business, financial condition and results of operations.
Although we maintain insurance coverage relating to employee accidents, social welfare, product transportation and damage to fixed assets resulting from natural disasters, we do not have any product liability, third-party liability or business interruption insurance coverage for our operations. Please refer to the section headed “Business– Insurance” in this listing document for further details. If any claims for injury or damages are brought against us, or if we experience any business disruption, litigation or natural disaster, we might incur substantial costs and diversion of resources, which may not be fully covered by insurance. In addition, there are certain types of losses, such as from war, acts of terrorism, earthquakes, typhoons, flooding and other natural disasters for which we cannot obtain insurance at a reasonable cost or at all. Should an uninsured loss or a loss in excess of insured limits occur, we could suffer financial losses, as well as damage to our reputation, lose all or a portion of our production capacity, as well as future operating income anticipated to be derived from the manufacturing activitiesconductedatthatproperty.Anymaterialuninsuredlosscouldhaveamaterialadverse effect on our business, financial condition and results of operations.
Our success and business operations are largely dependent on our senior management team and our ability to attract and retain talented personnel, thus the growth of our business could be adversely affected if we lose any of our senior management team or fail to recruit and retain talented personnel.
A majority of our Directors, Supervisors and senior management members have joined our Group for over five years and our success depends on the continued service of our senior management team, as identified in the section headed “Directors, Supervisors and Senior Management” in this listing document.The expertise, industry experience and contributions of our executive Directors and other members of our senior management are crucial to our success.Wewillneedanincreasingnumberofexperiencedandcompetentexecutivesandother membersofourseniormanagementteaminthefuturetoimplementourbusinessstrategiesand growth plans. If we lose any of our key management members, including any of our Directors and senior management, and are unable to recruit and retain replacement personnel with equivalent qualifications or talents in a timely manner, the growth of our business could be adversely affected.
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Our success also depends on our ability to attract, hire and retain qualified and skilled managerial, technical, research and development, sales and marketing and other personnel. We cannotassureyouthatwewillbeabletoconsistentlyattract,hireandretainsufficientnumbers of qualified and skilled personnel to continue to develop and grow our business. The inability to attract and retain a sufficient number of such skilled personnel could limit our ability to maintain our existing product portfolio and distribution channels or develop new products or distribution channels. In addition, competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them and consequently affect our financial condition and results of operations.
Our Controlling Shareholders have substantial influence over our Company and their interests may not be aligned with the interests of our other Shareholders, which may materially affect our business prospects and operations.
Our Controlling Shareholders have substantial influence over our business, including matters relating to our management and policies and decisions regarding mergers, expansion plans, business consolidation, the sale of all or substantially all of our assets, election of directors, dividend or other distributions and other significant corporate actions. Four of our Directors are at the same time directors or members of senior management of the companies which constitute our Controlling Shareholders. The concentration of ownership interests and the substantial influence of our Controlling Shareholders over us may discourage, delay or prevent a change in control of our Company, which could deprive other Shareholders of an opportunity to receive a premium for their Shares as part of a sale of our Company and reduce the price of ourShares.Inaddition,theinterestsofourControllingShareholdersmaydifferfromtheinterests of our other Shareholders. Subject to our Articles of Association and applicable laws and regulations, our Controlling Shareholders will continue to have the ability to exercise their substantial influence over us and to cause us to enter into transactions or take, or fail to take, actions or make decisions which conflict with the best interests of our other Shareholders, which may materially affect our business prospects and operations.
OurGroup’s reputation, business, financial condition, results of operations or prospects may be indirectly affected by our ControllingShareholders’ reputation.
Joincare is our Controlling Shareholder. Jiaozuo Joincare, a wholly-owned subsidiary of Joincare, is one of our 7-ACA suppliers. Recently, there has been some negative publicity associated with the containing of low quality refined oil ( ) in the soybean oil supplied by one JiaozuoJoincare’s suppliers. Please refer to the section headed “Business– The Low Quality Refined Oil Incident” in this listing document for further details.As Jiaozuo Joincare is one of our 7-ACA suppliers, such negative publicity may by association create a material adverse effect on ourGroup’s reputation, business, financial condition, results of operations or prospects.
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RISKS RELATING TO OUR INDUSTRY
Our growth relies in part on the continued development of the PRC pharmaceutical industry. If the recently announced healthcare reform plan does not result in the anticipated growth of the PRC pharmaceutical industry within the expected timeframe, our business and prospects could be materially and adversely affected.
The healthcare system in the PRC has undergone, and evolved over various stages of, reform since the PRC was established in 1949 and is still in the progress of undergoing further reforms.InMarch2009,thePRCGovernmentannouncedthatitexpectedtospendRMB850.00 billiononthehealthcarereforminthePRCinthefollowingthreeyearsandhighlightedseveral areas of focus. Please refer to the section headed “Industry Overview– Pharmaceutical Industry in China– The major reasons for the rapid development of the pharmaceutical industry in the PRC– Government support and medicare reforms” in this listing document. While such reform is expected to bring positive effects to the PRC pharmaceutical industry, there may be negative effects, such as:
• execution risk: the anticipated spending may be slower and the reform process may be more time-consuming and require a larger amount of funding than was announced;
• sufficiency of funding:61.0% of the planned spending of RMB850.00 billion is required to be financed by local governments, which may not have sufficient funds to allocate to the healthcare reform; and
• reduction in prices: centralised procurement through the adoption of the National List of Essential Drugs may lead to a reduction in the selling prices of our products if they are included in such list. As at the Latest Practicable Date, 11 types of drug preparation products sold by us had been listed on the National List of Essential Drugs.
Our growth relies to a significant extent on the continued development of the PRC pharmaceutical industry. Although the healthcare reform plan is expected to benefit our business, the full effect of the healthcare reform plan on our operations is unclear, and our business may not benefit as much as we expect.
The pharmaceutical industry in the PRC is highly regulated, and future government regulations may place additional burden on our business. The loss of or failure to obtain or renew any or all of these licences and permits may have a material adverse effect on our business, financial condition and results of operations.
ThepharmaceuticalindustryinthePRCissubjecttoextensivegovernmentregulationand supervision. In particular, the regulatory framework addresses all aspects of a pharmaceuticalcompany’s operations, including approval, production, licensing and certification requirements and procedures, periodic renewal and reassessment processes, registration of new drugs,
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quality control, pricing of pharmaceutical products and environmental protection. Moreover, regulations and policies relating to the pharmaceutical industry change from time to time. We could not assure you that the PRC Government will continue to adopt policies supporting the pharmaceutical industry which we are operating in. In the event that future government regulations place additional burden on our industry, our business and reputation, as well as our financial condition, results of operations and prospects, could be materially and adversely affected.
In addition, as a pre-requisite for carrying on pharmaceutical manufacturing business in the PRC, all pharmaceutical companies are required to obtain from the various government authorities certain permits and licences, including a business licence and a drug manufacturing permit for each pharmaceutical product before commencing production and/or sale of such product. Please refer to the section headed “Regulations” in this listing document for further information. These licences and permits are subject to renewal and periodic reassessment by the relevant PRC Government authorities from time to time.Asuspension or revocation of our existing licences or permits or failure to obtain or renew our licences and permits could result in a temporary or permanent suspension of some or all of our production activities. If this occurs, our business, financial condition and results of operations may be materially and adversely affected.
Some of ourproducts are subject to price controls and we do not have full discretion over the pricing of such products which could affect our results of operations.
Pharmaceutical products which are listed on the National Medicine Catalogue, the Provincial Medicine Catalogue or the National List of Essential Drugs or those pharmaceutical products which are deemed by the PRC Government to be drugs whose production and trading tend to create monopolies are subject to price control in the form of fixed retail prices or maximum retail prices.As at the Latest Practicable Date, 68 types of drug preparation products sold by us were listed on the National Medicine Catalogue or the Provincial Medicine Catalogue, of which 11 types were also included in the National List of Essential Drugs and therefore are subject to such price controls. There have not been material changes to the maximum retail prices of our major products during the Track Record Period. The PRC Government authorities do not impose restrictions over the wholesale prices of pharmaceutical manufacturers,suchasus.However,controlsoverandadjustmentstothemaximumretailprice ofapharmaceuticalproduct,ifsignificant,couldhaveacorrespondingimpactonthewholesale price of that pharmaceutical product. In the event that the cost of manufacturing or selling our products increases and we are not able to pass such increased costs to our end customers as a result of the price control, our results of operations could be adversely affected. In addition, in the event of a significant downward adjustment of retail prices, there is no assurance that the wholesale prices will not reduce significantly, and there may be a material adverse effect on our results of operations. Please refer to the section headed “Regulations– Price Controls” in this listing document for further details in relation to the laws and regulations on price control.
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We may not be able to fully comply with applicable GMP, GSP or other regulatory requirements or renew our GMP and GSP certifications and other permits and licences whichenableustoconductourbusiness.Non-compliancewith,changesinoramendments to these regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
All pharmaceutical manufacturing, distribution and retail companies in the PRC are required to obtain certain permits and licences from various PRC Government authorities, including GMP certifications for manufacturing, GSP certifications for wholesale and retail distributionandcertainotherpermitsandlicenceswhichenablethemtoconducttheirbusiness. Please refer to the section headed “Regulations” in this listing document for further details regarding certain key permits and licences relating to our business operations in general. We had obtained all the relevant licences, certificates and/or permits in relation to the manufacture and/or sale of our products. These permits and licences held by us are generally valid for a maximum period of five years and are subject to periodic renewal and/or reassessment by the relevant PRC Government authorities. We intend to apply for the renewal of these permits, licences and certifications when required by applicable laws, rules and regulations. However, the standards of such renewal or reassessment may change from time to time.We cannot assure you that we will be able to successfully renew all of these permits, licences and certifications. Anyinabilitytorenewanypermits,licencesorcertificationsthatarematerialtoouroperations couldseverelydisrupt,aswellaspreventusfromconducting,ourbusiness.Furthermore,ifany interpretation or implementation of the relevant regulations or new regulation requires us to obtain additional permits, licences or certifications, we cannot assure you that we will be able to successfully obtain them. Even if we obtain such permits, licences or certifications, there may be significant additional costs and expenses involved, which may adversely affect our results of operations.
We may fail to sufficiently and promptly respond to rapid changes in government regulation, treatment of diseases and customer preferences in the pharmaceutical industry which could have a material and adverse effect on our business, financial condition, results of operations and profitability.
ThepharmaceuticalindustryinthePRCissubjecttoextensivegovernmentregulationand supervision. In recent years, the PRC Government has implemented a variety of regulatory measures and announced plans to implement additional rules and regulations with respect to the pharmaceutical industry, including those relating to:
• the manufacturing, distribution or pricing of pharmaceutical products;
• additional quality control, licensing and certification requirements; and
• the pricing, procurement, prescription and dispensing of essential and other medicines by public hospitals and other healthcare institutions.
These measures may lead to significant changes in the PRC pharmaceutical industry, and could result in increased costs and lowered profit margins for manufacturers of pharmaceutical products. These measures could also lead to a decrease in the amount of products and services purchased by our customers and/or the price of our products.
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In addition, we cannot assure you that the PRC Government will continue to adopt policies supporting the pharmaceutical industry.
ThePRCpharmaceuticalindustryischaracterisedbyrapidadvancesinbiologicalscience and technology and continuous emergence of new diseases. Our future success depends on our ability to launch new products that meet evolving market demand, in particular, new pharmaceutical products that are effective in treating and/or diagnosing new diseases and illnesses. We cannot assure you that we will be able to respond to emerging trends by improving our product portfolio in a timely manner, or at all.
In addition to regulatory and industry changes, the preferences and purchasing patterns of our customers with regard to pharmaceutical products can change rapidly. Our success depends on our ability to anticipate product offering lead-time and demand, identify customer preferences and adapt our products to these preferences. We must adjust our research and development plan, production scale and schedule, product portfolio, service offering and inventory levels based oncustomers’ demand, sales trends and other market conditions. We cannot assure you that we will be able to sufficiently and promptly respond to changes in customer preferences and purchasing patterns in the future, and such failure may have a material and adverse effect on our business, financial condition, results of operations and profitability.
RISKS RELATING TO CONDUCTING BUSINESS IN THE PRC
Political, economic and social development of the PRC may materially and adversely affect our business, financial condition and results of operations.
We conduct our core business operations principally through our Company and our operatingsubsidiariesinthePRC.Ourresultsofoperationsandprospectsaresubject,toalarge extent, to political, economic and social developments in the PRC. The PRC economy has largelybeenacentrallyplannedeconomy,whichdiffersfromotherdevelopedeconomiesofthe world in many respects, including:
• its structure;
• the level of government regulation and involvement;
• the level of development;
• growth rate;
• the control of foreign exchange; and
• the allocation of resources.
As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to those of other developed countries.The PRC economy has been transitioning from a planned economy to a more market oriented economy. The PRC Government has implemented economic reform measures emphasising utilisation of market forces in the development of the PRC economy and is continuing to play a significant role in regulating industries by imposing industrial policies.
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We cannot, however, predict whether changes in the political, economic and social conditions and policies in the PRC, or in the relevant laws, regulations and rules, may have a material adverse effect on our business, financial condition and results of operations.
The legal system of the PRC is still developing and there are inherent uncertainties which may affect the protection afforded to our business and our Shareholders.
WeareacompanyincorporatedunderthelawsofthePRC.ThePRClegalsystemisbased on written statutes. While prior court decisions may be cited for reference, they have limited precedential value. Since 1979, the PRC Government has promulgated laws, rules and regulations dealing with economic matters, such as foreign investment, corporate organisation and governance, commerce, taxation and trade. However, because these laws, rules and regulations are relatively new, and because of the relatively limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws, rules and regulations involve significant uncertainties.
In addition, PRC laws, rules and regulations applicable to companies listed overseas do not distinguish among minority and controlling shareholders in terms of their rights and protections,andourminorityShareholdersmaynothavethesameprotectionsaffordedtothem by companies incorporated under the laws of the United States and certain other jurisdictions. Governmentcontrolofcurrencyconversionandchangesintheexchangeratebetweenthe RMB and other currencies may materially and adversely affect our business, financial condition and results of operations, and our ability to pay dividends.
Currently,RMBstillcannotbefreelyconvertedintoanyforeigncurrency,andconversion andremittanceofforeigncurrenciesaresubjecttoPRCforeignexchangeregulations.Itcannot be guaranteed that under a certain exchange rate, we will have sufficient foreign exchange to meet our foreign exchange requirements. Under the current PRC foreign exchange control policies, foreign exchange transactions under the current account conducted by us, including the payment of dividends, do not require advance approval from the SAFE, but we are required to present documentary evidence of such transactions and conduct such transactions at designated foreign exchange banks within the PRC that have the requisite licences to carry out foreign exchange business. Foreign exchange transactions under the capital account conducted by us, however, must be approved in advance by the SAFE.
Under existing foreign exchange regulations, following the completion of the Listing, we will continue to pay dividends in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, there is no assurance that these foreign exchange policies regarding payment of dividends in foreign currencies will continue in the future. In addition, any insufficiency of foreign exchange may restrict our ability to obtainsufficientforeignexchangefordividendpaymentstoshareholdersortosatisfyanyother foreign exchange requirements. If we fail to obtain approval from the SAFE to convert RMB into any foreign exchange for any of the above purposes, our capital expenditure plans, and even our business, financial condition and results of operations, may be materially and adversely affected.
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In addition, the value of RMB against the U.S. dollar, Hong Kong dollar and other currencies is subject to changes in thePRC’s policies and international economic and political developments.On21July2005,thePRCGovernmentintroducedamanagedfloatingexchange rate system to allow the value of RMB to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of RMB appreciated by approximately2% against the U.S. dollar. In June 2010, the PBOC announced the removal of the de facto peg. Following this announcement, the RMB has appreciated modestly. However, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or the Hong Kong dollar in the medium to long term if and when the PBOC changes its current intervention policy. Fluctuations in exchange rates may adversely affect the value, translated or converted into U.S. dollar or Hong Kong dollar, of our cash flows, operating income, earnings and financial position, and the value of, and any dividends payable to us by our PRC subsidiaries. For example, an appreciation of the RMB against the U.S. dollar or the Hong Kong dollar would make any new RMB-denominated investments or expendituresmorecostlytous,totheextentthatweneedtoconvertU.S.dollarsorHongKong dollarsintoRMBforsuchpurposes.Ifthisoccurs,ourbusiness,financialconditionandresults of operations may be materially and adversely affected.
Inflation in the PRC may have a material adverse effect on our business, financial condition and results of operations.
While the PRC economy has experienced rapid growth, such growth has been uneven amongvarioussectorsoftheeconomyandindifferentgeographicalareasofthecountry.Rapid economic growth can lead to growth in money supply and inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in our costs, our business, financial condition and results of operations may be materially and adversely affected. To control inflation in the past, the PRC Government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on State bank lending. Such an austere policy can however lead to a slowdown in the economic growth and may have a material adverse effect on our business, financial condition and results of operations.
Changes in the PRC Government policy in foreign investment in the PRC may adversely affect our business and results of operations.
According to the latest version of the Guidance Catalogue of Foreign Investment Industries (2011 Edition) ( (2011 ) ), or the Foreign Investment Catalogue, which became effective on 30 January 2012, our business does not belong to the restricted or prohibited category.As the Foreign Investment Catalogue is updated every few years, there can be no assurance that the PRC Government will not change its policies in a manner that would render part or all of our businesses to fall within the restricted or prohibited categories. If we cannot obtain approval from relevant approval authorities to engage in businesses which become prohibited or restricted for foreign investors, we may be forcedtosellorrestructureourbusinesswhichhavebecomerestrictedorprohibitedforforeign investment. If we are forced to adjust our corporate structure or business line as a result of changes in government policy on foreign investment, our business, financial condition and results of operations may be materially and adversely affected.
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You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.
We are a company incorporated under the laws of the PRC, and substantially all of our assets and our subsidiaries are located in the PRC. In addition, most of our Directors, Supervisors and executive officers reside within the PRC, and the assets of our Directors and executive officers may be located within the PRC.As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC upon most of our Directors, Supervisors and executive officers, including with respect to matters arising under the U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties providing for the reciprocal enforcement of judgments of courts with the United States,theUnitedKingdom,Japanormostotherwesterncountries.Inaddition,HongKonghas noarrangementforthereciprocalenforcementofjudgmentswiththeUnitedStates.Asaresult, recognition and enforcement in the PRC or Hong Kong of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter that is not subject to a binding arbitration provision may be difficult or impossible. In addition, although we will be subject to the Hong Kong Listing Rules and the Hong Kong Takeovers Code upon the listing of our H Shares on the Hong Kong Stock Exchange, the holders of H Shares will not be able to bring actions on the basis of violations of the Hong Kong Listing Rules and must rely on the Hong Kong Stock Exchange to enforce its rules.
OurArticles ofAssociation provide that disputes between holders of H Shares and us, our Directors, Supervisors or senior management or holders ofAShares, arising out of ourArticles of Association or any rights or obligations conferred or imposed upon by the Company Law and related rules and regulations concerning our affairs, are to be resolved through arbitration rather than by a court of law. A claimant may elect to submit a dispute to either the China International Economic and Trade Arbitration Commission or the Hong Kong International Arbitration Centre in accordance with its applicable rules. Awards that are made by the PRC arbitral authorities recognised under the Arbitration Ordinance (Chapter 609 of the Laws of Hong Kong) can be enforced in Hong Kong. Hong Kong arbitration awards may be recognised and enforced by PRC courts, subject to the satisfaction of certain PRC legal requirements. However, to our knowledge, no action has been brought in the PRC by any holder of H shares to enforce an arbitral award, and no assurance can be given as to the outcome of any action brought in the PRC by any holder of H shares to enforce a Hong Kong arbitral award made in favour of holders of H shares. Moreover, to our knowledge, there has not been any published report of judicial enforcement in the PRC by holders of H shares of their rights under the articles of association of any PRC issuer or the Company Law.
AnyactsofGod,actsofwaroroutbreakofhealthepidemicsmaysignificantlydisruptour business operations and have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to the general and social conditions of the PRC. Any natural disasters, such as fires, floods, earthquakes or other natural or man-made disasters may materially and adversely affect the economy, infrastructure and livelihood of the people in the PRC. Any acts of war and terrorist attacks may cause damage, evacuation or other disruption
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to us, our employees, production facilities, our distribution channels, markets, suppliers and customers. Potential war or terrorist attacks may also cause uncertainties and cause our business to suffer in ways that we cannot currently predict. We also face risks related to health epidemics. Past occurrences of epidemics or pandemics, such as the severe acute respiratory syndrome, have caused different degrees of damage to the national and local economies in the PRC. In June 2009, the World Health Organisation declared the outbreak of H1N1 influenza to be a pandemic. Recently, certain provinces of the PRC are being affected by H7N9 influenza. An outbreak of any epidemics or pandemics in the PRC, especially in the areas where we have operations, may result in quarantines, temporary closures of our offices and manufacturing facilities, travel restrictions or the sickness or death of our key personnel. Any of the above may cause material disruptions to our business operations, which in turn may materially and adversely affect our business, financial condition and results of operations.
RISKS RELATING TO THE LISTING
Certain risks that our B Shareholders should be aware of.
Our B Shareholders should be aware of the risks and special notes to the investors set out in the Implementation Plan, which was published by our Company on 31 January 2013 and approved by our Shareholders at the extraordinary general meeting on 20 February 2013. The full version of the Implementation Plan is available at the following website:
For the Chinese version:
http://www.cninfo.com.cn/finalpage/2013-01-31/62087805.PDF
For the English version:
http://www.cninfo.com.cn/finalpage/2013-01-31/62087806.PDF
B Shareholders are advised to seek their own PRC, Hong Kong and other relevant legaladvisers’ and/or financialadvisers’ advice regarding their investment in our Company. In particular, the B Shareholders should be aware of the following risks set out in the Implementation Plan:
(a) Risk regarding difference between B share market and H share market. B share and H share markets have different trading volume, liquidity, trading hours, investor base and other characteristics. As a result of these differences, the trading price of our B Shares and H Shares may not be the same and the historical share prices of B Shares may not be indicative of the share price at which the H Shares will be tradedfollowingthecompletionoftheListing.Wecouldnotguaranteethattheprice of H Shares in the future could be higher or equal to the price of B Shares before the Listing. Moreover, unlike B Share that has a price limit at the rate of10% per trading day, H Share has no price limit and any fluctuation in price depends upon the market.
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RISK FACTORS
(b) Risks regarding increased transaction costs. Immediately upon the Listing, B Shareholders who choose to convert their B Shares into H Shares and hold such H Shares for investment will need to pay more fees, charges and costs than they need to pay for their holding of our B Shares:
(i) special transaction charges in relation to the trading of H Shares, including but not limited to registration and transfer fees, dividends collection fees and bonus shares collection fees; and
(ii) those Shareholders who continue to trade our H Shares through relevant PRC securitiescompany’s trading system are obliged to pay commission charges to such PRC securities companies in addition to all transaction costs set out in (i) above for their trading in our H Shares.
(c) Risk regarding limited trading right. In accordance with relevant PRC laws and regulations, PRC Shareholders are not allowed to purchase overseas securities. Upon and after the Listing, our domestic investors and domestically-trading overseas investors can only hold or sell the H Shares held by them but cannot purchase any additional H Shares or any other securities listed on the Hong Kong Stock Exchange. All proceeds from the sale of the H Shares held by the CSDC as a nominee of our domestic investors and domestically-trading overseas investors must be remitted into the PRC as soon as practicable upon the sale.
Please refer to the section headed “Listings, Registration, Dealings and Settlement” in this listing document for further details.
The liquidity of our H Shares on the Hong Kong Stock Exchange may be limited and the effectiveness of the Arrangement is subject to limitations.
As at the Latest Practicable Date, our Company had 183,728,498 A Shares and 111,993,354 B Shares, both of which were listed on the Shenzhen Stock Exchange. Our Company intends to convert all the B Shares into H Shares which will be listed by way of introduction on the Main Board of the Hong Kong Stock Exchange.Application has been made to the Listing Committee for the listing of, and permission to deal in, the H Shares on the Hong Kong Stock Exchange. Immediately upon the completion of the Listing, all of the 111,993,354 B Shares will, due to the change of the listing venue, be converted into H Shares to be held by (a) our existing B Shareholders who did not elect the Cash Option; or (b) the Cash Option Providers. Given that Topsino (holding 50,660,052 B Shares as at the Latest Practicable Date) hasindicatedthatitwillnottradeitsHSharesforaperiodofsixmonthsfromtheListingDate, it is expected that 61,333,302 H Shares (representing approximately54.77% of the totalnumberofHSharesandapproximately20.74%ofthetotalnumberofissuedShares),beingthe maximum number of H Shares, will be available either to be sold by the H Shareholders through their respective accounts opened with the relevant PRC securities companies (through which their H Shares will be held by the CSDC as the nominee), or to be traded through their existing Hong Kong accounts or their other designated Hong Kong accounts to be opened with
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Guosen HK Brokerage or other eligible Hong Kong securities corporations upon the Listing. Moreover, as at 9 January 2014, there were at least 432 public beneficial B Shareholders with securities accounts opened in Hong Kong with Guosen HK Brokerage or other eligible Hong Kong securities corporations holding in aggregate 23,088,652 B Shares, representing approximately20.62% of the total number of issued B Shares and approximately7.81% of the total number of issued Shares, who are ready to trade their H Shares on the Hong Kong Stock Exchange upon the commencement of trading of H Shares on the Listing Date. Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares) ofHK$37.92, the market capitalisation of the 23,088,652 B Shares held by such 432 public beneficial B Shareholders is approximatelyHK$875.52 million. Please refer to the section headed “Listings, Registration, Dealings and Settlement” in this listing document for further details.
Notwithstanding the above, certain H Shareholders may not be willing to sell or tradetheirHSharesbasedontheArrangementupontheListing.Thismayadverselyaffectinvestors’ ability to purchase or liquidate our H Shares on the Hong Kong Stock Exchange. Neither our Company nor the Sole Sponsor has arranged any bridging arrangement or any other arbitrage activity for the Listing. Accordingly, there is no guarantee that the Arrangement will attain and/or maintain liquidity in our H Shares at any particular level on the Hong Kong Stock Exchange, nor is there assurance that a liquid and orderly market may be established despite the Arrangement is in place. Furthermore, there is no guarantee that the price at which our H Shares are traded on the Hong Kong Stock Exchange will be substantially the same as or similar to the price at which our B Shares are traded on the Shenzhen Stock Exchange.
The characteristics of theAShare and H Share markets may differ, and the liquidity and market price of our H Shares may be volatile.
Following the Listing, our A Shares will continue to be traded on the Shenzhen Stock Exchange and our H Shares will be traded on the Hong Kong Stock Exchange. Without the approval from the relevant regulatory authorities, our A Shares and H Shares are neither interchangeable nor fungible, and there is no trading or settlement between theAshare and the H share markets. The A share and H share markets have different trading characteristics (including trading volume and liquidity) and investor bases, including different levels of retail andinstitutionalparticipation.Asaresultofthesedifferences,thetradingpriceofourAShares and H Shares may not be the same. Moreover, fluctuations in ourAShare price may affect our H Share price, and vice versa. Because of the different characteristics of the A share and H share markets, the historical prices of our A Shares may not be indicative of our H Share performance. You should, therefore, not place any undue reliance on the prior trading history of our A Shares when evaluating an investment in our H Shares.
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RISK FACTORS
There has been no prior public market for our H Shares. In addition, following the Listing, the price and trading volume of our H Shares may be highly volatile and may fluctuate substantially in response to, among other factors:
• variations in our operating income, earnings, cash flow, asset quality, and financial and operating performance;
• changes in financial estimates by securities analysts;
• investor perceptions of us and the investment environment in Asia, including the PRC and Hong Kong;
• depth and liquidity of the market for our H Shares;
• differences between our actual profits and forecasts by third-party research analysts or media (if any);
• disputes or lawsuits relating to transfers of our Shares;
• complaints or allegations of financial or other impropriety at our Group made by third parties (as have been made in the past), whether true or not;
• fluctuation in the price and trading volume of our A Shares; and
• general economic and other factors.
There can be no assurance that an active trading market for our H Shares will develop following the Listing or, if it does develop, that it will be sustained or that the market price for our H Shares will not decline. The trading price of our H Shares may be volatile and could fluctuate widely in response to factors beyond our control, including general market conditions of the securities markets in Hong Kong, the PRC, Europe, the United States and elsewhere in the world. In particular, the performance and fluctuation of the market prices of other companies with similar business operations located mainly in the PRC that have listed their securities in Hong Kong may affect the volatility in the price of and trading volumes for our H Shares.
Recently, a number of PRC-based companies have listed their securities, or are in the process of preparing for listing their securities, in Hong Kong. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings or introduction. The trading performances of the securities of these companies at the timeoforaftertheirofferingsorintroductionmayaffecttheoverallinvestorsentimenttowards PRC-based companies listed in Hong Kong and consequently may impact the trading performance of our H Shares.These broad market and industry factors may significantly affect the market price and volatility of our H Shares, regardless of our actual operating and financial performance.
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RISK FACTORS
Foreign individual holders of our H Shares are subject to PRC income tax and there are uncertainties as to the PRC tax obligations of foreign enterprises that are holders of our H Shares.
Under current PRC tax laws, regulations and rules, non-PRC resident individuals and non-PRC resident enterprises are subject to different tax obligations with respect to the dividends paid to them by us or the gains realised upon the sale or other disposition of H Shares. Non-PRC resident individuals are required to pay PRC individual income tax at a20% rate under the Individual Income Tax Law of the PRC ( ). Accordingly, we are required to withhold such tax from dividend payments, unless applicable tax treaties between the PRC and the jurisdictions in which the foreign individuals reside, reduce or provide an exemption for, the relevant tax obligations. Generally, a convenient tax rate of10% shall apply to the dividends paid by a company listed in Hong Kong to foreign individuals according to the treaties.When a tax rate of10% is not applicable, the withholding companyshall:(a)returntheexcessivetaxamountpursuanttodueproceduresiftheapplicable tax rate is lower than10%; (b) withhold such foreign individual income tax at the applicable tax rate if the applicable tax rate is between10% and20%; and (c) withhold such foreign individual income tax at a rate of20% if no double taxation treaty is applicable.
For non-PRC resident enterprises that do not have establishments or premises in the PRC, or have establishments or premises in the PRC but their income is not related to such establishments or premises, under the EIT Law, dividends paid by us and the gains realised by such foreign enterprises upon the sale or other disposition of H Shares are ordinarily subject to PRC enterprise income tax at a20% rate. In accordance with the Notice on the Issues ConcerningWithholdingtheEnterpriseIncomeTaxontheDividendsPaidbyChineseResident EnterprisetoShareholdersWhichareOverseasNon-residentEnterprises(
H ) issued by the State Administration of Taxation, such tax rate has been reduced to10%, subject to a further reduction under a special arrangement or applicable treaty between the PRC and the jurisdiction of the residence of the relevant non-PRC resident enterprise.
Despite the arrangements mentioned above, there are significant uncertainties as to the interpretation and application of applicable PRC tax laws and rules due to several factors, including whether the relevant preferential tax treatment will be revoked in the future such that all non-PRC resident individual holders will be subject to PRC individual income tax at a flat rate of20%.
In addition, there remains significant uncertainty as to the interpretation and application of applicable PRC tax laws and rules byPRC’s tax authorities, including the taxation of capital gains by the non-PRC resident enterprises, individual income tax on dividends to non-PRC resident individual holders of our H Shares and on gains realised on sale or other disposition of our H Shares.PRC’s tax laws, rules and regulations may also change. If there is any change to applicable tax laws and rules and interpretation or application with respect to such laws and rules, the value of your investment in our H Shares may be materially affected.
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RISK FACTORS
OurShareholders’ interest may be diluted as a result of additional equity fund-raising. Our Company may need to raise additional funds in the future to finance expansion of or new developments relation to its existing operations or new acquisitions. If we issue additional Shares or equity-linked securities of our Company in the future other than on a pro rata basis to existing Shareholders, our Shareholders may experience dilution in their shareholding percentage.
Future sales or perceived sales of substantial amounts of our H Shares in the public market orthe conversion of ourAShares to H Shares could have a material adverse effect on the prevailing market price of our H Shares and our ability to raise capital in the future.
The market price of our H Shares could decline as a result of future sales of substantial amounts of our H Shares or other securities relating to our Shares in the public market, or the issuanceofournewSharesorothersecuritiesrelatingtoourShares,ortheperceptionthatsuch sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of our Shares could also materially and adversely affect the prevailing market price of our H Shares or our ability to raise capital in the future at a time and at a price favourable to us. Our Shareholders would experience dilution in their holdings upon issuance or sale of additional securities for any purpose, including, among other things, to improve our capital adequacy in the future.
Furthermore, according to the stipulations by the CSRC and our Articles of Association, our A Shares may be transferred to overseas investors, and such transferred shares may be listed or traded on an overseas stock exchange, provided certain conditions are met and certain procedures are completed. Conversion of a substantial number of ourAShares to H Shares, or the perception that such conversion may occur, could materially and adversely affect the price of our H Shares.
Investors may not be able to participate in rights offerings or elect to receive stock dividends and may experience dilution of your holdings.
We may, from time to time, distribute rights to our Shareholders, including rights to acquire securities.We will not distribute rights to a holder of our H Shares in the United States unlessthedistributionandsaleofrightsandthesecuritiestowhichtheserightsrelateareeither exempt from registration under the U.S. Securities Act of 1933, as amended (the “U.S. SecuritiesAct”) or are registered under the U.S. SecuritiesAct. We cannot assure you that we will be able to establish an exemption from registration under the U.S. SecuritiesAct, and we are under no obligation to file a registration statement with respect to any rights or underlying securities or to endeavour to have a registration statement declared effective under the U.S. SecuritiesAct.Accordingly, holders of our H Shares in the United States or other jurisdictions which have relevant restrictions may be unable to participate in rights offerings and may experience dilution of their holdings as a result. In addition, if we are unable to sell rights that arenotexercisedornotdistributedorifthesaleisnotlawfulorreasonablypracticable,wemay allow the rights to lapse, in which case holders of our H Shares will receive no value for these rights.
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RISK FACTORS
We cannot assure you that we will pay dividends in the future.
Dividends paid in prior periods may not be indicative of future dividend payments. We cannot guarantee when, if and in what form dividends will be paid in the future. The declaration of dividends is proposed by our Board and is based on, and limited by, various factors, including, without limitation, our business and financial performance, capital and regulatory requirements and general business conditions. We may not have sufficient or any profitstoenableustomakedividenddistributionstoourShareholdersinthefuture,evenifour financial statements indicate that our operations have been profitable.
RISKS RELATING TO STATEMENTS MADE IN THIS LISTING DOCUMENT
You should read the entire Implementation Plan, this listing document and the Transaction Guide carefully and we strongly caution you not to place any reliance on any information contained in press articles or other media regarding us and this Listing.
We strongly caution you not to place any reliance on any information contained in press articles or other media regarding us and this Listing. Prior to the date of this listing document, there has been press and media coverage regarding us and this Listing, which included certain financial information, financial projections, valuations, capital expenditure and other information about us that do not appear in this listing document. We have not authorised the disclosure of any such information in the press or media.We do not accept any responsibility for any such press or media coverage or the accuracy or completeness of any such information or publication. To the extent that any such information is inconsistent or conflicts with the information contained in the Implementation Plan, this listing document or the Transaction Guide, we disclaim responsibility for it and you should not rely on such information.
Investors should not place undue reliance on statistics and industry or market information that are contained in this listing document that are derived from various government or official sources.
Certain statistics, industry data or other information contained in the sections headed “Summary” and “Industry Overview” in this listing document is derived from various government or official sources or commissioned report. Whilst our Directors have taken all reasonable care to ensure that the facts and statistics are accurately reproduced from such sources, such information has not been independently verified by our Group, the Sole Sponsor, our/their respective affiliates, directors, employees and advisers, or any other parties involved in the Listing. Such information may be inconsistent, inaccurate, incomplete or out-of-date. None of our Group, the Sole Sponsor, our/their respective affiliates, directors, employees and advisers, or any other parties involved in the Listing makes any representation as to the accuracy or completeness of such information. Investors should give careful consideration as to the amount of weight or importance placed on such statistics, industry data and other information relating to the economy and the industry.
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RISK FACTORS
There are risks associated with forward-looking statements contained in this listing document.
This listing document contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. For details of these forward-looking statements includingtheassociatedrisks,pleaserefertothesectionheaded“Forward-lookingStatements” in this listing document.
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
In preparation for the Listing, our Company has sought the following waivers from strict compliance with the relevant provisions of the Hong Kong Listing Rules.
MANAGEMENT PRESENCE
Pursuant to Rule 8.12 of the Hong Kong Listing Rules, an issuer must have a sufficient management presence in Hong Kong, which normally means that at least two of its executive directors must be ordinarily resident in Hong Kong. Rule 19A.15 of the Hong Kong Listing Rules provides that the requirement under Rule 8.12 of the Hong Kong Listing Rules may be waived by the Hong Kong Stock Exchange at its discretion. Rule 19A.15 of the Hong Kong Listing Rules further provides that in exercising such discretion, the Hong Kong Stock Exchange will have regard to, among other considerations, anissuer’s arrangements for maintaining regular communication with the Hong Kong Stock Exchange. Our Company does not and, for the foreseeable future, will not have a sufficient management presence in Hong Kong for the purposes of satisfying the requirements under Rules 8.12 and 19A.15 of the Hong KongListingRules.OurCompanyhasthereforeappliedforawaiverfromcompliancewiththe requirements under Rules 8.12 and 19A.15 of the Hong Kong Listing Rules on the basis that since our core business operations are, and are expected to continue to be, based, managed and conducted in the PRC, and that our assets are primarily situated in the PRC, our management is best able to attend ourGroup’s functions by our management being based in the PRC. Requiring the existing executive Directors to relocate to Hong Kong in order to comply with Rules 8.12 and 19A.15 of the Hong Kong Listing Rules may result in difficulties in the management of the business operations of our Group and may be unduly burdensome to our Group.
For the purposes of the management and operations of our Group, the appointment to our Board of additional executive Directors who are ordinarily resident in Hong Kong would not only increase the administrative expenses of our Group, but would also reduce the effectiveness and efficiency of the executive Directors in administering the daily operations of our Group, especially when business decisions are required to be made within a short period of time. In addition, appointing a new executive Director who may not be familiar with the operations of our Group for the sole purpose of satisfying the requirements under Rules 8.12 and 19A.15 of the Hong Kong Listing Rules may not be in the best interests of our Company and our Shareholders as a whole.
Furthermore, each of our executive Directors has a vital role in managing our business in the PRC and it is necessary for them to remain physically close to our operations in the PRC. It is essential for them to remain proximate to the daily operations of our Group to appreciate the circumstances surrounding or affecting the business operations and the development of our Groupfromtimetotime,inordertoexercisetheirdiscretiononafullyinformedbasis,ormake appropriate business decisions or judgments in administering the daily operations of our Group.
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
We have received from the Hong Kong Stock Exchange a waiver from compliance with Rules 8.12 and 19A.15 of the Listing Rules subject to the following conditions:
(a) we have appointed two authorised representatives pursuant to Rule 3.05 of the Hong Kong Listing Rules who will act as our principal communication channel with the Hong Kong Stock Exchange and will ensure that we comply with the Hong Kong Listing Rules at all times. The two authorised representatives are Mr. An Ning (
) and Mr. Li Rucai ( ). Our Company will also appoint Ms. Cheng Pik Yuk ( ), a Hong Kong resident and the proposed assistant company secretaryofourCompany,asouralternativeauthorisedrepresentative.AlthoughMr. An Ning ( ) and Mr. Li Rucai ( ) normally reside in the PRC, bothofthempossessvalidtraveldocumenttovisitHongKongandareabletorenew such travel documents upon expiry. Each of them will be available to meet with the Hong Kong Stock Exchange within a reasonable time frame upon request of the Hong Kong Stock Exchange, if required.Any of them will be readily contactable by telephone, fax and email, and is authorised to communicate on behalf of us with the Hong Kong Stock Exchange;
(b) both authorised representatives and the alternative authorised representative have means to contact our Directors promptly at all times as and when the Hong Kong StockExchangewishestocontactthemembersoftheBoardforanymatters.Wewill implement a policy whereby (i) each Director will have to provide his/her office phone number, mobile phone number, residential phone number, fax number and email address to the authorised representatives; (ii) in the event that a Director expects to travel and be out of office, he/she will have to provide the phone number of the place of his/her accommodation or other means of communication to the authorised representatives; and (iii) each Director will provide his/her mobile phone number, residential phone number, office phone number, fax number and email address to the Hong Kong Stock Exchange;
(c) we will, in compliance with Rules 3A.19 and 19A.05 of the Hong Kong Listing Rules, retain a compliance adviser at least for the period commencing from the Listing Date and ending on the date that we publish our first full financial year resultspursuanttoRule13.46oftheHongKongListingRules,whowillhaveaccess at all times to ourCompany’s authorised representatives, Directors and other officers. The compliance adviser will advise on on-going compliance requirements and other issues arising under the Hong Kong Listing Rules and other applicable laws and regulations in Hong Kong after Listing and act as an additional communication channel between us and the Hong Kong Stock Exchange;
(d) our compliance adviser will act as our principal channel of communication with the HongKongStockExchangeinHongKongandourcomplianceadviserhasprovided the Hong Kong Stock Exchange the names, home and office telephone numbers, fax number of at least one of its officers and an alternate who will act as our complianceadviser’s contact with the Hong Kong Stock Exchange and us;
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WAIVERS FROM STRICT COMPLIANCE WITH
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(e) meetings between the Hong Kong Stock Exchange and our Directors could be arranged through our authorised representatives or compliance adviser, or directly with our Directors within a reasonable time frame. We will inform the Hong Kong Stock Exchange promptly in respect of any change in our authorised representatives and compliance adviser; and
(f) all Directors who are not ordinary resident in Hong Kong have confirmed that they possess valid travel documents to visit Hong Kong for business purpose and will be able to meet with the relevant members of the Hong Kong Stock Exchange within a reasonable period.
COMPANY SECRETARY
Rule 8.17 of the Hong Kong Listing Rules provides that our Company must appoint a company secretary who satisfies Rule 3.28 of the Hong Kong Listing Rules. Rule 3.28 of the Hong Kong Listing Rules provides that a company secretary must be an individual who, by virtue of his academic or professional qualifications or relevant experiences, is, in the opinion of the Hong Kong Stock Exchange, capable of discharging the functions of company secretary. According to Note 1 to Rule 3.28 of the Hong Kong Listing Rules, the Hong Kong Stock Exchange considers the following academic or professional qualifications to be acceptable: (a) a member of The Hong Kong Institute of Chartered Secretaries;
(b) a solicitor or barrister as defined in the Legal Practitioners Ordinance (Chapter 159 of the Laws of Hong Kong); and
(c) a certified public accountant as defined in the Professional Accountants Ordinance (Chapter 50 of the Laws of Hong Kong).
Pursuant to Note 2 to Rule 3.28 of the Hong Kong Listing Rules, in assessing “relevant experience”, the Hong Kong Stock Exchange will consider theindividual’s:
(a) length of employment with the listing applicant and other issuers and the roles he played;
(b) familiarity with the Hong Kong Listing Rules and other relevant law and regulations including the SFO, the Companies Ordinance and the Hong Kong Takeovers Code; (c) relevant training taken and/or to be taken in addition to the minimum requirement under Rule 3.29 of the Hong Kong Listing Rules; and
(d) professional qualifications in other jurisdictions.
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
We have appointed Mr. Li Rucai ( ) (“Mr. Li”), who has been the secretary to our Board since September 2007, as the company secretary of our Company. Our Company believes that having regard to Mr.Li’s knowledge and past experience in handling corporate matters, he has a thorough understanding of the operations of our Company and our Board and is able to perform his duties as our company secretary. Please refer to the section headed “Directors, Supervisors and Senior Management− Company Secretary” in this listing document for further details of Mr.Li’s biography. However, Mr. Li does not possess full qualifications as required under Rule 3.28 of the Hong Kong Listing Rules and may not be able to fulfil the requirements under Rule 3.28 of the Hong Kong Listing Rules. As such, we have appointed Ms. Cheng Pik Yuk ( ) (“Ms. Cheng”) to act as an assistant company secretary and to provide assistance to Mr. Li so as to enable Mr. Li to acquire the relevant experience as required under Rule 3.28 of the Hong Kong Listing Rules and to duly discharge the functions of a company secretary.While Mr. Li has not previously had personal experience of the Hong Kong regulatory system, he will be assisted and have the resources and expertise of Ms. Cheng as an assistant company secretary.
Ms.Chenghasover30yearsofexperienceinthecompanysecretarialfieldandisafellow of The Institute of Chartered Secretaries and Administrators in the United Kingdom and The Hong Kong Institute of Chartered Secretaries (the “HKICS”), and is a holder of thePractitioner’s Endorsement of the HKICS. Accordingly, Ms. Cheng satisfies the requirements of a company secretary as stipulated under Rule 3.28 of the Hong Kong Listing Rules. Please refer to the section headed “Directors, Supervisors and Senior Management– Company Secretary” in this listing document for further details of Ms.Cheng’s biography.
WeproposetoengageMs.Chengasanassistantcompanysecretaryforaminimumperiod of three years commencing from the Listing Date. During her engagement period, Ms. Cheng willensurethatshewillbeavailableatalltimestoprovidetheassistancetoMr.Liasdescribed above, including but not limited to communicating regularly with Mr. Li on matters relating to corporate governance, the Hong Kong Listing Rules, as well as other laws and regulations which are relevant to our Company. Our Group will further ensure that Mr. Li will receive the relevant trainings and support to enable him to be familiar with the Hong Kong Listing Rules andtheresponsibilitiesofacompanysecretaryasrequiredundertheHongKongListingRules. Furthermore, pursuant to Rule 3.29 of the Hong Kong Listing Rules, each of Mr. Li and Ms. Cheng will attend in each financial year no less than 15 hours of relevant professional training courses to familiarise themselves with the requirements of the Hong Kong Listing Rules and other Hong Kong regulatory requirements.
We have applied for, and the Hong Kong Stock Exchange has granted us, a waiver from compliance with the requirements under Rules 3.28 and 8.17 of the Hong Kong Listing Rules. The waiver is valid for an initial period of three years from the Listing Date, during which Mr. Li is appointed as the company secretary of our Company and shall be assisted by an assistant company secretary who fulfils the qualification and experience requirements under Rules 3.28 and 8.17 of the Hong Kong Listing Rules. Upon expiry of the three-year period, our Company will re-evaluate the qualifications of Mr. Li and determine whether he satisfies the requirements as stipulated under Rules 3.28 and 8.17 of the Hong Kong Listing Rules.
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
We acknowledge that if Ms. Cheng ceases to provide assistance to Mr. Li, the waiver will be revoked by the Hong Kong Stock Exchange with immediate effect. In addition, at the end of the three year period as mentioned above, the Hong Kong Stock Exchange will revisit thesituationwherebywehavetodemonstratetotheHongKongStockExchange’ssatisfactionthat Mr. Li, having had the benefit of Ms.Cheng’s assistance for three years, would have acquired the relevant experience within the meaning of Rule 3.28 of the Hong Kong Listing Rules so that a further waiver would not be necessary.
FINANCIAL INFORMATION INCLUDED IN THIS LISTING DOCUMENT
Rule 4.04(1) of the Hong Kong Listing Rules requires that theaccountants’ report to be included in a listing document must include the consolidated results of the listing applicant in respect of each of the three financial years immediately preceding the issue of the listing document or such shorter period as may be acceptable to the Hong Kong Stock Exchange. Guidance letter HKEx-GL25-11 stipulates that “where an applicant issues its listing document within two months after the latest year end”, the existing conditions for granting a waiver from strict compliance with Rule 4.04(1) of the Hong Kong Listing Rules are as follows:
(a) the applicant must list on the Hong Kong Stock Exchange within three months after the latest year end;
(b) the applicant must obtain a certificate of exemption from the SFC on compliance with the requirements under the Companies Ordinance;
(c) a profit estimate for the latest financial year (which must comply with Rules 11.17 to 11.19 of the Hong Kong Listing Rules) must be included in the listing document or the applicant must provide justification why a profit estimate cannot be included in the listing document; and
(d) there must be adirectors’ statement in the listing document that there is no material adverse change to its financial and trading positions or prospect with specific reference to the trading results from the end of the stub period to the latest financial year end.
Theaccountants’ report of our Group for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 has been prepared and is set out in Appendix I to this listing document. However, as this listing document is issued within a short period of time after 31 December 2013, theaccountants’ report of our Group has not been prepared for the full year ended 31 December 2013. It would not be possible for the audited results for the financial year ended 31 December 2013 to be finalised shortly after the year end. If the full year results for the financial year ended 31 December 2013 are included, there will be a significant delay in the listing timetable. If the financial statements are required
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WAIVERS FROM STRICT COMPLIANCE WITH
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to be audited up to 31 December 2013, our Company and the reporting accountants would have to undertake a considerable amount of work and to incur an additional two months after our Company has completed its consolidated management accounts to prepare, update and finalisetheaccountants’report.Thereafter,ourCompanyandtheworkingpartieswouldhavetoupdate other relevant sections in this listing document, in particular, the section headed “Financial Information” in this listing document accordingly. It is estimated that if our Company is required to include the audited results for the financial year ended 31 December 2013 in this listing document, the date of this listing document and the Listing Date would therefore be postponed by approximately two months.
Insuchcircumstances,wehaveappliedforawaiverfromtheHongKongStockExchange from strict compliance with the requirements of Rule 4.04(1) of the Hong Kong Listing Rules. Our Directors have confirmed that, after performing sufficient review, up to the date of issue of this listing document, there has been no material adverse change in the financial and trading position or prospects of our Group since 30 September 2013 and that there is no event which would materially affect the information contained in theaccountants’ report of our Group (as set out inAppendix I to this listing document) and in the section headed “Financial Information” and other sections in this listing document. In addition, our Directors consider that the Listing is to be conducted by way of introduction, which means that there will be no offering of shares for fund raising and no new investors becoming Shareholders of our Company at the time of the Listing and all information that is reasonably necessary for the investors to make an informed assessment of the activities or financial and trading position or prospects of our Group has been included in this listing document.As such, the waiver would not prejudice the interests of the investing public.
Also, in accordance with Guidance Letter HKEx-GL25-11, an estimate of the consolidated profit of our Group for the year ended 31 December 2013 has been included in this listing document. Please refer to Appendix II to this listing document for further details. Therefore, investing public would be given some guidance as to ourCompany’s financial performance for the year ended 31 December 2013.
The waiver from strict compliance with Rule 4.04(1) of the Hong Kong Listing Rules was granted by the Hong Kong Stock Exchange on the condition that:
(a) this listing document will be issued on or before 28 February 2014;
(b) the Listing Date will fall on or before 31 March 2014; and
(c) a statement is included in this listing document pursuant to which the Directors confirm that there is no material adverse change to the financial and trading positions or prospects of our Group since 30 September 2013 and up to the date ofthislistingdocument.Pleaserefertothesectionheaded“FinancialInformation–No Material Adverse Change” in this listing document for the disclosure of such statement.
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
DEALINGS IN SHARES PRIOR TO THE LISTING
Rule 9.09(b) of the Hong Kong Listing Rules provides that there must be no dealing in the securities of a new listing applicant for which listing is sought by any connected person of the listing applicant from four clear business days before the expected hearing date until listing is granted (the “Restrictive Period”).
In the context of a listing by way of introduction of a widely held, publicly traded company on the Shenzhen Stock Exchange, our Company has no control over the investment decision of our Shareholders. Our Company does not contemplate that it is within our control to satisfy the strict requirement under Rule 9.09(b) of the Hong Kong Listing Rules. Accordingly,wehaveappliedfor,andtheHongKongStockExchangehasgrantedus,awaiver from strict compliance with Rule 9.09(b) of the Hong Kong Listing Rules such that the restrictions on dealings in the Shares under Rule 9.09(b) of the Hong Kong Listing Rules shall not apply to the future Substantial Shareholders over whom our Company has no control in relation to their investment decisions.
In support of this waiver application, we have either confirmed or undertaken to the following:
(a) each of our Company and our management has no control over the investment decisions of our Shareholders (including potential new Substantial Shareholders) and their respective associates and their investing public, nor is each of them in a position to be fully aware of the dealing of our Shares by our Shareholders (save as disclosed in (c) below);
(b) our Company confirms that the waiver is only applicable to future Substantial Shareholders and their respective associates whose investment decisions we do not have control over and they have not, or will not be involved in the Listing and ourGroup’s management and operations prior to the Listing;
(c) our Company confirms that our Directors, Supervisors, senior management, connected persons and Substantial Shareholders, namely Topsino, Joincare, Shenzhen Baiyeyuan, Mr. Zhu and Ms. Liu (together with their respective associates), will not deal in our Shares during the Restrictive Period;
(d) each of our Substantial Shareholders of our Company, namely Topsino, Joincare, Shenzhen Baiyeyuan, Mr. Zhu and Ms. Liu, has undertaken to our Company that theyandtheirrespectiveassociateswillnotdealinourSharesduringtheRestrictive Period;
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WAIVERS FROM STRICT COMPLIANCE WITH
THE HONG KONG LISTING RULES
(e) we have undertaken that we shall notify the Hong Kong Stock Exchange of any dealing or suspected dealing in our Shares by any connected persons of our Company during the Restrictive Period;
(f) wehaveundertakenthatweshallreleaseinsideinformationtothepublicasrequired by relevant laws, rules and regulations applicable to our Company so that anyone who may deal in our Shares as a result of this waiver will not be in possession of non-public inside information; and
(g) each of our Company and the Sole Sponsor has undertaken that no non-public information will be disclosed to the existing Substantial Shareholders and the potential new Substantial Shareholders.
CASH FLOW FORECAST MEMORANDUM
Rule 9.11(10)(a) of the Hong Kong Listing Rules in force immediately prior to 1 October 2013 provides that, where the listing document contains a profit forecast (or estimate), two copies of a draft of theboard’s profit forecast (or estimate) memorandum covering the same period of the profit forecast (or estimate) contained in the listing document and cash flow forecast memorandum covering at least 12 months from the expected date of publication of the listing document with principal assumptions, accounting policies and calculations for the forecasts (or estimates) are required to be submitted to the Hong Kong Stock Exchange.
We have applied for, and the Hong Kong Stock Exchange has granted us, a waiver from strict compliance with Rule 9.11(10)(a) of the Hong Kong Listing Rules in force immediately prior to 1 October 2013 (to the extent of the requirement to submit a cash flow forecast memorandum to the Hong Kong Stock Exchange) on the following reasons:
(a) there is sufficient disclosure of our financial position, and business and financial prospects, in our periodic financial reports and public announcements by virtue of the relevant listing rules and applicable securities laws to which our Company is already subject to:
(i) as required by the Shenzhen Listing Rules and relevant PRC laws and regulations, our Company is required to include a general description of outlook and prospects and a warning statement and related explanations if the estimated operating results for the next reporting period will be a net loss or have a material adverse change when compared with our previous corresponding period in our quarterly unaudited financial statements report; and
(ii) as required by the Shenzhen Listing Rules and relevant PRC laws and regulations, our Company is required to make an announcement where there is any material change (over50%) in expectations to our financial position and prospects;
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WAIVERS FROM STRICT COMPLIANCE WITH
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(b) our Shares are already listed on the Shenzhen Stock Exchange where there is extensive coverage on ourGroup’s financial position and prospects throughanalysts’ research in the market; and
(c) the Shenzhen Listing Rules do not require our Company to include a cash flow forecast in the listing document or our periodic report and our Company does not intend to do so. In such a circumstance, it would be unduly burdensome to require our Company to produce and submit such a memorandum which would not provide any additional material information on top of our general disclosure obligation.
CONTINUING CONNECTED TRANSACTIONS
We have applied for, and the Hong Kong Stock Exchange has granted us, waivers, in relation to certain continuing connected transactions between our Group and our connected persons under Chapter 14Aof the Hong Kong Listing Rules. Please refer to the section headed “Connected Transactions” in this listing document for further details.
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INFORMATION ABOUT THIS LISTING DOCUMENT AND THE LISTINGDIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS LISTING DOCUMENT
This listing document, for which our Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Hong Kong Listing Rules for the purpose of giving information to the public with regard to our Company. Our Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief that all material information has been included in this listing document and the information contained in this listing document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this listing document misleading.
RESTRICTION ON THE USE OF THIS LISTING DOCUMENT
This listing document is published solely in connection with the Listing. It may not be used for any other purpose and, in particular, no person is authorised to use or reproduce this listing document or any part thereof in connection with any offering of shares or other securities of our Company. Accordingly, there is no, and will not be any, public offer, solicitation, or invitation by or on behalf of our Company and/or the Sole Sponsor to invest or hold any of our H Shares. Neither this listing document nor any other document or information (or any part thereof) delivered or supplied under or in relation to the Listing may be used for the purpose of making, and the delivery, distribution and availability of this listing document or such other document or information (or any part thereof) does not constitute, any offer of or solicitation or an invitation by or on behalf of our Company and the Sole Sponsor to invest or hold any of our H Shares.
CSRC APPROVAL
The CSRC issued its approval for the Listing and our application to list the H Shares on the Hong Kong Stock Exchange on 22 September 2013. In granting such approval, the CSRC accepts no responsibility for our financial soundness nor the accuracy of any of the statements made or opinions expressed in this listing document. No other approvals in the PRC are required to be obtained for the listing of the H Shares on the Hong Kong Stock Exchange. NO CHANGE IN BUSINESS
No change in the business of our Company is contemplated immediately following the Listing.
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INFORMATION ABOUT THIS LISTING DOCUMENT AND THE LISTING APPLICATION FOR THE LISTING OF OUR H SHARES ON THE HONG KONG STOCK EXCHANGE BY WAY OF INTRODUCTION
Application has been made to the Listing Committee for the listing of, and permission to deal in our H Shares on the Main Board of the Hong Kong Stock Exchange. OurAShares are listed on the Shenzhen Stock Exchange and upon completion of the Listing, our H Shares will be listed on the Hong Kong Stock Exchange, respectively. Consequently, unless otherwise agreed or waived by the Shenzhen Stock Exchange or, as the case may be, the Hong Kong Stock Exchange, our Company must comply with the listing rules of both the Shenzhen Stock Exchange and the Hong Kong Stock Exchange and any other relevant regulations and guidelines in the PRC and Hong Kong which are applicable to our Company. In the event that there is a conflict or inconsistency between the requirements of the listing rules of the two stock exchanges, the listing rules with the more onerous requirements shall prevail. Our Directors will use their best endeavours to ensure that no release of information will be made in the PRC unless a simultaneous release is made in Hong Kong and
vice versa.
INFORMATION ON THE LISTING
The Listing does not involve any offering of new Shares or a public offering of any other securities and no funds will be raised pursuant to the Listing.
The publication or delivery of this listing document should not, under any circumstances, constitute a representation that there has been no change or development reasonable likely to involve a change in our affairs since the date of this listing document or imply that the information contained in this listing document is correct as of any date subsequent to the date of this listing document.
Details of the Listing, registration, dealings and settlement of our H Shares are set out in the section headed “Listings, Registration, Dealings and Settlement” in this listing document. COMMENCEMENT OF DEALINGS IN THE H SHARES ON THE HONG KONG STOCK EXCHANGE
It is expected that dealings in our H Shares of board lots of 100 H Shares will commence on the Hong Kong Stock Exchange on Thursday, 16 January 2014, Hong Kong local time. Our H Shares will be listed and traded on the Main Board of the Hong Kong Stock Exchange in Hong Kong dollars.
REASONS FOR THE LISTING
Please refer to the section headed “Reasons for the Listing” in this listing document for further information.
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INFORMATION ABOUT THIS LISTING DOCUMENT AND THE LISTING H SHARES WILL BE ELIGIBLE FOR CCASS
Subject to the granting of the listing of, and permission to deal in, our H Shares on the Hong Kong Stock Exchange and the compliance with the stock admission requirements of HKSCC, our H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in our H Shares on the Hong Kong Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between the participants of the Hong Kong Stock Exchange is required to take place on the second business day after any trading day.
All necessary arrangements have been made for the H Shares to be admitted into CCASS. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.
H SHARE REGISTER AND STAMP DUTY
Our H Share register of members will be maintained by the H Share Registrar. Further details of the transfer, trading of our Shares are set out under the section headed “Listings, Registration, Dealings and Settlement” in this listing document.
Dealings in our H Shares registered on our H Share register of member will be subject to Hong Kong stamp duty.
UnlessdeterminedotherwisebyourCompany,dividendspayableinHKdollarsinrespect of our H Shares will be paid to our H Shareholders listed on our H Share register of member, by ordinary post, at the HShareholder’s risk, to the registered address of each H Shareholder. PROFESSIONAL TAX ADVICE RECOMMENDED
Potential investors are recommended to consult their professional advisers if they are in any doubt as to the taxation implications of subscribing for, purchasing, holding or disposal, and dealing in our H Shares (exercising rights attached to them). None of us, the Sole Sponsor, anyofour/theirrespectivedirectorsoranyotherpersonorpartyinvolvedintheListingaccepts responsibility for any tax effects on, or liabilities of, any person resulting from the subscription, purchase, holding or disposal of, dealing in, or the exercise of any rights in relation to, our H Shares.
LANGUAGE
Translated English names of Chinese laws and regulations, government authorities, institutions, natural persons or other entities included in this listing document and for which no official English translation exists are unofficial translations for your reference only.
ROUNDING
Any discrepancies in any table between totals and sums of amounts listed herein are due to rounding.
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INFORMATION ABOUT THIS LISTING DOCUMENT AND THE LISTING EXCHANGE RATE CONVERSION
Solely for your convenience, this listing document contains translations of certain Renminbi amounts into HK dollars at specified rates. No representation is made that the Renminbi amounts could actually be converted into any HK dollar amounts at the rates indicated or at all. Unless indicated otherwise, the translation of Renminbi into HK dollars was made at the rate of RMB0.78769 toHK$1.00, the exchange rates prevailing on 9 January 2014, set by the PBOC for foreign exchange transactions. Any discrepancies in any table between totals and sums of amounts listed therein are due to rounding. Further information on exchange rates is set forth in Appendix V to this listing document.
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DIRECTORS, SUPERVISORSAND PARTIES INVOLVED IN THE LISTING DIRECTORS
Name Residential Address Nationality
Executive Directors
Mr. An Ning ( ) Room 701, Building L Chinese
Chunshui An, Xiangshan Street
Overseas Chinese Town
Shenzhen
Guangdong Province
the PRC
Mr. Tao Desheng ( ) Room 705, No. 29 Minsheng Street Chinese
Gongbei
Xiangzhou District
Zhuhai
Guangdong Province
the PRC
Non-executive Directors
Mr. Zhu Baoguo ( ) No. 5 Yu Lan Dao Chinese
Yin Hu Yi Yuan
Lo Wu District
Shenzhen
Guangdong Province
the PRC
Ms. Liu Guangxia ( ) No. 5 Yu Lan Dao Chinese
Yin Hu Yi Yuan
Lo Wu District
Shenzhen
Guangdong Province
the PRC
Mr. Qiu Qingfeng ( ) Room 22H, Fei Yun Court Chinese
Shahe CST Plaza
Nanshan District
Shenzhen
Guangdong Province
the PRC
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DIRECTORS, SUPERVISORSAND PARTIES INVOLVED IN THE LISTING DIRECTORS
Name Residential Address Nationality
Mr. Zhong Shan ( ) Room 504, No. 289 Wushan Road Chinese
Tianhe District
Guangzhou
Guangdong Province
the PRC
Independent non-executive Directors
Mr. Luo Xiaosong ( ) Room 704, Unit Two, Huijin Homeland Chinese
Nanshan District
Shenzhen
Guangdong Province
the PRC
Mr. Yang Bin ( ) Block 19 Chinese
Minjin Garden
Chunfeng Road
Lowu
Shenzhen
Guangdong Province
the PRC
Mr. Guo Guoqing ( ) Unit 1-9-501 Chinese
New Century Garden
Wanliu Zhong Road
Haidian District
Beijing
the PRC
Mr. Wang Xiaojun Flat I, 4/F, Block 9 Chinese
( ) 9 Parkland Drive
Discovery Bay
New Territories
Hong Kong
Mr. Yu Xiong ( ) Room 107 Chinese
No. 32 Duo Lun Road
Hongkou District
Shanghai
the PRC
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DIRECTORS, SUPERVISORSAND PARTIES INVOLVED IN THE LISTING SUPERVISORS
Name Residential Address Nationality
Mr. Wang Maolin ( ) Room 1802, Building 2 Chinese
No. 399 Yanhe East Road
Xiangzhou District
Zhuhai
Guangdong Province
the PRC
Mr. Yuan Huasheng Room 401, Building 3 Chinese
( ) No. 390 Jida Shuiwan Road
Xiangzhou District
Zhuhai
Guangdong Province
the PRC
Mr. Huang Huamin Room 202, Unit 2, Building 14 Chinese
( ) No. 338 Yuehua Road
Xiangzhou District
Zhuhai
Guangdong Province
the PRC
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DIRECTORS, SUPERVISORSAND PARTIES INVOLVED IN THE LISTING PARTIES INVOLVED IN THE LISTING
Sole Sponsor Guosen Securities (HK) Capital Company Limited
Unit Nos. 1604-06, 16th Floor
Infinitus Plaza
199 Des Voeux Road Central
Hong Kong
Financial Adviser Guosen Securities Co., Ltd.
10/F, Trust Building
No. 1010 Hongling Central Road
Shenzhen
the PRC
Legal Advisers to our Company As to Hong Kong Law
King& Wood Mallesons
13/F, Gloucester Tower
The Landmark
15Queen’s Road Central
Central
Hong Kong
As to PRC Law
King& Wood Mallesons
55th Floor, Guangzhou International Finance Centre
5 Zhujiang Xilu
Zhujiang New Town
Guangzhou
Guangdong
the PRC
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DIRECTORS, SUPERVISORSAND PARTIES INVOLVED IN THE LISTING Legal Advisers to the Sole As to Hong Kong Law
Sponsor Paul Hastings
21-22/F, Bank of China Tower
1 Garden Road
Hong Kong
As to PRC Law
Jingtian& Gongcheng
34th Floor, Tower 3
China Central Place
77 Jianguo Road, Chaoyang District
Beijing
the PRC
Reporting Accountants and Ruihua Certified Public Accountants (LLP)
Auditors 4th Floor of Tower 2
No. 16 Xisihuanzhong Road
Haidian District
Beijing
the PRC
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CORPORATE INFORMATION
Registered Address and Administration and Research Building
Address of Head Office 38 Chuangye North Road
Shuang Linpian Area
Liangang Industrial Zone
Hongqi Town
Jinwan District
Zhuhai
Guangdong Province
the PRC
Place of Business in Hong Kong Flat 02, 17/F
registered under Part XI of Bayfield Building
the Companies Ordinance 99-101 Hennessy Road
Wanchai
Hong Kong
Company Website http://www.livzon.com.cn (information on the website does not form part of this listing document)
Authorised Representatives Mr. An Ning ( )
Room 701, Building L
Chunshui An, Xiangshan Street
Overseas Chinese Town
Shenzhen
Guangdong Province
the PRC
Mr. Li Rucai ( )
18-20A, Bay Garden
Shihua West Road, Jida
Zhuhai
Guangdong Province
the PRC
Alternative Authorised Ms. Cheng Pik Yuk ( )
Representative Level 54, Hopewell Centre
183Queen’s Road East
Hong Kong
Company Secretary Mr. Li Rucai ( )
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CORPORATE INFORMATION
Assistant Company Secretary Ms. Cheng Pik Yuk ( ), FCIS, FCS (PE)
Audit Committee Mr. Luo Xiaosong ( )
(Chairman)
Mr. Yang Bin ( )
Mr. Guo Guoqing ( )
Remuneration and Assessment Mr. Guo Guoqing ( )
(Chairman)
Committee Mr. Luo Xiaosong ( )
Mr. An Ning ( )
Nomination Committee Mr. Yang Bin ( )
(Chairman)
Mr. Guo Guoqing ( )
Mr. An Ning ( )
Strategic Committee Mr. Zhu Baoguo ( )
(Chairman)
Mr. Zhong Shan ( )
Mr. An Ning ( )
H Share Registrar Tricor Investor Services Limited
26/F, Tesbury Centre
28Queen’s Road East
Hong Kong
Compliance Adviser Guosen Securities (HK) Capital Company Limited
Unit Nos. 1604-06, 16th Floor
Infinitus Plaza
199 Des Voeux Road Central
Hong Kong
– 86–
CORPORATE INFORMATION
Principal Bankers Xiamen International Bank Zhuhai Branch
CNAC House
1195 Jida Jiuzhou Avenue East
Zhuhai
Guangdong Province
the PRC
Zhuhai China Resources Bank Co., Ltd.
1123 Yingbin Road South
Gongbei, Zhuhai
Guangdong Province
the PRC
Industrial and Commercial Bank of China Zhuhai Branch ICBC Tower
19 Jingshan Road
Jida
Zhuhai
Guangdong Province
the PRC
– 87–
INDUSTRY OVERVIEW
This section contains information, forecasts and statistics relating to the economy
in the PRC and the industry in which we operate. We believe that the sources of the
informationareappropriatesourcesforsuchinformationandhavetakenreasonablecare
in extracting and reproducing such information. We have no reason to believe that such
information is false or misleading or that any fact has been omitted that would render
such information false or misleading in any material respect. We have derived such
information and data partly from publicly available government and official sources as
well as a report we commissioned from Biaodian, an Independent Third-Party, which
have not been independently verified by us, the Sole Sponsor, nor any of our/their
directors, affiliates, advisers or any other parties involved in the Listing. Furthermore,
the information provided by the PRC Government sources may not be consistent with the
information compiled within or outside the PRC by third parties. We make no
representation as to the correctness or accuracy of government or official information
contained in this listing document. Accordingly, such information should not be unduly
relied upon.
PHARMACEUTICAL INDUSTRY IN CHINA
Overview
In recent years, there had been steady growth on the gross output of the pharmaceutical industry in the PRC. The gross output of the pharmaceutical industry in the PRC increased from approximately RMB838,072.00 million in 2008 to approximately RMB1,877,000.00 million in 2012, at a CAGR of approximately22.33%. The rapid and strong growth of the pharmaceutical industry in the PRC was mainly due to certain social and economic factors, such as (a) steady growth of GDP and disposable income; (b) population growth and ageing population; (c) more awareness in healthcare and increased consumption of pharmaceutical products; and (d) government support and medicare reforms. In view of the factors stated above, it was expected by Biaodian that the demand for pharmaceutical products in the PRC end-user market will continue to increase.
The major reasons for the rapid development of the pharmaceutical industry in the PRC Steady growth of GDP and disposable income
Between 2008 and 2012, there was a steady growth inPRC’s GDP from approximately RMB31,404.50billionin2008toapproximatelyRMB51,932.20billionin2012aswellasGDP per capita from approximately RMB23,648.00 in 2008 to approximately RMB38,354.00 in 2012. In addition, the disposable income per capita for urban population and rural population in the PRC were also on an upward trend.
– 88–
INDUSTRY OVERVIEW
Changes inPRC’s GDP 2008– 2012
PRC’s GDP (RMB100 million)
Growth rate(%)
600,000 12%
10.40%
519,322
9.60%
500,000 9.10% 471,564 10%
401,202
9.20%
400,000 8%
340,507
314,045 7.80%
300,000 6%
200,000 4%
100,000 2%
0 0%
2008 2009 2010 2011 2012
Source: National Bureau of Statistics of the PRC
Changes inPRC’s GDP per capita 2008– 2012
PRC’s GDP per capita (RMB)
Growth rate(%)
45,000 25%
21.43%
40,000 38,354
34,999
35,000 17.39%
20%
16.87%
30,000
25,511 29,947 15%
25,000 23,648
9.58%
20,000
10%
15,000
7.88%
10,000
5%
5,000
0 0%
2008 2009 2010 2011 2012
Source: National Bureau of Statistics of the PRC
– 89–
INDUSTRY OVERVIEW
Changes in disposable income per capita of the urban and rural population in the
PRC 2008– 2012
30,000 25%
24,565
25,000
20%
||
|-|
|13.12.|

||
|-|
|11.8.4|

||
|-|
|10.7.|

||
|-|
|9.8.5|

||
|-|
|8.48.0|

2008 2009 2010 2011 2012
Disposable income per capita Disposable income per capita
for urban population (RMB) for rural population (RMB)
Growth rate(%) Growth rate(%)
Source: National Bureau of Statistics of the PRC
Note: The growth rates as shown in the chart above are growth rate in real terms.
According to the Biaodian Report, with the growth in GDP as well as the disposable income of both the urban and rural population in the PRC, it is forecast that healthcare awareness among PRC population will be enhanced which in turn will lead to an increase in the amount of healthcare spending in the PRC.
Population growth and ageing population
Changes in PRC population 2008– 2012
Total population (million people)
Growth rate(%)
1,400 1,328 1,335 1,341 1,347 1,354 0.60%
|||
|-|-|
|0.51%|0.51%|

2008 2009 2010 2011 2012
Source: National Bureau of Statistics of the PRC
– 90–
INDUSTRY OVERVIEW
According to the information obtained from the National Bureau of Statistics of the PRC, there had been a steady growth in the PRC population between 2008 and 2012. The size of the PRC population had grown at a steady annual growth rate within the range of0.46% to0.51% during that period. In addition, the average life expectancy for males and females in the PRC increased from 68.6 years to 72.4 years and from 70.5 years to 77.4 years between 1990 and 2010, respectively. According to the Biaodian Report, approximately13.26% of the PRC population was over 60 years old in 2010. Population growth, coupled with an increasing ageing population and an increase in average life expectancy have led to rapid growth in the markets for pharmaceutical products, especially for geriatric diseases ( ) and chronic diseases ( ).
More awareness in healthcare and increased consumption of pharmaceutical products
Between 2007 and 2012, there had been an increasing number of people visiting hospitals and/or medical institutions in the PRC for medical consultations. In addition, the total PRC healthcare expenditure had also increased on a yearly basis.As shown in the following graph, theannualtotalhealthcareexpenditureinthePRChadnearlydoubledduringsuchperiod,from approximately RMB1,157.40 billion in 2007 to approximately RMB2,891.40 billion in 2012. Changes in total healthcare expenditure in the PRC 2007– 2012
Total healthcare expenditure (RMB100 million)
Growth rate(%)
30,000
28,914
30%
25.59%
28.53%
25,000 25%
22,496
19,921
20,000
17.58%
17,542 20%
14,535
18.36%
13.56%
15,000 15%
11,574
10,000
12.92%
10%
5,000 5%
0 0%
2007 2008 2009 2010 2011 2012
Source: 2012 Health Statistics Yearbook and the 2012 PRC Health and Family Planning Career Statistics Bulletin compiled by the SFDASouth Institution
According to the Biaodian Report, with further economic development in the PRC as well as the improvement in living standard, healthcare awareness among PRC population will continue to increase with a further increase in the number of medical consultations at hospitals and/or medical institutions as well as total health expenditure which in turn will increase the demand for pharmaceutical products.
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INDUSTRY OVERVIEW
Government support and medicare reforms
It was proposed by the PRC Government in the Outline of the Twelfth Five-Year Plan for the National Economy and Social Development of thePeople’s Republic of China (
) that more resources would be allocated forthepopulationinruralandsub-urbanareas.Inparticular,itwasintendedbythegovernment to improve social medical insurance plan by increasing the benefit amounts under such a plan. As part of the medicare reform, the number of hospitals and medical institutions etc. has increased between 2007 and 2011. In 2009, it was announced by the PRC Government that it would invest RMB850.00 billion in a series of projects to be launched under the medicare reform during the period between 2009 and 2011. These projects include the expansion of the coverageofthesocialmedicalinsuranceplan,theintroductionoftheNationalListofEssential Drugs and the increase in the number of community medical centres and clinics. It is expected that the demand for pharmaceutical products will further increase.
DRUG PREPARATION PRODUCTS MARKET IN THE PRC
Drug preparation products can generally be classified into western drug preparation products and Chinese drug preparation products. Drug preparation is a collective term for all kindsofdifferentformulationofpharmaceuticalproducts,includinginjections,tabletsetc.The graphbelowsetsouttheproductionandsalesvaluefordrugpreparationproductsmarketinthe PRC between 2008 and 2012:
Production and Sales Value for the Drug Preparation Products Market in the PRC
2008– 2012
12,000 35%
11,357.00
|||
|-|-|
|18.15.9||
||73%5%|

|||
|-|-|
|28.65.56||
||7%9,08|

|||
|-|-|
|22.4.40||
||7,04|

|||
|-|-|
|5.53|5,72|

2008 2009 2010 2011 2012
Total production value for drug preparation Total sales value from drug preparation
products market in the PRC products market in the PRC
(Nominal price, RMB100 million) (Nominal price, RMB100 million)
Growth rate(%) Growth rate(%)
Source: the SFDASouth Institution
– 92–
INDUSTRY OVERVIEW
Both the production value and sales value in respect of the drug preparation products market in the PRC demonstrated an upward trend during the period from 2008 to 2012.
According to the Biaodian Report, the continued growth of the PRC economy as well as the newly introduced healthcare reforms will further drive the demand for drug preparation products.
Western Drug Preparation Products
Western drug preparation products generally includes chemical drug preparation products and biological drug preparation products.
(a) Chemical drug preparation products
According to the Biaodian Report, in line with the growth in the PRC economy and PRC pharmaceuticalindustry,theproductionvalueandsalesvalueforthechemicaldrugpreparation productsinthePRChavealsomaintainedastablegrowth.However,followingtheintroduction of the reform measures on antibiotics to lower the maximum retail prices of antibiotics related drug preparation products as well as the restriction of use of antibiotics in the PRC in 2011 and 2012, respectively, there has been a slowdown in the growth rate on sales value of chemical drug preparation products in 2012.The graph below sets out the production and sales value for chemical drug preparation products market in the PRC between 2008 and 2012:
Production and Sales Value for the Chemical Drug Preparation Products Market in the PRC 2008– 2012
6,000
28.55%
30%
5,217.00 27.92% 23.47% 4,845.99
|||
|-|-|
|22.419.1||
||2%2%|

|||
|-|-|
|22.61.59||
||4,06|

2008 2009 2010 2011 2012
Total production value for chemical drug Total sales value for chemical drug
preparation products market in the PRC preparation products market in the PRC
(nominal price, RMB100 million) (nominal price, RMB100 million)
Growth rate(%) Growth rate(%)
Source: the SFDASouth Institution
– 93–
INDUSTRY OVERVIEW
(b) Biological drug preparation products
Biological drug preparation products are drug preparation products produced from microorganism, cells, tissues and fluid of animals and human beings. In recent years, there is a growing trend for PRC pharmaceutical manufacturers to increase their research and development effort into the biological drug preparation products sub-segment. Between 2008 and 2012, the profit margin for biological drug preparation products was comparatively higher than that of the PRC pharmaceutical industry as a whole.Adifference of approximately2% to3% in each year has been maintained during that period.
Changes in the Profit Margin of PRC Pharmaceutical Industry and
Biological Drug Preparation Products Sub-segment 2008– 2012
20%
14.83%
15% 13.71% 13.75%
12.48% 12.96%
10%
10.69% 11.03%
11.67%
10.93%
10.20%
5%
0%
2008 2009 2010 2011 2012
Profit margin of PRC Profit margin of biological drug
pharmaceutical industry(%) preparation products(%)
Source: the SFDASouth Institution
– 94–
INDUSTRY OVERVIEW
Chinese Drug Preparation Products
According to the Biaodian Report, in line with the growth in the PRC economy and PRC pharmaceutical industry, the production value and sales value for Chinese drug preparation products in the PRC have also maintained a stable growth in recent years. In addition, the increasing acceptance of using Chinese drug preparation products for treatment also leads to an increase in the sales value of Chinese drug preparation products. The graph below sets out the production and sales value for Chinese drug preparation products market in the PRC between 2008 and 2012:
Production and Sales Value for the Chinese Drug Preparation Products Market
in the PRC 2008– 2012
4,500
4,231.00
40
34.92%
|||
|-|-|
|217.6||
||0.156%|

|||
|-|-|
|19.8|3%|

|||
|-|-|
|15.5.08|83%1,62|

2008 2009 2010 2011 2012
Total production value for Chinese drug Total sales value for Chinese drug
preparation products market in the PRC preparation products market in the PRC
(nominal price, RMB100 million) (nominal price, RMB100 million)
Growth rate(%) Growth rate(%)
Source: the SFDASouth Institution
The total production value for Chinese drug preparation products market in the PRC had increased by approximately RMB252.60 billion from 2008 to 2012, while the total sales value for Chinese drug preparation products market in the PRC had risen by about RMB229.12 billion during the same period.
BULK MEDICINES AND INTERMEDIATES MARKET IN THE PRC
According to the Biaodian Report, the PRC is theworld’s largest producer and exporter of bulk medicines. More than20% of theworld’s total production of bulk medicines is produced in the PRC andPRC’s export of bulk medicines accounted for50% of theworld’s export market. However, there exists a number of challenges in the bulk medicines and
intermediates market in the PRC including: (a) excess production capacity; (b) increasing
pressure in compliance with environmental laws and regulations; and (c) low value-added
products, etc.
– 95–
INDUSTRY OVERVIEW
Intermediates are upstream components for bulk medicines. As it is in the lower end of the pharmaceutical value chain, the entry barrier as well as the technical requirement for producing intermediates are comparatively low.
The graph below sets out the production and sales value for bulk medicines market in the PRC between 2008 and 2012:
Production and Sales Value for Bulk Medicines Market
in the PRC 2008– 2012
4,000 23.50% 25%
21.37%
3,421.00
22.76%
21.28%
|||
|-|-|
|15.812.1||
||9%7%|

|||
|-|-|
|0%10.5|2%|

2008 2009 2010 2011 2012
Total production value for bulk Total sales value for bulk medicines
medicines market in the PRC market in the PRC (RMB100 million)
(RMB100 million)
Growth rate(%) Growth rate(%)
Source: the SFDASouth Institution
An upward trend can be observed from the above chart in both total production value and total sales value.
According to the Biaodian Report, the growth rates for both the production value and sales value for bulk medicines market in the PRC had experienced a downward trend between 2008 and 2012. The downward trend was caused by, among others, the global financial crisis, excess production capacity for bulk medicines and the restrictions in the use of antibiotics in the PRC.
According to the Biaodian Report, from January to September 2012, export of bulk medicines accounted for approximately48.52% of the total PRC export of healthcare products. However, the slowdown of global economy as well as the growth of bulk medicines
manufacturers in emerging markets, such as India, have diminished the competitive advantage
of PRC bulk medicines manufacturers.
– 96–
INDUSTRY OVERVIEW
DIAGNOSTIC REAGENTS AND EQUIPMENT MARKET IN THE PRC
Diagnostic reagents can generally be classified into vivo diagnostic reagents (
) and in-vitro diagnostic reagents ( ). In-vitro diagnostic reagents can be further classified into biochemical diagnostic reagents ( ), immune diagnostic reagents ( ) and nucleic acid diagnostic reagents ( ).
The major diagnostic reagents and equipment manufactured and/or sold by us are in-vitro diagnostic reagents. According to the Biaodian Report, for each of the three years ended 31 December 2010, 2011 and 2012, the PRC market for in-vitro diagnostic reagents amounted to approximately RMB9.90 billion, RMB11.50 billion and RMB13.50 billion, respectively, with a CAGR of approximately16.77%. It is expected that, with the introduction of further healthcare reform measures and other policy changes in the PRC, the demand for in-vitro diagnostic reagents in the PRC will continue to increase.
DATA SOURCE
Biaodian is principally engaged in publishing and information management and is a service provider of information gathering and research and analysis of the pharmaceutical industry. It has been engaged to provide the Biaodian Report for use in whole or in part in this listing document. Biaodian prepared its report based on (a) comprehensive database of the SFDA Southern Medicine Economic Institute; (b) pharmaceutical professional database of China Medicine Economic Information Network; (c) statistical yearbook from the Ministry of Health and other documents; (d) the Statistics Department in the SFDA, and data collected by Biaodian and its analysis based on available data for the purposes of compiling such report. The information derived from the Biaodian Report and contained herein has been obtained from sources which Biaodian believes to be reliable, however Biaodian cannot assure the accuracy or completeness of such information. Forecasts and assumptions included in the Biaodian Report are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen, including, without limitation, the actions of government, individuals, third parties and competitors. Specific factors that could cause actual results to materially differ include, among others, risks inherent in the pharmaceutical industry, financial risks, labour risks, supply risks, regulatory risks and environmental concerns.
This listing document contains information extracted from the Biaodian Report in sections such as “Industry Overview” and “Business”. We paid Biaodian a fee of no more than RMB230,000.00 for the preparation and update of its industry report.
Our Directors, having taken all reasonable care, are of the view that there is no material adverse change in the market information since the date of the Biaodian Report which may qualify, contradict or have an impact on the information contained in this section.
– 97–
REGULATIONS
MANUFACTURING OF PHARMACEUTICAL PRODUCTS
Pharmaceutical Manufacturing Permit
Pursuant to the Law of the PRC on the Administration of Pharmaceuticals (
), which was promulgated on 20 September 1984, amended on 28 February 2001, and became effective on 1 December 2001, a pharmaceutical product manufacturer is required to obtain a pharmaceutical manufacturing permit ( ) and a business licence from the relevant provincial food and drug administration authority in the PRC. The grant of such permit is subject to an inspection of the manufacturing facilities, and a finding that their sanitary condition, quality assurance systems, management structure and equipment meet the required standards. Pursuant to the Regulations of Implementation of the Law of the PRC on the Administration of Pharmaceuticals (
), which were promulgated on 4 August 2002 and became effective on 15 September 2002, and the Measures on the Supervision andAdministration of the Manufacture of Pharmaceuticals ( ), which was promulgated and became effective on 5August 2004, a pharmaceutical manufacturing permit is valid for five years and may be renewed at least six months prior to its expiration date upon a re-examination by the relevant authority.
Good Manufacturing Practise
Pharmaceutical product manufacturers shall obtain GMP certification for production of pharmaceutical products in the PRC. The Good Manufacturing Practise for Drugs (2010 revised edition) ( (2010 ) ) promulgated by the MOH on 17 January2011andeffectiveon1March2011,comprisesasetofdetailedguidelinesonpractises governing the production of pharmaceutical products, which includes those related to institution and staff qualifications, production premises and facilities, equipment, hygiene conditions, production management, quality controls, product operation, documentation and raw material management.
Pursuant to the Regulations of Implementation of the Law of the PRC on the Administration of Pharmaceuticals and the Administrative Measures for Certification of the Good Manufacturing Practise for Drugs ( ) promulgated by the SFDA on 2 August 2011, any newly-established pharmaceutical products manufacturer or manufacturer with the expansion of scope of manufacturing, newly-built, rebuilt or expansion of manufacturing workshops, production line or newly-added dosage forms for production shall apply for GMP certification as required. A GMP certificate (
GMP ) may be renewed at least six months prior to its expiration date upon a re-examination by the relevant authority.
– 98–
REGULATIONS
Good Agricultural Practise
The GoodAgricultural Practise for Chinese Crude Drugs (Interim) (
( ) )promulgatedbytheStateDrugAdministration(nowknownastheSFDA)and effective on 1 June 2002, provides the basic principles for the production and quality management of Chinese crude drugs, and requires producers of Chinese crude drugs to implement a set of standards regarding ecological environment of production site, germplasm and propagation material, management for cultivation and rearing, collection and primary processing, packaging, transportation and storage, quality management, personnel and facilities, and documentation.
Pursuant to the Administrative Measures for Certification of the Good Agricultural Practise for Chinese Crude Drugs (Interim) ( (
)) promulgated by the SFDA on 19 September 2003 and effective on 1 November 2003, producers of Chinese crude drugs may apply for a GAPcertificate for Chinese crude drugs (
GAP ). The Certification Management Centre of the SFDA shall arrange site inspection as to the compliance with the GAP requirements. Where the GAP requirements are conformed to, the SFDA will issue a GAP Certificate to the producer of Chinese crude drugs. AGAPcertificateisgenerallyvalidforfiveyearsandmayberenewedatleastsixmonthsprior to its expiration date upon a re-certification.
Traditional Chinese Medicines
On 9 October 2013, the SFDA, the Ministry of Industry and Information Technology of the PRC, the Ministry of Agriculture of the PRC, the Ministry of Commerce of the PRC, the MOH, the State Administration for Industry and Commerce of the PRC, the State Forestry Administration, StateAdministration of Traditional Chinese Medicine issued the Notice on the Further Strengthening of the Management of Herbal Medicines (Shi Yao Jian (2013) No. 208) ( ( [2013]208 )) (the “New Notice”). The New Noticeaimstostrengthenthemanagementofplantingandfarmingofherbalmedicine,primary processing of herbal medicine, professional market of herbal medicine, production and operation of the prepared traditional Chinese medicine, as well as to foster the healthy development of the herbal medicine industry.
Pharmaceutical Products Registration
According to the Administrative Measures on Registration of Medicines (
) promulgated by the SFDA on 10 July 2007 and effective on 1 October 2007, pharmaceutical products must be registered and approved by relevant authority before they can be manufactured. Different registration requirements and formalities are applicable to the registration of new, generic and imported medicines respectively.
Each pharmaceutical manufacturing enterprise is required to obtain a medicine registration approval ( ) for the products it manufactures. The medicine registrationcertificateisissuedbytheSFDAonlyiftheproductmeetsthePRCpharmaceutical standards, as set forth in the Pharmacopoeia of the PRC ( ) and the regulations promulgated by the SFDA.
– 99–
REGULATIONS
New Pharmaceutical Products
AnewpharmaceuticalproductmustberegisteredandapprovedbytheSFDAbeforeitcan be manufactured, and an application for changing dosage form or route of administration, or claiming a new indication for marketed drugs, shall be submitted as the process of new pharmaceutical products application. The registration and approval process requires the manufacturer to submit to the relevant provincial food and drug administration authority a registration application and relevant application materials. To obtain the SFDA approval necessaryforcommencingproduction,themanufacturerisalsorequiredtoconductpre-clinical trials, apply to the SFDA for permission to conduct clinical trials, and, after clinical trials are completed, file clinical data with the SFDA for approval.
If a pharmaceutical product is approved by the SFDA as a new pharmaceutical product and such manufacturer holds pharmaceutical manufacturing permit and meets the manufacturing requirements, the SFDAwill issue a New Drug Certificate ( ) together with an Approval Number ( ) to the manufacturer and may impose a monitoring period of not more than five years. During the monitoring period, the SFDA will monitor the safety of the new pharmaceutical product, and will not accept new pharmaceutical product certificate registrations for an identical medicine by another pharmaceutical company, approve changes to the ingredients of the registered pharmaceutical product to be identical to the new pharmaceutical product, nor approve the production or import of an identical pharmaceutical product by other pharmaceutical companies.
On 7 January 2009, the SFDA promulgated the Administrative Measures on the Special Examination and Approval of New Pharmaceutical Products Registration (
), which provide that certain types of new pharmaceutical products may apply to go through the special examination and approval process when submitting the application for clinical trials or the application of production as the case may be. Under the special examinationandapprovalprocess,thenewpharmaceuticalproductswhichfulfiltheprescribed criteria will enjoy priorities such as accelerated approval and additional supplementary information submission channels with respect to the registration.
Generic Pharmaceutical Products
An application for generic pharmaceutical products refers to a registration application for producing pharmaceutical products in line with existing national pharmaceutical products standard approved to be marketed by the SFDA and having the identical active ingredients, route of administration, dosage form, strength and therapeutic effects with the existing registered medicines. A generic pharmaceutical product may only be manufactured and marketed upon approval and grant of an Approval Number. The process of registration and approval involves technical review, on-site inspections by provincial level food and drug administration, and medicine testing conducted by qualified testing institutions, the results of which will be provided to the Centre for Drug Evaluation of the SFDA, where an overall opinion will be formed. The SFDA shall make a decision whether to grant the Approval Number based on the overall opinion provided by the Centre for Drug Evaluation of the SFDA.
– 100–
REGULATIONS
Registration of Imported Pharmaceutical Products
An application for the registration of imported pharmaceutical products produced by foreign manufacturers is allowed only if such medicines have already been approved to be sold in themanufacturer’s home country or region unless the relevant medicine is considered by the SFDA to be safe, effective and under high clinical demand. Imported medicines must also comply with the relevant requirements of the GMP standards adopted by themanufacturer’s home country as well as those required in the PRC.
The registration of imported pharmaceutical products requires the support of clinical research and the applicant shall apply for approval from the SFDAto conduct clinical research for the pharmaceutical product which it proposes to import. After the completion of clinical research, an application may be made for approval to import the proposed pharmaceutical product by submitting, among other things, relevant clinical research information and drug samples to the Centre for Drug Evaluation of the SFDA, where an overall opinion will be formed. The SFDAshall make a decision whether to grant the imported drug licence based on the overall opinion provided by the Centre for Drug Evaluation of the SFDA.
According to the Measures on the Administration of Pharmaceutical Products Registration, the Approval Number for medicine approved by the SFDA, the registration certificate of imported medicines ( ) and registration certificate of medicines ( ) are valid for five years. The certificates shall be re-registered within six months prior to expiration.
PRODUCTION OF PHARMACEUTICAL PRODUCTS THROUGH ENTRUSTMENT According to the Law of the PRC on theAdministration of Pharmaceuticals (
), the Regulations of Implementation of the Law of the PRC on the Administration of Pharmaceuticals ( ) and the Measures on the Supervision andAdministration of the Manufacture of Pharmaceuticals (
), a pharmaceutical product manufacturer may engage another pharmaceutical product manufacturer for production of pharmaceutical products through written entrustment contract. The entrusting party shall be a pharmaceutical product manufacturer that has obtained theApproval Number for the pharmaceutical products through entrustment, and the entrusted party shall be a pharmaceutical product manufacturer that has obtained a GMP certificate corresponding with the production conditions of such pharmaceutical products. The entrusting party shall be responsible for the quality and sale of the pharmaceutical products through entrustment, and make guidance and supervision over the entire process of production.
The bacterin products, blood products and other pharmaceuticals products as prescribed by the SFDA may not be produced through entrustment. The production of narcotic pharmaceuticals, psychotropic pharmaceuticals, toxic pharmaceuticals for medical treatment use, radioactive pharmaceuticals, precursor chemicals of the pharmaceutical category through entrustment shall be handled in accordance with specific laws and regulations.
– 101–
REGULATIONS
The application for the production of injections, biological products (excluding bacteria products and blood products) and for the trans-province production of pharmaceutical products through entrustment shall be accepted and subject to the examination and approval of the SFDA. The application for the production of other pharmaceutical products through entrustment shall be accepted by and subject to the examination and approval of the relevant provincial food and drug administration authority. In case the application complies with relevant requirements, the entrusting party shall be issued an Approval for Pharmaceutical Production through Entrustment ( ). The period of validity of the Approval for Pharmaceutical Production through Entrustment may not exceed two years, and may not exceed the effective period as prescribed by the Approval Number for the pharmaceutical products through entrustment.
PROTECTION OF TRADITIONAL CHINESE MEDICINE
Pursuant to the Regulations on the Protection of Traditional Chinese Medicine (
) promulgated by the State Council on 14 October 1992 and effective on 1 January 1993, traditional Chinese medicine for state protection shall be listed in the national pharmaceutical standards or listed in the pharmaceutical standards of provinces, autonomous regions and municipalities upon the determination of the MOH. Protection of traditional Chinese medicine is divided into two categories: category I protection and category II protection. The term of protection for category I products is 30 years, 20 years or 10 years. Such protection period may be repeatedly renewed for a period determined by the SFDA but not exceeding the original protection period. For category II products, the protection period is seven years, which may only be renewed once for another seven years. During the protection period, only holders of the Certificate of State Protected Traditional Chinese Medicine are entitled to produce the traditional Chinese medicine covered by the protection.
PHARMACEUTICAL PRODUCTS OPERATION
Pharmaceutical Operation Permit
Under the Administration Measures for Pharmaceutical Operation Permit (
), promulgated on 2 February 2004 and effective on 1 April 2004, the establishment of a wholesale pharmaceutical distribution company is subject to the approval of the food and drug administration at the provincial level, while the establishment of a retail pharmacy requires the approval of the local food and drug administration at or above the county level. The approval procedures involve inspection of the pharmaceuticaloperator’s facilities and equipment, warehouse, hygiene environment, quality control systems and personnel (including whether pharmacists and other professionals have the relevant qualifications). Upon approval, the authority will grant a pharmaceutical operation permit (
) valid for a period of five years to such pharmaceutical operators. Pharmaceutical operators should apply for renewal of their permits within six months prior to the expiry date subject to reassessment conducted by the relevant authority.
– 102–
REGULATIONS
Good Supply Practise
EachpharmaceuticalmanufacturingenterpriseisrequiredtoobtainaGSPcertificatefrom relevant food and drug administration prior to commencing its business. The Good Supply Practise for Drugs ( ) promulgated by the State Drug Administration (now known as the SFDA) on 30 April 2000 and effective on 1 July 2000, comprises a set of quality guidelines for operations related to pharmaceutical products, regulates pharmaceutical wholesale and retail operators to ensure the quality of pharmaceutical products in the PRC, and requires pharmaceutical operators to implement strict controls on the operation of pharmaceutical products, including standards regarding staff qualifications, premises, warehouses, inspection equipment and facilities, management and quality control. Under theAdministrative Measures for Certification of Good Supply Practises (
) promulgated by the SFDA and effective on 24 April 2003, the GSPcertificate is valid for five years and may be extended three months prior to its expiration upon a re-examination by the relevant authority.
On 22 January 2013, the new Good Supply Practise for Drugs (
) was promulgated by the MOH, and shall come into force on 1 June 2013, provides that besides pharmaceutical operation enterprise, pharmaceutical product manufacturer selling pharmaceutical products, or the activities of pharmaceutical products storage and transportationintheprocessofpharmaceuticalproductsdistributionshallalsocomplywiththe requirements of GSP. The new Good Supply Practise for Drugs comprehensively strengthens the relevant standards and requirements of pharmaceutical operation, including the quality management system, the staff qualifications, the purchase and sale, transportation, acceptance and storage of pharmaceutical products, and requires pharmaceutical operation enterprises to establish computer system conforming to the requirements of entire process operation management and quality control, and implement traceability of pharmaceutical products quality and electronic supervision of pharmaceutical products.
The SFDA issued the Notice on the implementation of the newly revised Good Supply Practise for Drugs (Shi Yao Jian Yao Hua Jian[2013] No. 32) ( <
> ( [2013]32 )) on 24 June 2013. The newly revised GSP will be applied to the examination of the wholesale enterprises and the retail enterprises if any of the Pharmaceutical Operation Permit or the Good Supply Practise for Drugs Certificate of the pharmaceutical manufacturing enterprise expires. Enterprises which meet the requirements will have their Pharmaceutical Operation Permits renewed and be issued with the GoodSupplyPractiseforDrugsCertificates.Priorto31December2013,enterprisesmayapply for the renewal of certificates which expire but cannot complete the transformation, and the validity period of the certificates will be extended up to 30 June 2014. Prior to 31 December 2015, all pharmaceutical manufacturing enterprises are required to fulfil the requirements of the newly revised GSPwhether or not their Pharmaceutical Operation Permits or Good Supply Practise for Drugs Certificates expires. Since 1 January 2016, enterprises are forbidden to engage in pharmaceutical operations if they cannot fulfil the requirements of the newly revised GSP.
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MANUFACTURING OF MEDICAL DEVICES
Classification of Medical Devices
Under the Regulations on the Supervision and Administration of Medical Devices (
) promulgated by the State Council on 4 January 2000 and effective on 1 April 2000, medical devices are classified in three categories as follows: Class I medical devices are those for which safety and effectiveness can be ensured through routine administration, and regulated by the municipal level food and drug administration where the manufacturerislocated.ClassIImedicaldevicesarethoseforwhichfurthercontrolisrequired to ensure their safety and effectiveness, and regulated by the provincial level food and drug administrationwherethemanufacturerislocated.ClassIIImedicaldevicesarethosewhichare implanted into the human body, or used for life support or sustenance, or pose a potential risk to the human body and thus must be strictly controlled in respect of safety and effectiveness, and are regulated by the SFDA under the strictest regulatory control. For Class II medical devices and Class III medical devices, clinical trials are required before regulatory approvals are granted.
Medical Device Manufacturing Enterprise Licence
Pursuant to theAdministrative Measures on the Supervision of the Production of Medical Devices ( ), promulgated by the SFDAand effective on 20 July 2004, the establishment of an enterprise involving manufacturing of Class II and/or Class III medical devices is subject to inspection and approval by the provincial and municipal food and drug administration and is required to obtain the Medical Device Manufacturing Enterprise Licence ( ), while the establishment of an enterprise involving manufacturing of Class I medical devices is subject to filing with the provincial and municipal food and drug administration.
The term of the validity of the Medical Device Manufacturing Enterprise Licence is five years. Re-inspection is required for the renewal of the licence.
Registration for Medical Devices
Pursuant to the Regulations on the Supervision and Administration of Medical Devices ( ) and theAdministrative Measures for the Registration of Medical Devices ( ) promulgated by the SFDA and effective on 9 August 2004, before a medical device can be manufactured for commercial distribution, a manufacturer must register and obtain a Registration Certificate of Medical Device (
) by proving its safety and effectiveness to the satisfaction of the respective levels of the food and drug administration. Domestically manufactured Class III medical devices are subject to direct review and approval by the SFDAwhereas Class I and II medical devices are reviewed and approved by the provincial and municipal food and drug administration, respectively. The term of validity for the registration certificate of medical devices is four years,whichmustberenewedwithinsixmonthspriortoexpiration.Theregistrationcertificate shall be invalidated if the production has been terminated for more than two consecutive years.
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MEDICAL DEVICE OPERATION
In accordance with the Regulations on the Supervision and Administration of Medical Devices ( ), and the Administrative Measures for the Permits for Medical Devices Operation Enterprises ( ), which became effective on 9 August 2004, an enterprise engaged in wholesale or retail of medical devices must obtain a Permit for Medical Devices Operation Enterprises (
) from the provincial food and drug administration before commencing the distribution of Class II and Class III medical devices. An exemption from this requirement exists in the case of a small number of Class II medical devices of which the medical devices operation enterprise is able to guarantee the safety and effectiveness, and the SFDAstipulates the list of such medical devices from time to time. A Permit for Medical Devices Operation Enterprises isvalidforfiveyearsandisrenewableuponexpiration.Torenewthepermit,amedicaldevices operation enterprise needs to submit an application to the provincial level food and drug administration within six months before the expiration of the permit.
The SFDA issued the Guiding Opinions on the Further Strengthening of the Monitoring System ofAdverse Incidents of Medical Devices (ShiYao Jian Xie Jian[2013] No. 205) (
( [2013]205 )) on 8 October 2013. The State intends to establish a sound technical organisation and network to monitor the adverse incidents of medical devices of various levels approximately within three years, so as to improve the monitoring mechanism, implement monitoring obligations, perfect the monitoring system, standardise monitoring works, further expand the monitoring coverage, explore sentinel surveillance mode, and gradually establish sentinel sites. Hence, the risk alert ability will be significantly improved and a proper monitory system of national adverse incidents of medical devices will be established.
PRESCRIPTION MEDICINES AND NON-PRESCRIPTION MEDICINES
In order to promote safety, efficacy and convenience in the use of pharmaceutical products, the State Drug Administration (now known as the SFDA) promulgated the Trial Administrative Measures regarding the Classification of Prescription Drugs and Non- Prescription Drugs ( ( ) ) on 18 June 1999, which became effective on 1 January 2000. These administrative measures divide medicines according to their type, specification, the relevant disease or ailment which they are designed to treat, dosage and method of administration. Prescription medicines relate to those whose prescription, purchase and intake require prescription by practising doctors or assistant doctors. Non-prescription drugs relate to those whose prescription, purchase and intake do not require prescription by practising doctors or assistant doctors.
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TheSFDAisresponsiblefortheselection,approval,publication,andrevisionoftheState Non-Prescription Drugs Catalogue ( ). Depending on the safety of the relevant drugs, non-prescription drugs are further subdivided into type A and type B and administered separately. Manufacturers of both prescription and non-prescription drugs are required to obtain a pharmaceutical manufacturing permit and to obtain production approvals for the relevant drugs. Wholesalers of prescription drugs and non-prescription drugs and retail outlets selling prescription medicines and typeAnon-prescription drugs are required to obtain a pharmaceutical operation permit. Retail outlets selling type B non-prescription drugs require approval from the provincial food and drug administration authority or its designated bureau. In addition, retail outlets selling type B non-prescription drugs are required to have professionally trained and suitably qualified staff.
DRUG DISTRIBUTION
Pursuant to the Provisions for Supervision of Drug Distribution (
) issued by the SFDA on 31 January 2007 and effective on 1 May 2007, pharmaceutical product manufacturers are permitted to distribute self-manufactured products only, and shall not sell any drugs that they produce for contract manufacturing or any drugs produced by others. Pharmaceutical product manufacturers or distributors shall not store or spot trade drugs on the premises not approved by the drug regulatory departments, or spot trade drugs by means of exhibition, exposition, trade fair, commodity fair or product promotion event, or sell prescription drugs directly to the public by post or over internet.
On 24 March 2005, the State Council promulgated the Regulations on theAdministration of Circulation and Injection of Vaccines ( ), effective on 1 June 2005, which categorised vaccines into Type I Vaccines and Type II Vaccines subject to different levels of administrative control on its distribution. Type I Vaccines refer to vaccines provided by the government to citizens free of charge and include vaccines determined by theState’s immunity plan, vaccines added by the provincial government authorities for the implementation of theState’s immunity plan and vaccines used for emergent inoculations or mass vaccinations organised by the government authorities. Type II Vaccines refer to other vaccines with which the citizens are voluntarily inoculated at their own expense. Pharmaceutical wholesale enterprises may engage in the business of vaccines upon approval and no pharmaceutical retail enterprise shall engage in such operations. Vaccine production enterprises or vaccine wholesale enterprises shall, according to the stipulations in government procurement contracts, supply Type I Vaccines only to institutions for disease control and prevention at the provincial level or other institutions for disease control and prevention designated by the provincial institution for disease control and prevention. Vaccine manufactures may sell self-produced Type II Vaccines to institutions for disease control and prevention, inoculation entities and vaccine wholesale enterprises. Vaccine wholesale enterprises may resell Type II Vaccines to institutions for disease control and prevention, inoculation entities and other vaccine wholesale enterprises.
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IMPORTAND EXPORTOFPHARMACEUTICALPRODUCTSAND MEDICALDEVICES Pursuant to the Circular of the SFDA on Implementation of Catalogue Management of Manufacturing of Certain Pharmaceutical Products and Medical Devices for Export (
) promulgated on 17 October 2008, to strengthen the administration and ensure quality and safety of pharmaceutical products and medical devices for export, the SFDAshall implement catalogue management of certain pharmaceutical products and medical devices for export since 18 October 2010. The first batch of catalogue includes 9 categories of APIs and pharmaceutical preparations, and 2 categories of medical device. Any manufacturer of the pharmaceutical products in the catalogue is required to obtain a Pharmaceutical Manufacturing Permit, Approval Number of pharmaceutical products, GMP Certificate, and Free Sale Certificate (
) before export. Any manufacturer of the medical devices in the catalogue is required to obtain a Medical Device Manufacturing Enterprise Licence and Registration Certificate for Medical Device.
According to the Law on the Administration of Pharmaceuticals of the PRC, the Regulations of Implementation of the Law of the PRC on the Administration of Pharmaceuticals, the Management Procedures for Imported Drugs ( ) promulgatedbytheSFDAandtheGeneralAdministrationofCustomsofthePRCon18August 2003 and amended on 24 August 2012, a drug may only be imported after an Imported Drug Registration Certificate is obtained by the relevant foreign manufacturer, or after a Pharmaceutical Product Registration Certificate is obtained by the relevant manufacturer of Hong Kong, Macau or Taiwan. Drugs shall be imported via the ports where drug importation ispermitted,andberegisteredbythedrugimporterswiththelocaldrugregulatorydepartments for the record. After inspection of the imported pharmaceutical products, the local drug regulatory department will issue a Drug Import Note ( ). The drug importer shall, with the Drug Import Note, complete the formalities for customs declaration and clearance with the Customs.
RECALL OF PHARMACEUTICAL PRODUCTS
Pursuant to theAdministrative Measures on the Recall of Pharmaceutical Products (
), which was promulgated by the SFDAand effective on 10 December 2007, in the event that a certain pharmaceutical product poses a potential health hazard, the manufacturer of that pharmaceutical product is required to initiate the recall procedures for pharmaceutical products. Pharmaceutical product manufacturers shall, among other things, formulate a product recall mechanism, collect and monitor safety information regarding pharmaceutical products, investigate, and assess pharmaceutical products that are likely to cause a potential hazard, and recall those that are identified as potential hazardous products. Further, sellers and healthcare institutions shall provide necessary assistance in the event of product recall, feedback recall information, and monitor and call back hazardous products. Depending on the nature of the potential hazard, pharmaceutical products recalls were classified into three classes. Class I and II recalls apply to products that may cause serious harm, or temporary and reversible harm on health, respectively. Class III recalls are initiated normally in the absence of potential health harm but for other reasons. Product recalls may be determined by the food and drug administration authorities, or initiated by the manufacturer itself.
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MEDICAL INSURANCE DRUGS CATALOGUE
Pursuant to the Decision of the State Council on the Establishment of the State Basic Medical Insurance System for Urban Employees (
) promulgated by the State Council and effective on 14 December 1998, and the Trail Implementation Administrative Measures for the Scope of Medical Insurance Coverage for Pharmaceuticals for Urban Employees (
), jointly issued by the Ministry of Labour and Social Security and other five national departments on 12 May 1999, the Ministry of Human Resources and Social Security of the PRC, together with other national departments, set the Basic Medical Insurance Drugs Catalogue ( ). The Basic Medical Insurance Drugs Catalogue is divided into two parts, PartAand Part B. The medicines to be included in PartAof the Basic Medical Insurance Drugs Catalogue are determined by the PRC Government for general application and local authorities may not adjust the content of that Part. The medicines to be included in Part B of the Basic Medical Insurance Drugs Catalogue are determined by the PRC Government and local authorities at the provincial level may, based on local economic development, medical demand and medical treatment habit, alter up to15% of the total number of Part B drugs. Patients purchasing medicines included in Part A of the Basic Medical Insurance Drugs Catalogue are entitled to reimbursement of the costs of such medicines from thesocialmedicalfundinaccordancewithrelevantregulationsofthePRC.Patientspurchasing drugs included in Part B of the Basic Medical Insurance Drugs Catalogue are required to pay a deductible and obtain reimbursement for the remainder of the purchase price.
NATIONAL LIST OF ESSENTIAL DRUGS
On 18 August 2009, the MOH and eight other ministries and commissions in the PRC issued the Provisional Administrative Measures on the National List of Essential Drugs (
( ) ) and the Guidelines on the Implementation of the National List of Essential Drugs System ( ), which aim to promote essential medicines sold to consumers at fair prices in the PRC and ensure that the general public in the PRC has equal access to the drugs contained in the National List of Essential Drugs. On 13 March 2013, the MOH promulgated the National List of Essential Drugs (2012 Edition) ( (2012 ) ), which came into force as of 1 May 2013 and applies to healthcare instructions at all levels. The National List of Essential Drugs containsChinesetraditionalmedicinedrinkpillsofchemicaldrugsandbiologicalproductsand traditional Chinese herbal medicine. The chemical drugs and biological products are classified according mainly to clinical pharmacology; the prepared Chinese traditional medicine consists of 203 species according mainly to their functions; the traditional Chinese herbal medicine shall be described with words without explicit species.
The SFDAissued the Notice on the Electronic Supervision of Pharmaceutical Products for the 2012 National List of Essential Drugs (2013 SFDA Notice No. 10) ( 2012 <
> ( 2013 10 )) on 9 May 2013. Pharmaceutical production enterprise producing pharmaceutical products which are listed on the National List of Essential Drugs is required to carry out electronic
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supervision whether or not it participates in bidding and purchase of essential drugs. Domestic pharmaceutical products and imported pharmaceutical products that are repackaged domestically are required to carry out electronic supervision prior to the end of November 2013, and imported pharmaceutical products are required to carry out electronic supervision prior to the end of March 2014.
PRICE CONTROLS
Pursuant to the Opinion of the Bureau of State Planning Commission regarding Reforms on Price Administration of Pharmaceutical Products (
) issued by Bureau of State Planning Commission on 20 July 2000, and the Circular of the NDRC on Issue of Price-controlled Pharmaceutical Products Catalogue of the NDRC (
< > ), which became effective on 1 August 2005, prices of pharmaceutical products are either determined by the PRC Government or based on market conditions. The Circular of the NDRC on Adjustment of Price-controlled Pharmaceutical Products Catalogue of the NDRC (
< > ) issued on 5 March 2010, has adjusted the Price-controlled Pharmaceutical Products Catalogue issued in 2005. The prices of certain pharmaceutical products sold in the PRC, primarily those included in the national and provincial medical insurance drugs catalogues are subject to price controls mainly in the form offixedpricesorpriceceilings.Manufacturersandoperatorscannotsettheactualpriceforany given price-controlled product above the price ceiling or deviate from the fixed price imposed by the government. The prices of medicines that are not subject to price controls are determined freely at the discretion of the relevant pharmaceutical companies.
The Circular of the NDRC on the Guiding Retail Price of National Essential Drugs (
), which was issued on 28 September 2009 and effective on 22 October 2009, sets price ceilings for the national essential drugs.As a result, all kinds of medical institutions, retail pharmacies and other pharmaceutical manufacturers and distributors at all levels shall not sell the national essential drugs at the prices which exceed the prices listed in such circular.
On 9 November 2009, the NDRC, the MOH and the Ministry of Human Resources and Social Security jointly promulgated the Notice on Issuing Opinions on Reforming the Price Formation System of Medicine and Medical Services (
).According to this notice, drugs listed in the National List of Essential Drugs,NationalMedicalInsuranceDrugsCatalogue,certaindrugswhoseproductionortrading tend to create monopolies, are subject to PRC Government price control. The prices of other drugs are determined by the market conditions and are not subject to PRC Government price control.
The NDRC, the MOH and the State Administration of Traditional Chinese Medicine issued the Notice on Regulating the Management of Price of Medical Services and RelatedIssues(FaGaiJiaGe[2012]No.1170)( (
[2012]1170 )) and the Standard of National Price for Medical Service 2012 (
(2012 ) )(the “New Standard”) on 4 May 2012. Prices fixed for medical services published in the New Standard are basis for charges of medical services in non-profit hospitals at various levels, which is forbidden to be broken down in any form throughout the country.
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Under the Measures on the Investigation of Ex-Factory Prices of Drugs (Trial Implementation) ( ( ) ) issued on 9 November 2011 and the Notice on Enforcement of Investigation and Survey of Ex-Factory Prices of Drugs (
)issuedon26March2012by the NDRC, the government will have the authority to conduct investigation on the ex-factory pricesonmedicinesproducedinthePRCorimportedfromoverseasbutdistributedinthePRC. The pharmaceutical manufacturers shall provide certain documents as required. The investigatorsarerequiredtochecktheretailpricesofpharmaceuticalproductsaccordingtothe pricing documents issued by the price authority or the pharmaceutical product manufacturers, and check the ex-factory prices of pharmaceutical products according to the sales detail accounts of pharmaceutical product manufacturers. The government will be able to use the results of the investigation to set and adjust the ex-factory prices for the pharmaceutical products.
In accordance with the relevant provisions in the Notice Relating to theAdvancement of Reform in the Pricing of Drugs for Public Hospitals at County Level (Fa Gai Jia Ge[2012] No. 2787) ( ( [2012]2787 )) jointly issued by the NDRC, the MOH and the Ministry of Human Resources and Social Security on 3 September 2012, the major provisions on the administration of drug prices contained in such notice were set out as follows:
Pursuant to the requirements of hospitals on trial for the reform of public hospitals at county hospitals, the premium pricing policy on drugs was cancelled at those hospitals on trial. Thehospitalsontrialhavetodisplaythesellingpriceofdrugstothepublic.Thelossofincome following the cancellation of premium pricing policy on drugs would be reasonably compensated from further investment by the government and the adjustment in the pricing of medical services. Different regional jurisdictions have to adopt practical measures so as to reduce the price of drugs and high value medical consumables. In accordance with the provisions of the Notice relating to Strengthening the Survey and Investigation on the Ex-factory Price of Drugs” (Fa Gai Ban Jia Ge[2012] No. 693) (
( [2012]693 )) issued by the Office of the NDRC, the survey and investigation on the ex-factory price of drugs will be strengthened. Different regional jurisdictions have to strictly implement the relevant policy measures on cancelling the premium policy on drugs. Various rebates and illegal discounts in the distribution of pharmaceuticals will be punished severely.
ADVERTISING RESTRICTIONS
Pursuant to the Law of the PRC on theAdministration of Pharmaceuticals Products (
), the Measures on the Examination of Pharmaceutical Products Advertisement ( ) and the Standards on the Examination and Publication of Pharmaceutical Products Advertisement ( ), which became effective from 1 May 2007, an enterprise seeking to advertise its pharmaceutical products shall apply for an advertising approval code. The code is issued by the relevant local administrative authority. Prescription drugs may only be advertised in medical or pharmaceutical publications approved by both the MOH and the SFDA. Prescription drugs may not be advertised in the mass media.
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DIRECTIONS, LABELSAND PACKAGING REQUIREMENTS OF PHARMACEUTICAL PRODUCTS
Under the Administrative Measures on Registration of Medicines (
), the contents in the labels and directions of pharmaceutical products must be approved by the SFDA and such contents shall be true and accurate without containing inappropriate advertisement.According to theAdministrative Measures Regarding the Directions and Labels of Pharmaceutical Products ( ) issued by the SFDA on 15 March 2006 and effective on 1 June 2006, the packaging and labelling format and colour of the same product of the same specification manufactured by the same company shall be consistent. Statements regarding the disease the product is applied to treat, terminology used in the medical profession, the name of the product, clinical trial name and results contained in directions of pharmaceutical products are required to follow the terminologies promulgated by the State. The directions are also required to state potential adverse drug reactions which may result from the usage of the product. The interior and exterior labels are required to state, among others, the common name of the product, the disease it is applied to treat, specification, dosage method, dosage volume, manufacturing date, approval number, expiration date, potential adverse drug reactions and information regarding the manufacturer.
According to the Administrative Measures Regarding the Packaging Materials and Containers in Direct Contact with Pharmaceutical Products (
) promulgated by the SFDA and effective on 20 July 2004, packaging materials and containers in direct contact with pharmaceutical products must comply with national standards and manufacturers of pharmaceutical products packaging materials and containers are required to apply for a pharmaceutical product packaging registration certificate by submitting the application materials and packaging samples to the SFDAat the provincial level whichwillconductapreliminaryreviewandforwardtheapplication,togetherwithitsopinion, to the SFDA. Successful applicants will be granted such certificates valid for a term of five years, which are renewable six months prior to expiration.
FOREIGN INVESTMENT CATALOGUE
On 24 December 2011, the NDRC and the Ministry of Commerce jointly promulgated a new version of the Foreign Investment Industrial Guidance Catalogue (2011 Edition) (
(2011 )) (the “Foreign Investment Catalogue”) to repeal the version formerly promulgated on 31 October 2007. The Foreign Investment Catalogue became effective on 30 January 2012. The permissibility to invest in a particular industry by a foreign investor in the PRC is determined by such Foreign Investment Catalogue. The Foreign Investment Catalogue categorised foreign investment in various industries into three categories: encouraged, restricted and prohibited. Foreign investment belonging to none of these three categories is permitted. Foreign investment in the encouraged category is entitled to receive certain benefits and incentives extended by the government. Foreign investment in the restricted category is permitted but must comply with applicable restrictions under PRC law. Foreign investment in the prohibited category is not allowed. With respect to the pharmaceutical industry, the category to which a particular foreign invested pharmaceutical manufacturer belongs under the Foreign Investment Catalogue is mainly dependent upon the type of products manufactured by such pharmaceutical manufacturer.
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Under the Foreign Investment Catalogue, foreign invested pharmaceutical manufacturers are encouraged in engaging in the following types of activities: (i) manufacture of new compound drugs or APIs (including raw materials and pharmaceutics); (ii) amino acids: manufacture of serine by fermentation, manufacture of tryptophan, histidine, etc.; (iii) manufacture of new anti-carcinogens and new cardio-cerebral-vascular medicines; (iv) manufacture of new medicines that are produced by using biological engineering technologies; (v) manufacture of AIDS vaccines, hepatitis C vaccines, and new vaccines regarding cervical carcinoma, malaria, hand-foot-and-mouth disease, etc.; (vi) manufacture of biological vaccines; (vii) development and manufacture of maritime medicines; (viii) manufacture of manufactured pharmaceutical products: new types of pharmaceutical products and new products which use new technology slow-releasing, controlled releasing, target treatment, absorption treatment; (ix) development and applications of new medical adjuvants; (x) manufacture of antibacterial agents for animal use (including anti-infective and chemical compounds); (xi) manufacture of new products and new-type preparations of antiseptic, anthelmintic, insecticides and anti-coccidium for animal use; and (xii) manufacture of new diagnostic reagent.
Under the Foreign Investment Catalogue, foreign invested pharmaceutical manufacturers are restricted from engaging in the following types of activities: (i) production of chloramphenicol, penicillium G, gentamicin, dihydrostreptomycin, amikacin, tetracycline hydrochloride, terramycin, medemycin, leucomycin, gyro-c-norfloxacin, norfloxacin, fluorine acid; (ii) production of analgin, acetaminophen, vitamin B1, vitamin B2, vitamin C, vitamin E, multivitamin preparations and oral calcium salt; (iii) production of vaccine varieties included in the scope of the national immunity plan; (iv) production of narcotic drugs and type A raw material drugs to be used to produce drugs to treat psychological diseases (Chinese party holding majority interest); and (v) production of blood related products.
Under the Foreign Investment Catalogue, foreign invested pharmaceutical manufacturers are prohibited from engaging in the following types of activities: (i) processing Chinese medicine materials listed in Regulations on the Protection of Wild Medicinal Resources and List of Protected Chinese Rare and Endangered Plants; and (ii) application of processing technologies of prepared slices of Chinese crude drugs by such as simmering, stir-frying, moxibustion and ustulation or production based on confidential prescription of traditional Chinese medicines.
SAFETY AND CREDIBILITY RATING
In order to increase the awareness of pharmaceutical manufacturers and research institutions on the safety and credibility of pharmaceutical products and medical equipment, the SFDApromulgated the Tentative Regulations Regarding the Safety and Credibility Rating of Pharmaceutical Products ( ) on 13 September 2004 pursuant to which the SFDA at the county level or above regulates the safety and credibility rating of the pharmaceutical manufacturers and research institutions in their jurisdiction by establishment of an information system through which the relevant pharmaceutical manufacturers and research institutions may be rated and rewarded accordingly.
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CENTRALISED PROCUREMENT OF PHARMACEUTICALPRODUCTS BY MEDICAL ORGANISATIONS
According to the Notice on Issuing Certain Regulations on the Trial Implementation of Centralised Procurement of Pharmaceutical Products by Medical Organisations (
) promulgated by the MOH and other four national departments on 7 July 2000 and the Notice on Further Improvement on the Implementation of Centralised Procurement of Pharmaceutical Products by Medical Organisations ( ) promulgated by theSFDAon23July2001,non-profitmedicalinstitutionsestablishedbythegovernmentinthe countylevelorhigherarerequiredtoimplementacollectivetendersystemfortheprocurement of pharmaceutical products. Medical organisations are required to join together to organise tenders to purchase drugs in bulk volume. The bids are to be assessed by a committee formed by pharmaceutical experts who are recognised by the relevant authorities, with reference to, most importantly, drug quality, as well as other criteria including price, service and quality of the drug manufacturers. For the same type of drugs, two to three products under different brands may be selected.
Pursuant to the Opinions on Further Regulating Centralised Procurement of Pharmaceutical Products by Medical Institutions (
) promulgated by the MOH, the SFDA and other four national departments on 17 January 2009, and the Working Regulations on Centralised Procurement of Pharmaceutical Products by Medical Institutions ( ) promulgated by the MOH, the SFDA and other four national departments on 7 July 2010, non-profit medical institutions established by the government in the county level or higher or owned by state-owned enterprises shall participate in the centralised procurement of pharmaceutical products. Medical institutions are required to make their purchases of medicines through a non-profit online platform established by each provincial and municipal government authority. Each provincial management agency for centralised procurement shall formulate its catalogue of centralised procurement of pharmaceutical products. Except that narcotic drugs and psychotropic substances of Class I under the nationalgovernment’s special control shall not be listed in the catalogue of centralised procurement, and psychotropic substances of Class II, medicinal toxic drugs, radioactive pharmaceuticals,APIs, Chinese crude drugs, prepared slices of Chinese crude drugs are optional to be listed in the catalogue of centralised procurement, all pharmaceutical products used by the medical institutions shall be covered by the catalogue of pharmaceutical products subject to centralised procurement. Medical institutions shall purchase the medicines in the catalogue through a public tender, tender invitation or direct price listings, including through implementation of government-mandated price controls. The pharmaceutical product manufacturers shall bid and participate in the centralised tender process directly by themselves. The periodic interval of centralised procurements of pharmaceutical products shall be more than a year in principle. Procurements regarding medicines included in the National List of Essential Drugs shall be otherwise regulated.
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REPORTING OF SIDE EFFECT
Under the Administrative Measures on Report and Monitoring of the Side Effect of Pharmaceuticals ( ) issued by the MOH and effective on 4 May 2011, pharmaceutical products manufactures are required to report records of side effects to relevant Side Effect Monitoring Centres on a regular basis. Process and timeline for reporting, monitoring and investigating different level of adverse incidents involving medicines are also specified.
INTELLECTUAL PROPERTY
Trademark
Under the Trademark Law of the PRC ( ) promulgated in 1982, last amended on 30 August 2013 and became effective on 30 August 2013, and the Implementation Rules for the Trademark Law of the PRC (
) which was promulgated on 3August 2002 and became effective on 15 September 2002, the period of validity of a registered trademark is 10 years from the date of registration, renewal is allowed thereafter and the period of validity of each renewal of registration is 10 years. The relevant administrations for industry and commerce have the power to investigate and handle any act of infringement of the exclusive right to use a registered trademark.
Patent
According to Patent Law of the PRC ( ) last amended on 27 December 2008 and the Implementation Rules for the Patent Law of the PRC last amended on 9 January 2010, patent protection is divided into three categories: invention patent, utility patent and design patent. Invention patent is intended to protect new technology or measures for a product, method or its improvement. Utility patent is intended to protect new technology or measures to increase the utility of a product shape, structure or its combination. Design patent is intended to protect new designs by combination of product shape, graphic or colour withaestheticandindustrialapplicationvalue.Inventionpatentsareeffectivefor20yearsfrom the initial date the patent application was filed. Utility model patents and design patents are effective for ten years from the initial date the patent application was filed.
PRODUCT LIABILITY AND PROTECTION OF CONSUMERS
Pursuant to the General Principles of the Civil Law of the PRC (
) promulgated on 12April 1986 and effective on 1 January 1987, producers and sellers of defective products causing property damage or injury may incur civil liabilities.
Pursuant to the Law of the PRC on the Protection of the Rights and Interests of Consumers ( ), which was promulgated on 31 October 1993 and became effective on 1 January 1994, protects the legal rights and interests of customers or respect of the safety of person and property on the purchase and use of goods and services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers.
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According to the Product Quality Law of the PRC ( ), promulgated on 22 February 1993 and amended on 8 July 2000, producers and sellers shall be liable for the defect of product.
Pursuant to the Tort Law of the PRC ( ) promulgated on 26 December 2009 and effective on 1 July 2010, a patient who suffers damages from any drug or defective medical device can claim for damages from either the medical institution or the manufacturer. If the patient claims for damages from the medical institution, the medical institution has the right to claim for repayment from the manufacturer.
SAFETY OF PRODUCTION
According to the Law for the Safety of Production ( ) which was promulgated on 29 June 2002 by the Standing Committee of the NationalPeople’s Congress and became effective on 1 November 2002, enterprises carrying out production activities shall have safe production conditions as required by relevant laws and regulations. Enterprises having more than 300 employees shall form a management department to carry out the functions of production safety or appoint personnel solely responsible for production safety. Enterprises shall display warning signs at the location and on equipment with high potential risks. Enterprises shall purchase job-related injury insurance according to relevant laws and regulations.
LABOUR AND SOCIAL INSURANCE
Under the Labour Law of the PRC ( ) which came into effect on1January1995,andtheLabourContractLawofthePRC( ) which became effective on 1 January 2008, labour contracts in written form must be executed to establish labour relationships between employers and employees. Wages cannot be lower than the local minimum wage. Employers shall establish a system for labour safety and sanitation, strictly abide by state standards, and provide relevant education to their employees. Employers are also required to provide for their employees a safe and sanitary work environment that meets state requirements, and to carry out regular health examinations of employees engaged in hazardous occupations.
Under the Social Insurance Law of the PRC ( ), the Regulations on Work-related Injury Insurance ( ), the Regulations on Unemployment Insurance ( ), the Provisional Measures on Insurance for Maternity of Employees ( ), the Interim Regulation on the Collection and Payment of Social Insurance Premiums ( ), and the Interim Provisions on Registration of Social Insurance ( ), enterprises are required to provide the employees in the PRC with social insurance covering basic pension insurance, unemployment insurance, maternity insurance, injury insurance and basic medical insurance. According to the Regulations on Management of Housing Provident Fund ( ), enterprises shall register and open housing provident fund accounts for employees at housing provident fund authorities, and pay housing provident fund.
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ENVIRONMENTAL PROTECTION
According to the Environmental Protection Law of the PRC (
), the Law of the PRC on Prevention of Water Pollution Law of the PRC (
),theImplementationRulesoftheLawofthePRConPreventionofWater Pollution ( ), the Law of the PRC on Prevention of Solid Waste Pollution ( ), and the Law of the PRC on Prevention of Air Pollution ( ), facilities for the prevention and control of pollution at a construction project must be designed, built and commissionedtogetherwiththeprincipalpartoftheproject.Enterprisesdischargingpollutants shall report to and register with the competent environmental protection administration authorities. Enterprises discharging any pollutants in their daily operations and manufacture shall observe the national and local discharge standards with regards to discharge of water pollutants, solid pollutants, gas exhaust and other pollutants.
Pursuant to the Environmental Protection Regulations for Construction Projects Pursuant to theAdministrative Rules on the Environmental Protection of Construction Projects (
) promulgated by the State Council of the PRC and effective on 29 November 1998, and the Law of the PRC on Appraising Environmental Impacts (
) promulgated by the Standing Committee of NationalPeople’s Congress of the PRC and effective on 1 September 2003, the environmental impact assessments must be carried out by qualified institutions for the construction projects. The construction entity shall work out the report of environmental impacts, the report form of environmental impacts or the registration form of environmental impacts according to the following principles: (i) if the environmental impacts may be significant, it shall work out a report of environmental impacts so as to include an all-round appraisal of the environmental impacts; (ii) if the environment impacts may be gentle, it shall work out a report form of environmental impacts so as to include an analysis or special appraisal of the environmental impacts; and (iii) if environmental impacts may be very small so that it is not necessary to conduct an appraisal of the environmental impacts, it shall fill in a registration form of the environmental impacts. The environmental impact appraisal documents of a construction project shall be submitted by the construction entity to the competent environment administrative authority in charge of environmental protection for examination and approval. In case the environmental impact appraisal document of a construction project fails to pass the examination of the environment administrative authority or fails to be approved after examination, the construction entity may not start construction.
Pursuant to the Administrative Rules on the Environmental Protection of Construction Projects and theAdministrative Measures on Environmental Protection InspectionAcceptance for Completion of Construction Projects ( ) promulgated by the Ministry of Environmental Protection of the PRC and effective on 1 February 2002, the trial production of the construction project shall be approved by the competent environmental protection administration authority. Within 3 months starting from the date of the construction project going into trial production, the construction entity shall apply for environmental protection inspection acceptance for completion of construction project to the competent environmental protection administration authority.
– 116–
REGULATIONS
INDUSTRY REGULATORY OUTLOOK
On 1 January 2013, the Ministry of Industry and Information Technology, the NDRC and Ministry of Finance jointly issued the Guiding Opinions on Accelerating the Merger and Reorganisation of Enterprises in Key Industries (Gong Xin Bu Lian Chan Ye (2013) No. 16) ( ( (2013)16 )), which set out the primary goals and the momentous missions for the medical and pharmaceutical industry: (i) to achieve the scale of production and intensification of essential pharmaceuticals manufacturing, the sales revenue of the top 100 enterprises exceeds50% of that of the whole industry and the market share of the top 20 enterprises ranked by the sales volume of main types of essential pharmaceuticals reaches80% by the year of 2015; (ii) to encourage the upstream and downstream integration of enterprises engaged in research& development and manufacture, bulk pharmaceuticals and pharmaceutical preparation, traditional Chinese medicine and traditional Chinese medicine patent prescription with an aim to improve the industry chain and enhance the efficiency of resources allocation; (iii) to encourage combination of competitive enterprises of the same product type and acquisition by the predominant enterprises of other enterprises, in furtherance of the centralisation of resources by the predominant enterprises, the realisation of enlarged scale and intensive operation and the enhancement of the industrial concentration levels; and (iv) to develop a number of large-scaled conglomerates with international competitiveness and of significant initiative impact on the development of the industry.
– 117–
HISTORY AND DEVELOPMENT
HISTORY AND DEVELOPMENT
OurhistorycouldbetracedbacktoJanuary1985,whenMacauNamYueTradingCo.,Ltd ( ), Guangdong Medicine Group Co., Ltd. ( ), Zhuhai Medicine United Company ( ) and Zhuhai Trust and Consultancy of the Bank of China ( ) entered into an agreement to set up the predecessor of our Company, Zhuhai Special Economic Zone Livzon Pharmaceutical Development Co., Ltd. ( ) (“Livzon Pharmaceutical Development”) which was renamed as Zhuhai Special Economic Zone Livzon Pharmaceutical (Group) Co., Ltd. ( ( ) ) (“Zhuhai Livzon”) in June 1989, a sino-foreign joint venture.
In September 1992, pursuant to the Approval on Agreeing the Establishment of Zhuhai Livzon Pharmaceutical Group Inc. (Yue Gu Shen[1992] No. 45 document) (
( [1992]45 )) issued by the Joint Examination Group for Pilot Joint Stock Enterprise in Guangdong Province (
) and Guangdong Economic System Reform Committee (
), Zhuhai Livzon was approved to undergo a capital restructuring and be transformed into a sino-foreign fund raising company limited by shares under the name of Zhuhai Special Economic Zone Livzon Pharmaceutical Group Inc. (
), raising funds from (a) Macau Nam Yue (Group) Co., Ltd. ( ( ) ), Zhuhai Credit Cooperative Union ( ), Guangdong Medicine Group Co., Ltd. ( ), Zhuhai Medicine Corporation ( ), Guangzhou Medicines& Health Products Imp.& Exp. Corp. ( ), Zhuhai Trust and Consultancy of the Bank of China ( ) and Zhuhai Guihua Employees Mutual Aid Association ( ) which converted their interests in ZhuhaiLivzon’s net assets into Shares; and (b) other domestic legal persons and internal staff. In 1993, pursuant to Yue Zheng Jian Fa Zi[1993] No. 001 document (
[1993]001 ) issued by the Guangdong Securities Regulatory Commission (
), Shen Ren Yin Fu Zi[1993] No. 239 document ( [1993] 239 ) issued by the PBOC, Shenzhen Special Economic Zone branch (
) and Zheng Jian Fa Shen Zi[1993] No. 19 document ( [1993]19 ) issued by CSRC, our B Shares andAShares were approved to be listed on the Shenzhen Stock Exchange on 20 July 1993 and 28 October 1993, respectively.
On 22 October 1996, pursuant to the Approval on the 3rd Amendment to the Articles of Association of the Joint Venture Zhuhai Special Economic Zone Livzon Pharmaceutical Group Inc. (Zhu Te Yin Wan Zi Guan Zi No.[1996] No. 451) (
( [1996] 451 )) issued by the Zhuhai Special Economic Zone Office for the Introduction of Foreign Investment (
), the name of our Company was changed to Livzon Pharmaceutical Group Inc. (
).
– 118–
HISTORY AND DEVELOPMENT
On29March2002,ShenzhenTaitaiHealthcareFoodCo.,Ltd.(laterrenamedasJoincare) entered into an equity transfer agreement with one of our then shareholders, Zhuhai Lishi Investment Co., Ltd. ( ) (“Lishi Investment”), an Independent Third-Party, pursuant to which Lishi Investment transferred its 22,379,239 A Shares to Shenzhen Taitai Healthcare Food Co., Ltd. at a consideration of RMB91,754,879.90. The consideration was determined on anarms’ length basis after the negotiation between the relevant parties and was financed byJoincare’s internal financial resources. Since then, Joincare became one of our Shareholders.
On 23 April 2002, China Grand Tide Medicine Limited ( ), an Independent Third-Party, and Topsino entered into a sale and purchase agreement, pursuant to which China Guangtai Pharmaceutical Co., Ltd. transferred 15,478,295 B Shares to Topsino at a consideration ofHK$6 per B Share. The consideration was determined with reference to the relevant regulations on crossed trading of B Shares of the Shenzhen Stock Exchange and was financed byTopsino’s internal financial resources.
Since 2002, Joincare became our single largest Shareholder.
On2January2004,Begol,LishiInvestmentandJoincareenteredintoasharetransferand custody agreement and a share pledge agreement, pursuant to which the 6,059,428 A SharesheldbyBegol,anIndependentThird-Party(representingapproximately1.98%ofourthentotal issued share capital), has been transferred to, held in custody by and pledged to Joincare. The consideration for the transaction was RMB24,964,843.36 which was determined on anarms’ length basis after the negotiation between the relevant parties and was financed byJoincare’s internal financial resources. As at the Latest Practicable Date, the registration procedures for the share transfer was not yet completed.
On 4 February 2005,Xi’an Dongsheng Group Co., Ltd. ( )(“Xi’an Dongsheng”), an Independent Third-Party, entered into an equity transfer agreement with Joincare, pursuant to whichXi’an Dongsheng transferred its 38,917,518AShares, representing approximately12.72% of our then total issued share capital to Joincare at a consideration of RMB170 million. The consideration was determined on anarms’ length basis after the negotiation between the relevant parties and was financed byJoincare’s internal financial resources.
– 119–
HISTORY AND DEVELOPMENT
The following table sets forth our significant business development/milestones:
Year Events
1985 • Establishment of Livzon Pharmaceutical Development
1989 • Livzon Pharmaceutical Development was renamed to Zhuhai Special Economic Zone Livzon Pharmaceutical (Group) Co., Ltd. ( ( ) )
1992 • Zhuhai Livzon was approved to be transformed into a limited fund raising company limited by shares under the name of
Zhuhai Special Economic Zone Livzon Pharmaceutical Group Inc. ( )
1993 • Our B Shares and A Shares were approved to be listed on the Shenzhen Stock Exchange
1996 • The name of our Company was changed to Livzon
Pharmaceutical Group Inc. ( )
1999 • The registered trademarks of Livzon was awarded the China Famous Brand ( ) by the SAIC
2002 • Joincare became our single largest Shareholder
2008 • Our Anti-viral Granules ( ), a major product of our Group was awarded with two invention patents for treatment of avian influenza in the PRC
2008 • We successfully launched our innovative product, Ilaprazole
( ) a national 1.1 class new pharmaceutical product to
the market
2009 • The construction of a new production plant for Livzon Group Pharmaceutical Factory ( ) (phase 2) was commenced
2011 • The construction of the new production plants for Livzon
Group Ningxia Xinbeijiang Pharmaceutical Manufacturing
Co., Ltd. ( ) and Livzon
Group Ningxia Fuxing Pharmaceutical Manufacturing Co.,
Ltd. ( ) were commenced
To increase the liquidity of our Shares, as well as providing our Shareholders with more opportunities to realise their investment in our Company, we plan to convert our B Shares into H Shares. Please refer to the section headed “Reasons for the Listing” in this listing document for further details.
– 120–
HISTORY AND DEVELOPMENT
OUR SHAREHOLDING AND GROUP STRUCTURE
Our shareholding structure
The diagram below sets out our shareholding structure as at the Latest Practicable Date: Ms. Liu(Note 1) Mr. Zhu(Notes 1 and 2) Ms. Liu Miao(Note 2)
10% 90% 100%
Taitai Pharmaceutical Industry Group
Limited
0.1%
99.90%
Shenzhen Baiyeyuan(Note 5) Hongxinhang Co., Ltd(Note 5)
48.03% 16.46%
Joincare(Notes 3 and 4)
100%
Hold:26.21% 100%
Pledge and in custody:2.05%
|||
|-|-|
|Other B Shareholders|Other A Shareholders|

1.99% 17.13% 20.74% 31.88%
Our Company
Notes:
(1) Mr. Zhu is the spouse of Ms. Liu.
(2) Ms. Liu Miao is the mother of Mr. Zhu.
(3) Joincare is a company listed on the Shanghai Stock Exchange.
(4) On 2 January 2004, Begol, Lishi Investment and Joincare entered into a share transfer and custody agreement and a share pledge agreement, pursuant to which the 6,059,428AShares held by Begol has been transferred to, held in custody by and pledged to Joincare.
(5) In accordance with theAcquisition of Listed Companies ManagementApproach (
),ShenzhenBaiyeyuanhasanassociationrelationshipwithHongxinhangCo.Ltd.,whichactsas persons acting in concert under the provisions of the Acquisition of Listed Companies Management Approach ( ).
– 121–
HISTORY AND DEVELOPMENT
The diagram below sets out our shareholding structure immediately after the exercise of the Cash Option under the Implementation Plan:
Ms. Liu(Note 1) Mr. Zhu(Note 1) Ms. Liu Miao(Notes 1 and 2)
10% 90% 100%
Taitai Pharmaceutical Industry Group
Limited
0.1%
99.90%
Shenzhen Baiyeyuan(Note 5) Hongxinhang Co., Ltd(Note 5)
48.03% 16.46%
Joincare(Notes 3 and 4)
Hold:26.21%
100% 100%
Pledge and in custody:2.05%
||||
|-|-|-|
|Cash Option Providers|Other B Shareholders|Other A Shareholders|

1.99% 17.13% 3.65% 17.09%
31.88%
Our Company
Notes:
(1) Mr. Zhu is the spouse of Ms. Liu.
(2) Ms. Liu Miao is the mother of Mr. Zhu.
(3) Joincare is a company listed on the Shanghai Stock Exchange.
(4) On 2 January 2004, Begol, Lishi Investment and Joincare entered into a share transfer and custody agreement and a share pledge agreement, pursuant to which the 6,059,428AShares held by Begol has been transferred to, held in custody by and pledged to Joincare.
(5) In accordance with theAcquisition of Listed Companies ManagementApproach (
), Shenzhen Baiyeyuan has an association relationship with Hongxinhang Co., Ltd., which acts aspersonsactinginconcertundertheprovisionsoftheAcquisitionofListedCompaniesManagement Approach ( ).
– 122–
HISTORY AND DEVELOPMENT
Our Group structure and further information on our major subsidiaries
The diagram below sets out our Group structure as at the Latest Practicable Date:
Our Company
|||||||
|-|-|-|-|-|-|
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|-|-|
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|||
|-|-|
|66.|7%|

|||
|-|-|
|90|%|

|||
|-|-|
|92.1|4%|

|||
|-|-|
|57.4|1%|

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||50.|04%|Lizhu (Hong Kong) Co., Limited||
|iaozuo Livzon Hecheng PharmaceuticalManufacturing Co., Ltd.|||||

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|-|
|Longxi Livzon Shenyuan Medicine Co., Ltd.|
|Datong Livzon Qiyuan Medicine Co., Ltd.|

HISTORY AND DEVELOPMENT
Effective
Place of shareholding
incorporation/ percentage of our Principal business Name of subsidiaries establishment Company activities
3 Livzon Group Livzon The PRC 100.00% • Sale of
Pharmaceutical Marketing pharmaceutical Co., Ltd. products
4 Zhuhai Livzon The PRC 100.00% • Sale of
Pharmaceutical Trading pharmaceutical Co., Ltd. products
5 Shanghai Livzon The PRC 51.00% • Production of
Pharmaceutical
(Note2)
pharmaceutical Manufacturing Co., Ltd. products
6 Zhuhai FTZ Livzon The PRC 100.00% • Production of
Hecheng Pharmaceutical pharmaceutical Manufacturing Co., Ltd. products
7 Zhuhai Livzon Diagnostic The PRC 51.00% • Production of
Reagents Inc. pharmaceutical products
8 Datong Livzon Qiyuan The PRC 92.50% • Plantation
Medicine Co., Ltd.
(Note3)
9 Longxi Livzon Shenyuan The PRC 90.00% • Plantation
Medicine Co., Ltd.
(Note4)
10 Zhuhai Livzon Advertising The PRC 100.00% • Provision of
Co., Ltd. service
– 124–
HISTORY AND DEVELOPMENT
Effective
Place of shareholding
incorporation/ percentage of our Principal business Name of subsidiaries establishment Company activities
11 Livzon Group Livzon The PRC 100.00% • Provision of
Medical Research Centre service
12 Jiaozuo Livzon Hecheng The PRC 100.00% • Production of
Pharmaceutical pharmaceutical Manufacturing Co., Ltd. products
13 Zhuhai Livzon MAB The PRC 51.00% • Provision of
Biological Technology Co.,
(Note5)
service
Ltd.
14 Livzon Group Vaccine The PRC 83.85% • Provision of
Engineering Inc.
(Note6)
service
15 Wenshan Livzon Sanqi The PRC 51.00% • Plantation
Plantation Co., Ltd.
(Note7)
16 Livzon Group Ningxia The PRC 99.21% • Production of
Xinbeijiang Pharmaceutical
(Notes8and9)
pharmaceutical Manufacturing Co., Ltd. products
17 Livzon Group Ningxia The PRC 100.00% • Operations not Fuxing Pharmaceutical yet commenced Manufacturing Co., Ltd.
– 125–
HISTORY AND DEVELOPMENT
Effective
Place of shareholding
incorporation/ percentage of our Principal business Name of subsidiaries establishment Company activities
18 Sichuan Guangda The PRC 100.00% • Production of
Pharmaceutical pharmaceutical Manufacturing Co., Ltd. products
19 Livzon Group Xinbeijiang The PRC 92.14% • Operations not Pharmaceutical
(Notes9and10)
yet commenced Manufacturing Inc.
20 Livzon Group Limin The PRC 100.00% • Production of
Pharmaceutical pharmaceutical Manufacturing Factory products
21 Livzon Group Fuzhou The PRC 100.00% • Production of
Fuxing Pharmaceutical pharmaceutical Co., Ltd. products
22 Gutian Fuxing The PRC 100.00% • Production of
Pharmaceutical Co., Ltd. pharmaceutical products
23 Ando Development Hong Kong 100.00% • General trading Limited and investment holding
24 Lizhu (Hong Kong) Hong Kong 100.00% • General trading Co., Limited and investment ( ) holding
– 126–
HISTORY AND DEVELOPMENT
Effective
Place of shareholding
incorporation/ percentage of our Principal business Name of subsidiaries establishment Company activities
25 Livzon Pharmaceutical Hong Kong 100.00% • General trading Biotechnology Co., and investment Limited holding
26 Li Zhu (Macau) Limitada Macau 100.00% • Operations not ( ) yet commenced 27 Companhia Macau Carason Macau 51.00% • Sale of
Limitada
(Note11)
pharmaceutical products
28 Winmain Investments British Virgin 100.00% • Investment
Limited Islands holding
Notes:
(1) WehavetwosubsidiariesinthePRCwithbusinesslicencesbeingrevokedon9November2004dueto overdue application for annual inspection. These two subsidiaries are Zhuhai Livzon Baiameng Biological Materials Co., Ltd. ( ) and Zhuhai Livzon Meidaxin Technological Development Co., Ltd. ( ).
(2) According to an equity transfer agreement entered into by our Company and Mr. Ding Gongcai (
) on 24 July 2009, our Company agreed to transfer49% equity interest in Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. ( ) at a consideration of RMB40,449,894.58toMr.DingGongcai( ).Mr.DingGongcai( )isadirectorof ShanghaiLivzonPharmaceuticalManufacturingCo.,Ltd.( ).Inaccordancewith the agreement, Mr. Ding Gongcai ( ) shall not be entitled to dividends paid before the payment of the consideration for the equity transfer in full. Based on the records retrieved from the ShanghaiAdministration for Industry (Pudong Branch) ( ), the transfer of49.00% equity interest in Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. (
) by our Company was confirmed. As such, from a PRC legal perspective, our Company isregardedasinterestedin51.00%equityinterestinShanghaiLivzonPharmaceuticalManufacturingCo., Ltd. ( ). In 2012, our Company received RMB19,884,600.00 as part of the consideration for the equity transfer, accounting for49.00% of the total consideration for the equity transfer. Please refer to the disclosure on Page I-56 in this listing document for further details on the accounting treatment.
(3) The remaining1.875% and5.625% equity interest in Datong Livzon Qiyuan Medicine Co., Ltd. (
) are held by Hunyuan County Heng Xin Agricultural Technology Promotion Co.,Ltd.( )andHunyuanCountyHengQiProductsTradingCo.,Ltd. ( ), respectively, each of them is an Independent Third-Party.
(4)Theremaining10.00%equityinterestinLongxiLivzonShenyuanMedicineCo.,Ltd.(
)isheldbyLongxiCountyTongYuanPharmaceuticalCo.,Ltd.(
), an Independent Third-Party.
– 127–
HISTORY AND DEVELOPMENT
(5)Theremaining49.00%equityinterestinZhuhaiLivzonMABBiologicalTechnologyCo.,Ltd.(
) is held by Joincare, our Controlling Shareholder.
(6)Theremaining16.15%equityinterestinLivzonGroupVaccineEngineeringInc.(
)isheldbyGuangzhouGalaxySunshineBiologicalProductsCo.,Ltd.(
), an Independent Third-Party.
(7) The remaining49.00% equity interest inWenshan Livzon Sanqi Plantation Co., Ltd. (
) is held by Mr. Chen Gaoze ( ), a director ofWenshan Livzon Sanqi Plantation Co., Ltd. ( ).
(8) The entire equity interests of Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd.( )isheldasto90.00%byourCompanyand10.00%byLivzon Group Xinbeijiang Pharmaceutical Manufacturing Inc. ( ) (“LivzonXinbeijiang”),a92.14%ownedsubsidiaryofourCompany.Assuch,ourCompanyisdeemedtohave a99.21% effective shareholding interest in Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd. ( ).
(9) The remaining4.01% and3.85% equity interest in Livzon Xinbeijiang is held by other legal persons who are Independent Third Parties and employees of Livzon Xinbeijiang, respectively.
(10) In 2001, Qingyuan Pharmaceutical Group Co., Ltd. ( ), which was a then shareholder of Livzon Xinbeijiang and a State-owned enterprise, transferred on two occasions49.60%and10.53%,respectively(inaggregate60.13%)oftheequityinterestsinLivzonXinbeijiang,whichwas State-owned asset, to our Company.According to the relevant PRC laws and regulations, the transfer of such State-owned asset was subject to, among other procedures and formalities, the approval of the State-ownedAssetsSupervisionandAdministrationCommissionoftheStateCouncilofthePRC(
) or its relevant local bureau and the filing requirement with the State Administration for Industry and Commerce of the PRC ( ) or its relevant local bureau (the “AIC”). However such approval and filing may not have been obtained or made.Notwithstandingthis,giventhat(i)theGuangdongProvincialPeople’sGovernment( ) had approved the increase in capital of Livzon Xinbeijiang which took place in 2004 and Livzon Xinbeijiang had made the necessary filing of such increase in capital with the AIC; (ii) Livzon XinbeijianghaspassedthelatestannualinspectionwiththeAIC;and(iii)accordingtosection33ofthe Company Law, shareholders whose names are registered in the register of members of a company canexercisetherightsofshareholders,ourPRClegaladvisers,King&WoodMallesons,areoftheopinion that the potential risk of ourCompany’s shareholding in Livzon Xinbeijiang being challenged is relatively low, the above defects do not affect the valid existence of Livzon Xinbeijiang, and our Company as a registered shareholder of Livzon Xinbeijiang holding92.14% of its equity interests can exercise the relevantshareholder’s rights.
(11) TheentireequityinterestsofCompanhiaMacauCarasonLimitada( )isheldasto99.00% by Zhuhai Livzon Diagnostic Reagent Inc. ( ), a51% ownedsubsidiaryofourCompanyand1%byLiLin,adirectorofZhuhaiLivzonDiagnosticReagentInc.( ) and Companhia Macau Carason Limitada ( ), respectively. As such, our Company is deemed to have a51.00% effective shareholding interest in Companhia Macau Carason Limitada ( ).
– 128–
HISTORY AND DEVELOPMENT
In addition, as at the Latest Practicable Date, we were interested in two major associated companies, particulars of which are as follows:
Effective
shareholding
Place of percentage of Principal business
Name of associated companies establishment our Company activities
1 Guangdong Blue Treasure The PRC 35.91% • Production and
Pharmaceutical Co., Ltd. sale of bulk
medicines and
intermediates
2 Tongyikangshimei Chain The PRC 35.00% • Sale of products
(Shenzhen) Co., Ltd.
( )
As advised by our PRC legal advisers, King& Wood Mallesons, save as disclosed in this section, each of the material transfers of shareholdings or equity interests of our Company or our subsidiaries were properly and legally completed and settled.
– 129–
BUSINESS
OVERVIEW
WeareaPRCbasedpharmaceuticalcompanywhichisprincipallyengagedintheresearch and development, production and sales of pharmaceutical products. Our headquarters in Zhuhai,thePRC,areresponsiblefortheoverallsalesandmarketingstrategyofourGroup.Our distribution network spreads across the PRC with 42 local offices and was managed and supported by 1,295 sales staff as at 30 September 2013. Our sales staff at our local offices are primarily responsible for the sales and distribution of our products in the PRC. Our overseas salesareoverseenbyourheadquarterswiththesupportofouroverseasagentsandouroverseas office in Vietnam.As at the Latest Practicable Date, our products covered (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment. The table below sets out our operating income from principal activities and gross profit margin by product segments for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September
2010 2011 2012 2012 2013
Gross Gross Gross Gross Gross Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Income Total Margin Income Total Margin Income Total Margin Income Total Margin Income Total MarginRMB’000 % %RMB’000 % %RMB’000 % %RMB’000 % %RMB’000 % % (unaudited)
Drugpreparationproducts 1,549,763 57.61 72.60 2,084,266 66.46 71.91 2,747,698 70.03 75.27 2,060,619 71.18 75.23 2,428,938 75.48 76.89 Bulkmedicinesandintermediates 916,953 34.08 19.36 777,307 24.78 14.78 834,638 21.27 14.71 606,339 20.95 14.84 530,492 16.48 10.73 Diagnosticreagentsandequipment 223,480 8.31 53.53 274,767 8.76 52.86 341,161 8.70 53.56 227,756 7.87 54.62 258,695 8.04 55.47 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00
– 130–
BUSINESS
Our major products in various product segments are mainly as follows:
Sales and distribution Majortypes of
Product segments channels products(Note1) Key end customers
Drug preparation • We sell our drug Western drug preparation
products preparation products to products
end customers through:• Bismuth Potassium • OTC pharmacies
(a) pharmaceutical Citrate Granules (
products distributors )
upon which we do not • Ilaprazole ( ) • Hospitals
rely on their marketing • Voriconazole for • Hospitals
and promotion Injection ( )
capabilities but • Cefodizime Sodium for• Hospitals
typically with Injection ( )
marketing support from
• Urofollitropin for • Hospitals
our own sales teams or
Injection ( )
third-party sales
• Menotropins for • Hospitals
representatives; and (b)
Injection ( )
pharmaceutical
Chinese drug preparation
products distributors
products
upon which we rely on
• Shenqi Fuzheng • Hospitals
their marketing and
Injection (
promotion capabilities.
)
• Anti-viral Granules ( • OTC pharmacies
)
Bulk medicines • We sell our bulk • Ceftriaxone Sodium ( • Pharmaceutical
and medicines and ) production enterprises intermediates intermediates directly • Phenylalanine ( ( )
to pharmaceutical )
production enterprises • Mevastatin ( )
( ) etc. • Colistin ( )
Diagnostic • We sell diagnostic • ELISAHIVTesting • Hospitals, centres for reagents and reagents and equipment Reagents (HIV disease control and
equipment to end customers either ) prevention (
directly or through • MYCOIITesting ) and department medical device Reagent ( of health ( )
distributors typically (
with marketing support ))
from our own sales • TPPATesting Reagent
teams or third-party (
sales representatives. ( ))
Note:
(1) Majorproductsareselectedbasedon(a)theamountofcontribution(intermsofsalesvalue)ofthoseproducts in the respective product segment and/or sub-segment; (b) our major innovative products; and (c) the positioning of our products in their respective markets.
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BUSINESS
The PRC Government imposes retail price controls over a wide range of drug preparation products in the PRC, whereas the bulk medicines and intermediates together with diagnostic reagents and equipment which we sell are not subject to any price controls and we could freely determine the selling price. During the Track Record Period and up to the Latest Practicable Date, the PRC Government has reduced the maximum retail price on pharmaceutical products on several occasions. Furthermore, following the introduction of the Notice on theAdjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012, the maximum retail prices of antibiotics related drug preparation products have been lowered and the use of antibiotics has been restricted in the PRC. Since we have been reforming our sales strategy involving increased reliance on our own sales teams or third-party sales representatives to promote our drug preparation products, such as Voriconazole for Injection ( ) and Cefodizime Sodium for Injection ( ), such reform has to a certain extent countered the negative effect on our selling prices to our pharmaceutical products distributors brought about by the introduction of the above notice and measures. In addition, we sell our drug preparation products as finished products to our pharmaceutical products distributors at wholesale prices. However, the decrease in the average wholesale prices charged by us for most of our major drug preparation products were in many instances less (on a percentage basis) than the decrease in retail ceiling prices imposed by the PRC Government.This was mainly due to the fact that the financial impact of these reductions in retail prices was shared among our Group, the pharmaceutical products distributors, independent third-party sales representatives (if applicable) and end customers. As such, we have not experienced any material adverse change to the selling prices of aforementioned drug preparationproductssoldbyustoourpharmaceuticalproductsdistributors.However,theprice of our antibiotics related bulk medicines (such as cephalosporins category ( )) has experienced a decline of more than30% during the Track Record Period as a result of the introductionofsuchnoticeandmeasures.Foreachofthethreeyearsended31December2010, 2011 and 2012 and nine months ended 30 September 2013, approximately15.40%,5.33%,5.00% and3.67% of our operating income were contributed from our production and/or sales of bulk medicines belonging to the cephalosporins category ( ).
In addition, the selling price of our Colistin ( ) have experienced a decline of more than40%, such decline was mainly caused by intensified market competition. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30September2013,approximately3.00%,3.03%,3.08%and2.28%ofouroperatingincomewere contributed from our production and/or sales of Colistin ( ).
Save for the aforesaid, there had not been material adverse changes to the prices of our major products during the Track Record Period.
Our production plants and herbal medicine plantation bases are all located in the PRC.As at the Latest Practicable Date, we owned and operated (a) four production plants for the production of drug preparation products; (b) four production plants for the production of bulk medicines and intermediates; (c) one production plant for the production of diagnostic reagents and equipment; and (d) three herbal medicine plantation bases.
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As at the Latest Practicable Date, we operated 45 production lines in aggregate, 26 of which were for drug preparation products, 16 of which were for bulk medicines and intermediates products, and three of which were for diagnostic reagents.
As advised by our PRC legal advisers, King& Wood Mallesons, we have obtained all necessary and relevant PRC production approvals and permits in relation to our business. We plan to increase our production capacities and capabilities by constructing new production facilities, upgrading our technology and replacing our equipment.
Our goal is to maximise return for our Shareholders. Therefore we continue to maintain our market competitiveness through increasing the variety of our products, especially drug preparation products as well as bulk medicines and intermediates, and expanding our production capacity of high margin products, such as Chinese drug preparation products. To achieve this, we aim to increase our production capacities and capabilities by constructing new production facilities, upgrading our technology and replacing existing equipment. As at the Latest Practicable Date, we had four new production plant projects under construction and three major expansion or technology advancement projects covering three bulk medicines and intermediates production plants and two drug preparation products production plants.
We value the intellectual property rights of our products and are committed to their protection. As at the Latest Practicable Date, we had 168 patents registered with the PRC Intellectual Property Office ( ), 17 patents registered overseas and had 44 patent applications pending for registration in the PRC. We also had 502 registered trademark certificates, of which, there were 480 registered trademark certificates in the PRC and 22 international certificates (including Hong Kong, Macau and Taiwan). The principal trademark of our Company “Livzon ” (“ ”), was awarded the China Famous Brand (
) in 1999.
COMPETITIVE STRENGTHS
Our Directors believe that our historical success and future prospects are underpinned by a combination of competitive strengths including:
A diversified portfolio of products
We have a diversified portfolio of products covering drug preparation products, bulk medicines and intermediates as well as diagnostic reagents and equipment, some of which come in a variety of formulations (including large-volume liquid for injection, small-volume liquidforinjection,powderforinjection,tablets,granules,capsulesetc.).Ourdrugpreparation products include both western drug preparation products and Chinese drug preparation products which target a wide range of therapeutic areas including gastrointestinal drugs, cardio-cerebral-vascular drugs, antibiotics drugs, gonadotropic hormone, blood and hemopoietic system drugs etc. Furthermore, our major products are competitive products in the market and our sales of 15 major products amounted to approximately54.96%,61.78%,63.72% and62.09% of our operating income from principal activities for each of the three
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years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively. Operating income generated by these products has taken up an increasing proportion of our total operating income which enables us to continue to improve our revenue structure to further increase the proportion of operating income generated from our major products. We believe that with a diversified portfolio of products, we are able to diversify the risks of a slowdown of demand in a particular market segment and maintain a steady growth of operating income.
A comprehensive sales network with established promotion capabilities
WehaveestablishedasalesnetworkcoveringthePRCmarketandhaveestablishedstable and good business relationships with main distribution channels.
We have developed a comprehensive sales network and sales and distribution model within the PRC. We have adopted different sales and distribution models when selling our products to hospitals, OTC pharmacies and township health centres below the community and county levels. We promote our drug preparation products mainly by our own sales representatives and third-party sales representatives. We normally sell our drug preparation products to end customers through pharmaceutical products distributors. As at 30 September 2013, our sales network spreads across the PRC with a total of 1,295 sales staff and 3,039 third-party sales representatives to promote our products in the PRC. We principally leverage on brand awareness when promoting our products so as to lay a sound foundation for the introduction of our new products.
We have established an overseas office in Vietnam, and recruited local employees to engage in related sales activities. In addition, we have obtained registration permits and have commenced sales of our drug preparation products in Vietnam, Pakistan, the Philippines, Kyrgyzstan, Uzbekistan, Tajikistan and Hong Kong. We have also commenced product registration activities in Central and South America and countries from the former Commonwealth of Independent States.
In relation to our marketing strategies, we have established an optimal marketing system by developing a series of specialised promotion policies based on our experience and market conditions as well as implementing an effectiveemployees’ incentive system.
Furthermore, we have developed an effective customer relationship management (CRM) system which enables us to manage our resources and operational processes (including budgeting, business, finance, promotion, customer resources, decision-making) effectively, simplify our management hierarchy and enhance our management efficiency.
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Strong research and development capabilities and proven track record of new product development
As at the Latest Practicable Date, we had a sound research and development team including our chemical drug preparation products team, our Chinese medicines team and our biologicaldrugpreparationproducts(monoclonalanti-bodiesandvaccines)team.Ourresearch and development team had 255 personnel, including 10 Ph.D degree holders and 88master’s degree holders who are principally responsible for the development and introduction of our newproductsinourkeyareas(includingtheareasofChinesemedicineinjection( ), auxiliary reproductive drugs ( ) and biological drugs ( )) and to resolve practical issues during our production processes.
We have placed a strong emphasis on the research and development of new products and technologies. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our research and development expenses accounted for approximately5.01%,5.30%,5.11% and4.80% of our total operating income, respectively. In 2010, our technology centre was recognised as a State-Accredited Enterprise Technology Centre ( ). Apart from our technology centre, we have established technological cooperation relationship with more than 30 domestic and overseas research institutions.
We believe that our existing products and new products to be developed by us in the future are important to our sustainable growth and future success. We employ a market-driven approachandleverageonourselfinnovationcompetitiveadvantageaswellasourresearchand development capabilities. Based on our technological innovation strategy which combines self innovation and cooperative innovation, we select research projects which meet market needs and support our development strategy to ensure the effectiveness and quality standard of such projects.
BUSINESS STRATEGIES
Our goals are to (a) consolidate our leading position in auxiliary reproductive drugs (
) and Chinese medicines for anti-tumour in the form of large-volume liquid for injection ( ) in the PRC; (b) continue to enhance our competitive advantages in other drug preparation products so as to increase our sales in potential drug preparation products; (c) accelerate the development of biological drug preparation products ( ); and (d) become an industry leader in the PRC pharmaceutical industry. To achieve these goals, we will pursue the following strategies:
To expand and consolidate our sales and distribution network and strengthen our marketing efforts
We will expand our sales and distribution network, with a view to further increasing our market share and deepening our market penetration. In respect of strengthening our sales teams, apart from recruiting more experienced sales representatives, we also intend to acquire
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and integrate with the sales teams of target companies so as to further expand the scale of our sales teams. In addition, we will strengthen our sales management organisation and the level of communication at regional and provincial levels. We will also establish and implement measures to regulate our sales activities by focusing on the three fundamentals of “employees, targets and assessment”. In terms of marketing, we will emphasise on strengthening our marketing efforts on new, exclusive and patented products, be well prepared in product introduction activities such as nation-wide tender process, product price, medical insurance, agricultural insurance, basic drugs, enhance our research on marketing strategies for our competitive products and the marketing of such competitive products in various academic fields and increase our brand awareness to lay a better foundation for our sales.
To integrate our research and development platform and to accelerate the pace of our research and development in various areas
We will further increase our efforts in the research and development of our drug preparation products, bulk medicines and diagnostic reagents.
In respect of drug preparation products, we strive to maintain a leading technological standard among PRC pharmaceutical companies by adopting the “self-innovation and external cooperation” dual research and development model and leveraging on the technologies of our potential products, such as inhalants ( ), sustained-release microsphere technology (
) and liposome ( ), to develop new formulations for drug preparation products, which in turn, would enhance our technological competitiveness. In 2012, our Anti-viral Granules ( ) was awarded as Chengdu Proprietary Innovation Products (
) by the Science and Technology Bureau of Chengdu ( ), Chengdu Development and Reform Commission ( ), Chengdu Commission of Economics and Credit ( ) and Chengdu Bureau of Finance ( ). We adopt a long-term development strategy for biological drug preparation products. In the coming years, we will continue to steadily invest in the research and development of biological drug preparation products and actively seek, develop and maintain a considerable amount of new biological drug preparation products research and development projects and aim to introduce newbiologicaldrugpreparationproductsintothemarket.Wewillalsoplacestrongeremphasis on the safety and re-assessment of our major Chinese drug preparation products, new formulations for Chinese drug preparation products as well as new product development. We expect by pursuing this strategy, we will be able to maintain our market share in the market of Chinesemedicineintheformoflarge-volumeliquidforinjection( )andtocontinue to supplement and broaden our Chinese drug preparation products portfolio.
In respect of bulk medicines, we will focus on the development and introduction of new products as well as integration of internal resources. We will restructure the product mix and fully utilise our production capacities by introducing competitive products. In managing the fluctuations in the bulk medicines market as well as intense competition, we will continue to introduce new bulk medicines and fully utilise our economies of scale in fermented and synthesisedproductiontechnologiestomaintainastablegrowthinourbulkmedicinesbusiness and become a competitive characteristic bulk medicines supplier in the industry.
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In respect of diagnostic reagents, we will consolidate our existing market share of diagnostic reagents which are distributed by us as well as place strong emphasis on our research capabilities to increase our sales in self-manufactured new diagnostic reagents as well as high-end products. We will also actively seek for opportunities to distribute new imported competitive diagnostic reagents so as to diversify our product mix and to enable us to have a competitive position in the area of immunosorbent diagnostic reagents ( ).
Furthermore, we have devoted resources in the research and development of biological drug preparation products such as vaccine products and monoclonal antibody products which we expect to launch our first batch of vaccine products and monoclonal antibody products in 2015 and 2017, respectively.
To accelerate our expansion through acquisition, strategic collaboration and joint ventures
We will actively collate information on acquisition and collaboration opportunities through various channels and will expand our business through identifying suitable target companies with reference to their products offered and technologies possessed as well as our business development strategies.We believe there are significant acquisition and consolidation opportunities in the fragmented PRC pharmaceutical industry. We continue to focus our acquisition and consolidation efforts on the pharmaceutical industry, and intend to pursue acquisition opportunities both internationally and domestically, in particular pharmaceutical companies with complementary technologies, products and/or business as well as those research companies that have already established or have potential to establish market leading positions in the biomedical field. We believe that this strategy will enable us to expand our strong market position and brand to cover a broader range of pharmaceutical products. As at the Latest Practicable Date, we had not identified any targets in relation to the aforesaid acquisition.
To expand and enhance our production capacity and capability
We plan to increase our scale of operations to satisfy market demands by constructing new production facilities and upgrading our technologies.As at the Latest Practicable Date, we had four new production plant projects under construction and three major expansion or technology advancement projects. Please refer to the sub-section headed “Production Process, Production Facilities and Expansion Plans” in this section for further details. Meanwhile, we carry out internal assessment on our compliance with GMP requirements and ISO9001 standards as well as participating in external ISO9001 assessment and other external assessments so as to actively pursue the internationally advanced GMPmanagement within our Group which in turn enable us to control our quality in selection of suppliers, audit, inspection of raw materials, production process, despatch of products and market tracking.
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PRODUCTS
Overview
Our Group specialises in the research and development, production and sale of pharmaceutical products. As at the Latest Practicable Date, our products covered (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment.
The table below sets out our operating income from principal activities and gross profit margin by product segments for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September
2010 2011 2012 2012 2013
Gross Gross Gross Gross Gross Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Operating%of Profit Income Total Margin Income Total Margin Income Total Margin Income Total Margin Income Total MarginRMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%)RMB’000 (%) (%) (unaudited)
Operatingincomeofeachproduct
segmentunderprincipalactivities
(I) Drugpreparationproducts
(a) Westerndrugpreparation
products 994,402 36.97 69.77 1,152,423 36.75 70.56 1,364,449 34.77 71.94 1,029,532 35.56 71.59 1,243,430 38.64 74.18 (b) Chinesedrugpreparation
products 555,361 20.64 77.66 931,843 29.71 73.59 1,383,249 35.26 78.55 1,031,087 35.62 78.88 1,185,508 36.84 79.72 1,549,763 57.61 72.60 2,084,266 66.46 71.91 2,747,698 70.03 75.27 2,060,619 71.18 75.23 2,428,938 75.48 76.89 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(II) Bulkmedicinesand
intermediates 916,953 34.08 19.36 777,307 24.78 14.78 834,638 21.27 14.71 606,339 20.95 14.84 530,492 16.48 10.73 (III) Diagnosticreagentsand
equipment 223,480 8.31 53.53 274,767 8.76 52.86 341,161 8.70 53.56 227,756 7.87 54.62 258,695 8.04 55.47 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00
Sales of drug preparation products is the largest contributor to our operating income from principal activities. Sales of our drug preparation products was approximately RMB1,549.76 million, RMB2,084.27 million, RMB2,747.70 million and RMB2,428.94 million for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounted for approximately57.61%,66.46%,70.03% and75.48% of our operating income from principal activities of the relevant periods. During the Track Record Period, the gross profit margin of our drug preparation products increased from approximately72.60% for the year ended 31 December 2010 to approximately76.89% for the nine months ended30September2013.Theincreaseinsalesandgrossprofitmarginofourdrugpreparation products during the Track Record Period was mainly driven by sales of high margin products, such as our Chinese drug preparation product, namely, Shenqi Fuzheng Injection (
) and our western drug preparation product, namely, Urofollitropin for Injection ( ).
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During theTrack Record Period, sales of our bulk medicines and intermediates decreased from approximately RMB916.95 million for the year ended 31 December 2010 to approximately RMB834.64 million for the year ended 31 December 2012 and approximately RMB530.49 million for the nine months ended 30 September 2013, and the gross profit margin of our bulk medicines and intermediates decreased from approximately19.36% for the year ended 31 December 2010 to approximately10.73% for the nine months ended 30 September 2013. The decrease in sales and gross profit margin of bulk medicines and intermediates was mainly caused by reduction of selling prices and shrinking demand for our antibiotics related bulk medicines due to the restriction of use of antibiotics in the PRC following introduction of the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012.
Diagnostic reagents distributed by us are produced by ourselves and imported from overseas suppliers. Sales of our diagnostic reagents and equipment increased from approximately RMB223.48 million for the year ended 31 December 2010 to approximately RMB341.16 million for the year ended 31 December 2012 at a CAGR of approximately23.55%, and the gross profit margin of these products was kept at approximately53% to56% throughout the Track Record Period.
Our Major Products
(I) Drug preparation products ( )
We currently have a diversified product portfolio with 91 types of drug preparation products (including both western drug preparation products and Chinese drug preparation products). Details of our major drug preparation products are set out in the following table:
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BUSINESS
Notes:
(1) OnlyBismuthPotassiumCitrateGranules( )incapsuleformislistedontheNationalListofEssential Drugs.
(2) The shelf-lives for Cefodizime Sodium for Injection ( ) in 0.5g and 1.0g are 1.5 years while the shelf-lives for Cefodizime Sodium for Injection ( ) in other dosages are two years.
(3) The shelf lives for Anti-viral Granules ( ) in 4g and 9g are two years while the shelf-lives for Anti-Viral Granules ( ) in 3g and 12g are 2.5 years.
(a) Western drug preparation products ( )
We currently manufacture and market 72 types of western drug preparation products covering various therapeutic areas such as gastrointestinal drug ( ), cardio-cerebral- vascular drug ( ), antibiotics drug ( ), gonadotropic hormone (
) and blood and hemopoietic system drug ( ). As at the Latest Practicable Date, 60 types of western drug preparation products sold by us were listed on the National List of Essential Drugs, the National Medicine Catalogue or the Provincial Medicine Catalogue.
(i) Bismuth Potassium Citrate Granules ( )
Our Bismuth Potassium Citrate Granules ( ) is a generic drug which is a gastrointestinal drug used to protect gastric mucosa. Our Bismuth Potassium Citrate Granules ( ) was launched into the market in 1994 and is a well known product in the PRC. The main ingredients for our Bismuth Potassium Citrate Granules ( ) is bismuth citrate and tripotassium two. Our Bismuth Potassium Citrate Granules ( ) can be used to lower pepsin activity, increase mucin secretion, promote mucosal release of prostaglandin so as to protect gastric mucosa.
According to the Biaodian Report, the PRC gastritis and peptic ulcer market has maintained a steady growth rate with a CAGR of approximately15% with a total sales amount of over RMB25 billion in 2012. Biaodian expects that by 2014, the total sales amount may reach RMB35 billion. Bismuth potassium citrates sold in the PRC are mainly produced by four manufacturers, including us.According to the Biaodian Report, our Bismuth Potassium Citrate Granules ( ) has an approximate85% market share in the market for PRC gastrointestinal drug preparation products in capsule form (in terms of sales amount) in 2012. Our Bismuth Potassium Citrate Granules ( ) in capsule form was selected to be listed on the National List of Essential Drugs in 2009.
(ii) Ilaprazole ( )
Our Ilaprazole ( ) is an innovative drug which is a gastrointestinal drug launched into the market in 2008. It is our own patented product.The bulk medicine used to produce our Ilaprazole ( ) is ilaprazole and is used for duodenal ulcer treatment. Ilaprazole ( ) is one of the newer proton pump inhibitors (PPI) in the PRC market and is being recognised as a national 1.1 class new pharmaceutical product and is produced by synthesised production technologies.
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According to the Biaodian Report, from 2011 to 2012, the CAGR for PRC gastritis and peptic ulcer drug market is approximately15%. PPI is a major drug preparation product for curing gastritis and peptic ulcer problems and accounted for over60% of the PRC gastritis and peptic ulcer drug market. Although our Ilaprazole ( ) is new to the market as compared with other PPI products, from 2010 to 2012, the CAGR of our operating income attributable to Ilaprazole ( ) is over100% which is much higher than the20% CAGR for PPI products in the PRC.
(iii) Voriconazole for Injection ( )
Our Voriconazole for Injection ( ) is a generic drug which is an antibiotic to cure empiricalanti-fungalinfections.OurVoriconazoleforInjection( )waslaunchedintothe market in 2006. The bulk medicine used to produce our Voriconazole for Injection ( ) is voriconazole which is mainly used by patients with immunity problems to cure fatal infectious diseases. Our Voriconazole for Injection ( ) was selected to be listed on the National Medicine Catalogue in 2009.
According to the Biaodian Report, the PRC voriconazole for injection market is mainly dominated by an overseas manufacturer with the rest of the market share being taken up by domestic manufacturers. From 2010 to 2012, the CAGR for this market is approximately40%. As compared with imported voriconazole for injection, ourVoriconazole for Injection ( ) is more price-competitive.
(iv) Cefodizime Sodium for Injection ( )
Our Cefodizime Sodium for Injection ( ) is a generic drug which is an antibiotic drug launched into the market in 2004. Our Cefodizime Sodium for Injection ( ) is a third-generation semi-synthetic cephalosporin which has a good antibacterial activity on gram-positive and gram-negative bacteria. It can also stimulate the macrophages inside human bodies and enhance the phagocytic activity level and sterilisation rate. Our Cefodizime Sodium forInjection( )ismainlyusedtocure,amongothers,pneumonia,bronchitis,pharyngitis caused by streptococcus and pneumococcal.
According to the Biaodian Report, due to the introduction of reform measures by the PRC Government in respect of antibiotics since 2011, the CAGR for the PRC cefodizime sodium market is approximately-19.63% between 2010 and 2012. There are a lot of manufacturers manufacturing cefodizime sodium for injection and hence market competition is intense. Our Cefodizime Sodium for Injection ( ) has an approximate20% market share in the PRC market for cefodizime sodium for injection products (in terms of sales amount) in 2012.
(v) Urofollitropin for Injection ( )
Our Urofollitropin for Injection ( ) is a generic drug which is a gonadotropic hormone to prevent women infertility through the stimulation of follicle growth. Our Urofollitropin for Injection ( ) was launched into the market in 2006 and is mainly used by anovulatory women.
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According to the Biaodian Report, the PRC market for follicle-stimulating hormone is dominated by a Swiss manufacturer having a60% market share, and we are the only domesticenterpriseproducingfollicle-stimulatinghormonehavingamarketshareofapproximately20% in 2012. As compared with our competitors, our Urofollitropin for Injection ( ) is competitively priced with reliable efficacy. It also has a long history of clinical application pursuant to which its quality and efficacy are recognised.
(vi) Menotropins for Injection ( )
Our Menotropins for Injection ( ) is a generic drug which is a gonadotropic hormone to prevent women infertility through the stimulation of follicle growth in the ovarian and steroid hormone secretion. Our Menotropins for Injection ( ) was launched into the market in 1994 and is mainly used by anovulatory women.
According to the Biaodian Report, our Menotropins for Injection ( ) had a clinical application history of nearly 20 years and had a market share of approximately75% for each of the three years ended 31 December 2010, 2011 and 2012 among hospitals in major PRC cities for menotropins for injection products.
(b) Chinese drug preparation products ( )
We currently manufacture and market 19 types of Chinese drug preparation products which come in various dosages and formulations, including tablets, capsules, granules, syrup, injection and suppository. Our Chinese drug preparation products are mainly used (a) as an adjuvant therapy for tumour and cancer treatment; and (b) for treatment of influenza, intestinal disease or cardio-cerebral-vascular diseases. As at the Latest Practicable Date, eight types of Chinese drug preparation products sold by us were listed on the National Medicine Catalogue or the Provincial Medicine Catalogue.
(i) Shenqi Fuzheng Injection ( )
Our Shenqi Fuzheng Injection ( ) is an innovative drug which is a Chinese drug preparation product used to treat qi deficiency ( ) problems, especially as an adjuvant therapyforcancerpatients.OurShenqiFuzhengInjection( )waslaunchedinto the market in 1999.As compared with other Chinese drug preparation injection products listed ontheNationalMedicineCatalogueortheProvincialMedicineCatalogue,ourShenqiFuzheng Injection ( ) is not restricted to the treatment of any particular type of cancer and therefore, it has a wider application than other drugs. The composition of Shenqi Fuzheng Injection ( ) is patented and its main ingredients are codonopsis ( ) and astragalus ( ).
According to the Biaodian Report, in 2012, the five largest anti-tumour Chinese medicine injection products accounted for approximately69.71% market share in the PRC anti-tumour Chinese medicine injection market. Our Shenqi Fuzheng Injection ( ) has an approximate16.15% market share in the PRC anti-tumour Chinese medicine injection products market in 2012.
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(ii) Anti-viral Granules ( )
Our Anti-viral Granules ( ) is an innovative drug and is made from nine ingredients, including radix ( ), forsythia ( ) and shichangpu ( ) and is a product exclusively manufactured by us. We have cooperated with The University of Hong Kong to conduct an in-depth research on ourAnti-viral Granules ( ) and it is evident thatourAnti-viralGranules( )areabletosuppressthemultiplicationofnewtype-A influenza (H1N1), highly pathogenic avian influenza (H5N1) and intestinal disease (EV71) which is one of the causative agents of hand foot and mouth disease.
The PRC anti-viral oral Chinese drug preparation products mainly consist of anti-viral oral liquid and anti-viral granules.According to the Biaodian Report, the largest manufacturer in the PRC anti-viral oral Chinese drug preparation products market had a market share of approximately55% in 2012 while our Anti-viral Granules ( ) had a30% market share.
(II) Bulk medicines ( ) and intermediates ( )
We currently manufacture and market 27 types of bulk medicines and intermediates covering the statin category ( ), cephalosporins category ( ), bulk medicine for anti-transplant ( ) and veterinary medicine ( ) as well as pharmaceutical intermediates( ).Detailsofourmajorbulkmedicinesandintermediatesaresetoutinthe following table:
Fortheninemonths
Fortheyearended31December ended30September
2010 2011 2012 2013
%of %of %of %of
Examplesof operating operating operating operating Medicine Expirydatesof
medicinefor income income income income registration themedicine
whichitis under under under under certificate registration
Ourmajor Typeofthe usedto Operating principal Operating principal Operating principal Operating principal ( ) certificate
products products produce income activities income activities income activities income activities number ( ) Shelf-lifeRMB’000 RMB’000 RMB’000 RMB’000
Ceftriaxone Bulk Ceftriaxone 229,389 8.53 134,649 4.29 151,170 3.85 63,609 1.98 H19994094 29September 2years Sodium( medicines Sodiumfor 2015
) (synthetic) Injection(
)
Phenylalanine IntermediatesAspartame 134,372 4.99 172,397 5.50 114,174 2.91 50,006 1.55 Notapplicable Notapplicable 3years ( ) (fermented) ( ) (Note)
Mevastatin IntermediatesPravastatin 61,373 2.28 93,633 2.99 128,187 3.27 72,312 2.25 Notapplicable Notapplicable 3years ( ) (fermented) ( ) (Note)
Colistin( Bulk Veterinary 80,817 3.00 94,974 3.03 120,765 3.08 73,397 2.28 (2012) 18April2017 3years ) medicines medicines 130152214
(fermented) ( )
Note: Phenylalanine ( ) and Mevastatin ( ) are intermediates, therefore no medicine registration certificate ( ) is required for production of these products.
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(i) Ceftriaxone Sodium ( )
Ceftriaxone Sodium ( ) is a third generation antibiotics belonging to the cephalosporins category. The main raw material for producing our Ceftriaxone Sodium (
) is 7-ACA. Drug preparation products produced by ceftriaxone sodium ( ) are mainly used for the treatment of respiratory infections, urinary tract or biliary tract infections, pelvic infections, skin and soft tissue infections, bones and joints infections, septicaemia and meningitis caused by sensitive pathogens as well as the prevention of infections during surgeries.
According to the Biaodian Report, theworld’s sales value for ceftriaxone sodium in 2012 was over USD1.5 billion whereby PRC sales was approximately RMB2 billion. Our CeftriaxoneSodium( )hasanapproximate30%marketshareinthePRCmarketfor ceftriaxone sodium (in terms of sales value) in 2012.
(ii) Mevastatin ( )
Drugs belonging to the statin category ( ) are frequently used to lower blood lipids. Mevastatin ( ) is a secondary metabolite fungi. Drug preparation products produced from mevastatin ( ) are used to lower cholesterol level in human bodies. With further chemical processing, mevastatin ( ) could be turned into pravastatin ( ) which isofahigherquality.Assuch,mevastatin( )isnormallybeingusedasanintermediate or raw material for the production of pravastatin ( ).
According to the Biaodian Report, our total export of Mevastatin ( ) amounted to 148 tonnes, accounting for approximately85% of theworld’s total supply of mevastatin in 2012.
(iii) Colistin ( )
Colistin ( ) is a bulk medicine normally used to produce veterinary medicine ( ). Drug preparation products produced from colistin ( ) is used for the prevention of intestinal diseases caused by gram-negative bacteria and bacterial enteritis of poultry and livestock.
According to the Biaodian Report, our Colistin ( ) has an approximate40% market share in the PRC colistin ( ) market (in terms of production value) in 2012. OurexportofColistin( )alsoaccountedforapproximately20%oftheglobalexport market of colistin ( ).
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(iv) Phenylalanine ( )
Phenylalanine ( ) is a nutritional supplement and is one of the essential amino acids required by human beings. Phenylalanine ( ) is generally used in pharmaceutical and food industries. In pharmaceutical industry, phenylalanine ( ) is an important ingredient for complex amino acid infusion ( ), an intermediate for certain anti-cancer drugs of the amino acids category. In food industry, phenylalanine ( ) is a major ingredient for producing aspartame ( ), a sweetener food additive. Almost70% of phenylalanine ( ) produced are used to produce aspartame ( ).
According to the Biaodian Report, the PRC market for phenylalanine ( ) is mainly dominated by imported products. Our Phenylalanine ( ) has an approximate23% market share in the PRC phenylalanine market (in terms of production value) in 2012. (III) Diagnostic reagents and equipment ( )
We currently market 112 types of self-manufactured or imported diagnostic reagents and equipment. Details of our major diagnostic reagents and equipment are set out in the following table:
Fortheninemonths
Fortheyearended31December ended30September
2010 2011 2012 2013
%of %of %of %of Expirydates
operating operating operating operating Medicine ofthe
income income income income registration medicine
under under under under certificate registration
Ourmajor Typeof Operating principal Operating principal Operating principal Operating principal ( ) certificate
products products income activities income activities income activities income activities number ( ) Shelf-lifeRMB’000 RMB’000 RMB’000 RMB’000
ELISAHIV Immunologic 26,818 1.00 30,322 0.97 34,319 0.87 25,288 0.79 S20020011 29September 1year
Testing diagnosis 2015
Reagents(HIV
)
MYCOIITesting Pneumonia 29,080 1.08 32,861 1.05 42,156 1.07 34,705 1.08 GuoShiYao 9December 1year
Reagent( diagnosis JianXie(Jin) 2013(Note)
Zi2009No.
( 3402832
))
TPPATesting Syphilis 31,269 1.16 39,914 1.27 49,249 1.26 34,720 1.08 GuoShiYao 9December 1year
Reagent( diagnosis JianXie(Jin) 2013(Note)
Zi2009No.
( 3402834
))
Note: These medicine registration certificates are required for the import of diagnostic reagents and equipment by us. We have already applied for the renewal of the medicine registration certificate and we expect to obtain the approval on the renewal of the relevant certificates in March 2014. Our Group has maintained sufficient inventory purchased under these certificates for the respective diagnostic reagents to be supplied to our customers during the interim period prior to the issuance of the renewed certificates.
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(i) ELISA HIV Testing Reagents (HIV )
We manufacture and sell a series of ELISA HIV testing reagents (HIV ). HIV testing reagents is used to screen blood donors and is also an adjuvant clinical therapy for HIV infection. The diagnosis for AIDS is mainly conducted by the testing of HIV antibody. According to the Biaodian Report, AIDS is one of the major focuses ofPRC’s public healthprojectswherebythecontributionandnumberoftestscarriedoutforAIDSdiagnosisare enormous.ThereareanumberofcompetingproductsinthePRCmarketforELISAHIVtesting reagents and we are one of the top players in terms of sales amount and had an approximate18% share in 2012. In addition, our ELISA HIV Testing Reagents could be used across all provinces in the PRC and are also used for physical examination by the national conscription programme.
(ii) MYCOII Testing Reagent ( ( ))
MYCOII Testing Reagent is an imported diagnostic reagent and is used for testing the mycoplasma pneumonia antibodies in serum. As respiratory disease is a common disease, MYCOII Testing Reagent is a compulsory test for clinical diagnosis.
According to the Biaodian Report, there are only a few manufacturers of mycoplasma pneumonia testing reagents and most of them are not mainstream products. The MYCOII Testing Reagent distributed by us has ranked first in the PRC market for MYCOII testing reagent (in terms of sales amount) for many years. Our sales of MYCOII Testing Reagent has recorded an annual growth of over20%.
(iii) TPPA Testing Reagent ( ( ))
TPPATesting Reagent is an imported diagnostic reagents and is also our patented product which is used for testing the TP antibody and titer in serum and plasma.
According to the Biaodian Report, there has been an upward trend for syphilis infection in recent years. Many PRC provinces useTPPATesting Reagent as an exclusive testing reagent for PMTCT projects. Furthermore, TPPA Testing Reagent is also widely used in clinical diagnosis as well as by the centres for diseases control and prevention. In 2012, TPPATesting Reagentshavebeenusedformorethan10milliontimesandthereisanupwardtrendforusage. Apart from diagnostic reagents, we also sell medical-related equipment which are mainly produced by third-party suppliers. Such equipment mainly include quantitative monitoring analysers and automated analysis systems which are used by hospitals.
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Changes in the Average Historical Prices of our Major Products during the Track Record Period Based on our records, the table below sets out the changes in the average historical prices of our major products during the Track Record Period:
Changeinaverageunitsellingprice
Year2012– Year2010–Year2010– Year2011– 30September 30September Product(inmajordosageformandpackaging) Year2011 Year2012 2013 2013% % % % (I) DrugPreparationProducts
(a) Westerndrugpreparationproducts
BismuthPotassiumCitrateGranules
( )–40capsulesperpack -9.13 -0.01 -0.04 -9.17 BismuthPotassiumCitrateGranules
( )(56granulesperpack) 0.02 – – 0.02 Ilaprazole( ) -1.28 -0.48 1.59 -0.19 VoriconazoleforInjection( ) -0.76 4.33 -17.58 -14.67 CefodizimeSodiumforInjection( )–2g 15.56 -12.15 55.57 57.93 CefodizimeSodiumforInjection( )–0.5g -1.51 1.36 56.79 56.51 CefodizimeSodiumforInjection( )–1g 0.37 17.04 32.43 55.56 CefodizimeSodiumforInjection( )–1.5g 17.11 -0.36 45.71 70.03 UrofollitropinforInjection( ) 1.63 0.22 1.69 3.57 MenotropinsforInjection( )–75U -3.58 -3.10 0.64 -5.97 MenotropinsforInjection( )–75U(1+1) -6.77 -3.12 -0.28 -9.93 (b) Chinesedrugpreparationproducts
ShenqiFuzhengInjection( ) 48.28 22.20 0.30 81.74 Anti-viralGranules( )–12g*10 6.64 5.89 6.58 20.35 Anti-viralGranules( )–3g*12 6.05 10.31 0.37 17.42 Anti-viralGranules( )–9g*10 8.03 1.06 4.70 14.31 Anti-viralGranules( )–4g*12 35.58 -0.18 2.93 39.30 (II) BulkMedicinesandIntermediates
CeftriaxoneSodium( ) -26.93 -8.71 -4.06 -36.01 Phenylalanine( ) 15.96 -16.02 -11.37 -13.69 Mevastatin( ) -8.89 -4.31 -3.68 -16.02 Colistin( ) -11.79 -7.91 -26.39 -40.20 (III)DiagnosticReagentsandEquipment
ELISAHIVTestingReagents(HIV ) -11.41 -1.64 -1.49 -14.16 MYCOIITestingReagent( (
)) 1.07 -0.87 0.13 0.33 TPPATestingReagent( (
))100T 3.97 4.72 -3.68 4.86 TPPATestingReagent( (
))200T 0.45 -3.22 -0.64 -3.40 According to the Biaodian Report, due to the ageing population and the urbanisation in the PRC during the recent years, together with other factors such as the changing living environment and the way of living and the increasing daily living pressure faced by the population, the incidence rate of cancer in the PRC has increased quickly and cancer has surpassed other diseases to become the number one fatal disease in both urban and rural areas in the PRC. Our Company reckons that this has therefore called for increasing demand in pharmaceutical products used in connection with tumour treatments, such as ourGroup’s Shenqi Fuzheng Injection ( ).
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CUSTOMERS, SALES AND MARKETING
Overview
Our drug preparation products and diagnostic reagents and equipment are mainly sold domestically. However, our bulk medicines and intermediates are sold both domestically and overseas. The table below sets out our operating income from principal activities generated by different geographical regions for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating%of Operating%of Operating%of Operating%of Operating%of Income Total Income Total Income Total Income Total Income TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) ThePRC
• NortheastChina1 223,633 8.31 272,331 8.68 317,571 8.09 228,408 7.89 272,288 8.46• NorthChina2 418,411 15.55 454,910 14.51 586,939 14.96 434,288 15.00 488,130 15.17• CentralChina3 245,244 9.12 301,208 9.60 415,827 10.60 324,600 11.21 387,167 12.03• EastChina4 664,257 24.69 733,168 23.38 863,755 22.02 587,458 20.29 645,021 20.05• SouthChina5 486,254 18.08 525,749 16.76 641,192 16.34 471,993 16.31 556,814 17.30• SouthwestChina6 287,036 10.67 374,070 11.93 502,072 12.80 392,082 13.54 443,155 13.77• NorthwestChina7 116,486 4.33 181,370 5.78 249,257 6.35 184,584 6.38 197,286 6.13 Overseas8 248,875 9.25 293,534 9.36 346,884 8.84 271,301 9.38 228,264 7.09 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00 Notes:
1. Northeast China includes Heilongjiang, Jilin, Liaoning and Inner Mongolia.
2. North China includes Beijing, Tianjin, Hebei, Shandong and Shanxi.
3. Central China includes Hunan, Hubei,Anhui and Henan.
4. East China includes Shanghai, Jiangsu and Jiangxi.
5. South China includes Guangdong, Guangxi, Hainan and Fujian.
6. Southwest China includes Chongqing, Sichuan, Guizhou, Yunnan and Tibet.
7. Northwest China includes Gansu, Qinghai, Ningxia, Xinjiang and Shaanxi.
8. Overseas includes SouthAmerica, Europe, SoutheastAsia, India and Japan.
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BUSINESS
Our headquarters in Zhuhai, the PRC, are responsible for the overall sales and marketing strategy of our Group. Our distribution network spreads across the PRC with 42 local offices and is managed and supported by 1,295 sales staff as at 30 September 2013. Our sales staff at our local offices are primarily responsible for the sales and distribution of our products in the PRC while our overseas sales are overseen by our headquarters with the support of our overseas offices and overseas agents. The map below sets out the location of our headquarters and 42 local offices as at the Latest Practicable Date:
哈爾濱
Harbin 1
長春
Changchun
1
烏U魯ru木m齊
qi 1 Shen瀋ya陽
ng
1
天津
Lan蘭zh州
ou
1
呼和Ho浩hh特
ot
2 石家莊Tianjin
1 1大連
Shijiazhuang 1 Dalin
Yinc銀hu川
an
1
Tai太yu原
an 1
濟Jin南
an
2 1
青島
Qingdao
西Xi安
an
2
Zhe鄭ng州
zhou2
合Na
肥n南jin京
g 1 1
1蘇Su州
zhou上Sh海
anghai
HeFei 1 1南通
Chen成gd都
u 1
Chong重qi慶
ng
1
W武uh漢
an 1
Hang杭zh州
ou
1 1
N
寧
Nan
i波
nto gn bg
o
南昌 1 1
Nanchang
Gui貴ya陽
ng 1
Chan長gs沙
ha
1 F福uz州
hou
溫We州
nzhou
韶關
Kunm昆in明
g 1
Shaoguan
1
1
南寧
1
1
總部
Nanning 1 1
汕Sh頭
antou
深圳
Headquarters
1 珠海 Shenzhen廣州
Zhuhai Guangzhou
地方辦事處
Ha海iko口
u
1
湛Zh江
anjiang
Local Offices
We have different end customers for each of our product segments. We have therefore adopted different sales and distribution models to sell our products. The table below sets out the end customers for each of our product segments:
Product segments Key end customers
Drug preparation products Hospitals, clinics and OTC pharmacies
Bulk medicines and intermediates Pharmaceutical production enterprises (
)
Diagnostic reagents and equipment Hospitals, centres for disease control and prevention ( ) and
department of health ( )
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To ensure effective and efficient distribution of our products, we group our sales staff according to different product types such that they could be familiar with our marketing strategies, product characteristics, pricing strategies and customer base for our particular products.
To raise the awareness of our products, we carry out various marketing activities across the PRC. During the Track Record Period, we had participated or organised various types of conferences and/or exhibitions targeting end customers of different product segments.
(I) Drug Preparation Products
The table below sets out a breakdown of our operating income from sales of drug preparation products for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating%of Operating%of Operating%of Operating%of Operating%of income total income total income total income total income totalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Salesgeneratedbyourown
salesteams(Note1) 284,314 18.34 358,961 17.22 418,104 15.21 326,087 15.83 321,429 13.23 Salesgeneratedbythird-
partysales
representatives 1,102,798 71.16 1,551,584 74.45 2,167,539 78.89 1,623,216 78.77 2,019,365 83.14 Salesgeneratedby
pharmaceuticalproducts
distributorswhichwe
relyontheirmarketing
andpromotion
capabilities 162,651 10.50 173,721 8.33 162,055 5.90 111,316 5.40 88,144 3.63 Total 1,549,763 100.00 2,084,266 100.00 2,747,698 100.00 2,060,619 100.00 2,428,938 100.00 Note:
(1) This includes overseas sales of drug preparation products.
(A) Sales and distribution model of drug preparation products in the PRC
We mainly sell our drug preparation products to our end customers through pharmaceutical products distributors, which are all GSPcertified. Our pharmaceutical products distributors are our direct customers and are Independent Third-Parties. As at 30 September 2013, we had established business relationships with 1,966 pharmaceutical products distributors to distribute our drug preparation products throughout the PRC. Our Directors believe that our sales and distribution model is in line with the industry practise.
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We had 1,157 sales staff who are mainly responsible for the sales and marketing of our drug preparation products as at 30 September 2013. To ensure effective and efficient distribution of our drug preparation products, our sales staff work closely with our pharmaceutical products distributors and third-party sales representatives. The diagram bellow illustrates our sales and distribution model for our drug preparation products:
Our Group
Products Payment Payment Products
||||
|-|-|-|
|(up|Pharmaceutical products distributorson which we do not rely on their marketand promotion capabilities)(Note 2)|ing|

||
|-|
|Third-party sales representativesor our own sales teams(Note 3)|

Market Promotion
information activities
End customers (including
hospitals, clinics and
OTC pharmacies)
Notes:
(1) As at 30 September 2013, we had established relationship with 1,155 pharmaceutical products distributorsuponwhichwerelyontheirmarketingandpromotioncapabilitiestopromoteourproducts andamajorityofthesepharmaceuticalproductsdistributorsenterintodistributionagreementswithus. We pre-set an annual purchase requirements of our products from these pharmaceutical products distributors.
(2) Asat30September2013,wehadestablishedrelationshipwith811pharmaceuticalproductsdistributors upon which we do not rely on their marketing and promotion capabilities to promote our products and amajorityofthesepharmaceuticalproductsdistributorsenterintoadhocsalesandpurchaseagreements with us. We do not set any annual purchase requirements of our products from these pharmaceutical products distributors.
(3)Asat30September2013,wehadenteredintocontractualarrangementswithapproximately99.80%of third-party sales representatives.
(4) Service fees are only paid to third-party sales representatives.
(5) Pharmaceutical products distributors upon which we do not rely on their marketing and promotion capabilitiestopromoteourproductsaregenerallysupportedbyourownsalesteamsorthird-partysales representatives who are independent from the pharmaceutical products distributors and us.
(6) Wehave,onaverage,abusinessrelationshipoffiveyearswitheachofourfivelargestpharmaceutical products distributors during the Track Record Period.
(a) Our relationship with pharmaceutical products distributors
Our sales and distribution of drug preparation products generally begins with our end customers placing purchase orders (including the designated brand, product types and
quantities) with our pharmaceutical products distributors. Upon receipt of the purchase orders,
our pharmaceutical products distributors will then place purchase orders with us in accordance
with the terms and conditions of the standard distribution agreements.
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Our relationship with our pharmaceutical products distributors is not that of a principal and an agent. We have no ownership or management control over any of our pharmaceutical products distributors. However, the pharmaceutical products distributors are required to comply with the terms and conditions of our standard distribution agreement. We enter into standard distribution agreements with majority of our pharmaceutical products distributors which we rely on their marketing and promotion capabilities to promote our products on an annual basis. The principal and general terms of our standard distribution agreements are as follows:
(i) Duration • Our distribution agreements are generally for a term of one year and are renewed annually.
(ii) Exclusive distribution rights • Each of our pharmaceutical products distributors is only authorised to sell our specific products exclusively within a defined geographical area so as to avoid competition among different pharmaceutical products distributors. Our pharmaceutical products distributors are forbidden to sell or promote our products to other regions beyond those designated by us.
(iii) Payment and credit terms • For those pharmaceutical products distributors which sell our pharmaceutical products to OTC pharmacies, they are required to settle their payment with us by letters of credit before our despatch of pharmaceutical products. For all other cases, we generally give our pharmaceutical products distributors a credit term ranging from 30 to 90 days.All of our sales to pharmaceutical products distributors are conducted in RMB and normally settled by bank remittances or bank accepted bills.
(iv) Pricing • We provide our pharmaceutical products distributors with suggested prices for our products and our pharmaceutical products distributors are not allowed to sell our products at a price below the price which we sell our products to them.
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(v) Sales and inventory reports and • Our pharmaceutical products distributors estimates are required to install a data collection software to record the inventory, sales and purchase levels and submit such information to us on a monthly basis.
(vi) Sales returns and treatment of • We do not accept returns of products from products beyond the specified our pharmaceutical products distributors expiry period except for products with quality issues or those pharmaceutical products which are severely damaged in the course of transportation. During the Track Record Period, we had not experienced any material sales returns.
• Each of our pharmaceutical products has a specified expiry period. Our pharmaceutical products distributors are responsible for disposing of our pharmaceutical products which are beyond the specified expiry period and are not allowed to sell any expired pharmaceutical products.
(vii) Termination • Our distribution agreements may be terminated, among other things, when the pharmaceutical products distributors are in breach of the terms of the distribution agreement or by mutual consent of the parties.
We generally have pre-set annual purchase requirements of our products from our pharmaceutical products distributors which we rely on their marketing and promotion capabilities. Each year, if a relevant pharmaceutical products distributor meets any of our pre-set purchase target, we will grant a sales discount to the relevant pharmaceutical products distributor in a sum calculated with reference to the annual sales from the relevant pharmaceutical products distributor, depending on the product types.
We enter into sales and purchase agreements with those pharmaceutical products distributors whom we do not rely on their marketing and promotion capabilities to promote our products. Such sales and purchase agreements mainly contain terms regarding payment and deliveryofourdrugpreparationproducts;whereasthegeneraltermsofsuchsalesandpurchase agreement are similar to our standard distribution agreements entered into with our pharmaceutical products distributors which we rely on their marketing and promotion capabilities to promote our products, save and except that there is no pre-set annual purchase target and such sales and purchase agreements are entered into on an ad hoc basis.
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We have, on average, a business relationship of five years with each of our five largest pharmaceutical products distributors during the Track Record Period. We generally select our pharmaceutical products distributors with proven distribution abilities, familiarity with their own target markets, financial strength, good credit records and scale of operations (the
“PPD Selection Criteria”).
All our pharmaceutical products distributors must possess the relevant pharmaceuticaloperationpermits( )andGSPcertificatesbeforetheycouldsell our drug preparation products to our end customers in the PRC.
We recognise our sales to our pharmaceutical products distributors upon delivery of our products to them at which time, the significant risks and rewards of ownership of the products are being transferred to them.
We manage our pharmaceutical products distributors through our sales staff at our local offices.Wealsoorganisetrainingsforourpharmaceuticalproductsdistributorsinordertokeep abreast of industry trends and to ensure our pharmaceutical products distributors are familiar with our products.
As at 31 December 2010, 2011 and 2012 and 30 September 2013, we had established businessrelationshipswith2,708,2,490,1,915and1,966pharmaceuticalproductsdistributors, respectively, to distribute our products in the PRC. The table below sets out the changes in the number of our pharmaceutical products distributors during the Track Record Period:
For the nine months ended For the year ended 30 31 December September 2010 2011 2012 2013 Pharmaceutical products distributors
at the beginning of the period 2,479 2,708 2,490 1,915 Addition of new pharmaceutical
products distributors 966 565 361 319 Termination or non-renewal of
existing pharmaceutical products
distributors (737) (783) (936) (268) Net change in pharmaceutical
products distributors 229 (218) (575) 51 Pharmaceutical products distributors
at the end of the period 2,708 2,490 1,915 1,966 Generally, we conduct reviews of the performances of our pharmaceutical products distributors. Based on the results of our review, we may terminate the agreements if the pharmaceutical products distributors underperform, consistently fail to meet their pre-set purchase targets (where applicable), or violate our policies. During the Track Record Period,
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as part of our internal policy to consolidate our pharmaceutical products distributors, we had terminated or decided not to renew certain distribution agreements with certain pharmaceutical products distributors and to retain business relationships with those pharmaceutical products distributors which are able to satisfy our PPD Selection Criteria.
(b) Our relationship with third-party sales representatives
The pharmaceutical products distributors which we do not rely on their marketing and promotion capabilities to promote our products are generally supported by our own sales teams or third-party sales representatives who are independent from the pharmaceutical products distributors and us. The third-party sales representatives play a crucial role in the promotion of our drug preparation products and they are mainly responsible for promoting our major drug preparation products. They also receive market information and pass such information to us. All of the third-party sales representatives are PRC individuals. As advised by our PRC legal advisers, King& Wood Mallesons, these third-party sales representatives are not our employees, so we seek to have a contractual arrangement with the majority of such third-party sales representatives to monitor their promotion activities and their performance. They are not required to obtain any permit or licence under the PRC laws and regulations to perform their role. Some of these contractual arrangements are in the form of formal written contracts. Our Directors believe that our arrangement with third-party sales representatives is in line with the industry practise and as advised by our PRC legal advisers, King& Wood Mallesons, such arrangement does not violate any applicable laws and regulations in the PRC.
We generally select the third-party sales representatives who are familiar with the conditions of the market, activities of our competitors, and other circumstances important to the marketing of our drug preparation products. The third-party sales representatives are generally also required to possess relevant sales experience in the PRC pharmaceutical market and have marketing, organisational and promotion capabilities. We believe that their local market knowledge and familiarity with our drug preparation products are essential to the effective selling and distribution of our drug preparation products. We maintain a close working relationship with them. We pay the third-party sales representatives a service fee calculated by reference mainly to their performance in terms of our revenue generated from sales attributable to them. These service fees were included in our marketing and promotional expenses.
Since the pharmaceutical products distributors which we do not rely on their marketing and promotion capabilities to promote our products are mainly responsible for the delivery of our products to our end customers while the third-party sales representatives are mainly responsible for promotion activities, there is no competition between them. Third-party sales representatives target their promotion activities at medical institutions and they are assigned with specific medical institutions and specific drug preparation products for their promotion activities. As such, there is no direct competition between the sales representatives.
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Third-party sales representatives are primarily responsible for promoting our major drug preparation products and hence, we seek to have a contractual arrangement on a yearly basis with these third-party sales representatives to monitor their performance. The principal and general terms of our agreements with third-party sales representatives are as follows:
(i) Obligation of sales • Sales representatives are required to sell, representatives promote and market our drug preparation products within their designated regions. Our third-party sales representatives are also required to uphold and protect our corporate image.
(ii) Sales information • Sales representatives are required to update us in writing, on a timely basis, the product type, quantities and price as requested by our end customers.
(iii) Sales and marketing strategies • Sales representatives are required to adhere strictly to our sales and marketing strategies.Wemayimposeapenaltyonthe sales representatives if they fail to observe our strategies.
(iv) Payment • We pay the sales representatives a service fee calculated by reference mainly to their performance in terms of our revenue generated from sales attributable to them.• Sales representatives are prohibited to collect any cash payment directly from our end customers.
• We are required to pay the sales representatives for the services they rendered within a prescribed period after our end customers settle their payments with us.
(v) Non-competition • Sales representatives are only allowed to promote our drug preparation products during the effective period of the agreement.
(vi) Termination • We or the sales representatives may terminate the agreement by a 30-day written notice.
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BUSINESS
We provide trainings to the third-party sales representatives such that they are familiar with our products and sales and marketing strategies, with an aim to ensure they will conduct the sales and marketing activities properly and legally. We have set up dedicated departments to monitor the performance and conduct of the third-party sales representatives. We assess and supervise the third-party sales representatives with reference to our internal polices (including our internal anti-bribery guidelines). If any sales representative has engaged in any improper or illegal activities which cause damage to our corporate image or us, we reserve the right to hold such sales representative liable for any loss suffered by us in respect of such misconduct pursuant to the terms of our agreement with third-party sales representatives. During the Track Record Period, we had not experienced any incidences of misconduct by the sales representatives.
As at 31 December 2010, 2011 and 2012 and 30 September 2013, we had established business relationships with 1,061, 1,438, 2,075 and 2,969 third-party sales representatives to promote our products in the PRC. The table below sets out the geographical distribution of these third-party sales representatives during the Track Record Period:
As at 30 As at 31 December September 2010 2011 2012 2013 Northeast China1 90 148 261 357 North China2 169 249 379 546 Central China3 162 211 312 486 East China4 199 289 387 570 South China5 271 313 383 486 Southwest China6 121 164 227 320 Northwest China7 49 64 126 204 Total 1,061 1,438 2,075 2,969 Notes:
1. Northeast China includes Heilongjiang, Jilin, Liaoning and Inner Mongolia.
2. North China includes Beijing, Tianjin, Hebei, Shandong and Shanxi.
3. Central China includes Hunan, Hubei,Anhui and Henan.
4. East China includes Zhejiang, Shanghai, Jiangsu and Jiangxi.
5. South China includes Guangdong, Guangxi, Hainan and Fujian.
6. Southwest China includes Chongqing, Sichuan, Guizhou, Yunnan and Tibet.
7. Northwest China includes Gansu, Qinghai, Ningxia, Xinjiang and Shaanxi.
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(B) Our overseas sales of drug preparation products
Apart from sales in the PRC, we also market and sell our drug preparation products overseas. We sell our drug preparation products through our overseas agents to our customers in Pakistan, the Philippines, Kyrgyzstan, Uzbekistan, Tajikistan and Hong Kong. In addition, wehaveestablishedanofficeinVietnamtosellourdrugpreparationproductstoourcustomers in Vietnam. We have also commenced product registration activities in Central and South America and countries from the former Commonwealth of Independent States. In future, our Group will further expand into the pharmaceutical markets in Africa, South America, Middle East and Southeast Asia, and will actively explore markets in North America and Europe.
Wegenerallygiveouroverseasdrugpreparationproductscustomersacredittermranging from 30 to 60 days. All of our sales to our overseas customers are conducted in U.S. dollars or Yen and normally settled by telegraphic transfer or letters of credit.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our overseas sales of drug preparation products amounted to approximately RMB0.36 million, RMB1.45 million, RMB3.66 million and RMB5.29 million, respectively, representing approximately0.01%,0.05%,0.09% and0.16% of our operating income from principal activities of the respective periods.
(C) Our pricing policies
The PRC Government imposes retail price controls over a wide range of drug preparation products in the PRC. The drug preparation products listed on the National List of Essential Drugs, the National Medicine Catalogue and the Provincial Medicine Catalogue are primarily subject to retail price controls by the PRC Government in the form of fixed prices or price ceilings.Aretail ceiling price is set (and revised from time to time but not at regular intervals) either by the NDRC or by the provincial level pricing department for each such product. Details on the retail price controls on drug preparation products are set out in the section headed “Regulations– Price Controls” in this listing document.
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As at the Latest Practicable Date, 68 types of our drug preparation products were listed in either the National Medicine Catalogue or the Provincial Medicine Catalogue of which 11 types were also listed on the National List of Essential Drugs. The following table sets out the number of types of drug preparation products we currently sell which are listed on the National List of Essential Drugs, the National Medicine Catalogue or the Provincial Medicine Catalogue:
Types of products which are listed on Types of the National products which Medicine are listed on Catalogue or the National the Provincial Total types List of Medicine Category of products Essential Drugs Catalogue Western drug preparation products ( )
• Gastrointestinal drug ( ) 12 3 12• Cardio-cerebral-vascular drug
( ) 10 – 10• Antibiotics drug ( ) 23 6 21• Gonadotropic hormone ( ) 4 1 3• Blood and hemopoietic system drug
( ) 1 – 1• Others 22 1 13 Chinese drug preparation products ( ) 19 – 8 Total 91 11 68 For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately52.31%,59.91%,62.61% and66.47% of our operating income from principal activities, respectively, were contributed by our sales of the above 68 types of drug preparation products which are subject to price controls.
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Retail price controls indirectly affect the wholesale prices of our drug preparation products at which we sell the products to pharmaceutical products distributors. For those drug preparationproductswhichweareallowedtofreelydeterminethesellingprice,wewillsetour prices of such products with reference to a number of factors, including market trends, market demand and supply, our costs of production andcompetitors’ prices. Furthermore, since we incur marketing and promotional expenses including service fee to third-party sales representatives, we will charge a higher selling price to those pharmaceutical products distributors which we do not rely on their marketing and promotion capabilities. During the Track Record Period and up to the Latest Practicable Date, the PRC Government has reduced themaximumretailpriceonpharmaceuticalproductsonseveraloccasions.Thefollowingtable shows the particular of the reduction of the maximum retail prices on such occasions during the Track Record Period that relate to our products:
Maximum Maximum
retailprice retailprice
before after Percentage Product Dosageformandpackaging reduction reduction ofreduction (RMB) (RMB)
2010
1 Colloidalbismuthsubcitrate • 300mg(containing110mg 36.00 27.30 24.17% capsules( )(Note1) Bismuth( ))x40
• 300mg(containing110mg 18.50 14.00 24.32% Bismuth( ))x20
2011
1 HMG( )(Note2) • 75unit 39.40 32.20 18.27%• 150unit 69.00 54.70 20.72% 2 Leuprolide( ) • 3.75mg,sustained-release 2,289.00 1,899.00 17.04% microsphere
3 Pancreatickininogenase • 60unitx60 48.10 37.00 23.08% ( ) • 120unitx24 33.80 26.00 23.08%• 120unitx40 55.40 42.50 23.29%• 120unitx48 66.00 50.70 23.18% 4 Cinnarizine( ) • 25mgx100 6.80 5.80 14.71% 5 Roxithromycin( ) • 50mgx12 18.80 13.20 29.79%• 50mgx24 36.50 25.70 29.59%
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Maximum Maximum
retailprice retailprice
before after Percentage Product Dosageformandpackaging reduction reduction ofreduction (RMB) (RMB)
6 Cefopcrazoneandsulbactam • 1.0g(1:1) 21.00 9.80 53.33% ( ) • 0.5g(1:1) 12.40 5.80 53.23%• 1.5g(1:1) 28.60 13.40 53.15%• 2.0g(1:1) 35.70 16.70 53.22%• 0.75g(2:1) 17.40 7.90 54.60%• 1.5g(2:1) 29.60 13.40 54.73%• 3.0g(2:1) 50.30 22.70 54.87% 7 Ceftazidimepentahydrate • 1g 18.00 11.30 37.22% ( ) • 2g 30.60 19.20 37.25% 8 Roxithromycin( ) • 150mgx6 12.10 3.50 71.07%• 75mgx12 13.50 4.00 70.37% 9 Tinidazole( ) • 500mgx8 4.50 2.60 42.22% 10 Famciclovir( ) • 125mgx6 27.20 17.70 34.93%• 250mgx6 46.20 30.10 34.85% 11 Isosorbidemononitrate • 20mgx48 49.00 27.50 43.88% ( ) • 10mgx50 30.00 16.80 44.00% 12 Amlodipinebesylate • 5mgx7 27.50 15.10 45.09% ( )
13 Carvedilol( ) • 10mgx10 13.50 10.90 19.26% 14 Lisinopril( ) • 10mgx10 26.10 19.70 24.52%• 10mgx16 41.10 30.98 24.62% 15 Valsartan( ) • 80mgx7 24.60 22.10 10.16% 16 Pravastatin( ) • 10mgx14 54.00 35.10 35.00%• 10mgx7 27.70 18.00 35.02% 17 Ligustrazine( ) • 50mgx100 8.40 8.10 3.57% 2012
1 Gemifloxacintablets • 320mgx3 168.00 145.00 13.69% ( )
2 Fluvoxamine( ) • 50mgx30 123.00 80.40 34.63% 3 Penciclovir( ) • 100mg:10g 29.78 17.60 40.90% 4 Mousenervegrowthfactor • 15,000unit 390.00 287.00 26.41% ( )
5 Clarithromycin( ) • 250mgx6 19.70 10.70 45.69%• 250mgx6 19.70 10.70 45.69% 6 Voriconazoleitraconazole • 100mg 499.00 226.00 54.71% ( )(Note3)
7 Valaciclovir( ) • 300mgx6 145.00 47.10 67.52%• 150mgx6 72.50 27.70 61.79%
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Maximum Maximum
retailprice retailprice
before after Percentage Product Dosageformandpackaging reduction reduction ofreduction (RMB) (RMB)
8 Urokinase( ) • 100,000 48.40 37.30 22.93%• 250,000 97.70 75.30 22.93%• 500,000 166.00 128.00 22.89% 9 Omeprazole( ) • 40mg 63.70 38.00 40.35% 10 Rabeprazole( ) • 10mgx7 45.20 37.20 17.70%• 10mgx14 88.20 72.50 17.80%• 20mgx7 76.90 63.20 17.82% 11 Pantoprazole( ) • 40mg 68.20 44.90 34.16% 12 Itopride( ) • 50mgx20 35.00 21.00 40.00%• 50mgx10 18.50 10.80 41.62% 13 Octreotide( 8 ) • 100mg:1ml 80.00 53.20 33.50% Notes:
(1) We market and sell colloidal bismuth subcitrate capsules ( ) under the name of Bismuth Potassium Citrate Granules ( ).
(2) We market and sell HMG ( ) under the name of Menotropins for Injection ( ).
(3) Wemarketandsellvoriconazoleitraconazole( )underthenameofVoriconazoleforInjection ( ).
As set out in the table above, among the 68 types of drug preparation products produced and sold by us which are subject to price controls, only one, 17, 13 and nil types of drug preparation products had experienced a reduction in the maximum retail price for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively. The operating income from the products which experienced a reduction in the maximum retail price was approximately RMB38.91 million, RMB223.90 million, RMB187.07 million and nil, representing approximately1.45%,7.14%,4.77% and nil percentage of the operating income from ourGroup’s principal activities for the each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively.
Furthermore, following the introduction of the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC ( ) in 2011 and theAdministrative Measures for the ClinicalApplication ofAntibiotics (
) in 2012, the maximum retail prices of antibiotics related drug preparation products have been lowered and the use of antibiotics has been restricted in the PRC. Since we have been reforming our sales strategy involving increased reliance on our own sales teams and third-party sales representatives to promote our drug preparation products, such as Voriconazole for Injection ( ) and Cefodizime Sodium for Injection ( ), such reform has to a
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certain extent countered the negative effect on our selling prices to our pharmaceutical products distributors brought about by the introduction of the above notice and measures. In addition, we sell our drug preparation products as finished products to our pharmaceutical products distributors at wholesale prices. However, the decrease in the average wholesale prices charged by us for most of our major drug preparation products were in many instances less (on a percentagebasis)thanthedecreaseinretailceilingpricesimposedbythePRCGovernment.This wasmainlyduetothefactthatthefinancialimpactofthesereductionsinretailpriceswasshared among our Group, the pharmaceutical products distributors, independent third-party sales representatives (if applicable) and end customers.As such, we had not experienced any material change to the selling prices of aforementioned drug preparation products sold by us to our pharmaceutical products distributors during the Track Record Period.
The procurement of pharmaceutical products by public hospitals and medical institutions is subject to the statutory tender process that involves bidding by pharmaceutical manufacturers. After the pharmaceutical manufacturers win the tender process, the public hospitals and medical institutions are allowed to select and procure the pharmaceutical products produced from the relevant pharmaceutical manufacturers through pharmaceutical products distributors which are GSP certified.
The statutory tender process is organised by the provincial or municipal governments and in principle, the periodic interval of centralised procurements of pharmaceutical products shall be more than a year. The selection is based on a number of criteria including, but not limited to, tender price, quality, pharmaceuticalmanufacturer’s reputation and service quality. The successful tender prices are the procurement prices at which pharmaceutical products distributors sell the pharmaceutical products to the public hospitals and medical institutions, and in part this determines the prices at which we sell the pharmaceutical products to our pharmaceutical products distributors. We understand that the statutory tender process is important to our business, as such, we have a designated department responsible for participating in such tender processes, and we seek to improve our overall tender position and number of successful tenders through industry expertise, market intelligence and competitive pricing.
Since the retail price of our drug preparation products are affected by the statutory tender price and product sales channels, we will strive to take measures to reduce the negative influences caused by price control measures, such as, increasing the success ratio within a stable tender price range through our efforts in the tender process, maintenance of a seasonable wholesale price to maintain our profit margin and further diversifying our product portfolio to minimise the negative influence of price control measures on our sales performance.
On 3 September 2012, the NDRC, the Ministry of Health and the Ministry of Human Resources and Social Security jointly issued the Notice Relating to the Advancement of Reform in the Pricing of Drugs for Public Hospitals at County Level (
) (the “Notice”). Since the Notice only concerns the reform of the pricing of pharmaceutical products prescribed and sold by public hospitals on county level to their patients, rather than the pricing of pharmaceutical products supplied by pharmaceutical enterprises to hospitals, and only public hospitals at county level in the specified trial locations
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are subject to the Notice, which is relatively small in number, the implementation of the Notice has no direct impact on the selling prices of our products. However, the decrease in the price paid by the patients to such hospitals for pharmaceutical products may create downward pressureonthesellingpricesofourproductssuppliedtosuchhospitals.Inanefforttoalleviate such pressure, our Group has taken and intends to take a number of measures, such as streamlining the structure of our sales network, increasing our sales efforts, and re-assessing and (if necessary) fine-tuning our sales model.
(II) Bulk Medicines and Intermediates
(A) Sales and distribution model for bulk medicines and intermediates in the PRC
Our bulk medicines and intermediates are principally sold directly to our customers such as pharmaceutical production enterprises ( ) or for our own internal production purposes. We had 35 sales staff who are mainly responsible for the sales and marketing of our bulk medicines and intermediates as at 30 September 2013. The major markets of our bulk medicines and intermediates in the PRC are Hebei, Shandong, Henan, Guangdong, Beijing, Jiangsu, Zhejiang, Fujian, Jiangxi and Hunan.
The diagram below illustrates our sales and distribution model for bulk medicines and intermediates:
Our Group
Payment Products Products
End customers
(Pharmaceutical production Internal production purposes
enterprises(藥品生產企業) etc.)
Although we have not entered into any long-term sales agreements with our key pharmaceutical production enterprises ( ) customers, we have, on average, established a business relationship of seven years with each of our five largest pharmaceutical production enterprises ( ) customers.
We generally give our domestic bulk medicines and intermediates customers a credit term ranging from 30 to 90 days.All of our sales to our domestic customers are conducted in RMB and normally settled in cash, bank remittances or bank acceptance bills.
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(B) Our overseas sales of bulk medicines and intermediates
Apart from domestic sales, we also sell our bulk medicines and intermediates to our customersoverseas.Ouroverseassalesareconductedthroughourownsalesstafflocatedinthe PRC. Our major overseas customers are located in India, Japan and Eastern Europe.
We generally give our overseas bulk medicines and intermediates customers a credit term ranging from 30 to 90 days. All of our sales to our overseas customers are conducted in U.S. dollars or Yen and normally settled by telegraphic transfer or letters of credit.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our overseas sales of bulk medicines and intermediates amounted to approximately RMB246.70 million, RMB290.78 million, RMB342.58 million and RMB221.39 million, respectively, representing approximately9.17%,9.27%,8.73% and6.88% of our operating income from principal activities of the respective periods.
(C) Our pricing policies
We formulate a standard price list for our bulk medicines and intermediates after taking into consideration, among other things, market trends, market demand and supply, our costs of production andcompetitors’ prices.
Bulk medicines and intermediates are not subject to retail price controls by the PRC Government. However, the selling price of our bulk medicines and intermediates may be indirectly affected by the retail price controls over the drug preparation products for which our bulk medicines and intermediates are used to produce. During the Track Record Period, the average unit selling price of our major bulk medicines and intermediates has experienced a decline, in particular the prices of antibiotics related bulk medicines (such as cephalosporins category ( )) have experienced a decline of more than30%, which was mainly caused by shrinking demand for those products due to changes of the national policy on antibiotics drugs. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately15.40%,5.33%,5.00% and3.67% of our operating income were contributed from our production and/or sales of bulk medicines belonging to the cephalosporins category ( ). Furthermore, the prices of our Colistin ( ) also experienced a decline of more than40% due to intensified market competition. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, approximately3.00%,3.03%,3.08% and2.28% of our operating income were contributed from our production and/or sales of Colistin ( ).
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(III) Diagnostic Reagents and Equipment
The table sets out a breakdown of our operating income from sales of diagnostic reagents and equipment for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of income total income total income total income total income totalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Salesgeneratedbyour
ownsalesteams(Note1) 53,985 24.15 62,912 22.90 79,194 23.21 49,406 21.69 50,878 19.67 Salesgeneratedby
third-partysales
representatives 12,509 5.60 16,958 6.17 18,592 5.45 13,929 6.12 13,366 5.17 Salesgeneratedbymedical
devicedistributors 156,986 70.25 194,897 70.93 243,375 71.34 164,421 72.19 194,451 75.16 Total 223,480 100.00 274,767 100.00 341,161 100.00 227,756 100.00 258,695 100.00 Note:
(1) This includes overseas sales of diagnostic reagents and equipment.
(A) Sales and distribution model for diagnostic reagents and equipment in the PRC
The diagnostic reagents and equipment which we sell comprise self-manufactured as well as imported products. We enter into distribution agreements with overseas third-party manufacturers, pursuant to which we act as the distributor for the diagnostic reagents and equipmentdevelopedand/ormanufacturedbysuchthirdparties.Wedistributethesethird-party diagnostic reagents and equipment by using the same sales, marketing and distribution model that we use for our self-manufactured diagnostic reagents and equipment. Under such distribution agreements, we are required to distribute the relevant diagnostic reagents and equipment within a certain pre-agreed region and to meet certain sales targets per year.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our operating income from our distribution business for third-party manufacturers accounted for approximately5.51%,5.91%,5.97% and5.26% of our operating income from principal activities, respectively.
Apart from selling diagnostic reagents and equipment directly to our end customers, we also sell our diagnostic reagents and equipment through medical device distributors, which are GSPcertified, to hospitals, centres for disease control and prevention ( ) and department of health ( ). We had 103 sales staff who are mainly responsible for the sales and marketing of diagnostic reagents and equipment as at 30 September 2013. Our medical device distributors are our direct customers and are Independent Third-Parties. As at 30 September 2013, we had established business relationships with 1,271 medical device distributors to distribute diagnostic reagents and equipment throughout the PRC. Our Directors believe that our sales and distribution model is in line with the industry practise.
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To ensure effective and efficient distribution of diagnostic reagents and equipment, our sales staff work closely with our distributors and third-party sales representatives.The diagram below illustrates our sales and distribution model for diagnostic reagents and equipment:
Our Group
Payment Products
Market Service Medical device distributors
information fee(Note 1)
Order, Third-party sales representatives Order,
Products Products
Payment or our own sales teams Payment
Market Promotion
information activities
End customers (including hospitals,
centres for disease control and
prevention(疾病預防控制中心) and
department of health(衛生部門)
Notes:
(1) Service fees are only paid to third-party sales representatives.
(2) Medical device distributors upon which we do not rely on their marketing and promotion capabilities to promote our products are generally supported by our own sales teams or third-party sales representatives who are independent from the medical device distributors and us.
(3) We have, on average, a business relationship of ten years with each of our five largest medical device distributors during the Track Record Period.
(a) Our relationship with medical device distributors
Our sales and distribution of diagnostic reagents and equipment generally begins with our end customers placing purchase orders (including the designated brand, product types and quantities) with our medical device distributors. Upon receipt of the purchase orders, our medical device distributors will then place purchase orders with us.
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Our relationship with our medical device distributors is not that of a principal and an agent. We have no ownership or management control over any of our medical device distributors. However, our medical device distributors are required to comply with the terms and conditions of our standard distribution agreement. We enter into the standard distribution agreements with majority of our medical device distributors on an annual basis. The principal and general terms of our standard distribution agreements are as follows:
(i) Duration • Our distribution agreements are generally for a term of one year and are renewed annually. (ii) Exclusive distribution rights• Each of our medical device distributors is only authorised to sell our products exclusively within a defined geographical area so as to avoid competition among different medical device distributors. Our medical device distributors are forbidden to sell or promote our products to other end customers or regions beyond those designated by us.
(iii) Non-competition • Our medical device distributors are not allowed to sell any products under other brands which are of similar nature as our products during the effective period of the distribution agreement.
(iv) Payment and credit terms • In general, we give our medical device distributorsacredittermrangingfrom30to90 days. All of our sales to medical device distributors are conducted in RMB and normally settled by bank remittances.
(v) Pricing • We provide our medical device distributors with suggested retail prices for our products and our medical device distributors are not allowed to sell our products at a price below the price which we sell our products to them.
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(vi) Minimum purchase targets, • We generally have pre-set annual purchase sales incentives and sales targets and/or pre-set quarterly purchase discounts targets from our medical device distributors. Each year, if a relevant medical device distributor meets any of our pre-set purchase target, we will grant a sales incentive to the relevant medical device distributor in a sum calculated with reference to the annual purchase by the relevant medical device distributor, depending on the product types. During the Track Record Period, sales incentive was recorded as part of our selling and marketing expenses.
• Furthermore, we will give a sales discount to our medical device distributors who place bulk purchase orders with us. During the Track Record Period, such sales discounts were deducted from our turnover. We believe that the sales discounts motivate our medical device distributors to achieve our pre-set purchasetargets.OurPRClegaladvisers,King& Wood Mallesons, have advised us that such sales discount arrangement is legal and valid under the applicable PRC laws and regulations.
(vii) Sales and inventory reports • Our medical device distributors are required to and estimates submit to us, among other things, their sales report, inventory report and three-month sales estimates, on a monthly basis.
(viii)Sales returns and treatment • We do not accept returns of products from our of products beyond the medicaldevicedistributorsexceptforproducts specified expiry period with quality issues. During the Track Record Period, we had not experienced any material sales returns.
• Each of our products has a specified expiry period. Our medical device distributors are responsible for disposing our products which are beyond the specified expiry period and are not allowed to sell any expired products.
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(ix) Termination • Our distribution agreements may be terminated, among other things, when the distributors are in breach of the terms of the distribution agreement, fail to meet the minimum sales targets or by a 30-day written notice.
We have, on average, a business relationship of ten years with each of our five largest medical device distributors during the Track Record Period. We generally select our medical device distributors with proven distribution abilities, familiarity with their own target markets, financial strength, good credit records and scale of operations (the “MDD Selection Criteria”). All our medical device distributors must possess the relevant permit for medical devices operation enterprises ( ) before they could sell diagnostic reagents and equipment to our end customers in the PRC.
We recognise our sales to our medical device distributors upon delivery of our products to them at which time the significant risks and rewards of ownership of the products are being transferred to them.
Wemanageourmedicaldevicedistributorsthroughoursalesstaffatourlocaloffices.We also organise trainings for our medical device distributors in order to keep abreast of industry trends and to ensure our medical device distributors are familiar with our products.
As at 31 December 2010, 2011 and 2012 and 30 September 2013, we had established businessrelationshipswith818,999,1,190and1,271medicaldevicedistributors,respectively, to distribute our products in the PRC. The table below sets out the changes in the number of our medical device distributors during the Track Record Period:
For the nine months For the year ended ended 30 31 December September 2010 2011 2012 2013 Medical device distributors at
the beginning of the period 751 818 999 1,190 Addition of new medical device
distributors 67 181 206 169 Termination or non-renewal of
existing medical device
distributors – – (15) (88) Net change in medical device
distributors 67 181 191 81 Medical device distributors at
the end of the period 818 999 1,190 1,271
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Generally, we conduct reviews of the performances of our medical device distributors. Based on the results of our review, we may terminate the agreements if our medical device distributorsunderperform,consistentlyfailtomeettheirpre-setpurchasetargets,orviolateour policies. During the Track Record Period, as part of our internal policy to consolidate our medical device distributors, we had terminated or decided not to renew certain distribution agreements with certain medical device distributors and to retain business relationships with those medical device distributors which are able to satisfy our MDD Selection Criteria.
(b) Our relationship with third-party sales representatives
Similar to our sales and distribution model for drug preparation products in the PRC, the medical device distributors which we do not rely on their marketing and promotion capabilities to promote our products are generally supported by our own sales teams or third-party sales representatives who are independent from the medical device distributors and us. The third-party sales representatives are principally responsible for promoting our diagnostic reagents and equipment in designated regions or to designated end customers. They also keep us generally informed of the conditions of the market, activities of our competitors, and other circumstances important to the marketing of diagnostic reagents and equipment. Our selection criteria for such third-party sales representatives are the same as those for drug preparation products. In addition, we also seek to have a contractual arrangement with these third-party sales representatives to monitor their performance where the principal terms are similar to those for drug preparation products. We pay them a service fee calculated by reference mainly to their performance in terms of our revenue generated from sales attributable to them. Please refer to the disclosure in the sub-section headed “Customers, Sales and Marketing– (I) Drug Preparation Products– (A) Sales and Distribution Model of Drug Preparation Products in the PRC– (b) Our Relationship with Third-party Sales Representatives” in this section for further details.
As at 31 December 2010, 2011 and 2012 and 30 September 2013, we had established business relationships with 56, 88, 83 and 70 third-party sales representatives, respectively, to promote our products in the PRC.
(c) Our direct sales of diagnostic reagents and equipment
Apart from selling diagnostic reagents and equipment through medical device distributors, we also sell such products to our end customers directly in the PRC. Our direct sales of diagnostic reagents and equipment are supported by our own sales staff at our local offices.
We generally conduct our direct sales by entering into sale and purchase agreements with our end customers and give our direct sales customers a credit term up to 180 days.All of our sales to our direct sales customers are conducted in RMB and normally settled in bank remittances or bank accepted bills.
(B) Our overseas sales of diagnostic reagents and equipment
Apart from sales in the PRC, we also market and sell our diagnostic reagents and equipment overseas. Our overseas sales are conducted through our own sales staff located in the PRC. Our major overseas customers are located in Europe.
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We generally give our overseas diagnostic reagents and equipment customers a credit term ranging from 30 to 60 days. All of our sales to our overseas customers are conducted in Euro and normally settled by telegraphic transfer.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our overseas sales of diagnostic reagents and equipment amounted to approximately RMB1.82 million, RMB1.30 million, RMB0.64 million and RMB1.58 million, respectively, representing approximately0.07%,0.04%,0.02% and0.05% of our operating income from principal activities of the respective periods.
(C) Our pricing policies
Diagnostic reagents and equipment are not subject to price controls in the PRC. We therefore could freely determine the selling price of diagnostic reagents and equipment after taking into consideration, among other things, market trends, market demand and supply, our costs of production andcompetitors’ prices. During the Track Record Period, we had not experienced any material adverse changes in the price for the major diagnostic reagents and equipment sold by us.
Our direct customers for all our product segments include mainly the medical device distributors, health authorities and centres for disease control and prevention. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our five largest customers, in aggregate, accounted for less than10% of our operating income from principal activities.
OUR SUPPLIERS
Our suppliers
Our suppliers include suppliers of raw materials as well as imported finished products. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the total purchase from our suppliers amounted to approximately RMB1,004.11 million, RMB879.78 million, RMB1,113.56 million and RMB809.79 million, respectively. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the purchases by our Group from our top five suppliers amountedtoapproximatelyRMB407.87million,RMB197.74million,RMB270.85millionand RMB177.96 million, respectively, representing approximately40.62%,22.48%,24.32% and21.98% of our total purchases for the respective periods. For each of the three years ended 31 December2010,2011and2012andninemonthsended30September2013,ourpurchasesfrom our largest supplier, accounted for approximately22.59%,8.49%,7.14% and5.12% of our total purchases, respectively.
Save as disclosed in the section headed “Connected Transactions” in this listing document, none of our Directors or any existing Shareholders who hold more than5% of our issued share capital, or their respective associates, had any interest in any of our five largest suppliers during the Track Record Period.
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Raw materials
We use different raw materials for the production of (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment. Details of our major raw materials used to produce our major products are set out in the table below:
Major raw materials used to produce our major
Product segments products
Drug preparation • Urofollitropin ( ), HMG( ), bismuth products potassium citrate ( ), codonopsis ( ),
astragalus ( ) and voriconazole ( )
Bulk medicines and • 7-ACA, glycerin ( ), soybean oil ( ), glucose intermediates ( ) and corn flour ( )
Diagnostic reagents and • HIV coated materials ( ) and HIV HRP ( )
equipment
Inaddition,wealsoprocureotherpackagingmaterialssuch asglassampulesforinjection products and gelatin capsule shells, as well as external packaging and printed instructions for all of our products. We principally source raw materials, ancillary materials, as well as packaging materials from various suppliers in the PRC. Each of our suppliers is required to produce our required raw materials in accordance with our quality standards and pass our quality inspection. In addition, staff from our quality control department will inspect the quality of the raw materials in accordance with the applicable laws and regulations and only those raw materials which pass through the inspection process would be accepted by us. The determination of the purchase price for the relevant raw materials is normally based on the prevailingmarketpriceofsuchmaterialswithsimilarqualityaftercomparingquotationswhich we obtained from several suppliers. In order to ensure there is a timely supply of raw materials byoursuppliersandasuitablelevelofrawmaterialsrequirements,wenormallymaintaina30- to 60-day supply of raw materials. In respect of raw materials which are difficult to source and some other strategically procured raw materials, we may maintain a 90-day supply of raw materials.
Prior to confirming the supplier of raw materials, our quality assurance department performs background checks on the operating history, track record and market reputation of a list of potential suppliers, procures different product samples from the potential suppliers for inspection and testing by our quality control division, conducts site visits and examines the productionfacilitiesofthepotentialsupplierstoensurethatthesupplierthatwepickmeetsour quality standard and requirement. In addition, we require our suppliers to provide us with evidence that they have all licences and permits necessary to conduct their operations, which may include business licences, manufacturing permits, import registration certificates, GMPor other relevant licences and any other related documents. We will review and evaluate our suppliers at the end of each year comprehensively.
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We typically do not enter into long-term supply agreements with our major suppliers of rawmaterialsastherawmaterialsrequiredforproductionaregenerallyreadilyavailableinthe market through many suppliers. In order to assure better management of the availability of resources and our operations, we do not rely on one major supplier and we have at least two suppliers for each type of principal raw materials as well as packaging materials respectively. Apart from that, we minimise the risk of supply shortages as well as allow us to benefit from the low cost of supplies due to competition among the suppliers by ensuring that there are suitable alternative raw materials.
Delivery of raw materials is generally within 20 to 35 days from the date of the purchase order and our suppliers deliver the raw materials to our production facilities at their expenses. Wegenerallypayadownpayment,whichcanbefullorpartialpaymentforthegoodsprocured, to our suppliers before the goods are delivered. We are normally granted a credit period of up to 60 days by our suppliers for any remaining outstanding payment.The credit period extended byourothersuppliersvariesfromsuppliertosupplierdependingon,interalia,ourrelationship with the particular supplier and the volume and prices of our purchases.
According to the terms of various agreements with the suppliers, our suppliers allow us to return any raw materials which are contaminated or damaged, or if such fail to meet our specified quality standards, or their effective dates have expired. During the Track Record Period, we did not experience any material return of supplies due to quality problems for our pharmaceutical production operations, or any shortage or delay in the delivery of raw materials that had a material adverse effect on our operations or performance. We did not encounter any outstanding disputes with our suppliers.
We believe that we have maintained good relationships with our suppliers, which enables us to procure raw materials and supplies used for our manufacturing operations in a reliable manner. In addition, we generally have alternative sources of supply for each type of our raw materials, and therefore we do not anticipate significant difficulties in sourcing them.
AftertakingintoconsiderationtheProtectionofRareandEndangeredPlantsandAnimals Catalogue ( ) issued by the relevant authorities in the PRC as well as the current market supply, our Directors do not foresee there will be any shortage or extinction of the key raw materials for the production of ourGroup’s major products in the near future.
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Changes in the Average Historical Purchase Prices of the Major Raw Materials for Our Major Products during the Track Record Period
Based on our records, the table below sets out the changes in the average historical purchase prices of the major raw materials for our major products during the Track Record Period:
Changeinaverageunitpurchaseprice
Year2012– Year2010–Year2010– Year2011– 30September 30September Rawmaterial Unit Year2011 Year2012 2013 2013% % % % (I) DrugPreparationProducts
Urofollitropin( ) wu 8.69 4.90 -0.47 13.49 HMG( ) wu -18.45 -0.68 -6.43 -24.21 Bismuthpotassiumcitrate( ) kg 10.05 28.30 12.51 58.86 Codonopsis( ) kg 93.80 85.45 -0.42 257.89 Astragalus( ) kg 18.67 34.61 6.55 70.20 Voriconazole( ) kg – – – – (II)BulkMedicinesandIntermediates
7-ACA kg -31.90 -16.32 -2.42 -44.39 Glycerin( ) kg 11.88 -1.57 16.76 28.58 Soybeanoil( ) tonne 12.57 -2.03 -27.11 -19.62 Glucose( ) kg 11.91 -8.14 -7.07 -4.47 Cornflour( ) kg 16.80 9.47 4.96 34.20 (III)DiagnosticReagentsandEquipment
HIVcoatedmaterials( ) set -3.71 14.21 3.99 14.36 HIVHRP( ) set -15.40 21.08 3.86 6.38 During the Track Record Period, significant increases in the prices for codonopsis ( ) and astragalus ( ) were mainly caused by a decrease in the supply of those Chinese herbal medicines as well as an increase in the general demand for Chinese drug preparation products. Codonopsis ( ) and astragalus ( ) are the major raw materials of Shenqi Fuzheng Injection ( ). The average selling price of Shenqi Fuzheng Injection (
) increased during the Track Record Period. The increase substantially offset the negativeeffectfromthepricesurgeforcodonopsis( )andastragalus( ).Therefore,the gross profit margin of Shenqi Fuzheng Injection ( ) kept fairly stable throughout the Track Record Period. We continued to expand cultivation of Chinese herbal medicines in our plantation bases in order to have better control of the major raw materials of our Chinese drug preparation products including codonopsis ( ) and astragalus ( ).
Following the introduction of theAmendment by the NDRC on Certain Categories of the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the ClinicalApplicationofAntibiotics( )in2012whichlowersthe maximum retail prices of antibiotics related drug preparation products and restricts the use of antibioticsinthePRC,thepricesforantibioticsrelatedbulkmedicinesandintermediates(such as 7-ACA) were also adversely affected.
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Imported products
During the Track Record Period, we imported certain diagnostic reagents and equipment from overseas suppliers.
We have entered into distribution agreements with all of our overseas suppliers of such diagnostic reagents and equipment that we import for distribution in the PRC. The principal and general terms of these distribution agreements vary but can be generally summarised as follows:
(i) Duration • Generally for one year and may be automatically renewed for another year upon expiration.
(ii) Distribution • Generally, our Group is only authorised to sell our imported products exclusively or non- exclusively within a defined geographical area in the PRC (the “Area”).
• Our Group is not allowed to distribute the products outside the Area.
(iii) Payment terms • We are required to settle our purchases by letters of credit generally, or other methods as the overseas suppliers may agree.
• Our overseas suppliers generally grant us a credit period ranging from 30 to 60 days.
(iv) Pricing • We purchase the products at the prices specified in the price lists of our overseas suppliers, subject to change in the manner agreed by the parties.
• In general, the prices at which we sell the products to our distributors shall follow the resale prices, subject to minimum prices, as prescribed by our overseas suppliers.
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(v) Minimum purchase value • In general, under the distribution agreements, we guarantee an annual minimum purchase value. If we fail to meet the annual minimum purchase value, we are required to pay to our overseas suppliers a penalty equal to a pre- agreed percentage of the annual minimum purchase value.
(vi) Promotion of products • We are obliged to endeavour and use our continuous effort to promote the products at our own expenses.
(vii) Termination • In general, the distribution agreements may be terminated by:
− ouroverseassuppliersupontheoccurrence of certain specified events (including giving prior written notice to us within a prescribed notice period, our failing to meet a given percentage of the annual minimum purchase value, our failing to comply with the payment terms, and a change in control or ownership structure of our Group member who signed the distribution agreement); or
− either party in case of insolvency, assignment of property, involuntary petitionofbankruptcyordissolutionofthe other party or flagrant violation of the distribution agreement by the other party. We have, on average, a business relationship of eight years with these overseas suppliers. PRODUCTION PROCESS, PRODUCTION FACILITIES AND EXPANSION PLANS
Production Process
Drug preparation products
Our drug preparation products are generally produced in the form of injection products (such as lyophilised powder for injection, large-volume liquid for injection, small-volume liquid for injection) and solid drug preparation products (such as tablets, capsules and granules) etc.
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The diagram below summarises the major steps of the production process of our injection products:
Filling and
Weighing Mixing Filtering
sealing
Warehouse
Sterilisation Testing
storage
The diagram below summarises the major steps of the production process of our solid drug preparation products:
Weighing Sieving Granulating Mixing
Compressing Drying and Packaging and
or filling disinfection storage
Bulk medicines and intermediates
The production of our bulk medicines and intermediates mainly comprises the fermentation technique and the synthetic technique.
The diagram below summarises the major steps of the production process of our fermented bulk medicines and intermediates:
Testing,
Fermentation of Crystallisation
Extraction packaging and
raw materials and drying
storage
(cid:3)
The diagram below summarises the major steps of the production process of our synthetic bulk medicines and intermediates:
Chemical mixing Sterilisation Crystallisation Packaging and
of raw materials and filtering and drying warehousing
(cid:3)
Diagnostic reagents and equipment
As at the Latest Practicable Date, we only manufactured certain types of diagnostic reagents which we sell.
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The diagram below summarises the major steps of the production process of our diagnostic reagents:
Plates packing Plates cleansing Plates drying Assembly of
and incubation and closure and bagging finished products
(cid:3)
Production Facilities
Our production plants are all located in the PRC. As at the Latest Practicable Date, we owned and operated nine production plants located in provinces or municipality namely Guangdong, Shanghai, Sichuan and Fujian. Out of the nine production plants, four of which focus on the production of bulk medicines and intermediates, four of which focus on the production of drug preparation products, and one focuses on the production of diagnostic reagents and equipment.
The following table sets out further details of our production plants:
Location of our
production plants
Name of ourproduction
(Approximate total Majortypes of products GMPorsimilar
plants gross floorarea) produced certification
1 Livzon Group Zhuhai, Guangdong Drug preparation products Obtained for all
Livzon Province, the PRC (Tablets, granules, production workshops
Pharmaceutical (9,787.54 sq.m.) capsules and powder for
Factory ( injection)
)
2 Shanghai Livzon Shanghai, the PRC Drug preparation products Obtained for all
Pharmaceutical (12,434.12 sq.m.) (Tablets, granules and production workshops
Manufacturing capsules)
Co., Ltd. (
)
3 Sichuan Guangda Pengzhou, Sichuan Drug preparation products Obtained for all
Pharmaceutical Province, the PRC (Tablets, granules and production workshops
Manufacturing (30,038.91 sq.m.) capsules)
Co., Ltd. (
)
4 Livzon Group Shaoguan, Guangdong Drug preparation products Obtained for all
Limin Province, the PRC (Large-volume liquid for production workshops
Pharmaceutical (28,309.32 sq.m.) injection and small-
Manufacturing volume liquid for
Factory ( injection)
)
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Location of our
production plants
Name of ourproduction
(Approximate total Majortypes of products GMPorsimilar
plants gross floorarea) produced certification
5 Zhuhai FTZ Zhuhai, Guangdong Bulk medicines and Obtained for all
Livzon Hecheng Province, the PRC intermediates production workshops
Pharmaceutical (15,475.25 sq.m.)
Manufacturing
Co., Ltd. (
)
6 Livzon Group Qingyuan, Guangdong Bulk medicines and Obtained for all
Xinbeijiang Province, the PRC intermediates production workshops
Pharmaceutical (31,505.73 sq.m.)
Manufacturing Inc.
(
)
7 Livzon Group Fuzhou, Fujian Province, Bulk medicines and Obtained for all
Fuzhou Fuxing the PRC intermediates production workshops
Pharmaceutical (51,735.47 sq.m.)
Co., Ltd. (
)
8 Gutian Fuxing Fuzhou, Fujian Province, Bulk medicines and Obtained for all
Pharmaceutical the PRC intermediates production workshops
Co., Ltd. ( (22,641.79 sq.m.)
)
9 Zhuhai Livzon Zhuhai, Guangdong Diagnostic reagents and Obtained for all
Diagnostic Province, the PRC equipment production workshops
Reagents Inc. ( (10,909.65 sq.m.)
)
Drug preparation products
As at the Latest Practicable Date, we operated 26 production lines for our drug preparation products. Our major drug preparation products production lines include one large-volume liquid for injection production line, two small-volume liquid for injection production lines, six powder for injection production lines (including both lyophilised and non-lyophilised production lines) and nine production lines for solid drug preparation products (including tablets, capsules and granules) etc.
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Bulk medicines and intermediates
In respect of bulk medicines and intermediates, as at the Latest Practicable Date, our four production plants with a total of 16 production lines mainly focused on the production of bulk medicines belonging to the cephalosporins category ( ), statin category ( ) and other bulk medicines and intermediates. Our production equipment and production quality management for our bulk medicines and intermediates are all up to the domestic standards.As some of our bulk medicines and intermediates are exported overseas, we have also passed or obtained international certificates for some of our production lines, details of which are as set out in the table below:
International certificates obtained Production line
the U.S. FDA Lovastatin ( )
Salinomycin ( )
Certificate of Suitability (COS) Pravastatin ( )
certification of the European Union Colistin Sulphate ( )
Drug Master File (DMF) registration by Acarbose ( )
the United States Mycophenolate Acid ( )
Drug Master File (DMF) registration by Mycophenolate Acid ( )
Canada
Diagnostic reagents and equipment
In respect of diagnostic reagents and equipment, as at the Latest Practicable Date, we operated three production lines to produce diagnostic reagents, including ELISA diagnostic reagents ( ).
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Production Capacities and Utilisation Ratio
The table below sets out the information on capacity and utilisation ratio of our major production lines for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013:
Fortheninemonthsended
Fortheyearended31December 30September
2010 2011 2012 2013
Design Design Design Design Utilisation capacity Utilisation capacity Utilisation capacity Utilisation capacity rate(%) Productionline Unit (Note1) Yieldrate(%) (Note1) Yieldrate(%) (Note1) Yieldrate(%) (Note1) Yield (Note2) (a) Drugpreparationproducts
Large-volumeliquidfor 10,000 720.00 659.38 91.58 720.00 790.61 109.81 720.00 1,066.36 148.11 720.00 951.31 176.17 injection(Note3)
bottles
Small-volumeliquidforinjection 10,000 7,650.00 5,033.41 65.80 7,650.00 4,512.86 58.99 7,650.00 5,781.26 75.57 7,650.00 3,308.91 57.67 pieces
Powderforinjection(Note4) 10,000 7,345.00 3,436.89 46.79 7,345.00 2,242.71 30.53 7,345.00 1,545.61 21.04 7,345.00 3,148.43 57.15 bottles
Tablets 10,000 113,360.00 67,886.64 59.89 113,360.00 76,997.71 67.92 113,360.00 70,460.93 62.16 113,360.00 45,814.73 53.89 tablets
Granules 10,000 46,500.00 24,770.78 53.27 46,500.00 37,065.38 79.71 46,500.00 50,438.08 108.47 56,100.00 35,002.98 83.19 packets
Capsules(Note5) 10,000 47,620.00 19,697.74 41.36 47,620.00 17,005.24 35.71 47,620.00 24,546.59 51.55 47,620.00 20,977.86 58.74 capsules
(b) Bulkmedicinesand
intermediates
Fermentedbulkmedicinesand tonnes 6,797.40 4,573.13 67.28 6,881.40 5,462.01 79.37 7,333.98 5,670.00 77.31 7,333.98 3,926.74 71.39 intermediates
Syntheticbulkmedicinesand tonnes 699.10 550.78 78.78 699.10 365.52 52.28 699.10 496.98 71.09 699.10 264.50 50.45 intermediates
(c) Diagnosticreagentsand
equipment
ELISAdiagnosticreagents( 10,000 100.00 56.26 56.26 100.00 67.92 67.92 100.00 85.75 85.75 128.00 72.89 75.93 ) boxes
Notes:
(1) The maximum annual production capacity for a production line is computed based on 250 effective production days a year and eight hours per day for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013.
(2) This is an annualised rate. In computing the annualised utilisation rate, the yield for the period was multiplied by four and divided by three.
(3) In order to meetcustomers’demand for our products, instead of operating for one shift per day, our large-volumeliquidforinjectionproductionlinesmay,whenneeded,beoperatingfortwoorthreeshifts per day. Our Group has three expansion/technology advancement projects to expand our production capacities,especiallyforproducinglarge-volumeliquidforinjectionproductswhichareexpectedtobe completed by the end of January 2014. Please refer to the sub-section headed “Production Process,ProductionFacilitiesandExpansionPlans–Ourexpansionplans–Expansion/Technologyadvancement projects” in this section for further details.
(4) Our powder for injection production lines include lyophilised powder for injection production lines whose utilisation rate during the Track Record Period was approximately100.00%.
(5) Our capsules production lines include a specific production line for producing a single type of soft capsule product.
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(6) The actual production activities were conducted occasionally on two shifts of eight hours per day to meet the demand for our products. Therefore, the utilisation rate for such relevant period exceeded100%.
(7)Wealsoownandoperateotherproductionlineswithutilisationratesrangingfromapproximately0.00% to60.00%.
As at the Latest Practicable Date, our annual design production capacities remained the same as those as at 30 September 2013.
In order to capture the increasing market demand and expand our market share for fermented bulk medicines and intermediates, we have carried out expansion plans in Ningxia, thePRCtoincreaseourproductioncapacitiesforMycophenolateAcid( ),Lovastatin(
), Salinomycin ( ) and Phenylalanine ( ) etc. which will mainly be sold overseas. Furthermore, we intend to launch new fermented bulk medicines and intermediates, such as Lifusita ( ) and Coenzyme Q10 ( Q10) to the market, which will also require us to further expand our production capacities for bulk medicines and intermediates. Please refer to the sub-section headed “Our expansion plans” in this section for further details. As advised by our PRC legal advisers, King& Wood Mallesons, we have obtained all necessaryandrelevantPRCpharmaceuticalproductionapprovalsandpermitsinrelationtoour business, which primarily include the pharmaceutical manufacturing permits, the GMP certificates and other required production approvals. We have obtained requisite licences or permits for the sale of our manufactured pharmaceutical products from the SFDA at the national or provincial level that authorise our manufactured pharmaceutical products to be sold nationwide in PRC, and we adhere to stringent and closely monitored quality assurance and safety control processes. For further details, please refer to the sub-section headed “Legal and Compliance” in this section.
Plantation Bases
We intend to achieve upstream vertical integration in our Chinese drug preparation products and have a better control over the price of herbal medicine. As such, we established our own herbal medicine plantation bases to plant astragalus ( ), codonopsis ( ) and radix notoginseng ( ). As at the Latest Practicable Date, we had three herbal medicine plantation bases located in Shanxi, Gansu and Yunnan, respectively. Details of our herbal medicine plantation bases are set out as follows:
Name of ourherbal
Location of ourherbal
medicine plantation
medicine plantation Site area of Majortypes of herbal
bases bases plantation fields medicine planted
1 Datong Livzon Datong, Shanxi Province, 1,945,431 sq.m. Astragalus ( )
Qiyuan Medicine the PRC
Co., Ltd (
)
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Name of ourherbal
Location of ourherbal
medicine plantation
medicine plantation Site area of Majortypes of herbal
bases bases plantation fields medicine planted
2 Longxi Livzon Longxi, Gansu Province, 13,041 sq.m. Codonopsis ( )
Shenyuan the PRC
Medicine Co., Ltd.
(
)
3 Wenshan Livzon Wenshan,Yunnan 1,300,065 sq.m. Radix Notoginseng ( ) Sanqi Plantation Province, the PRC
Co., Ltd.
(
)
We received Good Agricultural Practise (GAP) certificate for our plantation base in Datong in December 2009. Applying for GAP certificate for our other plantation bases is our long term goal, however, we did not have any concrete timetable for such applications as at the Latest Practicable Date. During the Track Record Period and up to the Latest Practicable Date, we were not aware of any incidences of application of prohibited pesticide in our plantation bases and had complied with the relevant laws and regulations in our plantation activities. The herbal medicines produced by us from our plantation bases are mainly for our own internal consumption and only the by-products of these herbal medicines, such as the flowers of radix notoginseng ( ), are sold by us to third parties. In addition, we also procure herbal medicines from external suppliers in order to meet our production requirements.
Subcontracting arrangements
We had engaged one subcontractor in the PRC for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 to manufacture certain products which we were unable to manufacture due to the relocation of our production facilities as part of the Construction Project of Livzon Pharmaceutical Jinwan Factory (
). Please refer to the sub-section headed “Production Process, Production Facilities and Expansion Plans– Our expansion plans” in this section for further details of the relocation plan. We have a business relationship of three years with such subcontractor which is an Independent Third-Party. As at the Latest Practicable Date, two of our western drug preparation products, including Levofloxacin Hydrochloride for Injection (
) and Urokinase for Injection ( ), were manufactured by our subcontractor. We own the intellectual property rights, including the medicine registration certificate ( ) and pharmaceutical manufacturing permit ( ), for the products which are manufactured by our subcontractor.
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We undertake an assessment of our subcontractors before engaging their services for the production of our pharmaceutical products. In our assessment, we take into consideration the following factors with regard to the potential subcontractor: operating history, market reputation, track record, relevant expertise, internal quality control system, product quality, state of technology used in production and GMP certificates of production facilities, its production capacity and reliability in meeting delivery schedules, competitive pricing, and competence of its management. We also visit the premises and production facilities of the subcontractor and conduct interviews with its management to assess its suitability and ability to meet our requirements.
We enter into subcontracting manufacturing agreements with our subcontractors on an annual basis. The subcontracting fees under these agreements are determined by mutual agreement and are calculated based on production volume and unit fee. The materials used for production are supplied by us. Our subcontractors are responsible for manufacturing the products within the agreed upon delivery time based on the orders that we place with them in advance. They are also required to adopt our production technology and comply with our quality standards, in addition to the SFDA standards. Our subcontractors are responsible for any quality defects in the products they manufacture. During the effective period of the subcontractingmanufacturingagreement,oursubcontractorsundertaketomanufactureandsell the relevant pharmaceutical products exclusively to us and we have the exclusive rights to market and sell these products. If we discover that any of our subcontractors are conducting unauthorised sales of our products, we will terminate our contract with them and seek compensation and penalty for such breach of contract. In addition, a subcontracting manufacturing agreement may be terminated by a non-breaching party, if the other party materially breaches the agreement.
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our operating income derived from the sales of the products that were manufactured by our subcontractors amounted to approximately RMB18.09 million, RMB20.52 million, RMB42.68 million and RMB9.92 million, respectively, accounting for approximately0.67%,0.65%,1.09% and0.31% of our operating income from principal activities, respectively. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the costs incurred by our Group in relation to all subcontract processing was approximately RMB7.59 million, RMB2.81 million, RMB7.11 million and RMB1.97 million, respectively.
Save as disclosed above, we did not have any other subcontracting arrangements for the production of our products during the Track Record Period and as at the Latest Practicable Date.
Our Expansion Plans
Our goal is to maximise return for our Shareholders. Therefore we continue to strengthen our market competitiveness through increasing the variety of our products, especially drug preparation products and bulk medicines and intermediates and expanding our production capacity of high margin products, such as Chinese drug preparation products. To achieve this,
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we plan to increase our production capacities and capabilities by constructing new production facilities, upgrading our technology and replacing existing equipment. As at the Latest PracticableDate,wehadfournewproductionplantprojectsunderconstructionandthreemajor expansion or technology advancement projects. Our Company has obtained all necessary approvals (including senior management, Board orShareholders’ approval, as applicable) for the four new production plant projects under construction and three major expansion or technology advancement projects below in accordance with our “Regulations on Investment” ( ), our Articles of Association and the Shenzhen Listing Rules. Details of these projects are set out as follows:
New production plant projects under construction
(1) Construction Project of Livzon Pharmaceutical Jinwan Factory (
)
In order to, among others, expand our production capacities, our Group commenced the relocation plan of our production plants in Zhuhai, the PRC in August 2011. Our current relocation plan, the construction of a new production plant for Livzon Group Pharmaceutical Factory ( ), is located in Xiaolin, Jinwan District, Zhuhai, covering an area ofapproximately427,000sq.m.,withatotalconstructionareaofapproximately320,000sq.m.. ThenewproductionplantwillhavetenworkshopswhichwillmeettheinternationalU.S.FDA, European Union and GMP standards. As at the Latest Practicable Date, the new production plant was still under construction and only the first two lyophilised powder for injection production lines have been built. The remaining workshops including non-lyophilised powder for injection production line and solid drug preparation products production line (including tablets, capsules and granules) and automatic warehouse and research and development centres are expected to be completed by the end of March 2014. The total investment for this construction project is RMB887.23 million. As at 30 September 2013, we had incurred approximately RMB829.05 million and is expected to incur an additional RMB58.18 million for this construction project. Such capital expenditures are funded by bank loans, borrowings and internal financial resources. As part of this construction project, we are unable to manufacture certain products and have to enter into subcontracting arrangements. We had not experienced any material difficulties in engaging subcontractors to manufacture certain drug preparation products, as such, we did not incur and we expect we will not incur any loss of operating income due to this construction project. Please refer to the sub-section headed “Subcontracting arrangements” in this section for further details.
(2) Jiaozuo Hecheng Annual Productivity 480 Tonnes Ceftriaxone Sodium, 240 Tonnes Cefuroxime Sodium, 20 Tonnes Cefodizime Acid Project ( 480
240 20 )
In order to lower the transportation costs of our raw materials, Jiaozuo Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) began the construction of new production lines in 2010 in Jiaozuo to take advantage of the close proximity with our major raw materials supplier, Jiaozuo Joincare. The total investment of this construction
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project is RMB100.00 million and is funded by internal financial resources. This construction project is located in Jiaozuo, Henan, covering an area of approximately 24,105.74 sq.m.. This construction project is expected to be completed by the end of June 2014. Upon the completion of this construction project, it is expected that our annual production capacity for Ceftriaxone Sodium( ),CefuroximeSodium( )andCefodizimeAcid( )at this new production plant will be 480 tonnes, 240 tonnes and 20 tonnes, respectively.As at 30 September 2013, we had incurred approximately RMB61.34 million and is expected to incur an additional RMB38.66 million for this construction project.
(3) Construction Project of Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd. ( )
In order to, among others, expand the production capacity of and increase our variety of bulk medicines and intermediates, we commenced the construction of a new production plant forLivzonGroupNingxiaXinbeijiangPharmaceuticalManufacturingCo.,Ltd.(
) in September 2011 with a total investment of RMB386.20 million and is fundedbyinternalfinancialresources.ThisconstructionprojectislocatedinPingluoIndustrial Park, Ningxia, covering an area of approximately 200,408 sq.m.. This construction project is expected to be completed by the end of March 2014. Upon the completion of this project, it is expected that our annual production capacities for our bulk medicines and intermediates products, Lovastatin ( ), Salinomycin ( ) and Enramycin ( ) will be increased by 120 tonnes, 600 tonnes and 760 tonnes, respectively. As at 30 September 2013, we had incurred approximately RMB377.17 million and is expected to incur an additional RMB9.03 million for this construction project.
(4) Construction Project of Livzon Group Ningxia Fuxing Pharmaceutical Manufacturing Co., Ltd. ( )
To expand the production capacity of and to increase our variety of bulk medicines and intermediates, we commenced the construction of a new production plant for Livzon Group Ningxia Fuxing Pharmaceutical Manufacturing Co., Ltd. ( ) in September 2011 with a total investment of RMB338.60 million and is funded by internal financial resources. This construction project is located in Pingluo Industrial Park, Ningxia, covering an area of approximately 200,558.73 sq.m.. This construction project is expected to becompletedbytheendofMarch2014.Uponthecompletionofthisproject,itisexpectedthat our annual production capacities for bulk medicines and intermediates, namely, Phenylalanine ( ) and Kanamycin ( ) will be increased by 7,000 tonnes and 500 tonnes, respectively.Asat30September2013,wehadincurredapproximatelyRMB333.20millionand is expected to incur an additional RMB5.40 million for this construction project.
Expansion/Technology advancement projects
In order to expand our production capacity for Shenqi Fuzheng Injection (
), a large-volume liquid for injection product, Livzon Group Limin Pharmaceutical Manufacturing Factory ( ) has the following three expansion/technology advancement projects. Upon completion of these projects, our production capacity for large-volume and small-volume liquid for injection are expected to be increased by 30 million bottles and 200 million pieces, respectively.
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(1) Livzon Group Limin Pharmaceutical Manufacturing Factory No. 2 Infusion Bottle Workshop and Bottles Warehouse Project (
)
We commenced this construction project in 2009 with a total investment of RMB71.83 million and is funded by internal financial resources. This construction project is expected to be completed by the end of January 2014. As at 30 September 2013, we had incurred approximately RMB70.04 million and is expected to incur an additional RMB1.79 million for this construction project.
(2) Livzon Group Limin Pharmaceutical Manufacturing Factory Comprehensive Demonstrating Application of Advanced Quality Control Technology for Overall Production Process of Shenqi Fuzheng Injection Solution (
)
We commenced this construction project in 2012 with a total investment of RMB229.31 million and is funded by internal financial resources. This construction project is expected to be completed by the end of January 2014. Upon the completion of this construction project, it is expected that Livzon Group Limin Pharmaceutical Manufacturing Factory (
) will have two additional workshops for producing large-volume liquid for injection and threeworkshopsforextractionofChinesedrugpreparationproducts.Asat30September2013, we had incurred approximately RMB199.18 million and is expected to incur an additional RMB30.13 million for this construction project.
(3) Livzon Group Limin Pharmaceutical Manufacturing Factory New Injection Workshop Project ( )
We commenced this construction project in 2012 with a total investment of RMB47.94 million and is funded by internal financial resources. This construction project is expected to be completed by the end of January 2014. As at 30 September 2013, we had incurred approximately RMB34.21 million and is expected to incur an additional RMB13.73 million for this construction project.
QUALITY CONTROL
During our operational process, we place emphasis on the quality control of our pharmaceutical products and we regard the quality and safety of our pharmaceutical products as two fundamental elements for our operations. We have formulated a series of Standard Operation Procedure (SOP) which are in line with our operations and are in accordance with the requirements of GMP and GSP, covering various key steps from receipt and acceptance of raw materials, production, storage, sales to after-sales of pharmaceutical products. We have also formulated a comprehensive quality control system which complies with the requirements of GMP and GSP so as to ensure the quality and safety of our pharmaceutical products.
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Inordertoensurethequalityofourproductsandmaintainourreputationandsuccess,our marketing, production and research and development departments work closely together to respond to customers feedback and market development needs. As a result, we are able to ensure that our products consistently meet the industry standards and requirements. We have undertaken quality inspections and established internal control guidelines at different stages of our production process from the procurement of raw materials to delivery of our products to our customers in order to comply with the relevant PRC laws, rules and regulations. We have also established a comprehensive internal policy and guidelines on quality control of the research and development of our own products, design, construction, installation and maintenance of production plants, equipment and facilities, the procurement of raw materials and packaging materials, work-in-progress and finished products, monitoring adverse drug reactions and after sales services to comply with GMP standards and requirements. Our comprehensive quality control system is designed according to the GMP standards and requirements. Our quality control system fully implements the procedures for periodic quality control audit, quality risk management and error correction and prevention. Our senior management is also actively involved in setting quality policies and improving quality control standards.
The quality control procedures adopted in the major steps of our operation process from the selection of suppliers of raw materials to delivery of products to customers are briefly set out as follows:
Managing of raw Prior to confirming the acceptance of a supplier of raw materials, materials our quality assurance department performs background checks on the operating history, track record and market reputation of a list of potential suppliers, procures different product samples from the potential supplier for inspection and testing by our quality control division, conducts site visits and examines the production facilities of the potential suppliers to ensure that the supplier that we pick meets our quality standard and requirement. In addition, we require our suppliers to provide us with evidence that they have all licences and permits necessary to conduct their operations, which may include business licences, manufacturing permits, import registration certificates, GMP or other relevant licences and any other related documents. We will review and evaluate our suppliers at the end of each year comprehensively. We also have in place strict quality assurance policies and procedures which are in line with industry practise to assess the levelofpesticideresiduesintherawmaterialsprocuredbyus.All raw materials (in particular Chinese herbal medicine raw materials) are tested for the level of pesticide residues in accordance with the requirements laid down in the Pharmacopoeia of the PRC 2010 (
2010 ) whereby laboratory reports were issued for each batch of raw materials.
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Our suppliers deliver the raw materials to our production facilities at their expenses. Generally, the suppliers are responsible for any damages and contamination of the raw materials during transit. We have placed appropriate measures to ensure that the quality of our raw materials are guaranteed and not damaged during transit. Upon receipt of the raw materials, personnel from our quality assurance department will inspect the packaging and labelling of the raw materials to ensure that the appropriate raw materials are being accepted and any abnormalities discovered are rectified immediately and recorded. Depending on the nature and cause of the defects of the raw materials and in particular raw materials that are damaged during transit, they may be returned to the suppliers within certain period of time from the date of receipt and the suppliers may be responsible for any loss and compensation suffered by us, subject to the various agreements with the suppliers. The acceptable raw materials will then be recorded and further inspection will be conducted to ensure that their qualities are being approved for production and that our herbal medicines raw materials do not contain any prohibited pesticides. The approved raw materials will then be kept in different types of storages according to their state, usage, level of safety and the temperature in which they should be kept. We also have a team involved in the management of scrap materials which will eventually be destroyed after inspection, evaluation and approval by our team.
Up to the Latest Practicable Date, we were not aware of any herbal medicines raw materials purchased by us that contained prohibited pesticides.
Manufacturing of To prevent products from contamination and cross- products contamination, mix-ups and errors, we have established internal guidelines regarding operational procedures to ensure that the products are properly received, stored, distributed and delivered. We also ensure that corresponding records documenting activities carried out in each stage of manufacturing have been kept.
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We have established an internal operational procedure for each production process from utilisation of the raw materials and manufacturing of products to sampling and packaging of products, to recording the details of the key information in each production step to ensure the traceability of the production process for each product, such as the date, name, quantity, serial number, batch number, the operating person and the verifying person.
Aspartofourqualitycontrolforourproductionprocess,wehave also adopted a set of procedures which involve the management and inspection of samples taken from the various production processessuchasrawmaterials,packagingmaterialsandfinished products.
Under the relevant laws and regulations of the PRC, animal testing is required before conducting preclinical trials for human beings. In order to satisfy regulatory authorities that our products are safe and effective in order to obtain their approval for commercial sale, we have conducted preclinical trials which involve animal testing on our products as part of our quality control for our production process. However, the results of operations in our business may be adversely affected as the process of such trials is expensive, lengthy and uncertain.
Each stage of our production process is monitored by our personnel of the quality assurance department to ensure that the quality control conforms with our internal guidelines as well as national standard relating to production site and facilities, operating procedures, production record and equipment operation procedures. The personnel conducts spot inspections and quality checks at each stage of our production process where they review records of production and test the quality of the items produced at each stage by comparing them with the samples. Any errors identified will be corrected and recorded.
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Release of finished A report will be issued by our quality assurance department products personnel on every batch of our finished products after sample inspection by them and prior to despatch to our customers and only products that pass the inspection will be sent to the warehouse for storage. These products will then be kept in differenttypesofstoragesaccordingtotheirtypes,usage,levelof safety and the temperature in which they should be kept. Such storages are regularly maintained in order to prevent the occurrence of fire, burglary, moist and contamination.Any batch offinishedproductsthatdonotmeetourqualitystandardswillbe destroyed. A product approval certificate is issued if no defects are detected. Our warehouse only releases products upon receipt of both the finished product reports and the product approval certificates and on a “first-in-first-out” basis. We have a set of internal guidelines for our personnel to determine the production date and the expiry date of our products. Our assurance department personnel ensures that each batch of products is properly labelled with its production date and expiry date, and also ensures that batches of products with different validity periods are properly identified and assessed such that no batches of expired products are released to our customers. The personnel atthewarehousewillconductafinalcheckoftheproductsbefore they are released for delivery to our customers.
We have set up a warehouse to manage with special care any of our toxic products or toxic residual arising during the production process of our products. Each of our department involved in the production will be responsible for dealing with the waste or pollutants discharged during the production process. Our environmental and safety department will ensure that any toxic residual arising from wastewater and air pollutants is appropriately treated through our own pollution control system before they are discharged to the governmental waste water treatment plant for further process. We also appoint independent professionals to manage any of our toxic products or toxic residual arising from the production process of our products.
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Delivery procedures We approve and select the appropriate logistics companies which are Independent Third Parties and who can guarantee the quality of our products are maintained during delivery to our distributors or customers by entering into certain logistics agreements with them. According to the terms of these logistics agreements, we are responsible for requesting the logistics companies to provide the extra support services for some of our products, such as products with special packaging which require special attention. The logistics companies are responsible for any product damages orcontaminationoccurredduringthedeliveryoftheproducts.We haveplacedappropriatemeasurestoensurethatthequalityofour products are being maintained during delivery, such as a temperature monitor is placed in the vehicle to ensure that the appropriate temperature level is maintained for certain products which require cold storage.
We believe after-sales service as an integral part of our business and we know that this service which we provide to our customers is crucial to our success. Therefore, to ensure our after-sales service quality control, we have our quality assurance department to receive feedback and to handle any complaints from our customers with regard to the quality of our products. Upon receipt of a complaint, we conduct investigations and where necessary, interview the party concerned. Approval for return of our products by customers may be obtained after their request are being recorded and assessed by our quality assurance department. The details of the returned products, such as its name, serial number, quantity, the reason for return and the reason for approving the return, will be kept in record.According to the distribution agreements entered into between us and the customers, we generally do not accept return of our products unless the products do not conform with the quality standard or theorder.Foreachofthethreeyearsended31December2010,2011and2012andninemonths ended 30 September 2013, we have received requests for product returns which amounted to approximately RMB0.39 million, RMB4.41 million, RMB0.77 million and RMB0.93 million, respectively. Such product returns are mainly due to damaged packaging etc.
We place emphasis on the quality of the services rendered by our employees at all levels. As at the Latest Practicable Date, there were approximately 441 employees in our quality controldepartment.Aspartofourqualitycontrol,wealsoprovidethemwithinternalemployee training.
We have already obtained operating licences related to the production and operation of pharmaceutical products in accordance with the requirements of relevant state laws and regulations. Pharmaceutical products produced and sold by us comply with the state laws and regulations related to supervision and management of the production and sales of pharmaceutical products.
During the Track Record Period, we had not experienced any claim, litigation or arbitration or material adverse findings in investigations or audits by government authorities withrespecttoproductliability,personalinjury,wrongfuldeathresultingfromtheusageofour pharmaceutical products.
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THE LOW QUALITY REFINED OIL INCIDENT
Background
Jiaozuo Joincare is one of our 7-ACA suppliers. In October 2011, in an investigation initiated by Zhejiang Ninghai County Public Security Bureau ( ), it was revealed that the soybean oil produced by Henan Huikang Oil Co., Ltd. (
) (“Henan Huikang”) and sold to Jiaozuo Joincare contained low quality refined oil (
)(the“Incident”).JiaozuoJoincareusessuchsoybeanoilasacultivationmediumfor seedsinsteadofaningredientfortheproductionofits7-ACA.BecauseoftheIncident,Jiaozuo Joincare ceased to purchase any soybean oil from Henan Huikang from October 2011. In August 2012, there were news articles reporting the Incident and hence trading in the shares of Joincare on the Shanghai Stock Exchange and our Shares on the Shenzhen Stock Exchange were temporarily suspended on 30 August 2012. As disclosed inJoincare’s announcement dated 31 August 2012, Joincare acknowledged that Henan Huikang is one of its suppliers of soybean oil and at the time when it purchased soybean oil from Henan Huikang, it has no knowledge that the soybean oil supplied by Henan Huikang to Jiaozuo Joincare contained low quality refined oil ( ). Joincare stated that all products produced by Jiaozuo Joincare were subjected to internal quality inspection as well as third-party inspection.According to the inspectionresultsof(i)JiaozuoJoincare(inrespectofsoybeanoiland7-ACA);(ii)theQuality and Technical Supervision and Testing Centre of Jiaozuo ( ) and the Inspection& Quarantine Technology Centre of the Henan Entry-Exit Inspection& Quarantine Bureau of the PRC ( ) (both in respect of 7-ACA); and (iii) the Henan Quality Control Inspection Station for Feed Grain and Oil Product ( ) (in respect of soybean oil), all such samples comply withtherelevantqualitycontrolstandards.InSeptember2012,aninvestigationcommittee(the “Investigation Committee”) was established by Jiaozuo Municipal Communist Party Committee ( ) and JiaozuoPeople’s Government ( ) to investigate Jiaozuo Joincare on the Incident. Jiaozuo Joincare and the Investigation Committee arranged for the inspection of samples of JiaozuoJoincare’s 7-ACA by Henan Analysis and Testing Research Centre ( ) and all such samples complied with the requisite quality standards. In February 2013, the Investigation Committee issued a notice announcing the results of the investigation which showed that the 7-ACA produced by Joincare were in compliance with the applicable quality standards.
Our PRC legal advisers, King& Wood Mallesons, are of the view that there had been no incidents showing that the products which we produced from the use of such 7-ACA supplied by Jiaozuo Joincare were non-compliant with the applicable quality standards.
Subsequent actions undertaken by the Joincare Group and us
In light of the Incident, the Joincare Group has adopted the following measures, among others, to minimise the occurrence of similar events:
(a) enhancing the supplier audit system for Jiaozuo Joincare;
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(b) tightening the quality standards for raw materials;
(c) adopting a systematic approach in raw materials procurement by introduction of financial background assessment of suppliers; and
(d) increasing the manpower on quality control.
In light of the Incident, we have also adopted various measures to reduce any potential adverse impact to us including:
(a) we have conducted a field audit at Jiaozuo Joincare in September 2012 to evaluate the quality control system of Jiaozuo Joincare;
(b) wehaveengagedathird-partytoinvestigatethelevelofcertainchemicalsin7-ACA and ceftriaxone sodium ( ) which are commonly found in low quality refined oil ( ). The results of such investigation showed that the level of heavy metals was much lower than the acceptable level while no aflatoxin (
) and benzopyrene ( ) were detected;
(c) we have tightened our quality standards for 7-ACA;
(d) we have enhanced our communication system with Jiaozuo Joincare pursuant to which Jiaozuo Joincare shall notify us immediately if there is any change in its production process which may affect the quality of its products;
(e) we and Joincare have arranged quality control seminars for the relevant staff of Jiaozuo Joincare to enhance their level of quality control management; and
(f) we have conducted a further field audit at Jiaozuo Joincare in December 2012 to re-evaluate the measures taken by Jiaozuo Joincare to improve its quality control system.
In addition, we have a comprehensive quality control system whereby all our raw materials have to undergo rigorous testing and inspection by the personnel from our quality assurance department to ensure all raw materials comply with the relevant quality control standards before they are used in our production process.
Effects on our business, operations and financial position
DuringtheTrackRecordPeriodanduptotheLatestPracticableDate,all7-ACAsupplied by the Joincare Group to us complied with the applicable quality standards of the PRC and we had not received any complaints or experienced any product recall with respect to our products produced using the 7-ACA supplied by the Joincare Group. As such, we expect to continue purchasing 7-ACA from the Joincare Group after Listing.
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For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our purchases of 7-ACA from the Joincare Group were approximately RMB226.83 million, RMB74.68 million, RMB79.37 million and RMB80.86 million, respectively, and our operating income from the sales of products produced using such 7-ACAfortherespectiveperiodswasapproximatelyRMB553.24million,RMB283.74million, RMB276.65 million and RMB187.16 million, respectively. Please refer to the section headed “Connected Transactions” in this listing document for further details.
Indemnity from Controlling Shareholder
Our Controlling Shareholder, Joincare, has agreed to indemnify us against any losses, liabilities and expenses, if any, relating to any claim brought by our customers, regulatory authorities and other third parties in relation to the quality of 7-ACAsupplied by the Joincare Group to us.
ENVIRONMENT AND SAFETY MATTERS
Our operations and facilities are subject to environmental laws and regulations stipulated by the national and the local environmental protection bureaus in the PRC.The main pollutants generated during our production process include waste water, waste gas and solid waste. We have established a pollution control system with dedicated personnel who are well-versed with the regulatory requirements applicable to our operation to inspect the production facilities and maintain environment protection equipment and facilities. We installed various types of pollution control equipment in our facilities to reduce, treat and recycle the waste generated in our production process. We also improve our production technique and select zero or low pollution raw materials to reduce the pollutants we discharge to the environment. When we plan for new products or new projects, we take into consideration the potential impact on the environment.
Our PRC legal advisers, King& Wood Mallesons, have opined that during the Track Record Period, there has been no material adverse effect on our operations which is related to our non-compliance with the relevant national or local environmental laws and regulations in the PRC and we have obtained all material permits, approvals and certifications required under PRC law in relation to our production facilities. Our facilities in the PRC are subject to regular inspection by environmental regulatory authorities. If these facilities are found not to be in compliancewiththeapplicableenvironmentalstandards,wemaybesubjecttopenalties,which may range from fines to suspension of production. As the PRC legal system continues to evolve, we may be required to undertake significant expenditures in order to comply with environmental laws and regulations that may be adopted or imposed in the future. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our total environmental compliance costs were approximately RMB18.47 million, RMB25.23 million, RMB30.08 million and RMB21.01 million, respectively. Our Directors expect the annual costs for future compliance with the applicable environmental laws and regulations in the PRC will be approximately RMB37.81 million.
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The PRC Government imposes a number of regulatory requirements on pharmaceutical companies with regard toemployees’ health and safety. We regard occupational health and safety as one of our important social responsibilities and have implemented safety guidelines at our production facilities, to which all employees are required to strictly adhere. We also conduct regular work place safety training and exams for our employees and have dedicated personnel who are well-versed with the regulatory requirements applicable to our operation to monitor different stages of the production process to ensure work place safety. Our production process is in compliance with GMP standards. During the Track Record Period, we have compliedwithallrelevantnationalorlocaloccupationalhealthandsafetylawsandregulations in all material respects and there were no major accidents that resulted in the death or serious injury of our employees. However, there is no assurance that we will not be subject to environmental liabilities in the event of an accident or other unexpected event, in which case we may be responsible for substantial clean up costs. If we do not have adequate insurance coveragetocoversuchloss,ourfinancialconditionandresultsofoperationsmaybematerially adversely affected. Please refer to the section headed “Risk Factors– Risks Relating to Our Business– Our insurance coverage may not completely cover the risks related to our business and operations” in this listing document for the associated risks.
INVENTORY
We have established an advanced inventory management system, which effectively improved the inventory turnover and timely delivery of our products, which in turn, lowered our finance costs and effectively control our risk exposures on quality issues so as to ensure a smooth linkage between production and sales. Our inventory primarily consists of raw materials, packaging materials and finished products. We have advanced warehouse facilities in our major production bases, such as, Shanghai, Sichuan, Fujian and Guangdong. Our inventory is warehoused in accordance with the requirements prescribed by GSP and GMP. In ordertominimisetherisksofexcessinventoryheldaswellasshortageinproductionandsales, we regularly review our inventory levels and have formulated corresponding administrative principles pursuant to which we manage our inventory according to different product segments and formulate the respective minimum inventory level. In general, we adhere to the principle of “production based on sales orders” when managing our supply chain and production level. We establish a business information platform to obtain the latest information on the sales channel of our products so that we are kept informed of our production, sales and inventory levels and to track our sales and inventory data in a timely manner. This business information platform lays the foundation for our maintenance of a reasonable inventory level as well as minimising the possibility of inventory shortage. We maintain a database of our inventory to track in-coming and out-going inventory and to monitor changes and inventory levels in a timely manner so as to ensure a suitable level of raw materials and finished products. Results of such stock-take will be compiled to generate a monthly inventory analysis report, which is used to assess our inventory control measures and costs. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our average inventory turnover days were approximately 112.0, 114.2, 112.9 and 137.6 days, respectively. We conduct regular reviews on the quality and expiry date of our inventory and write off raw
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material and finished products that are obsolete or expired in accordance with GMP or GSP standards. We will put an identification mark on those products which have a remaining shelf-life of six months only to remind our staff and will dispose of those products once they expire, normally on a semi-annual basis, and in accordance with the relevant regulatory requirements. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the losses from diminution in value of our inventories amounted to approximately RMB5.76 million, RMB11.15 million, RMB18.04 million and RMB10.08 million, respectively.
We continue to develop, integrate and upgrade our information system, such as our enterprise resource planning (ERP) system, customer relationship management (CRM) system and critical path method (CPM) since a comprehensive and efficient information system is fundamental to our supply chain, production, finance and customer management. Real-time monitoring and information exchange among our headquarters, our production plants across the PRC and our sales offices enable us to be informed of our production and sales status in an efficient manner and to track and analyse the trends of our production, inventory and sales, which in turn, enable us to manage our inventory in a reasonable manner.
RESEARCH AND DEVELOPMENT
Overview
We consider new product research and development to be fundamental to our continued development and future growth. We conduct our product development and research primarily throughourin-houseteam,andalsothroughcollaborationwithexternalresearchpartners,such as research institutes, universities and pharmaceutical companies. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our research and development expenditure amounted to approximately RMB136.54 million, RMB167.53 million, RMB201.37 million and RMB155.21 million, respectively. None of the above research and development expenditure has been capitalised as intangible assets of our Group because of uncertainties over, among other things, whether the research and development will eventually result in the desired products and whether the commercialisation of the new products will be successful. Our research and development efforts focus on the following:
• Innovative drug research. We seek to develop innovative drugs to address major unmet medical needs through in-house research and collaborations with third parties, including research institutes, universities and other pharmaceutical companies.
• Generic drug development. We seek to develop first-to-market generic drugs in major therapeutic areas, such as Gemifloxacin Mesylate Tablets (
), potassium citrate sustained-release tablets ( ) and penciclovir gel ( ).
• Productimprovement.Weseektoimprovethequalitystandards,safety,production technologies and discover new uses for our existing pharmaceutical products.
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• International registration. We continuously seek to increase the quality of our products by ensuring that our product quality meets the required international standards and by conducting required clinical trials and product registrations so as to establish and enhance the competitiveness of ourGroup’s products in the international market.
We perform thorough market analysis, includingproduct’s adaptive advantage analysis, market conditions analysis and technicality analysis, before commencing any research and development on our new or existing products and focus on pharmaceutical products that may have the potential for gaining widespread market acceptance or becoming one of the market leaders of similar products in the market. Recently, in identifying and selecting product candidates for development, we focus on the development of antibody medicines, vaccine and anti-tumour drugs. In addition, as part of our research and development activities, we engage in product upgrades by improving the production techniques of our products in order to improve product quality and therapeutic effects, reduce side effects, enhance bulk production output and lower production costs. As at the Latest Practicable Date, we had 21 types of products which were at different stages of the research and development process. Our research anddevelopmentprogrammesincludeproceduresforaccessofprojectinformation,procedures for the research of project information, feasibility study of new projects, technology research for new projects and procedures regarding reporting clinical and production issues.We believe our product research and development will continue to enrich and optimise the product portfolio of our Group. Those products in the research pipeline are those with high potential for commercialisation and can maximise our growth rate and profit margins.
In-house research and development
As at the Latest Practicable Date, our research and development team had over 255 personnel, including 10 Ph.D degree holders and 88master’s degree holders. These personnel are responsible for specifying research direction after understanding the needs of the relevant market segment, coordinating and managing product development and research projects for collaborations with external research partners, and conducting market analysis and research primarily for upgrading of existing products and conducting research on high-end generic drugs. For more details regarding the background and experiences of these personnel, please refer to the section headed “Directors, Supervisors and Senior Management” in this listing document.
Our research and development activities are primarily conducted through our own research institutions (both Chinese medicine preparation products and chemical drug preparation products) and our two subsidiaries, namely, Zhuhai Livzon MAB Biological Technology Co., Ltd. ( ) and Livzon Group Vaccine Engineering Inc. ( ). Our in-house research and development operations enable us to develop new pharmaceutical products quickly and at a low cost. As at the Latest Practicable Date, we had 168 patents registered with the PRC Intellectual Property Office ( ), 17 patents registered overseas and had 44 patent applications pending for registration in the PRC.
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For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our research and development expenses amounted to approximately RMB136.54 million, RMB167.53 million, RMB201.37 million and RMB155.21 million, respectively, representing approximately5.01%,5.30%,5.11% and4.80% of our total operating income, for the respective years. We had not capitalised any research and development expenses during the Track Record Period. The amount for the purchase of production technologies or rights in granted approvals of new drugs in addition to research and development expenses during each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB30.58 million, RMB17.13 million, RMB7.55 million and RMB5.29 million, respectively.
In respect of our development of chemical and biological drug preparation products, as an established enterprise in the PRC pharmaceutical industry, we continue to enhance our innovation standards in the course of developing pharmaceutical products and we have achieved a series of original innovative research achievements. In particular, our self innovative product, Ilaprazole chiral compounds LZ325 ( LZ325) is an innovative drug and we have applied for invention patent in the PRC, the United States, the European Union, Australia, Japan and Canada. Furthermore, our leuprolide microspheres for injection project ( ) is a new kind of sustained-release microsphere drug preparation product ( ) developed by us and is used for treating endometriosis and prostate cancer. Our leuprolide microspheres for injection (
) has an activity rate of 15 to 20 times higher than Luteinizing hormone-releasing hormone (LHRH) ( ) and is among the first batch of successfully developed sustained-release microsphere drug preparation products ( ) developed in the PRC which is applied on a monthly basis.
At present, our technological innovation strategy is to simultaneously pursue self innovation and cooperative innovation. Apart from self innovation, we also pursue international cooperation by introducing international technologies through licensing and technologytransferwherebywewillmakereferencetothesetechnologiesandre-innovate.Our newmolecularentitiesprotonpumpinhibitor(PPI)Ilaprazole( )isoneofourinnovative drug preparation products and is a pharmaceutical product for gastric ulcer and duodenal ulcer treatment and is a national 1.1 class new pharmaceutical product. Furthermore, our GemifloxacinTablets( ),aproductwhichweco-developedwithourKoreanpartner, has received approval from the PRC Government and we have applied for transfer production. Our research and development work has received recognition by various levels of the PRC Government authorities and we received government funding as recognition for our proven capabilities of developing novel and improved pharmaceutical products. During the Track Record Period, we had successfully applied for and have received government funding or subsidies of RMB128.47 million in relation to various research and development projects.
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Collaboration with external research partners
We have established long-term technological cooperation relationship with more than 30 domestic and overseas research institutions.
The types of collaboration arrangements vary from specific technical services and consultancy to longer-term cooperation in drug discovery. Depending on the subject matter of the collaboration and commercial negotiation, terms of these arrangements may vary. Based on project needs and our internal research capabilities, we regularly engage external research institutions to take the leading role in preclinical research and development, developing or optimising preparation formulae, clinical testing of products, ensuring commercialisation of new drugs meeting quality standards and submitting applications to relevant authorities for manufacture permits. Our research partners provide the necessary equipment, know-how and personnel. Our role, in addition to our participation in this research and development work, is to provide the funding for these joint research and development projects. In most cases, we are exclusively entitled to receive the full proceeds from the sales of these products. In addition, all of our research partners are bound by confidentiality obligations which prohibit them from transferring technology to third parties or divulging information relating to the products under development to third parties through publication or other means.
In addition to collaboration with research partners, we also purchase production technologies or rights in granted approvals of new drugs from selected biotechnology pharmaceutical companies by targeting promising development-stage products which have both high commercial potential and relatively low development risk. Product development through purchase of production technologies and rights in granted approvals can shorten our product development and research period which is suitable for developing new drugs in the market.
Our major research and development projects
We intend to produce and sell biological drug preparation products such as vaccine products and monoclonal antibody products in the future.
In respect of vaccine products, we commenced our research and development process in September 2010 and have applied for the production permit for the production of our first vaccine products, Encephalitis B Vaccine ( ). In addition, we have already obtained the manufacturing permit for our production plants responsible for the production of vaccine products which has an annual production capacity of over 10 million pieces. As at 30 September 2013, we had incurred approximately RMB92.39 million and is expectedtoincuranadditionalRMB131.17millionintheresearchanddevelopmentofvaccine products. We expect to launch our first batch of vaccine products to the market in 2015.
Since July 2010, we have devoted resources in the research and development of monoclonal antibody products. In June 2012, we applied to the SFDAfor clinical trials for our first monoclonal antibody product and are pending the grant of approval by the relevant government authorities. As at the Latest Practicable Date, we had finished the research and
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development of the production technique for our second monoclonal antibody product and it is expected that an application will be made to the SFDAfor clinical trials by the end of 2014. As at 30 September 2013, we had incurred approximately RMB213.79 million and is expected to incur an additional RMB373.41 million in the research and development of monoclonal antibody products. We expect to have an annual production capacity of 1.15 million pieces by 2017 when our first batch of monoclonal antibody products are expected to be launched to the market.
EMPLOYEES
We strive to retain and recruit employees who share our commitment as a successful pharmaceutical enterprise. We offer competitive remuneration packages to attract and retain talented and experienced employees. We provide various types of on-the-job training for all staff. In order to ensure our employees are able to understand and adapt to ourGroup’s policiesinanefficientmanner,toregulateouremployees’behaviourandpromoteourcorporateculture, we have adopted and revised our assessment system in terms of attendance, performance and ability.
As at 31 December 2010, 2011 and 2012 and 30 September 2013, we had 4,641, 5,308, 5,587 and 5,746 full-time employees, respectively. Set out below is the distribution of employees by function as at 30 September 2013:
Approximate percentage of total full-time Function Number employees Production staff 2,314 40.27% Sales staff 1,295 22.54% Technical staff 1,187 20.66% Administration staff 826 14.38% Finance staff 124 2.15% Total 5,746 100.00% As at 30 September 2013, in accordance with the applicable PRC laws and regulations, we had registered with the respective local authorities in respect of social security insurance and had also completed such registrations for our key employees. We also made contributions for pension insurance, medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and housing provident funds.
Wehaveacomprehensivetrainingsystem,andhaveestablishedandimplementedtraining programmes during the Track Record Period. Through participating in our training programmes, ouremployees’ knowledge, skills and techniques are enhanced which in turn
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enable our employees and our Group to improve our productivity. In respect of recruitment, we recruit new employees based on specific job requirements, our resources and needs. We adopt the policy of “internal selection followed by external recruitment” when recruiting our employees.
In accordance with the applicable laws, we have formed trade unions, and have provided the necessary facilities and venues and other physical materials for the union to conduct its operations and carry out its activities. We believe that we maintain good working relationships with our employees. During the Track Record Period, we had not experienced any strikes or any labour disputes with our employees which had or might have a material adverse effect on our business.
AWARDS AND CERTIFICATIONS
During the Track Record Period and up to the Latest Practicable Date, we had received the following major awards and certifications in recognition of our achievements:
Year Awards/Certificates Awarding authority
2013 Top 10 PRC Listed Companies of 21st Century Business Herald (21 Investment Value ( )
Top 10)
Top 100 PRC Listed Companies China Centre for Market Value
of Market Value Management Management of Listed
Performance (2013 Companies (
) )
Top 10 Best Corporate Southern Metropolis Daily (
Governance Listed Companies )
( 10 )
2012 Enterprises with Outstanding Guangdong Food Industry
Contribution to the Association (
Pharmaceutical Industry in )
Guangdong Province (
)
Our Anti-viral Granules ( Science and Technology Bureau ) was awarded as Chengdu of Chengdu ( ),
Proprietary Innovation Products Chengdu Development and
( ) Reform Commission (
), Chengdu Commission of
Economics and Credit (
) and Chengdu Bureau of
Finance ( )
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Year Awards/Certificates Awarding authority
2010-2011 Top Ten Private ThePeople’s Government of
Enterprises in Zhuhai (2010-2011 Zhuhai ( )
)
Our research, development and ThePeople’s Government of
launch of Ilaprazole ( ) was Zhuhai ( )
awarded the First-prize Winner of
the Zhuhai Science and
Technology Improvement Award
( )
Implementation Unit of Major ThePeople’s Government of
Projects in Strategically Zhuhai ( )
Important Emerging Industries
(
)
2011 High-tech Enterprises Science and Technology
Department of Guangdong
Province ( ),
Guangdong Provincial
Department of Finance (
), State Taxation Bureau of Guangdong Province (
) and Guangdong
Provincial Local Taxation Bureau ( )
2010 Top 50 Enterprises with the Guangdong Pharmaceutical
Most Comprehensive Strength in Industry Association (
the Pharmaceutical Industry in )
Guangdong Province (2010
50
)
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Year Awards/Certificates Awarding authority
2010 Top 20 Enterprises in Guangdong Pharmaceutical
Guangdong Manufacturing Industry Association (
Chemical Bulk Medicines for )
Pharmaceutical Industry and
Chemical Drug Preparations
(2010
20
)
Ranked 46 among thePRC’s Top the SFDA South Medicine
100 Enterprises in Economic Research Institute
Pharmaceutical Manufacturing (
Industry (Sales) in 2010 (2010 )
( )
46 )
2010 Ranked 37 among thePRC’s Top the SFDA (
100 Enterprises in ), South Medicine Economic Pharmaceutical Manufacturing Research Institute (
Industry (Sales) in 2009 ( ) and Pharmaceutical
100 ( ) 37 ) Economic News ( )
Technology Centre recognised by the NDRC, the Ministry of
the State Science and Technology (
( ) ), the Ministry of Finance
( ), the General
Administration of Customs (
) and the SAT
INTELLECTUAL PROPERTY RIGHTS
We value the intellectual property rights of our products and are committed to their protection. We rely on a combination of patents, trademarks and trade secrets, as well as employee and third-party confidentiality agreements to safeguard our intellectual property rights.Wehaveourownintellectualpropertyrightsdepartmentspecificallyresponsibleforour productregistration,patentapplication,intellectualpropertyrightsprotectionandotherrelated matters.
We own and have applied for patents to protect the technologies, inventions and advancements that we believe are significant to our business.As at the Latest Practicable Date, we had 168 patents registered with the PRC Intellectual Property Office ( ), 17 patents registered overseas and had 44 patent applications pending for registration in the PRC.
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The validity period for our invention patents is 20 years and for our utility patents and design patents is ten years, starting from the date the relevant application is filed.All of these patents were issued in the PRC. As with patent rights in most other jurisdictions, a patent holder in the PRC enjoys the right to exclude others from using, licensing and otherwise exploiting the patent in the PRC. However, there is no assurance that our patents will not be challenged in the PRC, which could be costly to defend and could divert our management from their normal responsibilities. Please refer to the section headed “Risk Factors– Risks Relating to Our Business– We may be exposed to infringement claims if we infringe third-party proprietary or intellectual property rights” in this listing document for the associated risks. In addition to patents, as at the Latest Practicable Date, we had 502 registered trademark certificates within and outside the PRC, of which there were 480 registered trademark certificates in the PRC and 22 international certificates (including Hong Kong, Macau and Taiwan).The major brand of our Company is “ ”, which was registered in 1992 with a term of ten years. The registration was renewed and extended to 2022. The principal trademark of our Company, “Livzon ” (“ ”), was awarded the China Famous Brand (
) in 1999. The principal trademark of our Company was also registered in regions such as Russia,JapanandtheEuropeanUnion.WealsohavethreeregisteredtrademarksinHongKong which will expire in 2015 and 2017. If we believe that a third-party has infringed the exclusive right of our registered trademark, we may, through appropriate administrative and civil procedures, institute proceedings to apply for an injunction from the relevant court, authority or resolution of the infringement through consultation. The relevant court or authority can also impose fines, confiscate or destroy the infringing products or equipment used to manufacture the infringing products.
Some elements of our pharmaceutical composition, formulation and delivery, as well as manufacturing methods or processes, involve unpatented, proprietary technology, processes, know-how or data. With respect to such proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements in order to safeguard our interests. All of our research and development personnel have entered into confidentiality, non-competition and proprietary information agreements with us. These agreements require such employees to assign to us all of their inventions, designs and technologies that they may develop during their periods of employment with us. In addition, there is a strict segregation of duties among personnel involved in different stages of our production process. This, we believe, serves to reduce the risk of any single staff member obtaining the technical know-how relating to the entire production process.
If our trademark registrations are challenged, our brand name is damaged or our trade secrets become known by our competitors, there could be a material adverse effect on our business. Please refer to the section headed “Risk Factors– Risks Relating to Our Business– We may not be able to adequately protect our intellectual property rights” in this listing document for the associated risks. Our Directors confirm that we have not violated any intellectual property rights or faced intellectual property claims by third parties during the Track Record Period.
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For details of our intellectual property rights, please refer to Appendix VI to this listing document.
In addition to protecting our own intellectual property, our success also depends on our ability to minimise the risk that any of our products or operations infringes the intellectual property rights of others. We follow a procedure under which our internal research and development staff and external patent agent or legal advisers conduct a patent clearance search for each product at the beginning of the product development process, and product development is only approved if the conclusion is that the proposed product would not infringe any third-party intellectual property rights discovered in our searches. We believe that the risk of infringing third-party intellectual property rights can be effectively reduced by our rigorous adherence to these procedures. During the Track Record Period, we were not engaged in or threatened with any claim for infringement of any intellectual property rights which would have a material financial and operational impact on us, either as claimant or as respondent. However, despite our internal control procedures, the risk of infringing third-party intellectual property cannot be eliminated entirely. Please refer to the section headed “Risk Factors– Risks Relating to Our Business– We may be exposed to infringement claims if we infringe third-party proprietary or intellectual property rights” in this listing document for the associated risks.
INSURANCE
We currently maintain the following insurance policies:
(a) personal accident insurances for certain of our employees;
(b) social welfare insurances in accordance with the relevant laws and regulations in the PRC;
(c) insurance policies pertaining to transportation of products during distribution; and (d) insurance policies that cover our major fixed assets against damage caused by accidents and natural disasters such as fire.
We do not maintain any product liability insurance arising from the manufacture and sale of our pharmaceutical products in the PRC, as we have previously made enquiries with a number of leading national insurance companies for product liability insurance and have not been able to identify any such insurance coverage owing to the lack of such insurance product offering in the PRC.
In respect of potential product liability claims, we strive to monitor and minimise the adverse drug reactions related to our products mainly through strict quality control during production, follow-up with our customers and regular visits by our product managers and sales staff to hospitals to monitor the clinical usage of our products. We also regularly monitor the Adverse Drug Reactions Information Circular issued by the National Centre forAdverse Drug Reaction Monitoring ( ) and other periodicals and databases. There had been no product liability claims against us during the Track Record Period.
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Our Directors believe that ourGroup’s insurance coverage for our production facilities and fixed assets is sufficient and in line with industry practise in the PRC. During the Track Record Period, we did not submit any material insurance claims.
PROPERTIES
Owned Properties
Buildings and units
AsatLatestPracticableDate,weownedandoccupied121buildingsandunitsinthePRC, with a total gross floor area of 242,620.20 sq.m., for which the relevant properties and units are used for production, trading office premises, industrial usage and residential purposes. We have obtained the building ownership certificates ( )/the real estate title certificates ( ) (as the case may be) for 113 buildings and units which we owned with a total gross floor area of 241,879.40 sq.m.
Wehavenotobtainedtherelevantbuildingownershipcertificates( )/thereal estate title certificates ( ) (as the case may be) for eight other buildings and units in Ningxia with an aggregate gross floor area of 740.80 sq.m., representing approximately0.31% of the aggregate gross floor area which we owned and occupied as at the Latest Practicable Date. Such properties were used by us as staff quarters. According to our PRC legal advisers, King& Wood Mallesons, as at the Latest Practicable Date, the consideration for the purchase of the above properties were fully settled during the period from June to October 2012. However, the building ownership certificates ( )/the real estate title certificates ( ) for these properties (as the case may be) have not been obtained. As advised by our PRC legal advisers, King&Wood Mallesons, if an application for such building ownership certificates ( )/the real estate title certificates ( ) for these properties (as the case may be) is made by the developer, there shall be no material legal obstacle.
Land use rights
As at the Latest Practicable Date, we held the land use rights of 37 parcels of land with an aggregate site area of approximately 1,175,356.35 sq.m. in the PRC.
The Guangdong ProvincePeople’s Government ( ) has allocated a parcel of allocation land with a site area of approximately 17,656.67 sq.m. in Zhuhai to us. We have not constructed any buildings on such land parcel, and it has been a vacant land and a green land since the land was allocated to us. Such land use does not comply with the relevant requirements of the Land Administration Law ( ) and the Catalogue of Allocation Land ( ). We believe that the production and operation of our Group will not be materially and adversely affected in the event the land use right of the above land parcel be forfeited by the government authorities in the future.
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The parcel of land with an area of 190,237 sq.m. (the “Limin Allocation Land”) where the land use rights of which are held by Livzon Group Limin Pharmaceutical Factory (
) (“Limin Factory”) is allocated to us for office, production and living uses. Pursuant to the Approval on Agreeing the Merger of Guangdong Limin Factory to Livzon Group by Way of Share Conversion (Shao Fu Fu[1996] No. 31 document) (
( [1996]31 )) issued by the ShaoguanPeople’s Government ( ) dated 18 November 1996, ShaoguanPeople’s Government agreed, among other things, to allow Limin Factory to continue to use the Limin Allocation Land subject to the payment of land use taxes to the relevant tax bureau in accordance with the relevant regulations and standards applicable to State-owned land use. According to the relevant requirements of the LandAdministration Law ( ) and the Catalogue ofAllocation Land ( ), the current use of the LiminAllocation Land by Limin Factory does not comply with the above requirements. As confirmed by the confirmation letter issued by Shaoguan Land Resources Bureau ( ) on 10 May 2013, (i) the grant and assignment procedures of the Limin Allocation Land are in progress as required by law, while Shaoguan Land Resources Bureau ( ) will actively assist Limin Factory with such procedures; (ii) there is no substantial obstacle in relation to the completion of such procedures and for Limin Factory obtaining the State-owned land use rights certificates ( ) for the LiminAllocation Land in the nature of assignable land upon settlement of the relevant land premium (approximately RMB40.00 million in total) as required by law; (iii) prior to obtaining such State-owned land use right certificates ( ), Shaoguan Land Resources Bureau ( ) will not recover the Limin Allocation Land, nor will it impose administrative penalties on Limin Factory for the industrial use of the LiminAllocation Land. Our Group confirms that we have started discussions with the relevant government departments in 2007 in respect of the proposed acquisition of the Limin Allocation Land. As at the Latest Practicable Date, we had formulated a corresponding compliance proposal and are going through the relevant grant and assignment procedures. Accordingly, our PRC legal advisers, King& Wood Mallesons, considerthatthecurrentuseoftheLiminAllocationLandbyLiminFactorywillnotmaterially and adversely affect the production and operations of our Group. For each of the three years ended31December2010,2011and2012andninemonthsended30September2013,operating income generated from the sales of products produced at Limin Factory amounted to approximately RMB453.60 million, RMB765.17 million, RMB1,187.89 million and RMB1,052.92 million, respectively, representing approximately16.86%,24.40%,30.28% and32.72% of our operating income from principal activities for the respective periods.
Construction in progress
As at the Latest Practicable Date, we had seven significant construction projects in progress, details of which are set out in the sub-section headed “Production Process, Production Facilities and Expansion Plans– Our expansion plans” in this section. Our PRC legal advisers, King& Wood Mallesons, are of the view that the “Livzon Group Limin Pharmaceutical Factory No. 2 Infusion BottleWorkshop and BottlesWarehouse Project” (
) and “Livzon Group Limin Pharmaceutical Factory Comprehensive Demonstrating Application of Advanced Quality Control Technology
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for Overall Production Process of Shenqi Fuzheng Injection Solution” (
) have not obtained the Construction Land Planning Permit ( ), and the “Livzon Group Limin Pharmaceutical Factory New Injection Workshop Project” (
) has not obtained the Construction Land Planning Permit ( ) and not until recently and only after the statutory required timeline, obtained the Construction Work Commencement Permit ( ). For each of these projects, our Group has set an implementation timetable for monitoring progress and avoiding unnecessary delay. According to our experience, it is not uncommon in the PRC for the time of issue of Construction Land Planning Permit ( ) and/or Construction Work Commencement Permit ( ) to vary on a case-by-case basis and to different degree, which makes it difficult for our Company to predict whether the time of issue of these permits will match the implementation timetable. Since the relevant Construction Land Planning Permit ( ) and/or Construction Work Commencement Permit (
) had not yet been issued in the time period under the relevant implementation timetable, our Group began construction in respect of these projects before the relevant Construction Land Planning Permit ( ) and/or Construction Work Commencement Permit ( ) were issued to avoid any significant negative impact (such as the productivity of our Group) that may arise from a delay on the expected completion time of the projects. However, according to the “Description of Lizvon Group Limin PharmaceuticalFactory’s Application of Permission Certificate for Construction Land- UsePlanningfortheFactoryofNo.89GongyexiRoad”(
89 ) issued by Urban and Rural Planning Bureau of Shaoguan ( ) on 8 March 2013, Limin Factory was in the process of re-applying for the Construction Land Planning Permit ( ) with the Urban and Rural Planning Bureau of Shaoguan ( ) as Limin Factory did not apply for the Construction Land Planning Permit ( ) for the construction of the above three projects when it moved to Shaoguan in 1979. The land of such production site is categorised as the category 2 industrial land upon the review by Urban and Rural Planning Bureau of Shaoguan ( ), and the type of asset complies with the requirement of the current urban planning and that there will be no substantial impediment for our Group in obtaining the Construction Land Planning Permit ( ). According to the “Description of Construction Land Planning Permit of Livzon Group Limin Pharmaceutical Factory” ( ) issued by the Urban and Rural Planning Bureau of Shaoguan ( ) on 1 July 2013, the Urban and Rural Planning Bureau of Shaoguan ( ) confirmed that it will not impose any administrative penalty on Limin Factory in respect of its failure to obtain the aforementioned Construction Land Planning Permits ( ). According to the Construction QualityManagementRegulations( ),apenaltyrangingbetween1% to2% of the total contracted construction price will be imposed for any commencement construction prior to the obtainment of the relevant ConstructionWork Commencement Permit ( ). Since the contracted construction price for the aforementioned project is RMB10,526,000.00, the maximum penalty which may be imposed on us in this regard will be RMB210,520.00.
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OurPRClegaladvisers,King&WoodMallesons,areoftheopinionthatasLiminFactory has already been issued with the Construction Work Commencement Permit (
) for the “Livzon Group Limin Pharmaceutical Factory New Injection Workshop Project” ( ) and the maximum amount of potential penalty of RMB210,520.00isrelativelyinsignificantwhencomparedtotheauditedconsolidatednetasset value of our Group as at 30 September 2013, the delay in obtaining such Construction Work Commencement Permit ( ) will not have any material adverse effect on the operations of our Group.
As at the Latest Practicable Date, our PRC legal advisers, King& Wood Mallesons, were of the further view that “Jiaozuo Hecheng Annual Productivity 480 Tonnes Ceftriaxone Sodium, 240 Tonnes Cefuroxime Sodium, 20 Tonnes CefodizimeAcid Project” (
480 240 20 ) of Jiaozuo Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) (“Jiaozuo Hecheng”) was actually occupying and using land with a total site area of 24,105.74 sq.m. belonging to Jiaozuo Joincare, which is a subsidiary of Joincare, and Jiaozuo Hecheng had not obtained the relevant land use rights certificates and the Construction Land Planning Permit (
), the Construction Work Planning Permit ( ) and the Construction Work Commencement Permit ( ) related to such project. Our Company explained that since the land use rights in respect of the land concerned are held by Jiaozuo Joincare, Jiaozuo Hecheng does not have the capacity to apply for the Construction Land Planning Permit ( ), the Construction Work Planning Permit (
) and the Construction Work Commencement Permit ( ). However, in view of the following matters:
(1) On 25 April 2013, Jiaozuo Hecheng and Jiaozuo Joincare signed relevant agreements for the matters related to the land use rights of the above land with a totalsiteareaof24,105.74sq.m..ItwasagreedthatJiaozuoJoincareshouldtransfer such land use rights to Jiaozuo Hecheng for an appraised value of approximately RMB5.57 million.
According to the confirmation letter issued by Jiaozuo Land Resources Bureau (
) on 17 May 2013, the above transfer of the land use rights of 24,105.74 sq.m. complies with the requirements stipulated by relevant laws and regulations and Jiaozuo Land Resources Bureau ( ) has accepted the application for the above transfer, and there is no substantial obstacle to (i) the partiestotheabovetransferlegallycompletingtheproceduresfortheabovetransfer procedures; and (ii) Jiaozuo Hecheng obtaining the land use rights to such land and the property ownership rights to the properties erected on such land.
(2) As confirmed by our Group, Jiaozuo Hecheng is actively re-applying for the Construction Land Planning Permit ( ), the Construction Work Planning Permit ( ) and the Construction Work Commencement Permit ( ) related to the construction of the project.
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(3) According to its confirmation letter issued on 17 May 2013, Macun branch of Jiaozuo Urban Planning Administration Bureau ( ) has accepted the re-application by Jiaozuo Hecheng for the Construction Land Planning Permit ( ) and the Construction Work Planning Permit ( ) related to the construction of the project, and after the relevant procedures have been completed, it will issue such permits to Jiaozuo Hecheng in accordance with the relevant laws and regulations, and there is no substantial obstacle to Jiaozuo Hecheng obtaining such permits. Such bureau has further confirmed that Jiaozuo Hecheng has not been imposed any administrative penalty because of the above and it will not impose any administrative penalty on Jiaozuo Hecheng in the future.
(4) According to its confirmation letter issued on 17 May 2013, Jiaozuo Housing and Urban Construction Bureau ( ) has accepted the re- application by Jiaozuo Hecheng for the Construction Work Commencement Permit ( ) related to the construction of the project, and after the relevant procedures have been completed, it will issue such permit to Jiaozuo Hecheng in accordance with the relevant laws and regulations, and there is no substantial obstacle to Jiaozuo Hecheng obtaining such permit. Jiaozuo Housing and Urban Construction Bureau ( ) has further confirmed that Jiaozuo Hecheng has not been imposed any administrative penalty because of the above and it will not impose any administrative penalty on Jiaozuo Hecheng in the future.
Accordingly, our PRC legal advisers, King& Wood Mallesons, are of the view that the above non-compliance in relation to “Jiaozuo HechengAnnual Productivity 480 Tonnes Ceftriaxone Sodium, 240 Tonnes Cefuroxime Sodium, 20 Tonnes CefodizimeAcid Project” ( 480 240 20 ) will not have a material adverse effect on the production and operations of our Group.
Our PRC legal advisers, King& Wood Mallesons, have confirmed that save as disclosed above,ourGrouplegallyownsallthesignificantconstructioninprogress,andhasobtainedthe requisite approvals, authorisations and/or consents according to the requirements of the laws and regulations of the PRC.
As at the Latest Practicable Date, no single property had a carrying value exceeding15% of our total assets. No property valuation report in respect of ourGroup’s property interests is required in reliance upon the exemption provided by section 6(2) of the Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong). The details of the significant properties and lands of our Group are set out in Appendix VI to this listing document.
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Leased Properties
As at the Latest Practicable Date, we also leased 31 buildings and land units, with an aggregate gross floor area of approximately 2,784,416.59 sq.m., in the PRC.According to our PRC legal advisers, King& Wood Mallesons, the leasing of the leased properties and the associated land use rights by our Group is legal and valid. The details of the significant leased properties and lands of our Company are set out in Appendix VI to this listing document.
In relation to certain properties leased by us with an aggregate gross floor area of approximately 5,349.42 sq.m., the lessors of the properties have not provided us with the relevant title documents confirming the lessors have the right to lease those properties to us. Therefore, our use of these properties may be challenged and we may be required to cease our use of these properties. If this occurs, we may take legal action against the relevant lessor for breach of the relevant tenancy agreement and we may have to relocate to other premises. Our Directors believe that these properties are not crucial to ourGroup’s operations as these properties are used by us for sales and administrative purposes and there is no foreseeable obstacle for us to relocate our operations to other available premises in a timely manner should it be necessary. Therefore, our PRC legal advisers, King& Wood Mallesons, are of the view thatthepossiblerelocationwouldnothaveanymaterialadverseimpactonourbusiness,results of operations and financial condition.
Our Group confirmed that, three of our subsidiaries, namely, Wenshan Livzon Sanqi Plantation Co., Ltd. ( ), Datong Livzon Qiyuan Medicine Co., Ltd. ( ) and Longxi Livzon Shenyuan Medicine Co., Ltd. (
) leased agricultural land to use for planting of Chinese herbal medicines purposes. No change was made to the use of such land parcels other than for their agricultural purpose, whilst those parcels of land were originally not basic farmland. In view of that, however, prior to the assignment of the contracting and operation rights with respect to the above land, the procedures of displaying public notice in writing or obtaining evidence in writing regarding the waiver of pre-emptive rights of members of the collective economic entity to which the relevant lessor belongs in relation to the certain conditions for the assignment of such land were not performed.
In the event the said pre-emptive rights of the members are prejudiced in the course of the assignment of the contract and operation rights, these members are entitled to claim their pre-emptive rights at thePeople’s Courts. However, according to the relevant provisions under the Interpretation of Applicable Legal Issues by the SupremePeople’s Court on Cases Involving the Rural Land Contract Disputes (
), thePeople’s Court does not support a claim for pre-emptive rights in the following circumstances: (a) the members of the collective economic entity fail to claim theirpre-emptiverightswithinthereasonableperiodafterthepublicnoticehadbeengiven;(b) in the absence of public notice in writing, the members of the collective economic entity fail to claim their pre-emptive rights within two months after the non-collective economic entity parties had begun using the contracted land. As confirmed by our Group, Wenshan Livzon SanqiPlantationCo.,Ltd.( ),DatongLivzonQiyuanMedicineCo.,
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Ltd. ( ) and Longxi Livzon Shenyuan Medicine Co., Ltd. (
) had used the contracted land for more than two months and the members of the collective economic entity had not made any claims for pre-emptive rights. Therefore, pursuant to the requirements as set out above, our PRC legal advisers, King& Wood Mallesons, advised that the relevant claims of pre-emptive rights by the members of the collective economic entity would not be supported by the relevant court.
COMPETITION AND INDUSTRY OUTLOOK
Some of our pharmaceutical products are not protected by patents and are therefore subject to competition from other generic pharmaceutical products. However, the SFDA may, at its discretion subject to certain limitations, grant first-to-market generic drugs a multiple- year protection period, during which other pharmaceutical companies cannot apply for the registration of pharmaceutical products with the same chemical structure, formulation and indication. Once the protection period lapses, other manufacturers would be able to produce pharmaceutical products with the same chemical structure, formulation and indication, and may be able to sell such products at a lower price. As a result, hospitals, clinics, OTC pharmacies and other retail outlets may choose such lower priced products over our pharmaceutical products. Furthermore, with respect to our patented pharmaceutical products, the existence of a patent may not necessarily protect us from competition as our patent may be challenged, invalidated or held to be unenforceable. This is because patent applications can take many years to be approved and issued and currently pending applications may later result in issued patents that our product candidates or technologies may infringe.
The pharmaceutical industry is characterised by rapid product development and technological change. Our pharmaceutical products could be rendered obsolete or made uneconomical by the development of new pharmaceutical products to treat the conditions addressed by our pharmaceutical products, technological advances affecting the cost of production,ormarketingorpricingactionsbyoneormoreofourcompetitors.Ourcompetitors may also be able to obtain regulatory approval for new products quicker than us and, therefore, may begin to market their products in advance of our products. We believe that competition among pharmaceutical products in the PRC will continue to be based on, among other things, brand name recognition, product efficacy, safety, reliability, availability, promotional activities and price.
Many of our existing and potential competitors have greater financial, technical, manufacturing or other resources than us. We will also face strong competition when we expand into other markets, where the existing competitors may have already established their positions. Many of our competitors may also have better brand name recognition, more established distribution network, larger customer base or more extensive knowledge of our customer groups. In addition, certain of our competitors may adopt low-margin sales strategies and compete against us based on lower prices. Furthermore, as a result of thePRC’s admission to theWorldTrade Organisation in 2001 and subsequent changes in PRC Government laws and regulations, we may also face increasing competition from foreign manufacturers in addition to domestic manufacturers. Subsequent to the reduction of import tariffs pursuant to thePRC’s World Trade Organisation obligations, the selling prices of imported pharmaceutical products in the PRC have become more competitive. Also, some foreign pharmaceutical manufacturers have set up domestic production bases in the PRC leading to increasing direct competition.
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On 1 January 2013, the Ministry of Industry and Information Technology, the NDRC and the Ministry of Finance jointly issued the Guiding Opinions on Accelerating the Merger and Reorganisation of Enterprises in Key Industries (Gong Xin Bu Lian Chan Ye (2013) No. 16) ( ( (2013)16 )), which set out the primary goals and the momentous missions for the medical and pharmaceutical industry, including the mission to achieve the scale of production and intensification of essential pharmaceuticals manufacturing such that the sales revenue of the top 100 enterprises will exceed50% of that of the total industry and the market share of the top 20 enterprises (in terms of sales volume) for essential pharmaceutical products will reach80% by 2015. According to the Biaodian Report, we ranked 39 among all PRC pharmaceutical manufacturers (in terms of sales value) in 2011.As such, in order to remain competitive, we intend to enhance our research and production capabilities and to expand our sales network and increase our market share through strategic mergers and acquisitions.As at the Latest Practicable Date, we were still identifying suitable target of mergers and acquisitions.
LEGALAND COMPLIANCE
Licence and permit
As a developer, manufacturer and distributor of pharmaceutical products, we are subject to regulation and oversight by different levels of the food and drug administration in the PRC, in particular, the SFDA. We are also subject to other PRC laws and regulations that are applicable to manufacturers and distributors in general.
A summary of the relevant PRC laws and regulations which our business operations are subject to in the PRC is set out in the section headed “Regulations” in this listing document. We have obtained all material licences, permits, approvals and consents for our business operations in the PRC, except for those that are currently under re-registration, and have complied with all relevant laws and regulations.
As at the Latest Practicable Date, we had obtained all the relevant certificates and/or permits in relation to the manufacture and/or sale of our products, some of which are not currently manufactured or sold by us after taking into account the market demand of such products.
We need to incur re-registration fees and other costs in maintaining those pharmaceutical products which we have certificates and/or permits but are not currently manufactured or sold by us in the market. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, such fees and costs were approximately RMB93,250.00, RMB66,150.00, RMB50,050.00 and RMB239,522.06, respectively. Our Directors believe that the level of marketability of our products is in line with the industry norm.
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According to the Measures on the Administration of Pharmaceutical Products Registration ( ), pharmaceutical manufacturers are required to register their products with the SFDAto obtain the necessary approval number prior to commencement of manufacture of the pharmaceutical products. The registration is valid for a term of five years, which must be re-registered within six months prior to expiration by submitting required application materials to the relevant drug administration authorities.We will apply for renewal of the relevant certificates for our products as and when they expire. We have not, in the past, encountered any difficulty in renewing such certificates for our products. As our products currently in production have been sold in the PRC for a considerable period of time, we do not foresee that there will be any major obstacle to the renewal process for our products, which is essentially a procedural matter.
The following major permits have been obtained by us for the purposes of our business and operations (apart from those pertaining to general business requirements):
Permits Name of entities Permit number Date of grant Expiry date
Pharmaceutical • Livzon Group Yue 20110523 1 January 2011 31 December 2015 manufacturing Xinbeijiang ( 20110523)
permit Pharmaceutical (2011) ShouYao 31 January 2011 30 January 2016
( ) Manufacturing Sheng Chan Zheng
Inc. ( No. 19045 ((2011)
) 19045 )
• Livzon Group Yue 20110623 13 December 2011 12 December 2016 Vaccine ( 20110623)
Engineering Inc.
(
)
• Livzon Group Yue 20110261 1 January 2011 31 December 2015 Livzon ( 20110261)
Pharmaceutical
Factory (
)
• Livzon Group Yue 20110549 1 January 2011 31 December 2015 Limin ( 20110549)
Pharmaceutical
Manufacturing
Factory (
)
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Permits Name of entities Permit number Date of grant Expiry date
• Zhuhai Livzon Yue 20110266 1 January 2011 31 December 2015 Diagnostic ( 20110266)
Reagents Inc.
(
)
• Sichuan Guangda Chuan 20100232 1 January 2011 31 December 2015 Pharmaceutical ( 20100232)
Manufacturing
Co., Ltd. (
)
• Livzon Group Min 20111011 1 January 2011 31 December 2015 Fuzhou Fuxing ( 20111011)
Pharmaceutical (2012) ShouYao 24 February 2012 23 February 2017
Co., Ltd. ( Sheng Chan Zheng
No. 13015 ((2012)
)
13015 )
• Zhuhai FTZ Yue 20110242 1 January 2011 31 December 2015 Livzon Hecheng ( 20110242)
Pharmaceutical
Manufacturing
Co., Ltd. (
)
• Gutian Fuxing Min 20113055 1 January 2011 31 December 2015 Pharmaceutical ( 20113055)
Co., Ltd. (
)
• Shanghai Livzon Hu 20110081 1 January 2011 31 December 2015 Pharmaceutical ( 20110081)
Manufacturing
Co., Ltd. (
)
– 218–
BUSINESS
Permits Name of entities Permit number Date of grant Expiry date
Pharmaceutical • Our Company YueAA7560155 24 September 2009 23 September 2014 operation permit ( AA7560155)
( )
• Zhuhai Livzon YueAA7560123 9 September 2009 8 September 2014
Diagnostic ( AA7560123)
Reagents Inc.
(
)
• Zhuhai Livzon YueAA7560173 24 September 2009 23 September 2014 Pharmaceutical ( AA7560173)
Trading Co., Ltd.
(
)
Medical device • Zhuhai Livzon Yue ShiYao Jian Xie 5 March 2012 4 March 2017
manufacturing Diagnostic Sheng Chan Xu
enterprise licence Reagents Inc. No. 20020579
( ( (
) ) 20020579 )
Permit for medical • Zhuhai Livzon Yue C332017 23 February 2012 22 February 2017
devices operation Diagnostic ( C332017)
enterprises ( Reagents Inc. Yue 33 (Shi Ji) 0558 25 May 2012 24 May 2017
) ( ( 33( )0558)
)
In addition, we have obtained 29 GMP certifications and three GSP certifications.
Renewal procedures for the above permits are to be carried out six months prior to the expiry of the validity periods. Our Directors are not aware of any reason that would cause or lead to the non-renewal of the permits.We have not encountered any problems in renewing our GMP certificates in the past.
Litigation and investigation
Our Group may from time to time be involved in litigation incidental to the conduct of our business. During the Track Record Period, we were not involved in any litigation, arbitration or administrative proceedings which had a material adverse effect on our financial condition or results of operations. As at the Latest Practicable Date, our Directors were not aware of any pending or threatened litigation, arbitration or administrative proceedings against our Group which could be expected to have a material adverse effect on our financial condition or results of operations.
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BUSINESS
Internal control and risk management
Our Board recognises the importance of internal controls to safeguardshareholders’ interests and manage business risks. Our Board has delegated the implementation of internal control systems as well as the operational and compliance controls and risk management procedures to the senior management of our Group. Furthermore, our Audit Committee will review the financial reporting and internal control procedures of our Group on a regular basis. The Zhuhai Livzon Diagnostic Reagents Inc. Incident
Background
In 2010, Zhuhai Livzon Diagnostic Reagents Inc. ( ) (“Livzon Diagnostic Reagents”) intended to organise an academic conference with Shanghai Clinical Laboratory Centre ( ) (“SCLC”) whereby Livzon Diagnostic Reagent was responsible for the expenses of the conference. The then local manager of Livzon Diagnostic Reagents stationed in Shanghai (the “Manager”) was responsible for organising the academic conference. In accordance with our internal policies, the Manager submitted a budget for the conference showing, among others, estimated accommodation expenses for experts, catering expenses and transportation fees, and applied for an advancement for the conference. The vice general manager of Livzon Diagnostic Reagents, Mr. Shi Jianfeng ( ), approved the conference advancement of RMB100,000.00 and hence we remitted such sum to theManager’s personal account. As represented by the Manager, subsequently, an officer of SCLC (the “SCLC Officer”) requested the Manager to give him the sum in advance so that he could facilitate the organisation of the conference. Upon the request of the SCLC Officer, the Manager withdrew the sum from his personal account and released it in cash to the SCLC Officer without authorisation from Livzon Diagnostic Reagents. According to our internal policies, the representatives of our Group who are responsible for organising conferences were only allowed to use the conference advancements to pay the conference expenses directly, but not to release such sum to any other third parties.Apparently, the Manager in this incident was in breach of our above internal policies. Upon receipt of such sum, the SCLC Officer deposited it into his personal account (the “Diagnostic Reagents Incident”). The then Directors and senior management members of our Company were aware of theManager’s application (including his proposed budget) and transfer of money to his personal account. However, they did not, and do not, know whether or not the reason why the Manager released the RMB100,000.00 advancement in cash to the SCLC Officer is in fact the one as represented to our Group by the Manager mentioned above. Furthermore, they were not aware of the release of RMB100,000.00 cash by the Manager to the SCLC Officer until March 2010 when the ShanghaiPudongProcuratorate( )issuedarequesttoLivzonDiagnostic ReagentsrequiringtheManagertoprovideassistanceintheinvestigationoftheallegedbribery committed by the SCLC Officer. According to a judgment issued by the Shanghai PudongPeople’s Court ( ) dated 5 July 2010, the court convicted the SCLC Officer of receiving bribe. However, neither Livzon Diagnostic Reagents nor the Manager was held liable.
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BUSINESS
According to the news entitled “3 (Three pharmaceutical and equipment suppliers prohibited in the Shanghai market)” published on the websiteoftheNewsCentreoftheShanghaiMunicipalHealthBureauon15February2011,the Shanghai Municipal Health Bureau decided that (a) health authorities in Shanghai were prohibited from purchasing any equipment and other products from, among the other two enterprises,LivzonDiagnosticReagentsfortwoyearscommencingfrom16February2011;(b) all relevant subsisting sales contracts were terminated and all liabilities arising from such termination were to be borne by the enterprises being listed in the commercial bribery record; and (c) all tender associations in Shanghai should not accept the participation of, among the other two enterprises, Livzon Diagnostic Reagents in the tender activities for pharmaceutical or equipment purchase in Shanghai for two years commencing from 16 February 2011.As the pharmaceutical supervisory authority in Shanghai, the Shanghai Municipal Health Bureau has the sole discretion pursuant to the Shanghai Municipal HealthBureau’sAdvice on Establishing the Required Records of Commercial Bribery in the Sale and Purchase of Pharmaceutical Products ( <
> ) to impose prohibitions on medical and health institutions at all levels in Shanghai from purchasing pharmaceutical products, medical devices, medical equipment or accessories (collectively, “Relevant Products”) from those enterprises which are engaging in the production and/or sale of the Relevant Products which it thinks are implicated in commercial bribery. As at the Latest Practicable Date, our Group had not received any document of punishment from the Shanghai Municipal Health Bureau. On the foregoing basis, our Company believed that the Shanghai Municipal Health Bureau issued the prohibitions mentioned above which concerned Livzon Diagnostic Reagents because it was implicated in the bribery case of the SCLC Officer. Livzon Diagnostic Reagents had resumed its participation in the pharmaceutical market in Shanghai after the two-year prohibition period expired on 15 February 2013.
In respect of the Diagnostic Reagents Incident, our Company issued an announcement on 18 February 2011 to inform our Shareholders and the public of the Diagnostic Reagents Incident. Both our Company and Joincare have not been subject to any investigation or public reprimand/private warning by the CSRC, the Shenzhen Stock Exchange or the Shanghai Stock Exchange (where applicable) in respect of the Diagnostic Reagents Incident.
Our PRC legal advisers, King& Wood Mallesons, are of the view that the Diagnostic Reagents Incident has no material adverse effect on the operations of our Group.
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BUSINESS
Subsequent actions undertaken by us
In light of the above and in order to prevent the occurrence of similar incidents in the future, we have adopted the following measures:
(a) wehaveterminatedtheemploymentcontractwiththeManageron4November2010 for his serious breach of our “Regulations for the Application, Utilisation and Reimbursement of Expenses by Marketing Departments (
)”; and
(b) we have amended our internal control manuals, such as the “Conference Arrangements”( )andthe“RegulationsfortheApplication,Utilisation and Reimbursement of Expenses by Marketing Departments” (
) in April 2010.
The table below sets out brief details of the “ConferenceArrangements” ( ) and the “Regulations for the Application, Utilisation and Reimbursement of Expenses by Marketing Departments” ( ) before and after the Diagnostic Reagents Incident. The aforesaid internal policies apply to conference advancement as well as other corporate expenses, including settlement with our suppliers and customers.
Before the Diagnostic After the Diagnostic
Reagents Incident Reagents Incident
Administration of • At least one conference • In order to strengthen the conference work representative is required monitoring function of
to administer the existing cash payment
conference work whereby control process and with the conference a view to preventing
representative has to future breaches of our
prepare the conference cash payment polices and plan which is to be conference arrangement
approved by the senior policies, two or more
management and the conference
marketing department. representatives are
required to administer the conference work if the
cash budget for
conference expenses
exceeds RMB10,000.00.
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BUSINESS
Before the Diagnostic After the Diagnostic
Reagents Incident Reagents Incident
Approval procedures • All conference expenses • In addition to the
and payment have to be pre-approved measures adopted before thresholds by the management by the Diagnostic Reagents way of conference Incident, the following
advancement. The finance measures are adopted:
department will then
reimburse the conference (a) If conference
expenses which are expenses are at least incurred within the limit. RMB10,000.00, the cash will be
• Conference advancement advanced to the two is to be checked by the conference
finance department and representatives
reviewed by the based on the
conference department. expenses associated Applications for large with their respective sum of conference responsibility.
advancement must be However, conference submitted to the finance advancement made department and approved to each conference by the assistant to representative
general manager of the should not exceed
relevant company before RMB40,000.00.
submitted to the sales
vice president and (b) For conference
general manager of the expenses which
relevant company for exceed the pre-
final approval. approved limit, no
reimbursement is
allowed unless it is approved by the
general manager of the relevant
company.
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BUSINESS
Before the Diagnostic After the Diagnostic
Reagents Incident Reagents Incident
Payment methods • Expenses which can be • In addition to the
settled by bank transfers measures adopted before should not be settled in the Diagnostic Reagents cash. Incident, we have set out maximum thresholds
• Accumulated expenses ranging from RMB500.00 below RMB2,000.00 to RMB1,000.00 for
could be paid in cash. different types of
expenses which could be• Conference expenses settled in cash.
have to be banked in a Furthermore, receipts are designated bank account required for
of the external event reimbursement purposes. organiser and we have
the right to deny any
reimbursement of
conference expenses if
they are paid in cash.
• For large sum of cash
paid during the
conference, the payment
has to be
witnessed/approved by
the conference
representative(s). For
large sum of cash paid by
the conference
representative, the
payment has to be
witnessed by a company
staff.
In addition, according to the “Supplemental Regulations on the Compliance with theGroup’sPolicyonMonetaryFundsandSettlementbyZhuhaiLivzonDiagnosticReagentsInc.” ( )whichwas adopted in July 2010 and amended in August 2013, no payment can be made by us to the suppliers/customers through an individual/otherentities’ accounts and/or settled by cash. We are of the view that our cash payment procedures are common practises for our Group and the industry in general.
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BUSINESS
In March 2013, we have engaged an independent internal control consultant, Crowe Horwath Corporate Consultancy Limited (“CHCCL”), to conduct an internal control review (the “ICR”) to assess the sufficiency of our anti-bribery measures.According to the results of the ICR, it was revealed that our previous anti-bribery measures contained certain weaknesses such as the lack of reporting mechanism for unethical behaviours and lack of relevant policies and procedures to prohibit any inappropriate behaviour. Based on the recommendations of CHCCL, we have enhanced our anti-bribery measures to monitor and avoid bribery, kickbacks and illegal rebates to suppliers and/or customers by introducing the following policies and procedures, such as the “Conflict of Interest Guidelines ( )”, the “Whistle- blowing Policies and Procedures ( )” and the “Anti-fraud Policies and Procedures ( )” in July 2013.
Effect on our business, operations and financial position
Before the Diagnostic Reagents Incident, our Company had established mechanisms for the monitoring of expenses, such as the “Conference Arrangements” ( ) and the “Regulations for the Application, Utilisation and Reimbursement of Expenses by Marketing Departments” ( ). According to these mechanisms, in respect of Livzon Diagnostic Reagents, a conference fee for an amount of RMB100,000.00 was not required to be approved by our Directors and the senior management of our Group. The payment of RMB100,000.00 by the Manager to the SCLC Officer constituted theManager’s own non-observance with the provisions under the “Regulations for theApplication,UtilisationandReimbursementofExpensesbyMarketingDepartments”(
)regardingcashpayment.NoneofourDirectors and senior management was held liable by any court or any regulator for the Diagnostic Reagents Incident. As such, we believe that the Diagnostic Reagents Incident does not affect the suitability of our Directors to perform their duties under the applicable laws and the Hong Kong Listing Rules and to act as directors under Rules 3.08 and 3.09 of the Hong Kong Listing Rules.
Priortothecommencementoftheaforementionedprohibitions,fortheninemonthsended 30 September 2010, Livzon DiagnosticReagents’ sales to health authorities in Shanghai amounted to approximately RMB8.53 million, representing approximately0.43% of ourGroup’s total operating income for the respective period. Livzon Diagnostic Reagents had resumed its participation in the pharmaceutical market in Shanghai after the two-year prohibition period expired on 15 February 2013.As such, our Directors are of the view that the Diagnostic Reagents Incident did not have any material adverse effect on our business, results of operations and financial condition.
During the Track Record Period and up to the Latest Practicable Date, we had not paid any kickbacks and illegal rebates to our suppliers and/or customers. Save and except for the Diagnostic Reagents Incident, during the Track Record Period and up to the Latest Practicable Date, we were not involved in any incidents of bribery.
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BUSINESS
Views from the Sole Sponsor
Based on the due diligence work conducted by the Sole Sponsor, nothing has come to their attention relating to the adequacy and effectiveness of the revised internal control/anti- bribery measures of our Company which needs to be brought to the attention of the Hong Kong Stock Exchange and the Sole Sponsor is of the view that our Directors are suitable being the directors of a listed company in Hong Kong and are able to demonstrate a standard of competence commensurate with their positions as directors.
Penalties
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, we were subject to penalties (including those related to tax, fire safety, environmental, motor vehicles and transportation) in the amount of approximately RMB323,662.00, RMB24,330.00, RMB52,850.00 and RMB12,650.00, respectively. Our PRC legal advisers, King& Wood Mallesons, have opined that during the Track Record Period, we were not subject to any penalties which had a material adverse effect on our operations.
GENERAL MANDATE ON PROPOSED BONDS ISSUANCE
Pursuant to the resolutions passed by our Shareholders at our 2011 annual general meeting held on 13April 2012, a mandate (the “Bonds Issuance Mandate”) has been granted to our Board authorising it to issue bonds (the “Bonds”) with an aggregate principal amount ofnotmorethanRMB1billion.TheBondsIssuanceMandateshallbevalidfor24monthsfrom 13 April 2012. Bonds issued under the Bonds Issuance Mandate shall be subject to the following terms and conditions:
(a) the Bonds shall bear a fixed rate of interest with the exact interest rate to be determined by our Company and the underwriter of the Bonds issuance according to the then market conditions;
(b) the Bonds shall have a maturity of not more than seven years;
(c) the Bonds shall be listed on the Shenzhen Stock Exchange; and
(d) the Bonds shall comply with the Company Law, the PRC Securities Law (
), the Corporate Bonds Issuance PilotApproach (
) and other applicable laws, rules and regulations.
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BUSINESS
In addition, the Board is also authorised to determine, amend or adjust, among others, the following:
(a) any placing arrangements for the Bonds to existing Shareholders;
(b) the offering size of the Bonds;
(c) the issue price of the Bonds;
(d) the interest rate of the Bonds and its method of determination;
(e) the method of issuance;
(f) redemption of Bonds mechanism (if any);
(g) arrangement of security;
(h) repayment terms and methods of the Bonds; and
(i) listing venue of the Bonds.
The proceeds from the Bonds issuance shall be used for general working capital purposes and/or for repayment of our bank borrowings.
As at the Latest Practicable Date, no Bond had been issued pursuant to the Bonds Issuance Mandate and the Board had no intention to issue Bonds under the Bonds Issuance Mandate.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
OUR CONTROLLING SHAREHOLDERS
Our Controlling Shareholders
AsattheLatestPracticableDateandimmediatelyfollowingtheListing,Joincarewasand will be directly and indirectly interested in approximately47.38% of our issued Shares, of which (a) approximately26.21% of our total issued Shares were directly held by Joincare, allofwhichwereAShares;(b)approximately17.13%ofourtotalissuedSharesweredirectlyheld by Topsino, a wholly-owned subsidiary of Joincare, all of which were B Shares; (c) approximately1.99% of our total issued Shares were indirectly held by Shenzhen Haibin, awholly-ownedsubsidiaryofJoincare,allofwhichwereAShares;and(d)approximately2.05% of the total issued Shares held by Begol which have been transferred to, held in custody by and pledged to Joincare pursuant to a share transfer and custody agreement and a share pledge agreement, all of which were A Shares.
In addition, as at the Latest Practicable Date and immediately following the Listing, (a) Shenzhen Baiyeyuan was and will be interested in approximately48.03% of the total issued shares of Joincare; (b) Mr. Zhu was and will be interested in90.00% of the equity interests of Shenzhen Baiyeyuan; and (c) Ms. Liu, Mr.Zhu’s spouse, was and will be interested in10.00% of the equity interests of Shenzhen Baiyeyuan.
As such, each of Joincare, Shenzhen Baiyeyuan, Mr. Zhu and Ms. Liu will be regarded as a Controlling Shareholder of our Company.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
Background of the Joincare Group
Joincare is a joint stock company incorporated in the PRC on 18 December 1992 and was listed on the Shanghai Stock Exchange in 2001. The Joincare Group is principally engaged in three major business segments, namely (a) the production and sales of drug preparation products; (b) the production and sales of bulk medicines and intermediates; and (c) the research, production and sales of healthcare products. As at the Latest Practicable Date, the Joincare Group produced and/or sold seven types of drug preparation products, five types of bulk medicines and intermediates, 46 types of diagnostic reagents and equipment and seven types of healthcare products. The table below shows the total operating income of the Joincare Group categorised by different product segments during the Track Record Period:
Forthe nine
months ended Forthe yearended 31 December 30 September
2010 2011 2012 2013
RMB’000 %RMB’000 %RMB’000 %RMB’000 % (unaudited) (unaudited) (unaudited) (unaudited)
Operating income of
each product
category under
segment activities
(I) Western drug
preparation
products 552,324 28.08 418,944 24.91 431,027 21.98 414,412 34.87 (II) Chinese drug
preparation
products 756 0.04 940 0.06 1,834 0.09 3,739 0.31 (III) Bulk medicines 198,063 10.07 225,342 13.40 227,081 11.58 136,046 11.45 (IV) Intermediates 924,632 47.01 676,293 40.21 543,723 27.73 386,855 32.55 (V) Diagnostic
reagents and
equipment 9,481 0.48 11,964 0.71 7,817 0.40 8,676 0.73 (VI) Healthcare
products 280,872 14.28 344,426 20.48 239,931 12.24 238,728 20.09 (VII) Others 719 0.04 4,112 0.23 509,368 25.98 50 0.00 Total 1,966,847 100.00 1,682,021 100.00 1,960,781 100.00 1,188,506 100.00 Note: All figures in relation to the Joincare Group as shown in the above table are unaudited figures.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
Drug preparation products researched, developed, produced and sold by the Joincare Group and our Group
The table below sets out the drug preparation products researched, developed, produced and sold by the Joincare Group and our Group as at the date of the Non-Competition Undertakings (as defined below) as categorised by different therapeutic areas:
Products
researched, Products
developed, researched,
produced developed,
and/or sold produced
by the and/or sold
Joincare by our
Group Group
(A) Western drug preparation products
• Digestive system gastrointestinal drug ( No Yes
/ )
• Cardio-cerebral-vascular drug ( ) Yes Yes
• Systemic anti-infective drug/antibiotics ( Yes Yes
/ )
• Reproductive assistance drug ( ) No Yes
• Anti-tumour drug ( ) No Yes
• Blood and hemopoietic system drug ( Yes Yes
)
• Anti-psychotic and anti-depression drug ( No Yes
)
• Nervous system drug ( ) No Yes
• Oral treatment drug ( ) Yes No
• Systemic anti-viral drug ( ) No Yes
• Immunomodulators ( ) No Yes
• Urinary system drug ( ) Yes No
• Chronic kidney disease drug ( ) No Yes
(B) Chinese drug preparation products
• Anti-tumour drug ( ) No Yes
• Antipyretic drug ( ) No Yes
• Blood management drug ( ) Yes Yes
• Sedative drug ( ) Yes No
• Paediatric drug ( ) No Yes
• Urology drug ( ) No Yes
• Relieving drug ( ) Yes No
• Dermatology drug ( ) No Yes
• Gynecological drug ( ) Yes No
• Nervous system drug ( ) Yes No
– 230–
RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
We and the Joincare Group both use similar distribution models for the sales and distribution of drug preparation products in the PRC which is in line with the industry norm. In addition, both our Group and the Joincare Group target our drug preparation products to end customers such as hospitals, clinics and pharmacies. However, our sales teams are separate and independent of the Joincare Group and we do not share our customer resources and databases. Please refer to the sub-section headed “Operational Independence” in this section for further details.
Both our Group and the Joincare Group research, develop, produce and/or sell (i) cardio-cerebral-vascular drugs; (ii) systemic anti-infective drugs/antibiotics; (iii) blood and hemopoietic system drugs; and (iv) blood management drugs.
The table below sets out the total operating income and gross profit of our Group and the Joincare Group generated from the production and/or sales of these four types of products during the Track Record Period:
Fortheninemonthsended Fortheyearended31December 30September
2010 2011 2012 2013
%of %of %of %of
operating operating operating operating
income income income income
from from from from
Operating principal Gross Operating principal Gross Operating principal Gross Operating principal Gross income activities profit income activities profit income activities profit income activities profitRMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000 TheJoincare
Group 477,101 24.26 348,892 336,692 20.02 265,561 340,284 17.36 279,997 328,256 27.62 288,986 OurGroup 477,375 17.74 298,157 497,576 15.86 309,483 505,459 12.88 321,657 367,810 11.43 241,320 Note: All figures in relation to the Joincare Group as shown in the above table are unaudited figures.
Furthermore, our gross profit generated from the production and/or sales of these four types of products represent approximately20.96%,17.59%,13.55% and11.67% of our gross profit from principal activities for each of the three years ended 31 December 2010, 2011 and 2012andninemonthsended30September2013,respectively.AsfortheJoincareGroup,gross profit generated from the production and/or sales of these four types of products represent approximately30.86%,35.30%,43.24% and46.58% of the JoincareGroup’s gross profit from principal activities for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
However, our Directors are of the view that there is no substantial competition between ourGroup’s production and sale of these products with that of the Joincare Group because of the following reasons:
(a) Cardio-cerebral-vascular drugs– The Joincare Group only produces one type of cardio-cerebral-vasculardrugswhichisusedsolelyforhypertensiontreatmentwhile we produce two types of cardio-cerebral-vascular drugs which could be used to lower blood pressure or to cure angina, infarction and coronary heart diseases etc. The therapeutic areas of the cardio-cerebral-vascular drugs produced by us are different from that of the Joincare Group except for two types of products produced by us which are used to lower blood pressure. However, these two types of products have different clinical application with those of the Joincare Group and according to evidence from some clinical studies, when our products are used together with those of the Joincare Group, better treatment results would be achieved. The table below sets out the total operating income and gross profit of our Group and the Joincare Group generated from the production and/or sales of cardio-cerebral-vascular drugs during the Track Record Period:
Fortheninemonthsended Fortheyearended31December 30September
2010 2011 2012 2013
%of %of %of %of
operating operating operating operating
income income income income
from from from from
Operating principal Gross Operating principal Gross Operating principal Gross Operating principal Gross income activities profit income activities profit income activities profit income activities profitRMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000 TheJoincare
Group 11,510 0.59 3,516 12,232 0.73 3,021 16,411 0.84 5,915 14,339 1.21 5,868 OurGroup 97,527 3.63 69,874 119,122 3.80 87,533 142,779 3.64 109,582 108,560 3.37 82,153 Note: AllfiguresinrelationtotheJoincareGroupasshownintheabovetableareunauditedfigures. According to the Biaodian Report, our sales of cardio-cerebral-vascular drugs accounted for approximately0.32%,0.32% and0.28% market share (in terms of salesamount)ofthePRCcardio-cerebral-vasculardrugsmarketforeachofthethree years ended 31 December 2010, 2011 and 2012, respectively.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
(b) Systemic anti-infective drugs/antibiotics– The systemic anti-infective drugs/antibioticsresearched,developed,producedand/orsoldbyourGroupandthat of the Joincare Group belong to different categories of antibiotics where the chemical composition as well as the antibacterial spectrum of our systemic anti-infective drugs/antibiotics and that produced and/or sold by the Joincare Group are different. In addition, the clinical applications of our systemic anti-infective drugs/antibiotics are also distinct from those systemic anti-infective drugs/antibiotics researched, developed, produced and/or sold by the Joincare Group. The table below sets out the total operating income and gross profit of our Group and the Joincare Group generated from the production and/or sales of systemic anti-infective drugs/antibiotics during the Track Record Period:
Fortheninemonthsended Fortheyearended31December 30September
2010 2011 2012 2013
%of %of %of %of
operating operating operating operating
income income income income
from from from from
Operating principal Gross Operating principal Gross Operating principal Gross Operating principal Gross income activities profit income activities profit income activities profit income activities profitRMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000RMB’000 %RMB’000 TheJoincare
Group 465,591 23.67 345,376 324,460 19.29 262,540 323,873 16.52 274,082 313,917 26.41 283,118 OurGroup 325,947 12.12 204,582 307,002 9.79 197,560 276,293 7.04 188,149 208,066 6.47 151,727 Note: AllfiguresinrelationtotheJoincareGroupasshownintheabovetableareunauditedfigures. According to the Biaodian Report, our sales of systemic anti-infective drugs/antibiotics accounted for approximately0.67%,0.57% and0.47% market share (in terms of sales amount) of the PRC systemic anti-infective drugs/antibiotics market for each of the three years ended 31 December 2010, 2011 and 2012, respectively.
(c) Blood and hemopoietic system drugs– As at the date of the Non-Competition Undertakings (as defined below), the Joincare Group did not produce and/or sell blood and hemopoietic system drugs while research and development work has been carried out by the Joincare Group with respect to one type of blood and hemopoietic system drugs (the “Potential Joincare Product”). The blood and hemopoietic system drugs produced and/or sold by us are mainly used to cure acute leukopenia, pulmonary embolism, myocardial infarction, cerebral embolism and retinal artery occlusion. As informed by Joincare, the Potential Joincare Product will mainly be used to cure deep vein thrombosis. The therapeutic areas of the blood and hemopoietic system drugs produced and/or sold by us are completely different from the Potential Joincare Product. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the operating income generated from our sales of blood and hemopoietic system drugs was approximately RMB21.62 million, RMB26.77 million, RMB24.74 million and RMB22.87 million, respectively, representing approximately0.80%,0.85%,0.63% and0.71% of the operating income from ourGroup’s principal activities, respectively, while the gross profit/loss for the respective periods were approximately RMB7.91 million,
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
RMB5.81 million, RMB0.64 million and RMB-0.92 million. According to the Biaodian Report, our sales of blood and hemopoietic system drugs accounted for approximately0.35%,0.37% and0.32% market share (in terms of sales amount) of the PRC blood and hemopoietic system drugs market for each of the three years ended 31 December 2010, 2011 and 2012, respectively.
(d) Blood management drugs–As at the date of the Non-Competition Undertakings (as defined below), the Joincare Group did not produce and/or sell blood management drugs while research and development work has been carried out by the Joincare Group with respect to one type of blood management drugs (the “Potential Joincare Blood Management Drug”). The blood management drugs researched, developed, produced and/or sold by us are mainly used to cure angina related to coronary heart disease and infarction. As informed by Joincare, the Potential Joincare Blood Management Drug will mainly be used to cure blood congestion and blockage related strokes.Thetherapeuticareasofthebloodmanagementdrugsproducedand/orsoldby us are completely different from the Potential Joincare Blood Management Drug. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the operating income generated from our sales of blood management drugs was approximately RMB32.29 million, RMB44.68 million, RMB61.65 million and RMB28.31 million, respectively, representing approximately1.20%,1.42%,1.57% and0.88% of the operating income from ourGroup’s principal activities, respectively, while the gross profit for the respective periods were approximately RMB15.79 million, RMB18.58 million, RMB23.29 million and RMB8.36million.AccordingtotheBiaodianReport,oursalesofbloodmanagement drugs accounted for approximately0.32%,0.35% and0.37% market share (in terms of sales amount) of the PRC blood management drugs market for each of the three years ended 31 December 2010, 2011 and 2012, respectively.
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Bulk medicines and intermediates researched, developed, produced and sold by the Joincare Group and our Group
Both our Group and the Joincare Group research, develop, produce and/or sell bulk medicines and intermediates, details of which are set out in the table below:
Major products
researched, developed, Major products researched, produced and/or sold developed, produced and/or by the Joincare Group sold by our Group
Bulk medicines • Bulk medicines mainly • Bulk medicines mainly
belong to the meropenem cover the statin category category ( ( ) and
) and cephalosporins category imipenem/cilastatin ( ( ), such as
/ ) Ceftriaxone Sodium (
)
• Veterinary medicines
• Food chemicals
Intermediates • 7-ACA • Mevastatin ( )
• D7-ACA
The customers for bulk medicines and intermediates are pharmaceutical production enterprises ( ). As bulk medicines and intermediates are raw materials for production of drug preparation products and bulk medicines, respectively, our customers for bulk medicines and intermediates are different from those of the Joincare Group since bulk medicines and intermediates belonging to different categories are used to produce different drug preparation products and bulk medicines.As such, our Directors are of the view that there is no substantial competition between ourGroup’s production and sales of bulk medicines and intermediates with that of the Joincare Group.
Diagnostic reagents and equipment researched, developed, produced and/or sold by the Joincare Group and our Group
Although both the Joincare Group and our Group produce and/or sell diagnostic reagents and equipment, all the diagnostic reagents and equipment that are produced and/sold by the Joincare Group are used for disease prevention or food safety testing while the diagnostic reagents and equipment that are produced and/or sold by us are used mainly by medical institutions for disease diagnosis. Since the application of the diagnostic reagents and equipment which are produced and/or sold by the Joincare Group is completely different fromours,ourDirectorsareoftheviewthatthereisnosubstantialcompetitionbetweenourGroup’s production and/or sales of diagnostic reagents and equipment with that of the Joincare Group.
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Vaccine products researched and/or developed by the Joincare Group and our Group
As at the Latest Practicable Date, both the Joincare Group and our Group carried out research and development projects on certain vaccine products. However, the vaccine products which are currently researched and developed by us and the Joincare Group are used to prevent different kinds of diseases.
Views of our Directors and the directors of Joincare
Both our Directors and the directors of Joincare are of the view that our Group and the Joincare Group are two separate groups operating independently of each other with separate listing status since 2002 when Joincare became the single largest Shareholder of our Company. Therefore, both our Directors and the directors of Joincare consider it to be in the best interests of our Shareholders andJoincare’s shareholders to maintain and continue the existing business operations of our Group and the Joincare Group, respectively. Nevertheless, in order to minimise any potential competition between ourGroup’s and the JoincareGroup’s pharmaceutical business, each of our Controlling Shareholders has provided a non-competition undertaking on 10 January 2014. Please refer to the sub-section headed “Non-Competition Undertaking” in this section for further details.
NON-COMPETITION UNDERTAKING
On 10 January 2014, each of our Controlling Shareholders (collectively, the “Covenantors”) has provided a non-competition undertaking (each, a “Non-Competition Undertaking”), pursuant to which each of them has unconditionally and irrevocably undertaken and warranted that with effect from the date of the Non-Competition Undertakings, each of the Covenantors will not, and will use his/her/its best endeavours to procure that none of the companies controlled by them (other than our Group) will, carry on directly or indirectly any Restricted Activities (as defined below).
Each of the Covenantors has further undertaken that, in the event that he/she/it and/or any of the persons or companies in his/her/its control (other than our Group) is offered or becomes aware of any future Competing Business Opportunity (as defined below):
(a) he/she/it shall promptly notify our Company in writing and refer such Competing Business Opportunity (as defined below) to our Company for consideration; and (b) he/she/it shall procure such Competing Business Opportunity (as defined below) to be first offered to our Group on reasonable and fair terms and conditions.
Each of the Covenantors has further undertaken that, any Restricted Transfer (as defined below) by the Covenantors and/or any of the persons or companies in his/her/its control is subject to our right of first refusal. Where our Group decides not to exercise our right of first refusal, the Covenantors and/or any of the persons or companies in his/her/its control may pursuesuchRestrictedTransfer(asdefinedbelow)onsuchtermswhicharenomorefavourable than those made available to our Group.
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Each of the Covenantors has further unconditionally and irrevocably undertaken that he/she/it will not make use of his/her/its connections with our Company or his/her/its position as a shareholder of our Company to participate or be engaged in any activities which may be detrimental to the interests of our Group and our other Shareholders.
Each of the Covenantors has further unconditionally and irrevocably undertaken that, except with the prior written consent of our Group, each of them and the companies in his/her/its control (other than our Group) shall not, and shall procure his/her/its associates (other than our Group) will not, directly or indirectly:
(a) at any time induce or attempt to induce any director, manager or employee or consultant of any member of our Group to terminate his or her employment or consultancy (as applicable) with our Group, whether or not such act of that personwouldconstituteabreachofthatperson’scontractofemploymentorconsultancy(as applicable); or
(b) within three years after the Relevant Employee (as defined below) ceased to be employed by our Group employ any person who has been a director, manager, employee of or consultant to any member of our Group (save and except for those persons who were a director, manager, employee of or consultant to the Covenantors and/or companies in his/her/its control (other than our Group) as at the date of the Non-Competition Undertakings) who is or may be likely to be in possession of any confidential information or trade secrets relating to the Restricted Activities (as defined below) (the “Relevant Employee”); or
(c) alone or jointly with any other person through or as manager, adviser, consultant, employee of or agent for or shareholder in any person, firm or company, in competitionwithanymemberofourGroup,canvass,orsolicitoracceptordersfrom or do business with any person with whom any member of our Group has done business or solicit or persuade any person who has dealt with our Group or is in the process of negotiating with our Group in relation to the Restricted Activities (as defined below) to cease to deal with our Group or reduce the amount of business which the person would normally do with our Group or seek to improve their terms of trade with any member of our Group.
Each of the Relevant Parties (as defined below) has further unconditionally and irrevocably undertaken that during the period for which the Non-Competition Undertakings is in force:
(a) each of the Relevant Parties (as defined below) shall allow, and shall procure that the relevant associates (excluding us) to allow the independent non-executive Directors to review, at least on an annual basis, that he/she/it is in compliance with the Non-Competition Undertakings;
(b) each of the Relevant Parties (as defined below) shall provide all information necessary for the annual review by the independent non-executive Directors on the compliance and enforcement of the Non-Competition Undertakings by the Relevant Parties (as defined below);
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(c) each of the Relevant Parties (as defined below) shall allow our Company to disclose decisions on matters reviewed by the independent non-executive Directors relating to the compliance and enforcement of the Non-Competition Undertakings by the Relevant Parties (as defined below) either through the annual report or by way of announcement to the public; and
(d) each of the Relevant Parties (as defined below) shall provide our Company with a confirmation annually for inclusion by our Company in our annual report, in respect of his/her/its compliance with the terms of the Non-Competition Undertakings.
TheNon-CompetitionUndertakingswilltakeeffectfromthedateoftheNon-Competition Undertakings and shall lapse upon the occurrence of the earliest of any of the following events or circumstances:
(a) thedayonwhichtherelevantCovenantorandthepersonsorcompaniesinhis/her/its control cease to be controlling shareholders of our Company; or
(b) the day on which our Shares cease to be listed on the Hong Kong Stock Exchange and any other overseas stock exchanges (save and except for short suspension of trading in our Shares).
For the purpose of the Non-Competition Undertakings,
(a) “associates” has the same meaning as ascribed to it under the Hong Kong Listing Rules from time to time;
(b) “Competing Business Opportunity” means any business opportunity that competes with the Restricted Activities;
(c) “controlling shareholder” has the same meaning as ascribed to it under the Hong Kong Listing Rules from time to time;
(d) “Relevant Parties” means the Covenantors and the companies in his/her/its control (other than our Group);
(e) “Restricted Activities” means (I) the research, development, production and sale of (i) drug preparation products; (ii) bulk medicines and intermediates; and (iii) diagnostic reagents and equipment; and (II) the engagement in the research, development, production and sale of those products which may compete, directly or indirectly, with the products which are researched, developed, produced and sold by our Group from time to time (for the avoidance of doubt, Restricted Activities exclude those products which are researched, developed, produced and/or sold by the Relevant Parties as at the date of the Non-Competition Undertakings); and
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(f) “Restricted Transfer” means any intention to sell, transfer, lease, licence or otherwise transfer or licence such assets and business which constitute or may constitute directly or indirectly competition with the Restricted Activities.
As informed by Joincare, its PRC legal advisers advised it that based on the applicable laws (including the Company Law) and regulations in the PRC as well as the articles and internal regulations of Joincare,Joincare’s provision of the Non-Competition Undertakings (including the right of first refusal) is not subject to any approval byJoincare’s shareholders. Save as disclosed in this section, none of our Controlling Shareholders and their respective associates has any interest in a business which competes or is likely to compete either directly or indirectly with the business of our Group.
Save for the indirect interests held by Mr. Zhu and Ms. Liu in Joincare as disclosed in this section, none of our Directors has any interest in a business which competes or is likely to compete either directly or indirectly with the business of our Group.
MANAGEMENT INDEPENDENCE
Our Board comprises two executive Directors, namely, Mr.An Ning ( ), and Mr. Tao Desheng ( ), four non-executive Directors, namely, Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ), and five independent non-executive Directors,namely,Mr.LuoXiaosong( ),Mr.GuoGuoqing( ),Mr.Yang Bin ( ), Mr. Wang Xiaojun ( ) and Mr. Yu Xiong ( ). Each of our Directors is aware of his/her fiduciary duties as a director which require, among others, that he/she must act for the benefit of and in the best interests of our Company and not allow any conflict between his/her duties as a Director and his/her personal interests.
Joincare,asourControllingShareholder,hascontroloverourBoard.Joincareisexpected to continue to have control over our Company and the operating results of our Company are expected to be consolidated in the financial statements of Joincare immediately upon the Listing. Our Company has maintained and will continue to maintain our management independence, with full rights to make all decisions on, and to carry out, our own business operations independently. Our Group holds all relevant licences necessary to carry on business and has sufficient capital, equipment and employees to operate the business independently from our Controlling Shareholders.
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Independence of boards and management
Joincare and our Company have boards of directors and senior management that function independently of each other. The following table sets out a summary of the positions held by our Directors and members of our senior management team within our Company and Joincare as at the Latest Practicable Date:
Positions held within our Positions held within
Name Company Joincare
Mr. Zhu Chairman, non-executive Chairman
Director and chairman of our
Strategic Committee
Ms. Liu Vice chairman and non- Vice chairman
executive Director
Mr. Qiu Qingfeng Non-executive Director Director, general manager and ( ) secretary to the board of
directors
Mr. Zhong Shan Non-executive Director and Vice general manager
( ) member of our Strategic
Committee
There were four Directors who held positions in both our Company and Joincare namely, Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ) (the “Overlapping Members”) as at the Latest Practicable Date. Ms. Liu is the wife of Mr. Zhu. Save for the aforesaid, none of our Directors or Supervisors or senior management was a director or held a senior management role in the Joincare Group as at the Latest Practicable Date. Our Board, our Supervisors and our senior management and the board of directors of Joincare and its senior management are independent of, and separate from, each other.
Our Board is of the view that the OverlappingMembers’ roles and experiences with Joincare are beneficial to our Company, as their presence with our Company will ensure the continuity and stability of our operations and their individual expertise and experience are valuable to the strategic development of our Company. For further details of the relevant experience of the Overlapping Members, please refer to the section headed “Directors, Supervisors and Senior Management” in this listing document. In addition, our Board believes that the positions held by our Directors namely, Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng (
) and Mr. Zhong Shan ( ) in Joincare will not affect their abilities to discharge their fiduciary duties and duties of skill, care and diligence to our Company, on the following basis:
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Mr. Zhu
Mr. Zhu is currently our Chairman and non-executive Director and the Chairman of Joincare. We have been informed by Joincare that its board of directors believes that it would be in the best interests of the shareholders of Joincare for Mr. Zhu to remain on its board of directors as the Chairman, a position which has been held by Mr. Zhu since the establishment of Joincare. Joincare has communicated to us that Mr. Zhu has been beneficial to its future growth success in view of his extensive experiences, vision, and knowledge in operations and business management of Joincare as well as the pharmaceutical industry. Furthermore, the board of directors of Joincare considers that having Mr. Zhu remaining on its board would enable Joincare to continue to benefit from Mr.Zhu’s advice and input to its business. Mr. Zhu has been the Chairman of our Company since 2002 and the President of our Company from 2006 to September 2013, whereby he was responsible for the overall direction, strategic development and management of our Group. As Mr. Zhu has been performing his dual directorship role for more than 10 years, during which the business and operations of both our Group and Joincare have been carried out smoothly despite the fluctuations in the macro- economic environment, he is fully aware of the allocation of duties as a director of a listed company in both Shenzhen and Shanghai and the fiduciary duties he owes to the respective shareholders of our Company and Joincare. In addition, Mr. Zhu is able to ensure that no conflicts of interest exists among himself, our Company and Joincare and that the respective board of directors of our Company and Joincare consider that their respective shareholders havetheirbestinterestsprotectedwhilehavingMr.Zhutocontinuetoserveasanon-executive Director, and the Chairman of our Company and at the same time the Chairman of Joincare. In view of the above, our Board and the board of directors of Joincare believe that Mr.Zhu’s extensive experience and vision in the industry could bring beneficial foresight to the business strategies of our Group and Joincare accordingly.
Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( )
Ms. Liu has been the vice chairman of Joincare since November 1999 and since April 2007 and June 2008, Ms. Liu has also been our non-executive Director and our vice chairman, respectively.
Mr.QiuQingfeng( )joinedShenzhenTaitaiPharmaceuticalCompanyLimited ( ) in 1996 and is currently a director, general manager and the secretary to the board of Directors of Joincare. Mr. Qiu has been our Director since April 2007.
Mr. Zhong Shan ( ) joined Joincare in 2001, and is currently a vice general manager of Joincare. Mr. Zhong has been our Director since April 2007 and is also a member of our Strategic Committee.
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Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ) are non- executive Directors of our Company. Each of them will not have any management role in the day-to-day operations of our Group and will only be involved in high level business decisions provided there are no actual or potential conflict of interests. Given each of Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( )’s contribution to our Group and the Joincare Group throughout the years and their vast experience in the industry, both our Company and Joincare believe that it would be in the best interests of the respective shareholders of our Company and Joincare for them to participate as non-executive directors on our Board and as directors on the board of Joincare.
It is recognised that since Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ) are also directors of Joincare, they may potentially be perceived as having a conflict of interests in certain circumstances involving our Company and Joincare. However, these Directors are mindful of their fiduciary duties to act in the best interests of our Company and Joincare. In cases where there are actual or potential conflict of interests, these four common Directors will, in accordance with the requirements of the Hong Kong Listing Rules, the Shenzhen Listing Rules and theArticles ofAssociation, abstain from voting on the relevant resolutions in board meetings of our Company and Joincare. As such, we believe that it is unlikely that any conflict of interest will arise when Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ) provide their high-level strategic advice to our Company when such advice is needed.
Corporate governance measures
During the Track Record Period and as at the Latest Practicable Date, our Company and Joincare were listed on the Shenzhen Stock Exchange and the Shanghai Stock Exchange, respectively.TheboardofdirectorsofJoincareandourCompanyarefullyawareoftheirduties owed to their respective shareholders (including the minority shareholders) and therefore, they will ensure that our Company and Joincare will operate separately and independently of each other to maintain best interests of the shareholders of Joincare and our Company as a whole. In the case of aDirectors’ meeting at which our Company needs to decide on a transaction between a member of our Group and a member of the Joincare Group, our Directors that hold any directorships in Joincare will need to abstain from voting at such meeting. As such, it is not possible for Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan (
) to influence the decision of our Board with respect to any such transaction. Such transaction will also require the approval at a Board meeting where independent non-executive Directorswhohaveno(andwhoseassociateshaveno)materialintereststhereinsoastoensure that the best interests of our Company are being served.As such, we consider that the interests of our Shareholders in such situation are already adequately protected, as our Directors that are also directors of Joincare may not participate in the decision with respect to the voting of the relevant transaction. In addition, Joincare, as well as the other Controlling Shareholders, has each signed a non-competition deed with our Company in order to minimise the effect of any actual or potential competition of our business with that of our Controlling Shareholders. In view of this, our Company does not expect to have many situations where the interests of
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Joincare conflict with our Company. Therefore, it is unlikely that Mr. Zhu, Ms. Liu, Mr. Qiu Qingfeng ( ) and Mr. Zhong Shan ( ) will be conflicted from being able to provide their respective strategic advice to our Company when such advice is required. For further details regarding the non-competition undertaking, please refer to the sub-section headed “Non-competition undertaking” in this section.
Ingeneral,aftertheListing,anyDirectorwhohasamaterialinterestinactualorpotential connected transactions will be required under the Hong Kong Listing Rules and theArticles of Association to abstain from voting in meetings of the Board in relation to such transactions. In these cases, our five independent non-executive Directors will bring their independence to ourBoard’s decision making process. They will also advise and vote on the transactions and can seek independent advice from external financial advisers if required. Our non-conflicting executive Directors would also bring their extensive experience and expertise in the pharmaceutical industry to our Board. Through such measures, our Company believes that our Directors will be able to fully discharge their functions as a collective Board.
In addition, the daily management and operations of our Company is mainly carried out by our senior management who do not hold positions within the Joincare Group and have extensive experience in the pharmaceutical industry. Please refer to the section headed “Directors, Supervisors and Senior Management” in this listing document for their background andexperiences.ItisexpectedthataftertheListing,ourCompanywillcontinuetobecentrally managed by our senior management team. Our Company has sound reporting mechanisms in place to ensure that important decisions are made independently and only with the proper authorisations from the senior management team. For example, budgetary control, capital expenditure, raw materials procurements and hiring of senior personnel require approval of the senior management of our Group. Following the Listing, the senior management of our Group and the senior management of the Joincare Group will not overlap. This helps to ensure the independence between the daily management and operations of our Group and those of the Joincare Group.
AsattheLatestPracticableDate,uponmakingallreasonableenquiries,ourDirectorsand the directors of Joincare, confirm that, to the best of their knowledge and belief, no products which were developed, produced and sold by our Group that were the same as that of the Joincare Group in terms of detection of diseases, therapeutic areas, clinical applications and end markets.
Having considered the above factors, our Directors are satisfied that there is no material direct competition between our Group and Joincare Group as the management team of both our Group and the Joincare Group are separate and independent of each other with separate listing statusformorethan10years.Togetherwiththecorporategovernancemeasuresadoptedbyour Group, our Directors are of the view that our Company is capable of managing its business independently from our Controlling Shareholders and their respective associates and that any potential or material competition between our Group and the Joincare Group could be minimised.
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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
OPERATIONAL INDEPENDENCE
Our Group has our own systems and database which are separate and independent of all our competitors to access to our customers including distributors and end consumers, and to record price quotations and client information which ensures that such information are kept confidential. In addition, our Group has carried out all our essential administrative operations, such as cash and accounting management, invoicing and billing and other financial and management control systems independently from our Controlling Shareholders and their respective associates. We have our own in-house research and development teams, own sales teams as well as own production facilities independent from our Controlling Shareholders.As such, we do not rely on the research and development, distribution network and manufacturing capabilities of our Controlling Shareholders.
Our sales teams operate our business independently from Joincare and will not share any information regarding its products,customers’ details andcustomers’ requirements with Joincare. Furthermore, our Group does not undertake to join marketing activities with the Joincare Group, and none of ourGroup’s purchase orders with our customers is contingent upon, or bundled with, purchase orders placed by the same customers with the Joincare Group. During the Track Record Period, all of our sales were negotiated and concluded by our own sales teams which operate independently from Joincare and there are no instances where our Group has channeled our sales to the Joincare Group and
vice versa.
Save for the continuing connected transactions disclosed in the section headed “Connected Transactions” in this listing document, our Directors do not expect that there will beanyothernon-exemptcontinuingconnectedtransactionsbetweenourGroupononesideand our Controlling Shareholders and/or their respective associates on the other side upon or shortly after the Listing.
FINANCIAL INDEPENDENCE
Our Directors confirm that our Group will be financially independent from our Controlling Shareholders upon Listing. Members of our Group do not currently, and are not expected in the future to, rely on our Controlling Shareholders for services, funding or operational support. Our Group has our own internal control and accounting systems, accounting and finance department, independent treasury function for cash receipts and payment and independent access to third-party financing. All outstanding loans and non-trade payablesowedtoandfrom,and/oroutstandingfinancialguaranteesorindemnitiesprovidedby our Controlling Shareholders and their respective associates, if any, have been settled before the Listing.
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Our Directors believe that our Group will be able to obtain further financing such as bank loans, if necessary, upon market terms and conditions without relying further on financial assistance from our Controlling Shareholders and their respective associates after the Listing. CORPORATE GOVERNANCE
Our Board consists of five independent non-executive Directors to ensure that our Board isabletoeffectivelyexerciseindependentjudgmentinitsdecision-makingprocessandprovide independent advice to our Shareholders. Our Group will ensure that our independent non-executive Directors are of sufficient calibre, knowledge and experience, have no prior connections or relationships with our Group or our connected persons and will carry weight in ourGroup’s decision-making process. The background and experiences of the independent non-executive Directors are set out in the section headed “Directors, Supervisors and Senior Management” in this listing document.
In addition, our Company also ensures that in the case of aDirectors’ meeting at which our Company needs to decide on matters which involve our Controlling Shareholders and their respective associates, such Directors who have conflicts of interests will need to abstain from voting at such meeting. For further details, please refer to the sub-section headed “Corporate governance measures” under this section.
NON-DISPOSAL UNDERTAKING
Pursuant to Rule 10.07(1)(a) of the Hong Kong Listing Rules, our Controlling Shareholders have undertaken to the Hong Kong Stock Exchange that, (a) they will not, during the period commencing on the date of this listing document and ending on the date which is six months from the Listing Date, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interest or encumbrances in respect of, any of the Shares in respect of which they are shown by this listing document to be the beneficial owner; and (b) they will not, during the period of six months from the date on which the period referred to in (a) above expires, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interest or encumbrances in respect of, any of our Shares referred to in (a) above if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, they would then cease to be one of our Controlling Shareholders. Note (2) to Rule 10.07 of the Hong Kong Listing Rules provides that the rule does not prevent a controlling shareholder from using the Shares beneficially owned by it as security (including a charge or a pledge) in favour of an authorised institution (as defined in the Banking Ordinance) for a bona fide commercial loan.
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OurControllingShareholdershavefurtherundertakentotheHongKongStockExchange, the Sole Sponsor and us respectively that they will, within a period commencing on the date of this listing document and ending on a date which is 12 months from the Listing Date, immediately inform the Hong Kong Stock Exchange, the Sole Sponsor and us in writing of: (a) any pledges or charges of any of our Shares or securities of our Company beneficially owned by it, whether directly or indirectly, in favour of an authorised institution (as defined in the Banking Ordinance) for a bona fide commercial loan pursuant to Note (2) to Rule 10.07(2) of the Hong Kong Listing Rules and the number of such Shares or securities of our Company so pledged or charged; and (b) any indication received by it, either verbal or written, from any pledgee or chargee of any of our Shares or other securities of our Company pledged or charged that any of such Shares or other share capital will be sold, transferred or disposed of.
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CONNECTED TRANSACTIONS
OVERVIEW
We have entered into various transactions in the ordinary course of our business with certain parties which are or which we consider to be connected persons of our Company as defined under the Hong Kong Listing Rules during the Track Record Period and are expected to continue following the Listing.
CONTINUING CONNECTED TRANSACTIONS
Exempt Continuing Connected Transactions
1. Sale of products to the Joincare Group
During the Track Record Period, certain subsidiaries of our Group have been selling products including diagnostic reagents, to certain subsidiaries of the Joincare Group. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the total amount paid by the Joincare Group to us in relation to these sales amounted to approximately RMB53,316.28, RMB26,369.33, RMB287,520.58 and RMB444,978.81, respectively. As such transactions are expected to continue on a recurring basisaftertheListingandJoincareistheControllingShareholderofourCompany,assuch,our sale of products to the Joincare Group will constitute continuing connected transactions of our Company upon Listing.
As each of the applicable percentage ratios (other than the profits ratio) of the aggregate payment to be paid by the Joincare Group to our Group in relation to the above sales in aggregate on an annual basis was, and is expected to be, less than0.1%, such continuing connected transactions are de minimis transactions which are exempt from reporting, annual review, announcement and independentshareholders’ approval requirements under Chapter 14A of the Hong Kong Listing Rules.
2. Lease of properties from our Group by the Joincare Group
During the Track Record Period, the Joincare Group has leased some properties from our Group. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended30September2013,thetotalamountpaidbytheJoincareGrouptousinrelationtothese leases amounted to approximately RMB206,092.14, RMB214,810.25, RMB351,211.13 and RMB388,442.60, respectively. As such transactions are expected to continue on a recurring basisaftertheListingandJoincareistheControllingShareholderofourCompany,assuch,our leases of properties to the Joincare Group will constitute continuing connected transactions of our Company upon Listing.
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As each of the applicable percentage ratios (other than the profits ratio) of the aggregate payment to be paid by the Joincare Group to us in relation to the above leases in aggregate on an annual basis was, and is expected to be, less than0.1%, such continuing connected transactions are de minimis transactions which are exempt from reporting, annual review, announcement and independentshareholders’approval requirements under Chapter 14Aof the Hong Kong Listing Rules.
3. Lease of properties from Joincare by our Group
During the Track Record Period, we leased some properties from Joincare. For each of the threeyearsended31December2010,2011and2012andninemonthsended30September2013, the total amount paid by us to Joincare in relation to these leases amounted to approximately RMB nil, RMB329,472.00, RMB658,944.00 and RMB494,208.00, respectively. As such transactions are expected to continue on a recurring basis after the Listing and Joincare is the Controlling Shareholder of our Company, as such, our leases of properties from the Joincare Group will constitute continuing connected transactions of our Company upon Listing.
As each of the applicable percentage ratios (other than the profits ratio) of the aggregate payment to be paid by us to Joincare in relation to the above leases in aggregate on an annual basis was, and is expected to be, less than0.1%, such continuing connected transactions are de minimis transactions which are exempt from reporting, annual review, announcement and independentshareholders’approval requirements under Chapter 14Aof the Hong Kong Listing Rules.
4. Provision of water, electricity and power by our Group to the Joincare Group
During the Track Record Period, certain subsidiaries of our Group have been providing water, electricity and power to certain subsidiaries of the Joincare Group. For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the total amount paid by the Joincare Group to us in relation to the provision of these utilities amountedtoRMBnil,RMBnil,RMBnilandapproximatelyRMB100,992.69,respectively.As such transactions are expected to continue on a recurring basis after the Listing and Joincare is the Controlling Shareholder of our Company, as such, our provision of utilities to the Joincare Group will constitute continuing connected transactions of our Company upon Listing.
As each of the applicable percentage ratios (other than the profits ratio) of the aggregate payment to be paid by the Joincare Group to our Group in relation to the above provision of utilities in aggregate on an annual basis was, and is expected to be, less than0.1%, such continuing connected transactions are de minimis transactions which are exempt from reporting, annual review, announcement and independentshareholders’approval requirements under Chapter 14A of the Hong Kong Listing Rules.
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CONNECTED TRANSACTIONS
Non-exempt Continuing Connected Transactions
Purchase of products and raw materials from Joincare
Parties : Our Company (as purchaser)
Joincare (as seller)
On 10 January 2014, our Company entered into an agreement with Joincare, pursuant to which the Joincare Group shall sell certain products and raw materials which are mainly used for the production of antibiotics related drug preparation products, such as voriconazole itraconazole ( ), 7-ACA, D7-ACA, acetonitrile ( ), 100ml moulded bottles, rubber plugs to such members of our Group from time to time in accordance with the terms thereof for a period commencing from the Listing Date and ending on 31 December 2015 (the “Joincare Purchases Agreement”).
The agreement with Joincare comprises the general terms and conditions upon which the relevant members of our Group may purchase products and raw materials from the relevant members of the Joincare Group. The relevant members of our Group may from time to time place purchase orders with the relevant members of the Joincare Group setting out the detailed terms for the purchase of products and raw materials, provided that such detailed terms shall not be inconsistent with the terms of the agreement with Joincare. The Joincare Group will not be obligated to sell any fixed quantity or types of products and raw materials to members of our Group during each term of the agreement with Joincare. The actual quantity, types and prices of the products and raw materials to be sold to the relevant members of our Group shall be subject to the individual purchase order placed by the relevant members of our Group with the relevant members of the Joincare Group from time to time.
Thepricesatwhichtheproductsandrawmaterialsaretobesoldbytherelevantmembers of the Joincare Group to the relevant members of our Group shall be at the prevailing market price for such products and raw materials, or if the same is not available, a price which is not less favourable to our Group than the price at which the relevant members of the Joincare Group sells similar products and raw materials to Independent Third Parties.
Our Group has been continuously expanding our business and anticipates that more raw materials for the manufacture of ourGroup’s products will be required for ourGroup’s future business growth. Taking into account factors such as the quality and price of raw materials supplied by the relevant members of the Joincare Group and the reputation of Joincare, our Group considers that the purchase of raw materials under the agreement with Joincare is necessary to facilitate ourGroup’s business development plan and will improve the competitiveness, quality and price of ourGroup’s products.
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CONNECTED TRANSACTIONS
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the total amount paid to the Joincare Group in relation to the purchase of products and raw materials from the Joincare Group amounted to approximately RMB235.53 million, RMB86.47 million, RMB84.63 million and RMB89.11 million, respectively, representing approximately23.45%,9.82%,7.60% and11.00% of our total purchases for the respective periods. The decrease in our purchases from the Joincare Group for 2011 and 2012 was mainly due to the shrinking demand for our antibiotics related drug preparation products due to the restriction of use of antibiotics in the PRC following the introduction of theAmendment by National Development and Reform Commission on Certain Categories of the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011 and the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012.
Our Company estimates the total purchase under the Joincare Purchases Agreement for each of the two years ending 31 December 2014 and 2015 will not exceed RMB156.00 million and RMB187.20 million, respectively. The proposed annual caps for each of the two years ending 31 December 2014 and 2015 have been determined with reference to (a) the internal projection of the development of ourGroup’s business; (b) the prevailing market condition and demand for ourGroup’s products; (c) the historical growth of the PRC pharmaceutical industry; (d) the prevailing market prices for the relevant raw materials; (e) inflation; (f) thebusinessdevelopmentplansofourGroup;(g)theimplementationbyourCompany’ssubsidiary Zhuhai FTZ Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. (
) (“Zhuhai Hecheng”) of its recent in-depth reform in terms of, among other things,salaryincentiveandstaffperformanceassessment,aimedatincreasingthesalesincome of Zhuhai Hecheng; and (h) ourGroup’s potential in increasing our market share in the area of bulk medicine (including cephalosporins category ( )) and intermediates. From the publication of the 2012 Notice on Governance of Corporates Engaging in Illegal Waste Emission and Protection of Public Health and Environment ( 2012
) and the 2013 Notice on Governance of Corporates Engaging in Illegal Waste Emission and Protection of Public Health and Environment ( 2013 ) by the relevant PRC Government authorities, our Company expects that the supervision of pharmaceutical enterprises on environmental aspects will become more stringent. Because of this, our competitors who are using production methods or equipment that do not satisfy the currentrequiredstandardsmayloseoutontheirsupplytothemarket.Further,sincewebelieve ourGroupismoreadvancedinenvironmentalcontrolandgovernancethanourcompetitors,we expect ourGroup’s market share may increase by taking up the market share which our competitors may be are losing out. Therefore, we consider that the proposed annual caps for the two years ending 31 December 2014 and 2015 are fair and reasonable.
Our Directors (including our independent non-executive Directors) are of the view that the Joincare Purchases Agreement has been entered into on normal commercial terms, in the ordinary and usual course of business of our Group and that the terms thereof are fair and reasonable and in the interests of our Shareholders as a whole.
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CONNECTED TRANSACTIONS
Waiver
For the transactions contemplated under the Joincare Purchases Agreement, each of the percentage ratios (other than the profits ratio) of the aggregate payment to be paid by our Group, for each of the two years ending 31 December 2014 and 2015 is greater than5%, the transactions contemplated under the Joincare Purchases Agreement would constitute continuing connected transactions of our Company under the Listing Rules and are therefore subject to the annual review, reporting, announcement and independentshareholders’approval requirements under Rules 14A.45 to 14A.54 of the Hong Kong Listing Rules following the completion of the Listing.
As the non-exempt continuing connected transactions described above are expected to continue on a recurring basis after the Listing, have been entered into prior to the Listing Date and have been fully disclosed in this listing document, our Directors consider that compliance with the reporting and announcement and the independentshareholders’approval requirements would add unnecessary administrative costs for us. Accordingly, we have applied for, and the Hong Kong Stock Exchange has granted us, waivers pursuant to Rule 14A.42(3) of the Hong Kong Listing Rules to exempt the non-exempt continuing connected transactions from strict compliance with the announcement and independentshareholders’ approval requirements (where applicable) under the Hong Kong Listing Rules.
Joincare is the Controlling Shareholder of our Company.As such, Joincare is a connected person of our Company under Chapter 14A of the Hong Kong Listing Rules. Thus, upon Listing, the transactions contemplated under the Joincare PurchasesAgreement will constitute continuing connected transactions of our Company.
Our Company will comply with the relevant requirements under Chapter 14Aof the Hong Kong Listing Rules, including the proposed annual caps for the non-exempt continuing connected transactions as described above.
Our independent non-executive Directors and auditors of our Company will review whether the non-exempt continuing connected transactions have been entered into based on the principal terms and pricing policies under the relevant agreement as disclosed in this section. The confirmations of our independent non-executive Directors and our auditors will be disclosed annually, as required under the Hong Kong Listing Rules.
In the event of any future amendments to the Hong Kong Listing Rules imposing more stringent requirements than those applicable as at the Latest Practicable Date on the continuing connected transactions as disclosed in this section, our Company will take appropriate steps to ensure compliance with such new requirements within a reasonable period of time.
COMPLIANCE WITH THE SHENZHEN LISTING RULES
Our Company obtainedshareholders’ approval in respect of the entering into of the Joincare Purchases Agreement and the proposed annual caps for the non-exempt continuing connected transactions for each of the two years ending 31 December 2014 and 2015 at our extraordinary general meeting held on 8August 2013. Please refer to our announcement dated 8 August 2013 for further details.
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CONNECTED TRANSACTIONS
CONFIRMATION FROM OUR DIRECTORS
Our Directors, including our independent non-executive Directors, are of the opinion that the transactions as described in the sub-section headed “Continuing Connected Transactions” in this section have been entered into, and will be carried out following the completion of the Listing, in the ordinary and usual course of our business and on normal commercial terms, as the case may be, from our perspective, and that the terms of the transactions and the annual caps for such continuing connected transactions are fair and reasonable and in the interests of our Shareholders as a whole.
CONFIRMATION FROM THE SOLE SPONSOR
Afterreviewoftherelevantdocumentationandhistoricalfiguresprovidedbyus,theSole Sponsor is of the view that (a) the non-exempt continuing connected transactions as described above are in the ordinary and usual course of our business, on normal commercial terms, are fair and reasonable and in the interest of our Shareholders as a whole; and (b) the annual caps for such non-exempt continuing connected transactions as described above are fair and reasonable and in the interests of the Shareholders as a whole.
TRANSACTIONS AND BALANCES WITH RELATED PARTIES
Except for the transactions and balances with Guangdong Blue Treasure Pharmaceutical Co., Ltd ( ), all related party transactions as disclosed in Section VII.3 of theAccountants’ Report in Appendix I to this listing document were also connected transactions or continuing connected transactions for our Company.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
GENERAL
Our Board consists of 11 Directors, comprising two executive Directors, four non- executive Directors and five independent non-executive Directors.
According to theArticles ofAssociation, the functions and powers of our Board include:• conveningShareholders’ general meetings and to report on its work to theShareholders’ general meetings;
• implementing resolutions ofShareholders’ general meetings;
• determining the operating plans and investment proposals of our Company;
• formulating our annual financial budgets and final accounts;
• formulating our profit distribution plans and plans for recovery of losses;
• formulating proposals for increase or reduction of our registered share capital and the issue of bonds or other securities or the listing of our Company;
• formulating plans of substantial acquisition by our Company, acquisition of the shares of our Company or merger, division, dissolution and changes of the form of our Company;
• within the scope of authorisation by ourShareholders’ general meetings, determining matters concerning external investments, acquisition and sales of assets, pledge of assets, external guarantees, entrustment of wealth management and connected transactions;
• deciding on the establishment of our internal management structure;
• appointingandremovingourCompany’spresident,secretaryofourBoardandunder the nominations of the president, appointing and removing senior management such as the vice presidents and financial officers and deciding on their remuneration, reward and punishment;
• formulating ourCompany’s basic management system;
• formulating proposals for any amendment to our Articles of Association;
• managing the disclosure of ourCompany’s information;
• proposing to ourShareholders’general meetings engagement or replacement of theaccountant’s firm conducting auditing for our Company;
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
• reviewing the work report of our president and assessing the work of our president; and
• exercising such other functions and powers as conferred by laws, administrative regulations, the Articles of Association or ourShareholders’ general meeting.
As required by the Company Law, a joint stock company with limited liability should establish a supervisory committee, which is responsible for monitoring the financial matters and supervising the acts of its board of directors and members of its management. Our Supervisory Committee consists of three members, of whom one is an employee representativeelectedbyouremployeesandtwomembersappointedbyShareholdersatShareholders’general meetings for a term of three years. Members of the Supervisory Committee shall not include Directors, president or members of our senior management.
According to the Articles of Association, the functions and powers of our Supervisory Committee include:
• reviewing ourCompany’s regular reports prepared by our Board and issuing written verification opinions;
• examining ourCompany’s financial affairs;
• supervising our Directors and members of senior management in the performance of their duties and proposing removal of Directors and members of senior management who violated applicable laws and regulations, the Articles of Association and resolutions ofShareholders’ general meetings;
• demanding rectification from our Directors and members of senior management when the acts of such persons are harmful to the interest of our Company;
• verifying financial information such as the financial report, business operation report and plans for distribution of profits to be submitted by our Board toShareholders’general meetings and, should any queries arise, authorising, on behalf of our Company, a re-examination by certified public accountants or practicing auditors;
• proposing to conveneShareholders’ extraordinary general meetings and convening and presiding overShareholders’general meetings when our Board fails to perform its duties of convening and presiding overShareholders’general meetings under the Company Law;
• making proposals atShareholders’ general meetings;
• bringing an action against our Directors or members of senior management according to section 152 of the Company Law;
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
• investigating when ourCompany’s operations show abnormal signs and engaging accounting firms, law firms or other professional organisations to assist if necessary with the relevant expenses being paid by our Company;
• exercising other functions and powers conferred by the Articles of Association.
DIRECTORS
The following table provides information on our Directors:
Month and year
of appointment Responsibilities
Name Age as Director Position in our Group
Mr. An Ning 41 May 2003 Executive Responsible for the strategic ( ) Director and development and the overall president business management of our Group and a member of our Strategic Committee, our
Nomination Committee and
our Remuneration and
Assessment Committee
Mr. Tao Desheng 49 July 2009 Executive Responsible for the strategic ( ) Director and vice development of our Company president and research and development management of biological
medicine
Mr. Zhu Baoguo 51 June 2002 Chairman and Responsible for the overall
(
)(Note)
non-executive strategic and business
Director development of our Group
and chairman of our Strategic Committee
Ms. Liu Guangxia 44 April 2007 Vice chairman Responsible for the strategic (
)(Note)
and non-executive development of our Company Director
Mr. Qiu Qingfeng 42 April 2007 Non-executive Responsible for the strategic ( ) Director development of our Company
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Month and year
of appointment Responsibilities
Name Age as Director Position in our Group
Mr. Zhong Shan 42 April 2007 Non-executive Responsible for the strategic ( ) Director development of our Company and a member of our
Strategic Committee
Mr. Luo Xiaosong 38 June 2008 Independent Chairman of our Audit
( ) non-executive Committee, member of our
Director Remuneration and Assessment Committee and supervising
and providing independent
judgment to our Board
Mr. Yang Bin 41 July 2009 Independent Chairman of our Nomination ( ) non-executive Committee, member of our
Director Audit Committee and
supervising and providing
independent judgment to our Board
Mr. Guo Guoqing 51 June 2013 Independent Chairman of our Remuneration ( ) non-executive andAssessment Committee,
Director member of ourAudit
Committee and our Nomination Committee and supervising and providing independent
judgment to our Board
Mr. Wang Xiaojun 59 September 2013 Independent Supervising and providing
( ) non-executive independent judgment to our
Director Board
Mr.Yu Xiong 52 September 2013 Independent Supervising and providing
( ) non-executive independent judgment to our
Director Board
Note: Mr. Zhu is the husband of Ms. Liu.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Executive Directors
Mr. An Ning ( ), aged 41, is our executive Director, president, responsible officer for financial matters, one of our authorised representatives and a member of our Strategic Committee, our Nomination Committee and our Remuneration and Assessment Committee. Mr. An is principally responsible for the daily business operations and management of our Company and the execution of ourCompany’s strategies. Mr.An has been our executive Director, responsible officer for financial matters and vice president since 2003. Since July 2006, Mr. An has been our executive vice president and was appointed as our president in September 2013. From 2001 to 2003, Mr. An was the financial supervisor of Joincare. Since December 2008, Mr. An has been an independent director of The Great Wall Group Company Limited Guangdong ( ) (Shenzhen stock code: 300089) which is listed on the Shenzhen Stock Exchange. Mr. An obtained his EMBA from Cheung Kong Graduate School of Business ( ) in March 2006. Mr. An was named as “An Outstanding CIO of the Top 100 PRC Information Technology Enterprises for Year 2005” (2005 CIO) by CNET Networks (China) and “2007 Outstanding CFO of the PRC” (2007 CFO) by Top CFO Magazine (
) in March 2008. Mr. An is a Certified Public Accountant and Certified Tax Accountant in the PRC and he also possesses the Certified PublicAccountant qualification for securities-related businesses in the PRC.
Mr. Tao Desheng ( ), aged 49, is our executive Director and vice president. Mr. Tao is principally responsible for the research and development of biological medicine, monoclonal anti-bodies and vaccines. Mr. Tao is also in charge of overseas markets. Mr. Tao has been the vice president of our Company and our Director since June 2005 and July 2009, respectively. Mr. Tao obtained his practising pharmacist qualification ( ) in October 2002 and the title of senior engineer in pharmaceutical manufacturing (professor) (
( ) ) in March 2013. Mr. Tao graduated with abachelor’s degree in chemistry from the faculty of pharmaceutical chemistry of the Nanjing School of Pharmaceutical Sciences ( ). From 2000 to 2002, Mr. Tao attended a postgraduate advanced course in enterprise management organised by Sun Yat-Sen University ( ). Non-executive Directors
Mr.ZhuBaoguo( ),aged51,isourChairman,non-executiveDirectorandthe Chairman of our Strategic Committee. Mr. Zhu is principally responsible for the overall direction, strategic development and management of our Company. Mr. Zhu is also the legal representative of our Company. Since 2002, Mr. Zhu has been the chairman of our Board and since 2006, he has also been the president of our Company. Mr. Zhu is also the founder and chairman of Joincare. From July 1989 to December 1992, Mr. Zhu was the general manager of Henan Fei Long Chemical Products Co., Ltd. ( ), a sino-foreign joint venture. Since May 2010 and June 2012, Mr. Zhu has been a committee member of 5th Shenzhen CCPCC ( ) and the vice chairman of Shenzhen Federation of Industry and Commerce ( ), respectively. Mr. Zhu obtained hisbachelor’s degree in chemistry from Henan Normal University ( ) in 1985. Mr. Zhu is the spouse of Ms. Liu, our non-executive Director.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Ms. Liu Guangxia ( ), aged 44, is our vice chairman and non-executive Director. Ms. Liu is principally responsible for the strategic development of our Company. Ms. Liu has been our Director and vice chairman of our Board since April 2007 and June 2008, respectively. Since January 1999 and November 1999, Ms. Liu has been a director of Shenzhen Baiyeyuan and the vice chairman of Joincare, respectively. Ms. Liu graduated from Henan Normal University ( ) majoring in English in 1990. Ms. Liu is the spouse of Mr. Zhu, our non-executive Director.
Mr. Qiu Qingfeng ( ), aged 42, is our non-executive Director. Mr. Qiu is principally responsible for the strategic development of our Company. Mr. Qiu has been our Director sinceApril 2007. Mr. Qiu was the chairman of our Supervisory Committee from June 2005 to April 2007. Mr. Qiu joined Shenzhen Taitai Pharmaceutical Company Limited (
)in1996andiscurrentlyadirector,generalmanagerandthesecretarytothe board of directors of Joincare. Mr. Qiu obtained his MBA from China Europe International Business School ( ) in September 2007. Mr. Qiu is a Certified Public Accountant in the PRC.
Mr.ZhongShan( ),aged42,isournon-executiveDirectorandamemberofour Strategic Committee. Mr. Zhong is principally responsible for the strategic development of our Company. Mr. Zhong has been our Director since April 2007. From July 1994 to April 2000, Mr. Zhong worked in the Guangzhou branch of Deloitte Touche Tohmatsu and Kwan, Wong, Tan& Fong (Hong Kong) which provide auditing and accounting consultancy services. Mr. Zhong joined Joincare in 2001 and is currently the vice general manager of Joincare. Mr. Zhong graduated from the applied chemistry profession of the Faculty of Applied Chemistry of Huaqiao University ( ) and obtained abachelor’s certificate in 1993.
Independent non-executive Directors
Mr.LuoXiaosong( ),aged38,isourindependentnon-executiveDirector,the chairman of our Audit Committee and a member of our Remuneration and Assessment Committee. Mr. Luo has been our independent non-executive Director since June 2008. Mr. Luo is principally responsible for supervising and providing independent judgment to our Board. Since 2005, Mr. Luo has been the project manager, department manager and salaried partner of Shenzhen Greatwall Certified Public Accountants Co., Ltd (
). Mr. Luo graduated from Xian Jiaotong University ( ), majoring in accounting, in June 2000. Mr. Luo is a Certified Public Accountant in the PRC.
Mr. Yang Bin ( ), aged 41, is our independent non-executive Director, the chairman of our Nomination Committee and a member of our Audit Committee. Mr. Yang is principally responsible for supervising and providing independent judgment to our Board. Mr. Yang has been our independent non-executive Director since July 2009. Since February 2010, hehasbeenanindependentdirectorofShenzhenChineseTestingInternationalCorporation(
) (Shenzhen stock code: 300012) which is listed on the Shenzhen Stock Exchange. Since January 2011, he has been the secretary of the board of directors of Shenzhen CAU Technology Co., Ltd ( ), a company listed on the Shenzhen Stock Exchange (Shenzhen stock code: 000004). Mr. Yang obtained hismaster’s degree in business administration from Xian Jiaotong University (
) in June 2004.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Guo Guoqing ( ), aged 51, is our independent non-executive Director, the chairman of our Remuneration and Assessment Committee and a member of our Audit Committee and our Nomination Committee. Mr. Guo is principally responsible for supervising and providing independent judgment to our Board. Mr. Guo has been our independent non-executive Director since June 2013. Mr. Guo is a committee member of 7th All-China Youth Federation ( ), 8th and 9th CPPCC National Committee ( ), a member of the 11th NationalPeople’s Congress ( ) and a committee member of the Democratic League of China ( ). Over the past years, Mr. Guo has been a deputy director of the School of Trade Economics and the vice-president of the Faculty of Business Administration of Renmin University of China ( ). Mr. Guo is currently a professor and doctoral tutor of the School of Business of Renmin University of China( )andthedirectorofPRCmarketingresearchcentreofRenminUniversity of China ( ). Mr. Guo is also a consultant of China Marketing Association of University ( ), the vice-president of PRC Business History Society ( ) and an expert of the National Natural Science Foundation of Management Science Review Panel ( ). Mr. Guo obtained his doctoral degree in economics from Renmin University of China ( ) in January 1998. The table below sets out Mr.Guo’s appointments as director or supervisors of publicly listedcompaniesinthelastthreeyearsimmediatelyprecedingthedateofthislistingdocument: Name of listed company Role Period
Longrun Tea Group Independent non-executive August 2002– present
Company Limited (Hong director
Kong stock code: 2898)
Sinosteel Jilin Carbon Independent director June 2011– present
Co., Ltd. (
)
(Shenzhen stock code:
000928)
Jiugui Liquor Co., Ltd. Independent director June 2008– present
( )
(Shenzhen stock code:
000799)
Beijing Wangfujing Independent director June 2011– present
Department Store
(Group) Co., Ltd.
( ( )
)
(Shanghai stock code:
600859)
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Name of listed company Role Period
Gree Real Estate Co., Ltd. Independent director August 2010– present
( )
(Shanghai stock code:
600185)
Shenzhen Tatfook Chairman of the board of December 2009– January Technology Co., Ltd. supervisors 2013
(
) (Shenzhen stock
code: 300134)
Mr. Wang Xiaojun ( ), aged 59, is our independent non-executive Director. Mr. Wang has been our independent non-executive Director since September 2013. Mr. Wang is principally responsible for supervising and providing independent judgment to our Board. From July 1986 to September 1987, Mr.Wang worked as a lawyer at China Global Law Office. From October 1992 to February 1993, Mr.Wang was an assistant manager in the China Listing Affairs Unit of the Hong Kong Stock Exchange. From March 1993 to December 1995 and January 1996 to March 1996, Mr. Wang worked as a trainee solicitor and an assistant solicitor at Richards Butler, respectively. Mr. Wang is currently a partner of Junhe Law Offices. Mr. Wang graduated from Renmin University of China ( ) majoring in law in July 1983 and graduated from the Graduate School of the ChineseAcademy of Social Sciences (
)inDecember1986.Mr.WangisasolicitoradmittedinthePRC,HongKongand England and Wales. Mr. Wang was named as “Leading Lawyers in Capital Markets and Corporate Finance” by Asialaw in 2008 and 2010. The table below sets out Mr.Wang’s appointments as directors of publicly listed companies in the last three years immediately preceding the date of this listing document:
Name of listed company Role Period
China Aerospace Independent non-executive March 2013– present
International Holdings director
Limited (Hong Kong
stock code: 31)
Yanzhou Coal Mining Independent non-executive May 2011– present
Company Limited (Hong director
Kong stock code: 1171)
Zijin Mining Group Co., Independent non-executive November 2009– present Ltd. (Hong Kong stock director
code: 2899)
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Name of listed company Role Period
Norinco International Independent director June 2008– present
Cooperation Limited (
) (Shenzhen stock
code: 000065)
OP Financial Investments Independent non-executive August 2004– present
Limited (Hong Kong director
stock code: 1140)
Guangzhou Shipyard Independent non-executive May 2005– May 2011
International Company director
Limited (Hong Kong
stock code: 317)
Mr.YuXiong( ),aged52,isourindependentnon-executiveDirector.Mr.Yuhas been our independent non-executive Director since September 2013. Mr. Yu is principally responsible for supervising and providing independent judgment to our Board. Mr. Yu is currently the deputy vice-president and a researcher of China State Institute of Pharmaceutical Industry ( ), the chairman of the Pharmaceutical Engineering Expert Committee of the Chinese Pharmaceutical Association ( ) and a lecturer of the graduate school of Shanghai Institute of Pharmaceutical Industry (
). From 1984 to 2010, Mr. Yu held various positions at Shanghai Institute of Pharmaceutical Industry ( ), including as an assistant researcher, deputy researcher, researcher and deputy vice-president. Mr. Yu has approximately 30 years of experience in the research of innovative chemical pharmaceutical products and the production techniques of chemical pharmaceutical products. In particular, Mr. Yu specialises in the research and development of anti-parasitic drugs, anti-bacterial drugs, anti-viral drugs, anti-tumour drugs and cardio-vascular drugs. Mr. Yu graduated from Fudan University (
) majoring in Chemistry in 1984. He obtained the qualification as a researcher specialising in pharmaceutical chemistry from The Shanghai Institute of Pharmaceutical Industry (
)in2002.ThetablebelowsetsoutMr.Yu’sappointmentsasdirectorsofpublicly listedcompaniesinthelastthreeyearsimmediatelyprecedingthedateofthislistingdocument: Name of listed company Role Period
Guangdong Taiantang Independent director July 2007– July 2013
Pharmaceutical Co., Ltd.
(
) (Shenzhen stock
code: 002433)
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Name of listed company Role Period
Shandong Lukang Independent director April 2006– April 2012
Pharmaceutical Group
Co., Ltd.
(
) (Shanghai stock
code: 600789)
Shanghai Shyndec Director June 2003– June 2011
Pharmaceutical Co., Ltd.
(
) (Shanghai stock
code: 600420)
Save as disclosed in this listing document, each of our Directors confirms with respect to himself/herself that: (a) he/she has not held any directorships in the last three years in any public companies, the securities of which are listed on any securities market in Hong Kong or overseas; (b) he/she does not have any relationship with any other Directors, Supervisors, senior management or substantial shareholders or Controlling Shareholders; (c) there is no other information that should be disclosed for himself/herself pursuant to the requirements under Rule 13.51(2)(a) to (v) of the Hong Kong Listing Rules; and (d) there are no other matters that need to be brought to the attention of our Shareholders.
SUPERVISORS
The following table provides information on our Supervisors:
Month and year Responsibilities
Name Age of appointment Position in our Group
Mr. Wang 47 January 2010 Supervisor Monitoring and overseeing
Maolin ourCompany’s financial
( ) matters, examining our
Company’s periodic reports, and supervising the conduct of our Board and senior
management
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Month and year Responsibilities
Name Age of appointment Position in our Group
Mr. Yuan 51 June 2013 Supervisor Monitoring and overseeing
Huasheng ourCompany’s financial
( ) matters, examining our
Company’s periodic reports, and supervising the conduct of our Board and senior
management
Mr. Huang 42 June 2013 Supervisor Monitoring and overseeing
Huamin ourCompany’s financial
( ) matters, examining our
Company’s periodic reports, and supervising the conduct of our Board and senior
management
Mr. Wang Maolin ( ), aged 47, is our Supervisor. Mr. Wang is principally responsible for monitoring and overseeing ourCompany’s financial matters, examining ourCompany’s periodic reports, and supervising the conduct of our Board and senior management. Mr.Wang has been our Supervisor and chairman of our labour union since January 2010. Since 2001, Mr. Wang has been our chief supervisor of the legal supervision head office. In January 2012, Mr. Wang was elected as a representative of 8th ZhuhaiPeople’s Congress (
). Mr. Wang graduated from the Law Department ofAnhui University (
) and was awarded with abachelor’s degree in 1989.
Mr. Yuan Huasheng ( ), aged 51, is our Supervisor. Mr. Yuan is principally responsible for monitoring and overseeing ourCompany’s financial matters, examining ourCompany’s periodic reports, and supervising the conduct of our Board and senior management. Mr.Yuan has been our Supervisor since June 2013. Mr.Yuan has been a director of the futures department of China Jinchuan Nonferrous Supply Co., Ltd. ( ); a manager of the business department (import) of Jinchuan Nonferrous Metals Import-Export Co.,Ltd.( );thegeneralmanageroftheassetmanagementdepartment of Zhuhai Gongye Holdings Co., Ltd. ( ); the vice-chairman and legal representative of Zhuhai Lianshen Asset Management Co., Ltd. (
); the communist party committee member, the chairman of the labour committee, the secretary of branch agencies as well as the vice-general manager of Zhuhai Lianji Holdings Co., Ltd. ( ); the vice-general manager and communist party committee member of Zhuhai Shanglian Investment Holdings Co., Ltd. (
). Mr. Yuan has been the vice-general manager of Zhuhai Aviation Industrial Development Group Co., Ltd. ( ) and the vice-president of Zhuhai Airport Group Corp. ( ) since May 2009 and August 2012, respectively. Mr. Yuan obtained hismaster’s degree in Business Administration from China Europe International Business School ( ) in March 1993 and is a senior economist.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Huang Huamin ( ), aged 42, is our Supervisor. Mr. Huang is principally responsible for monitoring and overseeing ourCompany’s financial matters, examining ourCompany’s periodic reports, and supervising the conduct of our Board and senior management. Mr. Huang has been our Supervisor since June 2013. Mr. Huang has been the chief financial officer and assistant to the general manager of Livzon Group Lixin Co. Ltd. (
), the manager of the finance department and business department of Livzon Group Liwei Co., Ltd. ( ) as well as the manager of ourCompany’s finance clearing centre. From September 2008 to May 2009, Mr. Huang was employed by Zhuhai Gree Real Estate Co., Ltd. ( ). Mr. Huang has been the chief financial controller and the secretary to the board of directors of Gree Real Estate Co., Ltd. (
), a company listed on the Shanghai Stock Exchange (Shanghai stock code: 600185) since May 2009 and October 2009, respectively. Mr. Huang obtained hisbachelor’s degree in Industrial Economy from the Shanghai University of Finance and Economics (
) in 1993 and is an accountant.
Save as disclosed in this listing document, each of our Supervisors confirms with respect to himself that: (a) he has not held any directorships in the last three years in any public companies, the securities of which are listed on any securities market in Hong Kong or overseas; (b) he does not have any relationship with any other Directors, Supervisors, senior management or substantial shareholders or Controlling Shareholders; (c) there is no other information that should be disclosed for himself pursuant to the requirements under Rule 13.51(2)(a) to (v) of the Hong Kong Listing Rules; and (d) there are no other matters that need to be brought to the attention of our Shareholders.
SENIOR MANAGEMENT
The following table provides information on our senior management:
Year of Responsibilities in Name Age appointment Position our Group
Mr. Xu Guoxiang 51 2007 Vice president Responsible for the ( ) marketing and sales management of ourCompany’s products Mr. Lu Wenqi 46 2006 Vice president Responsible for the ( ) scientific research
management of our Chinese medicine
and chemical
medicine
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Year of Responsibilities in Name Age appointment Position our Group
Mr. Yang Daihong 47 2006 Vice president Responsible for the ( ) quality control of
our production and supply and our
Company’s safety
and environmental
management
Mr. Xu Guoxiang ( ), aged 51, is our vice president. Mr. Xu has been our vice president since 2007 and is principally responsible for the marketing and sales management of ourCompany’s products. In March 2007, Mr. Xu was the chief supervisor of our marketing departmentandthegeneralmanagerofourbranchcompanyinHenanProvince,thePRC.From 2000 to 2005, Mr. Xu was the director of Yangtze River Pharmaceutical Co., Ltd (
).FromNovember2010toNovember2011,Mr.XuattendedanadvancedEMBAcourseinPRC’spharmaceuticalindustryorganisedbytheMedicalSchoolofPekingUniversity ( ) and obtained a completion certificate.
Mr. Lu Wenqi ( ), aged 46, is our vice president. Mr. Lu has been our vice president since October 2006 and is principally responsible for the scientific research management of our Chinese medicine and chemical medicine. From 1995 to 2006, Mr. Lu worked as the manager of development management of Shenzhen Taitai Pharmaceutical Co., Ltd ( ) and a director of the research institute of Joincare. Mr. Lu obtained hisbachelor’s degree in industrial electrical automation from Huazhong University of Science and Technology ( ) in 1988.
Mr. Yang Daihong ( ), aged 47, is our vice president. Mr. Yang has been our vice president since May 2006 and is principally responsible for the quality control of our production and supply and ourCompany’s safety and environmental management. From 1999 to 2009, Mr. Yang was the chief engineer and factory manager of Livzon Group Livzon Pharmaceutical Factory ( ). Mr. Yang obtained qualifications as a pharmaceutical engineer and a licenced pharmacist. From September 2000 to July 2002, Mr. Yang attended a postgraduate advanced course in enterprise management organised by Sun Yat-Sen University ( ) and obtained a completion certificate.
COMPANY SECRETARY
Mr. Li Rucai ( ), aged 43, is the secretary to our Board, our company secretary and one of our authorised representatives. Mr. Li graduated from the Accounting Science Department of Shanghai University of Finance and Economics ( ) in July 1992 and held a bachelor degree in Accounting. From September 2000 to July 2002, Mr. Li studied intheenterprisemanagementprofessionattheManagementCollegeofSunYat-SenUniversity ( ). From June 2005 to August 2007, Mr. Li was appointed as the financial controller
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
of Xinbeijiang Pharmaceutical Limited Liability Company ( ) (now known as Livzon Group Xinbeijiang Pharmaceutical Manufacturing Inc. (
)). Since September 2007, Mr. Li has acted as the secretary to our Board.
Ms. Cheng Pik Yuk ( ), aged 55, is an assistant company secretary of our Company.Ms.ChengisacorporateservicesdirectorofTricorServicesLimited,(togetherwith its associated companies, the “Tricor Group”) providing corporate secretarial services to client companies. Prior to joining the Tricor Group, she was a senior manager of the company secretarial department of Deloitte Touche Tohmatsu and also served as the departmental manager. Ms. Cheng has worked in the company secretarial departments of a number of international accounting firms and has over 30 years of experience in the company secretarial field. She has been providing corporate secretarial support services to listed companies and multi-national groups. Ms. Cheng graduated from The Hong Kong Polytechnic and is a fellow of The Institute of Chartered Secretaries and Administrators in the United Kingdom and The Hong Kong Institute of Chartered Secretaries (the “HKICS”), and is a holder of thePractitioner’s Endorsement of the HKICS.
We have applied for, and the Hong Kong Stock Exchange has granted us, a waiver under Rules 3.28 and 8.17 of the Hong Kong Listing Rules in relation to the requirement on the qualifications of a company secretary in respect of Mr. Li Rucai ( ). Please refer to the section headed “Waivers from Strict Compliance with the Hong Kong Listing Rules– Company Secretary” in this listing document for further details.
AUTHORISED REPRESENTATIVES
Mr. An Ning ( ) and Mr. Li Rucai ( ) have been appointed as our authorised representatives under Rule 3.05 of the Hong Kong Listing Rules. We have also appointed Ms. Cheng Pik Yuk ( ), a Hong Kong resident and our assistant company secretary, as our alternative authorised representative. The authorised representatives and the alternate authorised representative will act as the principal communication channel with the Hong Kong Stock Exchange and will make themselves readily available in Hong Kong whenever necessary to deal with inquiries from the Hong Kong Stock Exchange. When the Hong Kong Stock Exchange contacts the authorised representatives and the alternate authorised representative, they will be able to contact all members of the Board immediately, ensuring an effective communication channel with the Hong Kong Stock Exchange.
In addition to appointing the authorised representatives, we have also retained the services of a compliance adviser which, in addition to the authorised representatives of our Company, will act as the principal channel of communication with the Hong Kong Stock Exchange from the Listing Date until the date on which we comply with Rule 13.46 of the Hong Kong Listing Rules in respect of our financial results for the first full financial year following Listing.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
COMPLIANCE ADVISER
We have appointed Guosen HK Capital as our compliance adviser pursuant to Rules 3A.19 and 19A.05 of the Hong Kong Listing Rules.
We have entered into a complianceadviser’s agreement with the compliance adviser, the material terms of which are as follows:
(a) we appoint the compliance adviser for the purpose of Rule 3A.19 of the Hong Kong Listing Rules for a period commencing on the date of listing our Shares on the Hong Kong Stock Exchange and ending on the date on which we comply with Rule 13.46 of the Hong Kong Listing Rules in respect of our financial results for the first full financial year commencing after the Listing Date, or until the agreement is terminated, whichever is earlier;
(b) the compliance adviser shall advise us on the following matters: (i) before the publication of any regulatory announcement, circular or financial report; (ii) where a transaction, which might be a notifiable or connected transaction under the Hong Kong Listing Rules, is contemplated including share issues and share repurchase; (iii) where our business activities, developments or results deviate from any forecast, estimate or other information in this listing document; and (iv) where the Hong Kong Stock Exchange makes an inquiry of us under Rule 13.10 of the Hong Kong Listing Rules; and
(c) we may terminate the appointment of the compliance adviser only if the complianceadviser’s work is of an unacceptable standard or if there is a material dispute (which cannot be resolved within 30 days) over fees payable to the compliance adviser as permitted by Rule 3A.26 of the Hong Kong Listing Rules. The compliance adviser willhavetherighttoresignorterminateitsappointmentifwebreachtheagreement. CORPORATE GOVERNANCE
OurDirectorsrecognisetheimportanceofgoodcorporategovernanceinmanagementand internal control procedures so as to achieve accountability.
Our Company has adopted a code of corporate governance, containing the code provisions of the Corporate Governance Code contained in Appendix 14 to the Hong Kong Listing Rules. Our Directors will use their best endeavours to procure our Company to comply with such code of corporate governance.
BOARD PRACTISES
In the absence of extraordinary events, it is the practise of our Board to meet at least four times a year. At such meetings, our Directors conduct, among other things, an operational review of our business.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
BOARD COMMITTEES
Audit Committee
Our Board has established an Audit Committee, which operates under written terms of reference approved by our Board. It is ourBoard’s responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records, and the reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. Our Board has delegated the responsibility for the initial establishment and the maintenance of a framework of internal controls and ethical standards for our management to our Audit Committee.
Our Audit Committee currently comprises three independent non-executive Directors, namely Mr. Luo Xiaosong ( ), Mr. Yang Bin ( ) and Mr. Guo Guoqing (
). Mr. Luo Xiaosong ( ) is the chairman of our Audit Committee.
Nomination Committee
Our Board has established a Nomination Committee, which operates under written terms of reference approved by our Board. Our Nomination Committee is responsible for making recommendations to our Board regarding candidates to fill vacancies on our Board, as well as the management of our Board succession.
Our Nomination Committee currently comprises one executive Director, namely, Mr. An Ning ( ) and two independent non-executive Directors, namely Mr. Yang Bin (
) and Mr. Guo Guoqing ( ). Mr. Yang Bin ( ) is the chairman of our Nomination Committee.
Remuneration and Assessment Committee
Our Board has established a Remuneration and Assessment Committee, which operates under written terms of reference approved by our Board. Our Remuneration and Assessment Committee is responsible for determining and reviewing compensation arrangements for our key management executives. Our Remuneration and Assessment Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions, the nature and amount of executiveDirectors’ and seniorexecutives’ emoluments, and ourCompany’s financial and operational performance, with the overall objective of ensuring maximum shareholder benefit from the retention of a high quality board and executive team.
Our Remuneration and Assessment Committee currently comprises one executive Director, namely, Mr. An Ning ( ) and two independent non-executive Directors, namelyMr.GuoGuoqing( )andMr.LuoXiaosong( ).Mr.GuoGuoqing ( ) is the chairman of our Remuneration and Assessment Committee.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Strategic Committee
Our Board has established a Strategic Committee, which operates under written terms of referenceapprovedbyourBoard.OurStrategicCommitteeisresponsiblefor,includingbutnot limited to, (a) conducting research and providing comments in respect of the long-term strategic development of our Company; (b) conducting research and providing comments in respect of major investment and financing proposals which our Board are authorised by the Articles of Association to approve; and (c) conducting research and providing comments in respect of major transactions which would affect ourCompany’s development.
Our Strategic Committee currently comprises one executive Director, namely Mr. An Ning ( ) and two non-executive Directors, namely Mr. Zhu and Mr. Zhong Shan (
). Mr. Zhu is the chairman of our Strategic Committee.
DIRECTORS’ANDSUPERVISORS’ REMUNERATION
Our Directors and Supervisors receive remuneration in the form of, among others, salaries, allowances, in-kind subsidies, social security insurance, provident fund and others made on their behalf. The aggregate remuneration paid to our Directors and Supervisors for each of the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB2,434,200.00, RMB2,428,600.00, RMB3,349,600.00 and RMB1,751,300.00, respectively.
The following table provides details of the various components of total remuneration paid to our Directors and Supervisors:
Social
security
Salaries, insurance,
allowances provident
and in-kind fund and
subsidies others Total RMB RMB RMB For the year ended 31 December 2010 2,209,700.00 224,500.00 2,434,200.00 For the year ended 31 December 2011 2,188,500.00 240,100.00 2,428,600.00 For the year ended 31 December 2012 3,097,000.00 252,600.00 3,349,600.00 For the nine months ended 30 September 2013 1,552,200.00 199,100.00 1,751,300.00
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
The following table provides details of the various components of total remuneration paid to the top five highest paid individuals:
Social
security
Salaries, insurance,
allowances provident
and in-kind fund and
subsidies others Total RMB RMB RMB For the year ended 31 December 2010 2,894,100.00 383,500.00 3,277,600.00 For the year ended 31 December 2011 2,851,300.00 416,900.00 3,268,200.00 For the year ended 31 December 2012 4,769,100.00 433,900.00 5,203,000.00 For the nine months ended 30 September 2013 1,961,400.00 338,300.00 2,299,700.00 Save as otherwise disclosed in this listing document, none of our executive Directors and Supervisors in office during the past three years received any salaries, housing allowances, pension scheme contributions, other allowances and benefits in kind from us.
Saveasotherwisedisclosedinthislistingdocument,noremunerationhasbeenpaidtoour Directors or Supervisors or the five highest paid individuals as an inducement to join or upon joining our Group or as compensation for the loss of office as a director of any member of our Group or of any other office in connection with the management of the affairs of any member of our Group during the Track Record Period. No Directors or Supervisors waived any emoluments during the Track Record Period.
The estimated annualDirectors’ andSupervisors’ fees and other emoluments to be paid by our Group for the year ended 31 December 2013 is approximately RMB2,651,900.
Saveasdisclosedinthesectionheaded“RelationshipwithOurControllingShareholders” in this listing document, none of our Controlling Shareholders, Directors and their respective associates are interested in any business which competes or is likely to compete with that of ours.
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FINANCIAL INFORMATION
You should read the following discussion and analysis in conjunction with our
Group’s audited consolidated financial information for the three years ended 31
December 2012 and nine months ended 30 September 2013, together with the
accompanying notes, as set forth in theAccountants’Report in Appendix I to this listing
document. The consolidated financial information of our Group has been prepared in
accordance with CASBE. The consolidated financial information of our Group contained
intheAccountants’Report also complies with the disclosure requirements of “Regulation
on the Preparation of Information Disclosure of Companies Issuing Public Shares, No.
15 General Requirements for Financial Reports” as revised by the CSRC in 2010. The
ReportingAccountants had conducted their audit in accordance with China Standards on
Auditing for Certified Public Accountants.
The following discussions and analysis contain certain forward-looking statements
thatreflectourcurrentviewswithrespecttofutureeventsandfinancialperformance.These
statementsarebasedontheassumptionsandanalysismadebyusinlightofourexperience
and perception of historical trends, current conditions and expected future developments,
as well as factors that we believe are appropriate under the circumstances. However,
whether actual outcomes and developments will meet our expectations and predictions
depend on a number of risks and uncertainties over which we do not have control. Factors
that could cause or contribute to such differences include those described in the sections
headed “Risk Factors” and “Forward-looking Statements” in this listing document.
OVERVIEW
We are principally engaged in the research and development, production and sales of pharmaceutical products. We currently market and sell 230 types products in the PRC and overseas. Those products are mainly categorised as (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment.
We have established a sales network covering the PRC market. As at the Latest Practicable Date, apart from our headquarter in Zhuhai, the PRC, we had 42 local offices. We promote our products mainly through our own sales teams, pharmaceutical products distributors and third-party sales representatives.
As at the Latest Practicable Date, we owned and operated (a) four drug preparation products production plants; (b) four bulk medicines and intermediates production plants; and (c) one diagnostic reagent and equipment production plant. We plan to increase our production capacities and capabilities by constructing new production plants, upgrading our technology and replacing our existing equipment. As at the Latest Practicable Date, we had three bulk medicine production plants under construction, one drug preparation products production plant under construction and several technological advancement projects.
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FINANCIAL INFORMATION
FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The principal factors that have affected or are expected to affect our results of operations and financial condition are set out as follows:
• Growth of the PRC pharmaceutical industry
• Regulatory environment in the PRC
• Product mix
• Cost of production
• Government grant
• Taxation
Growth of the PRC pharmaceutical industry
Our business expansion and operating income growth depend largely on the growth of the pharmaceutical industry in the PRC.According to the Biaodian Report, the gross output of the pharmaceutical industry in the PRC increased from approximately RMB838,072 million in 2008 to approximately RMB1,877,000 million in 2012, at CAGR of approximately22.33%. The rapid growth of the pharmaceutical industry in the PRC has been, and is expected to continue to be, driven by a number of favourable socioeconomic factors, such as the rapid growth of thePRC’s GDP and the disposable income of its population, the continuing ageing of its population, the rise in healthcare awareness, the adoption of the healthcare reform plan and other types of policy incentives and support provided by the PRC Government. Our product portfolio is highly diversified, and we believe that we have been well positioned to capture the rapid growth of the PRC pharmaceutical industry. However, if the PRC pharmaceutical industry does not grow as rapidly as expected, our future growth may be adversely affected.
Regulatory environment in the PRC
Our results of operations are and will continue to be affected by regulations promulgated or undertaken by the PRC Government, particularly those governing our drug preparation products are subject to price controls and the procurement of drug preparation products is subject to a collective tender process.
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FINANCIAL INFORMATION
Customers purchasing drug preparation products which are listed in the National Medicine Catalogue or the Provincial Medicine Catalogue are eligible for full or partial reimbursement under national and provincial medical insurance programmes. As such, drug preparation products which are listed in the National Medicine Catalogue and the Provincial Medicine Catalogue are generally more affordable to customers than products that are not listed. Therefore, the inclusion of our drug preparation products in the National Medicine Catalogue or in the Provincial Medicine Catalogue can substantially improve the sales volume of our drug preparation products business. As at the Latest Practicable Date, among the drug preparation products sold by us, 68 types of them were listed on in the National Medicine Catalogue or the Provincial Medicine Catalogue while 11 types of them were included in the National List of Essential Drugs. In the event that any of our major drug preparation products are removed from the National Medicine Catalogue or the Provincial Medicine Catalogue, our results of operations and financial condition may be adversely affected.
According to the relevant laws and regulations of the PRC, drug preparation products included in the National Medicine Catalogue and the Provincial Medicine Catalogue are subject to price controls by the PRC Government. Substantially all of our drug preparation products are subject to price controls by the PRC Government in the form of fixed retail prices or maximum retail prices. These controls indirectly affect the wholesale price of our drug preparation products. Our operating income is mainly from sale of our drug preparation products, which we sell at wholesale prices to distributors, who in turn sell them to end customers such as, hospitals and medical institutions. The PRC Government authorities do not impose restrictions over the wholesale prices at which pharmaceutical manufacturers, such as ourselves, sell drug preparation products to distributors. However, controls over and adjustments to the maximum retail price of a drug preparation product, if significant, could indirectly affect the wholesale price of that drug preparation product. During the Track Record Period, we did not experience any material operational and financial impact as a result of price reductions. In the event that any of our major drug preparation products are subject to any restrictions or significant price reduction, our results of operations and financial condition may be adversely affected.
According to the relevant laws and regulations of the PRC, the procurement of substantiallyalldrugpreparationproducts,includingthedrugpreparationproductslistedinthe National Medicine Catalogue and the Provincial Medicine Catalogue, is subject to a collective tender process through which only successful bidders may sell their products to public hospitals and other public healthcare institutions. We participate in such tender processes regularly and the successful bidding prices are the supply prices at which distributors sell the products to the public hospitals. The wholesale prices at which we sell to our distributors are determined with reference to the successful bidding prices. Our sales volume and market share depend on our ability to win purchase contracts through the collective tender process. If we are not successful in winning bids in the collective tender process, we will lose the operating income associated with the sales of the affected drug preparation products to the public hospitals in the relevance province or city and our results of operations and financial condition may be adversely affected.
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FINANCIAL INFORMATION
Product mix
Our results of operations are affected by the product mix. As at 30 September 2013, our product portfolio had 91 types of drug preparation products, 27 types of bulk medicine and intermediates and 112 types of diagnostic reagents and equipment. We generated from our major products, in aggregate, approximately54.96%,61.78%,63.72% and62.09% of our operating income from principal activities for the years ended 31 December 2010, 2011 and 2012andninemonthsended30September2013,respectively.Goingforward,wewillcontinue to evaluate and adjust our product portfolio from time to time to focus on products with higher profit margins, greater market demand and potential to maintain or increase our profitability. Cost of production
The cost of purchasing raw materials is the largest component of our operating cost from principal activities. Prices of raw materials, especially those used in the production of our Chinese drug preparation products, rose significantly over the past few years, and are expected to continue to rise. To minimise the impact caused by increase in the price of raw material of our Chinese drug preparation products, we have established three herbal medicine plantation basesinYunnan,ShanxiandGansu,respectively.Anyincreaseinthepriceofourprincipalraw materials would negatively impact our gross profit margin if we are unable to transfer the increased cost resulting from such price increase through increasing the selling price of our products.
Taxation
OurCompanyandmajorsubsidiariesareoperatinginthePRC, andourprofitsaresubject to the PRC Enterprise Income Tax. Under the EIT Law and its implementation rules, our Company and major subsidiaries in the PRC are qualified as “high and new technology enterprises strongly supported by the State” and thus enjoying a preferential enterprise income tax rate of15%. However, the preferential enterprise income tax rate is subject to review and approval by tax authority every three years. If the PRC Government changes the policies governing the preferential enterprise income tax rate or our Company and subsidiaries are not qualified as “high and new technology enterprises strongly supported by the State” under the EIT Law and its implementation rules after periodical review by tax authority, our result of operations and financial condition could be adversely affected.
BASIS OF PRESENTATION
(1) Determination in the scope of consolidation
The consolidated financial statements were prepared in accordance with “Accounting Standards for Business Enterprises No. 33– Consolidated Financial Statements” issued in February 2006 by the Ministry of Finance of the PRC. The scope of consolidated financial statements is based on control and the financial statements comprise of our Company, the subsidiaries directly or indirectly controlled by it and the special purpose entities. Control is thepowertogovernthefinancialandoperatingpoliciesoftheinvesteessoastoobtainbenefits from their operating activities.
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FINANCIAL INFORMATION
Where there are evidences indicating that our Company does not have control over a particular investee, the financial statements of the investee are not consolidated.
(2) Treatments on the acquisition or disposal of interests in the subsidiaries
The acquisition date and the disposal date are determined at the time when the significant risk and rewards of ownership of the equity interests in the subsidiaries acquired or disposed are transferred. For the acquisition or disposal of subsidiaries through a business combination involving enterprises not under common control, the operating results and cash flows after the acquisition date and prior to the disposal date are included in the consolidated income statement and consolidated cash flow statement as appropriate. For the acquisition of subsidiaries through a business combination involving enterprises under common control, the operating result and cash flow from the beginning of reporting period to the date of business combinationarealsoincludedintheconsolidatedincomestatementandconsolidatedcashflow statement and are presented separately. The comparative figures in consolidated financial statements are also restated.
If our Group acquires non-controlling interest in a subsidiary fromsubsidiary’s non-controlling shareholders, the difference between the investment cost for acquiring the non-controlling interest and ourGroup’s interest in the net assets of the non-controlling interest acquired is adjusted in theshareholder’s equity (capital reserve). If the credit balance of capital reserve is insufficient, any excess is adjusted to retained earnings.
(3) When the accounting period oraccounting policies of a subsidiary are different from those of our Group, necessary adjustments shall be made to the financial statements of the subsidiary.
When the accounting policies adopted by a subsidiary are different from those of our Group, our Group makes necessary adjustments to the financial statements of the subsidiary based on ourGroup’s own accounting policies upon the consolidation of the financial statements. Where a subsidiary was acquired through a business combination involving enterprises not under common control, the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the acquisition date are adjusted in the financial statements of the subsidiary.
(4) Method of consolidation
Intra-group balances and transactions are eliminated in preparing the consolidated financial statements.
The net assets of the subsidiary attributable to non-controlling shareholders are presented separately in the consolidated financial statements within theshareholders’ equity. When the amount of loss for the current period attributable to the non-controlling shareholders of a subsidiary exceeds the non-controllingshareholders’ portion of the opening balance ofshareholders’ equity of the subsidiary of the period, the excess is allocated against the non-controlling interest.
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FINANCIAL INFORMATION
CRITICALACCOUNTING POLICIES
(I) Principles for the recognition of revenue
1. Sale of goods
(1) General principles
Revenue is recognised when the significant risks and rewards of ownership of goods have been transferred by our Group to the buyer, and our Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, and when it is probable that the economic benefits will flow to our Group and the amount of revenue and costs can be measured reliably.
(2) Methodology
OurGroupsellsgoodsbythewayofdistributionandentersintosalescontracts with dealers. Revenue from sales are recognised according to the invoiced amount upon the delivery of goods according to the orders received from dealers.
2. Rendering of services
At the balance sheet date, where the outcome of a transaction involving the rendering of services can be estimated reliably, revenue from the rendering of services is recognised by reference to the stage of completion of the transaction. The stage of completion of the transaction is determined according to the progress of work performed by the following methods:
(1) Survey of work performed;
(2) Services performed to date as a percentage of total services to be performed; or
(3) The proportion of the costs incurred to date bear to the estimated total costs of the transaction.
Total revenue from rendering of services is determined by the amount received or receivable from the party receiving the service as stated in the contract or agreement unless the amount received or receivable as stated in the contract or agreement is not at fair value. At the balance sheet date, the revenue arising from the rendering of services for the current period is recognised with reference to the total revenue of rendering of servicesmultipliedbypercentageofcompletion(netofthecumulativeamountofrevenue recognised in the prior accounting periods).
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FINANCIAL INFORMATION
Where outcome of rendering of services cannot be estimated reliably at the balance sheet date, the revenue is determined as follows:
(1) If the costs incurred are expected to be recoverable, revenue is recognised to the extent that the costs incurred that are expected to be recoverable, and an equivalent amount is charged as service cost.
(2) If the costs incurred are not expected to be recoverable, the costs incurred are recognised in profit or loss for the current period and no service revenue is recognised.
3. Assignment of asset use rights
If it is probable that economic benefits associated with the transaction will flow to ourGroup,andtheamountofrevenuecanbereliablyestimated,ourGrouprecognisesthe revenue from the assignment of asset use rights by the following methods:
(1) Interest income is recognised on a time proportion basis with reference to the principal outstanding the applicable effective interest rate.
(2) Licensing revenue is recognised by reference to the period and method stated under relevant contract or agreement.
(II) Recognition and measurement of receivables, recognition and accounting for the provision of bad debts
At the end of the reporting period, if there is objective evidence of impairment in relation to the financial assets other than the financial assets at fair value through profit or loss, impairment loss is determined by the excess of the carrying amount of the financial asset over the estimated present value of future cash flows.
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FINANCIAL INFORMATION
(1) Receivables (including accounts receivables and other receivables)
Criteria and method of provision for bad debt of receivables that are individually significant and impairment provided on an individual basis:
Judgment criteria or amount of
receivables that are individually Amount of more than10% of the
significant balance of receivables
Methods of providing bad debts for If there is objective evidence of
single receivables with significant impairment noted in the individual
amount on individual provision basis impairment test, provisions for bad
debts are made based on the excess of the carrying amount of the financial
asset over the present value of future
cash flows. For those not impaired in
the individual impairment test,
provisions for bad debts are made
based on the portfolio of credit risk
using ageing analysis method.
Bad debt provision for receivables by portfolio:
Basis for determining portfolio of
Basis for determining the portfolio credit risk by ageing
Method for bad debt provision by Ageing analysis method
portfolio
Method of bad debts provision of receivables based on portfolio of credit risk by ageing:
Percentage of Percentage of provision for provision for accounts other Ageing receivables receivables Within 1 year (inclusive) 5% 5% 1-2 years (inclusive) 6% 6% 2-3 years (inclusive) 20% 20% 3-4 years (inclusive) 70% 70% 4-5 years (inclusive) 90% 90% Over 5 years 100% 100%
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FINANCIAL INFORMATION
No bad debts provision is made on receivables from intra-group transactions in the scope of consolidation.
If there is any indication that there is a significant difference between the recoverability of individual receivable and other receivables with the same age as indicated by a portfolio test, and the bad debt provision made in accordance with the portfolio of credit risk using ageing analysis method cannot truly reflect the recoverable amount of that individual receivable, provision of bad debt will be made on individual basis.
Criteria and method of provision for bad debt for receivables that are individually insignificant but impairment provided on an individual basis.
Amount that are not individually
Basis for determining the portfolio significant and aged over 3 years
Methods of bad debts provision For the individual impairment test,
provisions for bad debts are made as
the excess of the carrying amount over the estimated present value of future
cash flows. If the present value of
future cash flows cannot be estimated accurately, provisions for bad debts are made based on the portfolio of credit
risk using ageing analysis method.
For other receivables (including bills receivable, prepayments, interest receivable and long-term receivables), provisions for bad debts are made based on the excess of the carrying amount over the estimated present value of future cash flows.
Theaboveamountsthatarenotrecoverablearewrittenoffagainstthecorresponding receivables after approval.
(III) Accounting method for inventories
1. Classification of inventories
Inventories include raw materials, packaging materials, work in progress, finished goods, sub-contracting materials and low-value consumables.
2. Inventory system: our Group maintains a perpetual inventory system.
3. Method of costing: Inventories are initially measured at cost. Cost of inventories comprises all costs of purchase and other expenditures incurred in bringing the inventories to their present location and condition. Cost of inventories is calculated using the weighted average cost method and the first-in-first-out basis. Low-value consumables and packaging materials are amortised in full upon the use.
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4. The underlying factors in the determination and the basis of provision for diminution in value of inventories:
At the end of the reporting period, provision for diminution in value of inventories will be made after a thorough inspection of the inventories and adjusted at the lower of cost and the net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion,sellingexpensesandrelatedtaxes.Provisionfordiminutioninthevalue of inventories is normally determined on an item-by-item basis and on a collective group basis when inventories are numerous and with low unit price. For items of inventories relating to a product line that is produced and marketed in the same geographical area and with the same or similar uses or purposes, which cannot be evaluated separately from other items in that product line, provision for diminution in value of inventories are determined on an aggregate basis.
At the balance sheet date, if the circumstances resulting in the write-down of inventories no longer exist, the amount of the provision for diminution in value of inventories that has been made is reversed. The amount of reversal is recognised in the profit or loss for the current period.
(IV) Method of costing and depreciation for fixed assets
1. Recognition of fixed assets
Fixed assets represent the tangible assets for use in the production of goods or supply of services, for rental to others or for operation and administrative purposes with useful lives over one year. Fixed asset is recognised when it meets the following conditions:
(1) it is probable that the economic benefits associated with the fixed asset will flow to our Group; and
(2) its cost can be reliably measured.
2. Classification of fixed assets
Fixed assets include plant and building, machinery and equipment, motor vehicles, electronic devices and others.
3. Measurement of fixed assets
Fixed assets are initially recognised at cost.
(1) Where the payment for acquisition of a fixed asset is postponed beyond the normal credit terms, which constitutes financing transaction in substance, the present value of the purchase price is recognised as the cost of fixed assets.
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(2) The fixed assets acquired from debtor under debt restructuring are measured at the fair value, and the difference between the carrying amount of the restructured debt and the fair value of the fixed assets acquired from debtor under debt restructuring is recognised in the profit or loss for the current period. If the exchange of non-monetary assets transaction is commercial in nature and the fair value of the assets received or transferred can be reliably measured, the fixed assets received in the exchange of non-monetary assets transaction shall normally be measured at the fair value of the assets transferred, unless there is objective evidence indicating that the fair value of the assets received is more reliable; For the exchange of non-monetary assets transaction which does not meet the above conditions, the cost of fixed assets received is initially recognised at the carrying amount of the assets transferred with the relevant taxes.
(3) The fixed assets acquired in the business combinations involving enterprises under common control are measured at the carrying amount of the fixed assets recognised by the acquiree. The fixed assets acquired in the business combinations involving enterprises not under common control are recognised at its fair value.
The present value of the initial estimate for the costs of dismantling and removing the fixed assets is recognised in the carrying amount of fixed assets.
The subsequent cost on fixed assets is recognised in the carrying amount of fixed assets provided that the economic benefits associated with fixed assets and the addition item exceeding those upon its initial recognition will flow to our Group, and the carrying amount does not exceed the recoverable amount of the fixed assets.
4. Method for depreciation of fixed assets: Fixed assets are depreciated using the straight-line method over their estimated useful lives from the month they are available for intended use. The estimated useful lives, residual values and depreciation rates of each class of fixed assets are as follows:
Annual Estimated Depreciation depreciation residual Class of fixed assets period rate values (years)
Plant and building 20 4.5%-4.75% 5%-10% Machinery and equipment 10 9%-9.5% 5%-10% Motor vehicles 5 18%-19% 5%-10% Electronic devices and others 5 18%-19% 5%-10%
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5. Recognition of provision for impairment on fixed assets: The fixed assets are reviewed at the end of each reporting period to determine whether there is objective evidenceofimpairment.Ifsuchevidenceexists,therecoverableamountofthefixed assets is estimated.The recoverable amount of an asset is the higher of its fair value less costs to sell and the present value of the estimated future cash flows expected to be derived from the asset. If the recoverable amount of an asset is less than its carrying amount, an impairment loss is recognised based on the excess of the carrying amount over the recoverable amount. Provision for impairment of fixed assets is made on an item-by-item basis. Once an impairment loss is made for an asset, it is not reversed in subsequent accounting periods.
When a fixed asset with provision on impairment made is depreciated, the rates and amounts of depreciation are recomputed based on the carrying amount of the fixed assets and the remaining useful lives. No depreciation is recognised for fixed asset that is impaired in full.
(V) Accounting method for construction in progress
1. Classification of construction in progress
Construction in progress is classified into individual projects.
2. Conversion of construction in progress to fixed assets
All costs directly attributable to bringing the assets to working condition for its intended use are included in construction in progress before it is transferred to fixed assets when they are ready for their intended use. If the construction in progress achieved in a stage that the assets constructed are ready for their intended use but the final account of the completed project has not been issued, the cost of fixed asset is recognised at the date when the asset is ready for their intended use based on the estimated cost determined by the construction budget, construction price or actual cost and the depreciation is recognised in accordance with the estimated cost. When the final account of completed project is issued, the estimated cost is adjusted according to the actual cost, while the depreciation charged is not adjusted.
3. Impairment of construction in progress: At the end of the reporting period, our Group reviewed the construction in progress projects to determine whether there is objective evidence of impairment. For construction in progress that has been suspended and is not expected to resume within three years, provision for impairmentofconstructioninprogressisrecognisedbasedontheexcessofcarrying amount over the recoverable amount of the project.Any provision for impairment of construction in progress made is not reversed.
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FINANCIAL INFORMATION
(VI) Accounting of intangible assets
1. Recognition of intangible assets
An intangible asset is an identifiable non-monetary asset without physical substance owned or controlled by our Group. The intangible asset is recognised when it meets the following conditions:
(1) It is probable that the economic benefits associated with the intangible assets will flow to our Group;
(2) The cost of the intangible asset can be reliably measured.
2. Measurement of intangible assets
Intangible assets are measured initially at cost.
(1) Where the payment for acquisition of an intangible asset is postponed beyond the normal credit terms, which constitutes financing transaction in substance, the present value of the purchase price is recognised as the cost of fixed assets. (2) The intangible assets acquired from debtor under debt restructuring are measured at the fair value, and the difference between the carrying amount of the restructured debt and the fair value of the intangible assets acquired from debtor under debt restructuring is recognised in profit or loss for the current period. If the exchange of non-monetary assets transaction is commercial in nature and the fair value of the assets received or transferred can be reliably measured, the intangible assets received in the exchange of non-monetary assets transaction shall be measured at the fair value of the assets transferred, unless there are objective evidences indicating that the fair value of the assets received is more reliable. For the exchange of non-monetary assets transaction that does not meet the above conditions, the cost of intangible assets received is initially recognised at the carrying amount of the assets transferred with the relevant taxes.
(3) The intangible assets acquired from business combinations involving enterprises under common control are measured at the carrying amount of the intangible assets recognised by the acquiree. The intangible assets acquired in the business combinations involving enterprises not under common control are recognised at its fair value.
3. Useful life and amortisation of intangible assets
Our Group shall determine the useful life of intangible assets upon acquisition according to its judgement. For intangible assets with finite useful life, useful life is estimated from the length of, or number of production or similar units constituting.When there is no foreseeable limit to the period over which an intangible asset is expected to generate economic benefits for our Group, it is regarded as having an indefinite useful life.
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FINANCIAL INFORMATION
Amortisation of intangible assets: Intangible assets with finite useful life are amortised in the profit or loss using the straight-line method over the estimated useful life.An intangible asset with indefinite useful life is not amortised. The useful life for an intangible asset with a finite useful life and the method of amortisation are reviewed at least once at the end of each year. If the useful life and amortisation method for the intangible assets are different from the previous estimate, the change of amortisation is recognised prospectively.
4. Impairment of intangible assets is accounted for using the accounting policies in respect of impairment of assets. Once an impairment loss is made on an intangible asset, it is not reversed in subsequent accounting periods.
(VII) Research and development expenditures
Expenditures on an internal research and development project are classified into expenditures on the research phase and expenditures on the development phase.
Expenditures on the research phase refer to the costs incurred for original and planned investigations undertaken with the prospect of gaining new scientific or technical knowledge and understanding for further development activities. If there is uncertainty that the development phase cannot be achieved, intangible assets cannot be created as a result of the research phase.
Expenditures on the development phase refer to the cost incurred for the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products or processes before the start of commercial production or use. The development phase is the application of the result of the research phase with the entity capable to demonstrate the feasibility of completing new products or new technologies.
Expenditures on a research phase are recognised in profit or loss when incurred. Expenditures on a development phase are recognised as intangible assets if an entity can demonstrate all of the following:
1. The technical feasibility of completing the intangible asset so that it will be available for use or for sale;
2. Its intention to complete the intangible asset and use or sell it;
3. The intangible asset will generate future economic benefits;
4. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible assets; and
5. The expenditures attributable to such intangible assets during its development can be reliably measured.
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FINANCIAL INFORMATION
(VIII) Impairment of assets
1. Determination for impairment of assets
Impairment of assets means the recoverable amount of asset is less than its carrying amount. Our Group reviews at each balance sheet date to determine whether there is any indication for impairment of assets. If there is any indication that an asset may be impaired, the recoverable amount of the asset is estimated. An impairment loss is recognised in the profit or loss based on the excess of the carrying amount of the asset over its recoverable amount. Once an impairment loss is recognised for an asset, it is not reversed in a subsequent period. Upon the recognition of impairment loss of an asset, the depreciation or amortisation expenses of the impaired asset is adjusted accordingly in the future periods for the remaining useful life of the asset on a systematic basis. Objective evidence of impairment includes one or more of the following loss events:
(1) The current market price of assets declines significantly, which is beyond the expectation based on the advance of time or normal use;
(2) Significant changes in the economic, technological or legal environment in which our Group operates or in the market in which the fixed assets is located, that have an adverse effect on our Group;
(3) Market interest rates or any other rates of investment return increase significantly during the period, which affect the discount rate used in calculating theasset’s present value of the expected future cash flows and result in a significant decrease in the fixedasset’s recoverable amount;
(4) Any evidence indicates that the assets become expired or physical damage has occurred;
(5) The assets have been or will be idle, or terminated for use, or disposed ahead of schedule;
(6) Any evidence in the internal report of our Group shows that the economic performance of the assets have been or will be lower than the expected performance, for example, the net cash flow generated by assets or the operating profit (or loss) realised is lower (higher) than the excepted amount, etc; and
(7) Other circumstances indicate that the asset may have been impaired.
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FINANCIAL INFORMATION
2. Recognition of impairment loss of assets
(1) At the end of the reporting period, our Group reviews our long-term equity investments, fixed assets, construction in progress, intangible assets and goodwill, so as to determine whether there is any indication for impairment of assets. Goodwill arising from business combination and intangible assets with indefinite useful period shall be tested for impairment annually whether or not there is any indication of impairment.
(2) If any indication exists that an asset may be impaired, the recoverable amount of the asset is estimated. The recoverable amount of an asset is the higher of its fair value less costs to sell and its present value of expected future cash flows. If the recoverable amount of an asset is less than its carrying amount, an impairment loss is recognised in profit or loss as the excess of the carrying amount over the recoverable amount. Goodwill is allocated to each asset group (orsetsofassetgroup,thesamebelow)forthepurposeofimpairmenttest.The goodwill stated in the consolidated financial statement does not include the goodwill attributable to non-controlling interest. For the purpose of impairment test of goodwill, the goodwill attributable to non-controlling interest is included in the carrying amount of the asset group. The adjusted carrying amount of the asset group is compared with its recoverable amount to determine whether an impairment of asset group (including goodwill) exists. The amount of impairment loss related to an asset group is allocated to goodwill attributable to non-controlling interest and our Group on a pro rata basis. Once an impairment loss is made for a long-term equity investment, investment property measured by using cost method, fixed asset, intangible asset and goodwill, it is not reversed in subsequent accounting periods.
3. Identification of asset group
(1) Our Group shall normally estimate the recoverable amount based on single asset. If it is difficult to estimate the recoverable amount of a single asset, the recoverable amount of the asset group that the single asset belongs is determined. The identification of an asset group is based on whether the major cash inflows generated by the asset group are largely independent of those generated by other assets or other asset groups, with the considerations of ourGroup’s management of production and operational activities and the decision making process of continuous use or disposal of assets. Once the asset group is recognised, it will be consistently applied to each accounting period.
(2) The recoverable amount of an asset group or set of asset groups is the higher of its fair value less costs to sell and its present value of expected future cash flows.
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FINANCIAL INFORMATION
(3) If the recoverable amount of an asset group or set of asset groups is less than its carrying amount, impairment loss is recognised in the profit or loss. For impairment losses related to an asset group or a set of asset groups, the amount is deducted first from the carrying amount of any goodwill allocated to the asset group or set of asset groups, and then reduce the carrying amount of the other assets in the asset group or set of asset groups on a pro rata basis.
(IX) Government grant
1. Principles of recognitions: A government grant is recognised when the following conditions are satisfied.
(1) There is reasonable assurance that our Group will comply with the conditions attaching to the grant by the government; and
(2) The grant will be received by our Group from the government.
2. Measurement: If a government grant is in the form of a transfer of a monetary asset, it is measured at the amount that is received or receivable. If a government grant is in the form of a transfer of a non-monetary asset, it is measured at its fair value. If its fair value cannot be measured reliably, it is measured at its nominal amount. 3. Accounting treatment:Agovernment grant related to assets is recognised initially as deferred income and amortised to profit or loss on a straight-line basis over the useful life of the asset. A government grant measured at its nominal amount is recognised in profit or loss for the current period.
A government grant related to income is recognised by the following methods:
(1) A grant that compensates our Group for expenses or loss to be incurred in the subsequentperiodsisrecognisedinitiallyasdeferredincomeandrecognisedin profit or loss in the same periods in which the expenses are recognised.
(2) A grant that compensates for expenses incurred is recognised in profit or loss for the current period.
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FINANCIAL INFORMATION
SUMMARY OF RESULTS OF OPERATIONS DURING THE TRACK RECORD PERIOD
Fortheninemonthsended Fortheyearended31December 30September
2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Totaloperatingincome 2,726,719 3,162,915 3,943,525 2,909,014 3,233,360 Totaloperatingcosts 2,219,805 2,720,601 3,445,291 2,493,758 2,785,505 Including:Operatingcosts 1,286,485 1,397,937 1,569,688 1,144,685 1,164,585 Businesstaxesandsurcharges 8,858 40,730 54,546 40,442 41,375 Sellingexpenses 648,046 970,891 1,441,654 1,062,612 1,274,345 Administrativeexpenses 265,890 297,630 351,031 239,849 296,759 Financialexpenses (425) (20,723) (17,122) (11,861) (10,947) Impairmentloss 10,951 34,136 45,494 18,031 19,388 Add:Gains/(losses)fromchangesinfairvalue 10,780 (11,084) 16,382 4,800 (3,529) Investment(losses)/income (1,279) (1,485) 4,137 1,669 3,810 Including:(Losses)/incomefrominvestmentin
associatesandjointlycontrolledenterprises (2,469) (2,717) 2,432 77 2,070 Operatingprofit 516,415 429,745 518,753 421,725 448,136 Add:Non-operatingincome 21,167 36,182 44,268 15,945 31,654 Less:Non-operatingexpenses 3,915 2,776 2,708 1,913 1,745 Including:Lossesfromdisposalof
fixedassets 835 161 1,082 1,048 5 Profitbeforeincometax 533,667 463,151 560,313 435,757 478,045 Less:Incometaxexpenses 81,177 75,353 85,090 70,716 79,518 Netprofitfortheyear/period 452,490 387,798 475,223 365,041 398,527 Netprofitattributabletotheshareholdersof
ourCompany 418,181 359,370 441,672 343,631 378,519 Non-controllinginterests 34,309 28,428 33,551 21,410 20,008 Othercomprehensive(loss)/income (5,631) (4,927) 102 (759) (1,759) Totalcomprehensiveincomeforthe
year/period 446,859 382,871 475,325 364,282 396,768 Totalcomprehensiveincomeattributableto
shareholdersofourCompany 412,550 354,443 441,775 342,872 376,771 Totalcomprehensiveincomeattributableto
non-controllinginterests 34,309 28,428 33,550 21,410 19,997
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FINANCIAL INFORMATION
DESCRIPTION OF SELECTED INCOME STATEMENT LINE ITEMS
Operating income
Our total operating income comprises operating income from our principal activities and operating income from our non-principal activities. The following table sets out a breakdown of our total operating income for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of Income Total Income Total Income Total Income Total Income TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Operatingincome
fromprincipal
activities 2,690,196 98.66 3,136,340 99.16 3,923,497 99.49 2,894,714 99.51 3,218,125 99.53 Operatingincome
fromnon-
principal
activities1 36,523 1.34 26,575 0.84 20,028 0.51 14,300 0.49 15,235 0.47 Total 2,726,719 100.00 3,162,915 100.00 3,943,525 100.00 2,909,014 100.00 3,233,360 100.00 Note 1: Our operating income from non-principal activities comprises mainly sales of waste liquor, supply of steam and rental income.
Our principal activities are the research and development, production and sales of pharmaceutical products. Our operating income from principal activities represents sales of pharmaceutical products. Our products are categorised as (a) drug preparation products; (b) bulk medicines and intermediates; and (c) diagnostic reagents and equipment.
We have been undergoing a reform of sales strategy by putting efforts on promotion of our major drug preparation products (especially, Shenqi Fuzheng Injection ( ) and gonadotropic hormones) through our own sales teams and third-party sales representatives directly to the end customers (i.e. hospitals and other medical institutions) with a view to ascertaining a better control over the relationships with our end customers. The third-party sales representatives are required to strictly comply with our sales policy and management system. Their performances are generally assessed periodically in accordance with our performance appraisal programme.
Sincewehavebeenincreasingourrelianceonthepromotionthroughourownsalesteams and the third-party sales representatives, our marketing and promotional expenses has thus increased accordingly. Therefore, we have increased the selling price of our products accordingly to reflect the increase in marketing and promotional expenses.
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FINANCIAL INFORMATION
During theTrack Record Period, our operating income from principal activities increased from approximately RMB2,690.20 million in 2010 to approximately RMB3,923.50 million in 2012. The increase in the operating income from principal activities was mainly driven by an increase in sales volume and/or the average selling price of our major products, such as Shenqi Fuzheng Injection ( ) and certain gonadotropic hormone products. During the Track Record Period, sales volume and average selling price of Shenqi Fuzheng Injection (
), which is one of our major products, increased significantly. Its sales volume increased from approximately 5.42 million bottles in 2010 to approximately 8.89 million bottles in 2012, and its average selling price increased from approximately RMB62.97 per bottle in 2010 to approximately RMB114.09 per bottle in 2012. The increase in sales volume and average selling price of Shenqi Fuzheng Injection ( ) reflected (i) the continued market demand for the Chinese drug preparation injection products; (ii) our strategy tofocusonthedevelopmentofproductswithhugegrowthpotentialandhighprofitmargin;and (iii) our effort to promote our major drug preparation products (such as Shenqi Fuzheng Injection ( )) through our own sales teams and the third-party sales representatives. During the Track Record Period, the sales volume of our gonadotropic hormone products, such as Urofollitropin for Injection ( ) and Leuprorelin Acetate for Injection( ),increasedsignificantly.Theincreasereflectedthefactthatthemarketdemand forgonadotropichormoneproductsinthePRCishugewithhighpotentialgrowth.Theaverage selling prices of our gonadotropic hormone products remained stable throughout the Track Record Period.
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FINANCIAL INFORMATION
Analysis of our operating income from principal activities by product segments
We have a diversified product portfolio categorised into three major segments. The table below sets out a breakdown of our operating income from principal activities by product segments for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating%of Operating%of Operating%of Operating %of Operating %of Income Total Income Total Income Total Income Total Income TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Operatingincomeofeach
productsegmentunder
principalactivities
Drugpreparationproducts
I.Westerndrugpreparation
products
–Gastrointestinaldrugs 239,708 8.91 261,081 8.33 300,655 7.66 226,079 7.81 266,342 8.28–Cardio-cerebral-vascular
drugs 97,527 3.63 119,122 3.80 142,779 3.64 110,089 3.80 108,560 3.37–Antibioticdrugs 325,947 12.12 307,002 9.79 276,293 7.04 213,116 7.36 208,066 6.47–Gonadotropichormones 224,717 8.35 330,015 10.52 458,128 11.68 348,307 12.03 443,937 13.79–Bloodandhemopoietic
systemdrugs 21,615 0.80 26,770 0.85 24,741 0.63 18,076 0.63 22,874 0.71–Others 84,888 3.16 108,433 3.46 161,853 4.12 113,865 3.93 193,651 6.02 994,402 36.97 1,152,423 36.75 1,364,449 34.77 1,029,532 35.56 1,243,430 38.64 ------ ---- ------ ---- ------ ---- ------ ----- ------ ----- II.Chinesedrugpreparation
products 555,361 20.64 931,843 29.71 1,383,249 35.26 1,031,087 35.62 1,185,508 36.84 Subtotal 1,549,763 57.61 2,084,266 66.46 2,747,698 70.03 2,060,619 71.18 2,428,938 75.48 ------ ---- ------ ---- ------ ---- ------ ----- ------ ----- Bulkmedicinesand
intermediates 916,953 34.08 777,307 24.78 834,638 21.27 606,339 20.95 530,492 16.48 Diagnosticreagentsand
equipment 223,480 8.31 274,767 8.76 341,161 8.70 227,756 7.87 258,695 8.04 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00
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FINANCIAL INFORMATION
Drug preparation products
Western drug preparation products
Operating income from sale of western drug preparation products was approximately RMB994.40 million, RMB1,152.42 million, RMB1,364.45 million and RMB1,243.43 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounted for approximately36.97%,36.75%,34.77% and38.64% of our operating income from principal activities of the relevant periods. Operating income from sale of western drug preparation products increased steadily throughout the Track Record Period. (i) Gastrointestinal drugs
Operating income from sale of gastrointestinal drugs for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB239.71 million, RMB261.08 million, RMB300.66 million and RMB266.34 million. The increases were mainly attributable to an increase in sales of Bismuth Potassium Citrate Granules ( ) series products and Ilaprazole ( ) series products. Bismuth Potassium Citrate Granules ( ) series products, which are our major products, have been a well known medicine for treatment of stomach ailments in the PRC. The operating income contributed by Bismuth Potassium Citrate Granules ( ) series products were increased from approximately RMB105.79 million for the year ended 31 December 2010 to approximately RMB120.53 million for the year ended 31 December 2012, representing CAGR of approximately6.74%. Ilaprazole ( ) series products, which are the drugs used for duodenal ulcer treatment, are our innovative products initially launched in 2008.The operating income contributed by Ilaprazole ( ) series products grew significantly at CAGR of approximately112.87% from approximately RMB7.30 million for the year ended 31 December 2010 to approximately RMB33.08 million for the year ended 31 December 2012.
(ii) Cardio-cerebral-vascular drugs
Operating income from sale of cardio-cerebral-vascular drugs for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB97.53 million, RMB119.12 million, RMB142.78 million and RMB108.56 million. The increase in sales of cardio-cerebral-vascular drug was mainly driven by (i) an increase in sales volume ofAmlodipine Besylate Capsules ( ) and Valsartan Capsules (
) and (ii) an increase in average selling price of Valsartan Capsules ( ) from approximately RMB6.00 per box in 2010 to approximately RMB8.20 per box in 2012.
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FINANCIAL INFORMATION
(iii) Antibiotic drugs
Operating income from sale of antibiotic drug for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB325.95 million, RMB307.00 million, RMB276.29 million and RMB208.07 million, respectively. 2011 and 2012 were challenging years for thePRC’s antibiotic drug industry, since the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) andAdministrative Measures for the ClinicalApplication ofAntibiotics ( ) were introduced in 2011 and 2012, respectively, which adversely affected the business environment of antibiotic drug manufacturers in the PRC. Following introduction ofAdministrative Measures for the ClinicalApplication ofAntibiotics ( ) by the MOH, the use of antibiotic drugs became restricted. Some of our customers took a prudent attitude and postponed their purchasing plans, which led to the shrinking in the demand of our antibiotic drugs. Therefore, the operating income from sale of antibiotic drugs decreased significantly during the Track Record Period.
(iv) Gonadotropic hormones
Operating income from sale of gonadotropic hormones for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB224.72 million, RMB330.02 million, RMB458.13 million and RMB443.94 million. The increases were mainly attributable to increase in sales volume of Leuprorelin Acetate Microspheres for Injection ( ) and Urofollitropin for Injection ( ). From 2010 to 2012, the sales volume of Leuprorelin Acetate Microspheres for Injection ( ) and Urofollitropin for Injection ( ) increased at a CAGR of approximately301.45% and approximately46.77%, respectively. The increase in sales of our gonadotropic hormones reflected the fact that the market demand for gonadotropic hormones in the PRC is huge with high potential growth. The average selling prices of our gonadotropic hormones remained stable throughout the Track Record Period.
(v) Blood and hemopoietic system drugs
Operating income from sale of blood and hemopoietic system drugs represented sales of Urokinase for Injection ( ). Operating income from sale of blood and hemopoietic system drug for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately RMB21.62 million, RMB26.77 million, RMB24.74 million and RMB22.87 million.
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FINANCIAL INFORMATION
Chinese drug preparation products
Operating income from sale of Chinese drug preparation products was approximately RMB555.36 million, RMB931.84 million, 1,383.25 million and RMB1,185.51 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounted for approximately20.64%,29.71%,35.26% and36.84% of our operating income from principal activities in the relevant periods. Our major Chinese drug preparation product is Shenqi Fuzheng Injection ( ). Shenqi Fuzheng Injection ( ) is an innovative drug which is a Chinese drug preparation product used to treat qi deficiency ( ) problems, especially as an adjuvant therapy for cancer patients. Operating income from sale of Shenqi Fuzheng Injection ( ) was approximately RMB341.08 million, RMB625.67 million, RMB1,014.04 million and RMB913.45 million, accounted for approximately61.42%,67.14%,73.31% and77.05% of operating income from sale of our Chinese drug preparation products for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively. From 2010 to 2012, the sales volume and average selling price of Shenqi Fuzheng Injection ( ) increased significantly at a CAGR of approximately28.09% and34.61%, respectively. The increase in salesvolumeandaveragesellingpriceofShenqiFuzhengInjection( )reflected mainly (i) the continued market demands for the Chinese drug preparation injection products; (ii) our strategy to focus on the development of products with huge growth potential and high profit margin; and (iii) the positive effect from promoting our major drug preparation products (such as Shenqi Fuzheng Injection ( )) through our own sales teams and the third-party sales representatives directly to the end customers (i.e. hospitals and other medical institutions).
Bulk medicines and intermediates
Our bulk medicines and intermediates include mainly Ceftriaxone Sodium ( ), Mevastatin ( ), Colistin ( ) and Phenylalanine ( ). The target markets for our bulk medicines and intermediates are in the PRC and overseas. Operating income from sale of bulk medicines and intermediates was approximately RMB916.95 million, RMB777.31 million, RMB834.64 million and RMB530.49 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounted for approximately34.08%,24.78%,21.27% and16.48% of our operating income from principal activities of the relevant periods.
Operating income from sale of bulk medicines and intermediates decreased from approximately RMB916.95 million for the year ended 31 December 2010 to approximately RMB777.31 million for the year ended 31 December 2011. The decrease was mainly attributable to the price cut of our antibiotics drug related bulk medicines. In 2011, the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) became effective, resulting in the reduction of the maximum retail prices of certain antibiotics drugs. The average selling prices of the bulk medicines used for production of the relevant antibiotics drugs were thus indirectly affected. The average
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FINANCIAL INFORMATION
selling prices of our Ceftriaxone Sodium ( ) and Cefuroxime Sodium ( ), both of which are antibiotics drug related bulk medicines, dropped significantly. The average selling price of Ceftriaxone Sodium ( ) dropped from approximately RMB823.62 per kg in 2010 to approximately RMB601.79 per kg in 2011, and the average selling price of Cefuroxime Sodium ( ) dropped from approximately RMB1,308.60 per kg in 2010 to approximately RMB977.98 per kg in 2011.
Following the introduction of Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012, the demand of antibiotics drug related bulk medicines remained weak in the PRC. Increase in operating income from sale of bulk medicines and intermediates from approximately RMB777.31 million for the year ended 31 December 2011 to approximately RMB834.64 million for the year ended 31 December 2012 was mainly driven by overseas sales.
Diagnostic reagents and equipment
Our diagnostic reagents and equipment represent mainly diagnostic kit products and enzyme linked immunoassay diagnostic reagent products. Operating income from sale of diagnostic reagents and equipment was approximately RMB223.48 million, RMB274.77 million, RMB341.16 million and RMB258.70 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively, accounted for approximately approximately8.31%,8.76%,8.70% and8.04% of our operating income from principal activities in the relevant periods. Operating income from sale of diagnostic reagents and equipment grew steadily during the Track Record Period.
Analysis of our operating income from principal activities by geographical markets
The table below sets out a breakdown of unaudited operating income from our principal activities by geographical markets for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of Income Total Income Total Income Total Income Total Income TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) ThePRC
–NortheastChina1 223,633 8.31 272,331 8.68 317,571 8.09 228,408 7.89 272,288 8.46–NorthChina2 418,411 15.55 454,910 14.51 586,939 14.96 434,288 15.00 488,130 15.17–CentralChina3 245,244 9.12 301,208 9.60 415,827 10.60 324,600 11.21 387,167 12.03–EastChina4 664,257 24.69 733,168 23.38 863,755 22.02 587,458 20.29 645,021 20.05–SouthChina5 486,254 18.08 525,749 16.76 641,192 16.34 471,993 16.31 556,814 17.30–SouthwestChina6 287,036 10.67 374,070 11.93 502,072 12.80 392,082 13.54 443,155 13.77–NorthwestChina7 116,486 4.33 181,370 5.78 249,257 6.35 184,584 6.38 197,286 6.13 Overseas 248,875 9.25 293,534 9.36 346,884 8.84 271,301 9.38 228,264 7.09 Total 2,690,196 100.00 3,136,340 100.00 3,923,497 100.00 2,894,714 100.00 3,218,125 100.00
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FINANCIAL INFORMATION
1. Northeast China includes Heilongjiang, Jilin, Liaoning and Inner Mongolia.
2. North China includes Beijing, Tianjin, Hebei, Shandong and Shanxi.
3. Central China includes Hunan, Hubei,Anhui and Henan.
4. East China includes Shanghai, Jiangsu and Jiangxi.
5. South China includes Guangdong, Guangxi, Hainan and Fujian.
6. Southwest China includes Chongqing, Sichuan, Guizhou, Yunnan and Tibet.
7. Northwest China includes Gansu, Qinghai, Ningxia, Xinjiang and Shaanxi.
8. Overseas includes SouthAmerica, Europe, SoutheastAsia, India and Japan.
During theTrack Record Period, the majority part of our operating income from principal activities was generated in the PRC. East China region and South China region were two largest PRC markets of our Group. East China region is the region with the highest GDP per capita in the PRC. Operating income from East China region accounted for approximately24.69%,23.38%,22.02% and20.05% of our operating income from principal activities for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively. Guangdong Province is the base of our business where operating income from South China region accounted for approximately18.08%,16.76%,16.34% and17.30% of our operating income from principal activities for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, respectively. India, our largest overseas market, contributed approximately22.88% to38.32% of operating income from overseas sales during the Track Record Period.
Operating costs
Our total operating cost comprises operating cost from our principal activities and non-principal activities. The following table sets out a breakdown of our total operating cost for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of Income Total Income Total Income Total Income Total Income TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Operatingcostfrom
principalactivities 1,267,927 98.56 1,377,394 98.53 1,549,904 98.74 1,130,067 98.72 1,150,212 98.77 Operatingcostfromnon-
principalactivities 18,558 1.44 20,543 1.47 19,784 1.26 14,618 1.28 14,373 1.23 Total 1,286,485 100.00 1,397,937 100.00 1,569,688 100.00 1,144,685 100.00 1,164,585 100.00
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FINANCIAL INFORMATION
The table below sets out a breakdown of our operating cost from principal activities by product segment for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Operating %of Operating %of Operating %of Operating %of Operating %of Cost Total Cost Total Cost Total Cost Total Cost TotalRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Operatingcostofeach
productsegmentunder
principalactivities
Drugpreparationproducts
I.Westerndrugpreparation
products
–Gastrointestinaldrugs 34,329 2.71 37,896 2.75 39,975 2.58 30,094 2.66 31,444 2.73–Cardio-cerebral-
vasculardrugs 27,653 2.18 31,589 2.29 33,197 2.14 25,525 2.26 26,407 2.30–Antibioticdrugs 121,365 9.57 109,442 7.94 88,144 5.69 69,006 6.11 56,339 4.90–Gonadotropic
hormones 74,277 5.86 112,728 8.18 158,953 10.26 122,061 10.80 154,321 13.42–Bloodandhemopoietic
systemdrugs 13,708 1.08 20,956 1.52 24,104 1.56 17,061 1.51 23,798 2.07–Others 29,305 2.31 26,719 1.95 38,450 2.47 28,782 2.55 28,717 2.50 300,637 23.71 339,330 24.63 382,823 24.70 292,529 25.89 321,026 27.92 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- II.Chinesedrug
preparationproducts 124,048 9.78 246,091 17.87 296,754 19.15 217,805 19.27 240,419 20.90 Subtotal 424,685 33.49 585,421 42.50 679,577 43.85 510,334 45.16 561,445 48.82 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Bulkmedicinesand
intermediates 739,397 58.32 662,459 48.10 711,886 45.93 516,367 45.69 473,576 41.17 Diagnosticreagentsand
equipment 103,845 8.19 129,514 9.40 158,441 10.22 103,366 9.15 115,191 10.01 Total 1,267,927 100.00 1,377,394 100.00 1,549,904 100.00 1,130,067 100.00 1,150,212 100.00 During the Track Record Period, our operating cost from principal activities generally increased in line with the increase in our operating income from principal activities. Our operating cost from principal activities increased from approximately RMB1,267.93 million for the year ended 31 December 2010 to approximately RMB1,549.90 million for the year ended 31 December 2012. The increase was mainly driven by the increase in sales volume of our major products. The overall unit costs of our major products generally remained stable duringtheTrackRecordPeriod,exceptfortheunitcostsofourmajorChinesedrugpreparation product, Shenqi Fuzheng Injection ( ). Owing to continued demand for Chinese herbalmedicineinrecentyears,thepriceofcodonopsis( )andastragalus( ),whichare majorrawmaterialofShenqiFuzhengInjection( ),increasedsignificantly.The unit cost of Shenqi Fuzheng Injection ( ) increased accordingly during the Track Record Period.
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FINANCIAL INFORMATION
Gross profit and gross profit margin
The following table sets out the gross profit and gross profit margin of each product segment under our principal activities for the periods indicated:
Fortheyearended31December Fortheninemonthsended30September 2010 2011 2012 2012 2013
Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit marginRMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%)RMB’000 (%) (unaudited)
Grossprofitofeach
productsegmentunder
principalactivities
Drugpreparationproducts
I.Westerndrugpreparation
products
–Gastrointestinaldrugs 205,379 85.68 223,185 85.49 260,680 86.70 195,985 86.69 234,898 88.19–Cardio-cerebral-
vasculardrugs 69,874 71.65 87,533 73.48 109,582 76.75 84,564 76.81 82,153 75.68–Antibioticdrugs 204,582 62.77 197,560 64.35 188,149 68.10 144,110 67.62 151,727 72.92–Gonadotropic
hormones 150,440 66.95 217,287 65.84 299,175 65.30 226,246 64.96 289,616 65.24–Bloodandhemopoietic
systemdrugs 7,907 36.58 5,814 21.72 637 2.57 1,015 5.62 -924 -4.04–Others 55,583 65.48 81,714 75.36 123,403 76.24 85,083 74.72 164,934 85.17 693,765 69.77 813,093 70.56 981,626 71.94 737,003 71.59 922,404 74.18 ------ ------ ------ ------ ------
II.Chinesedrug
preparationproducts 431,313 77.66 685,752 73.59 1,086,495 78.55 813,282 78.88 945,089 79.72 Subtotal/Overall 1,125,078 72.60 1,498,845 71.91 2,068,121 75.27 1,550,285 75.23 1,867,493 76.89 Bulkmedicinesand
intermediates 177,556 19.36 114,848 14.78 122,752 14.71 89,972 14.84 56,916 10.73 Diagnosticreagentsand
equipment 119,635 53.53 145,253 52.86 182,720 53.56 124,390 54.62 143,504 55.47 Total/Overall 1,422,269 52.87 1,758,946 56.08 2,373,593 60.50 1,764,647 60.96 2,067,913 64.26 Our gross profit was approximately RMB1,422.27 million, RMB1,758.95 million, RMB2,373.59 million and RMB2,067.91 million for the years ended 31 December 2010, 2011 and2012andninemonthsended30September2013,respectively.Ourgrossprofitmarginwas approximately52.87%,56.08%,60.50% and64.26% for the years ended 31 December 2010,
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FINANCIAL INFORMATION
2011 and 2012 and nine months ended 30 September 2013, respectively. The increase in our gross profit margin was mainly attributable to increase in operating income from sale of high margin products, such as western drug preparation products and Chinese drug preparation products.
Business taxes and surcharges
Our business taxes and surcharges mainly comprise of (i) urban maintenance and construction tax; (ii) education surcharges; (iii) flood prevention fee; and (iv) business taxes. Our business tax and surcharges were approximately RMB8.86 million, RMB40.73 million, RMB54.55 million and RMB41.38 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, representing approximately0.32%,1.29%,1.38% and1.28% of our total operating income of the relevant periods, respectively.
The following table sets out a breakdown of our business taxes and surcharges for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Urban maintenance
and construction
tax 4,831 22,191 29,779 22,128 22,392 Education surcharges 2,539 16,344 22,634 16,777 17,271 Flood prevention fee 1,283 1,734 1,883 1,363 1,430 Business taxes 44 73 55 31 67 Others 161 388 195 143 215 Total 8,858 40,730 54,546 40,442 41,375 All of the above taxes and surcharges are charged on the basis of our operating income or our turnover tax amount to be paid during the Track Record Period.
The significant increase in business taxes and surcharges during the Track Record Period was mainly attributable to the fact that we were required to pay additional urban maintenance andconstructiontaxaswellaseducationsurchargespursuanttotheNoticeoftheStateCouncil on Extending the Urban Maintenance and Construction Tax and Educational Surcharges from Domestic to Foreign Invested Enterprises and Individuals (
) introduced in 2010 and Notice on the Provisional Measures for the Administration on the Collection of Education Surcharge in Guangdong Province ( ) introduced in 2011.
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FINANCIAL INFORMATION
Selling expenses
Our selling expenses mainly comprise marketing and promotional expenses, staff salaries for sales and marketing personnel, travelling expenses and entertainment, transportation costs and business meeting expenses. Our selling expenses were approximately RMB648.05 million, RMB970.89 million, RMB1,441.65 million and RMB1,274.35 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, representing approximately23.77%,30.70%,36.56% and39.41% of our total operating income of the relevant periods, respectively.
The table below sets out a breakdown of our selling expenses for the periods indicated: For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Marketing and
promotional
expenses 529,573 835,444 1,281,273 946,806 1,147,173 Including: Service
fees paid to
third-party sales
representatives 327,774 530,658 890,248 698,533 868,885 Advertising and
promotional
expenses 201,799 304,786 391,025 248,273 278,288 Staff salaries for sales
and marketing
personnel 48,560 46,816 58,999 43,305 49,963 Transportation costs 22,379 26,075 28,852 21,018 22,174 Travelling expenses
and entertainment 13,887 16,458 22,041 15,045 16,684 Business meeting
expenses 12,797 16,985 20,070 12,700 15,863 Others 20,850 29,113 30,419 23,738 22,488 Total 648,046 970,891 1,441,654 1,062,612 1,274,345
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FINANCIAL INFORMATION
Our marketing and promotional expenses increased significantly from approximately RMB529.57 million for the year ended 31 December 2010 to approximately RMB1,281.27 million for the year ended 31 December 2012 and from approximately RMB946.81 million for the nine months ended 30 September 2012 to approximately RMB1,147.17 million for the nine months ended 30 September 2013. During the Track Record Period, we put significant effort in promoting our drug preparation products (especially, Shenqi Fuzheng Injection (
) and gonadotropic hormones) through our own sales teams and the third-party sales representatives in order to have better control over the relationships with our end customers. Increase in our marketing and promotional expenses during the Track Record Period reflected the expansion of third-party sales representatives network to promote our major drug preparation products.
Administrative expenses
Our administrative expenses mainly comprise research and development costs, staff salaries for administrative, finance and human resources personnel, amortisation of intangible assets, and depreciation of equipment and facilities used for administrative purpose and losses on suspension of operations. Our administrative expenses were approximately RMB265.89 million, RMB297.63 million, RMB351.03 million and RMB296.76 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, representing approximately9.75%,9.41%,8.90% and9.18% of our total operating income of the relevant periods, respectively.
The table below sets out a breakdown of our administrative expenses for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Research and
development costs 69,237 74,575 99,640 81,986 100,423 Staff salaries for
administrative,
finance and human
resources personnel 68,241 73,569 95,393 57,600 61,573 Depreciation and
amortisation 37,484 38,837 40,133 24,331 25,853 Losses on suspension
of operations 19,726 26,557 19,348 15,431 21,782 Tax expenses1 11,047 12,496 12,881 8,930 11,021 Others 60,155 71,596 83,636 51,571 76,107 Total 265,890 297,630 351,031 239,849 296,759 Note 1: Our tax expenses represent mainly property tax, stamp duty and urban land use tax, which are not chargedonthebasisofouroperatingincomeorourturnovertaxtobepaidduringtheTrackRecord Period.
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FINANCIAL INFORMATION
Our administrative expenses generally increased in line with our business growth during the Track Record Period.
The research and development costs include the costs incurred by us for our in-house research and development activities and amortisation of technical know-how. The increase in the research and development costs during the Track Record Period reflected our continuous investments in the research and development of new pharmaceutical products.
The increase in staff salaries for administrative, finance and human resources personnel as well as depreciation and amortisation reflected an increase in our manpower and fixed or intangible assets to support the growth of our business scale during the Track Record Period. The losses on suspension of operations represent the expenses recognised during the period of temporary suspension of our production for technological advancement, regular repair and maintenance and relocation of production facilities. The relevant losses include mainly the staff cost, depreciation of fixed assets and repair and maintenance costs of the relevant production plants during the period.
Financial expenses
Financial expenses comprise mainly interest income, interest expenses, bank charges and exchange gains/losses. We recorded a net finance income of approximately RMB0.42 million, RMB20.72 million, RMB17.12 million and RMB10.95 million for the years ended 31 December 2010, 2011 and 2012 and for the nine months ended 30 September 2013, representing approximately0.02%,0.66%,0.43% and0.34% of our total operating income of the relevant periods, respectively.
The following table sets out a breakdown of our net finance income for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Interest income 10,377 42,027 40,137 26,675 17,688 Exchange
gains/(losses) 2,239 4,742 (189) (1,268) 5,379 Interest expenses (10,982) (22,110) (17,182) (9,192) (8,500) Bank charges (1,209) (3,936) (5,644) (4,354) (3,620) Total 425 20,723 17,122 11,861 10,947
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FINANCIAL INFORMATION
Our interest income represents mainly bank interest income. Our interest expenses represent mainly interest expenses on bank borrowings and short-term financing bills after deduction of such interest expenses that are capitalised as our construction in progress. We recorded a net financial income during the Track Record Period. The increase in 2011 was mainly attributable to the combine effect of (i) increase in bank interest income as result of increase in bank balance; and (ii) decrease in interest expenses due to capitalisation of part of our interest expenses as construction in progress. The decrease in net financial income in 2012 was mainly attributable to a slight decrease in the interest income and recognition of exchange loss which was partially offset by the decrease in interest expenses. The decrease in interest expenses was mainly attributable to capitalisation of part of our interest expenses as construction in progress.
Impairment loss
Our impairment loss comprises mainly provision for diminution in value of inventories, provision for impairment of fixed assets, provision for bad debts and provision for impairment of long-term equity investments. Our impairment loss were approximately RMB10.95 million, RMB34.14 million, RMB45.49 million and RMB19.39 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, representing approximately0.40%,1.08%,1.15% and0.60% of our total operating income of the relevant periods, respectively.
Thefollowingtablesetsoutabreakdownofourimpairmentlossfortheperiodsindicated: For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Provision for
diminution in value
of inventories 5,760 11,149 18,035 7,800 10,083 Provision for bad
debts 4,276 7,024 12,496 10,231 9,305 Provision for
impairment of fixed
assets 815 15,963 14,963 – – Provision for
impairment of
long-term equity
investments 100 – – – – Total 10,951 34,136 45,494 18,031 19,388
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FINANCIAL INFORMATION
The increase in provision for diminution in value of inventories and provision for bad debts was generally in line with the increase in our inventories and accounts receivables balances during the Track Record Period. The increase in provision for impairment of fixed assets was mainly attributable to the impairment loss being made for certain production facilities and production plants of Livzon Group Livzon Pharmaceutical Factory (
) which would not be used after our relocation to the new production plant.
Gains/Losses from changes in fair value
Our gains/losses from changes in fair value represent gains/losses from the fair value changes of financial assets held for trading. We held approximately RMB57.87 million, RMB44.34 million, RMB59.32 million and RMB9.16 million of financial assets held for trading as at 31 December 2010, 2011 and 2012 and as at 30 September 2013, respectively, representing mainly the equity shares of various companies listed on Hong Kong Stock Exchange. The net gain/loss represents mainly the fair value change in our tradable equity shares listed on Hong Kong Stock Exchange.
Thefollowingtablesetsoutabreakdownofourfairvaluechangesoffinancialassetsheld for trading for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Gains/(losses) on
equity shares 10,714 (10,927) 16,366 4,814 (3,559) Gains/(losses) on
funds 66 (157) 16 (14) 30 Total 10,780 (11,084) 16,382 4,800 (3,529) Investment income/losses
Our investment income/losses include income/losses from investment in associates, investment income from equity investments and profits appropriated from other equity. For the years ended 31 December 2010 and 2011, our investment loss was approximately RMB1.28 million and RMB1.49 million, respectively. However, we recognised an investment income of approximatelyRMB4.14millionfortheyearended31December2012.Ourinvestmentincome for the nine months ended 30 September 2013 was approximately RMB3.81 million.
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FINANCIAL INFORMATION
The following table sets out a breakdown of our investment income/(losses) for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Income/(losses) from
investment in
associates (2,469) (2,717) 2,432 77 2,070 Investment income
from financial
assets held for
trading 839 1,204 997 881 184 Gains on disposal of
investments – – 556 559 848 Investment income
from available-for-
sale financial assets 319 28 152 152 364 Profits appropriated
from other equity
investments 32 – – – 344 Total (1,279) (1,485) 4,137 1,669 3,810 Non-operating income
Our non-operating income mainly comprises government grants, gains on disposal of fixed assets, income from scraps, compensation income, waiver of payables and penalty income. Our non-operating income amounted to approximately RMB21.17 million, RMB36.18 million, RMB44.27 million and RMB31.65 million for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, representing0.78%,1.14%,1.12% and0.98% of our total operating income of the relevant periods, respectively.
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FINANCIAL INFORMATION
The table below sets out the major components of our non-operating income for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Amortisation of
government grants 13,209 32,047 42,064 15,100 28,994 Gains on disposal of
fixed assets 6,578 623 1,012 176 335 Penalty income 65 4 16 12 77 Income from scraps 362 470 541 275 388 Waiver of payables − 733 200 – 603 Compensation income 717 15 – – 869 Others 236 2,290 435 382 388 Total 21,167 36,182 44,268 15,945 31,654 The government grants were mainly granted by the government bodies for the research and development of our pharmaceutical products or technical know-how developed by us, and were granted on a one-off basis. Government grant is either recognised (i) as deferred income initially and amortised in income statement subsequently; or (ii) as income at the time of the government grant being received. For discussion on our deferred income, please refer to the section headed “Certain Balance Sheet Items– Deferred Income” in this listing document. Non-operating expenses
Non-operating expenses mainly comprise write-off of fixed assets, losses on disposal of fixed assets, charity donation expenses and liquidated damages expenses. For the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our non-operating expenses were approximately RMB3.92 million, RMB2.78 million, RMB2.71 million and RMB1.75 million, representing approximately0.14%,0.09%,0.07% and0.05% of our total operating income, respectively.
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FINANCIAL INFORMATION
The following table sets out a breakdown of our non-operating expenses for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Write-off of fixed
assets 215 559 1,361 665 374 Losses on disposal of
fixed assets 835 161 1,082 1,048 5 Charity donation
expenses 1,288 260 187 130 1,318 Liquidated damages
expenses 13 1,600 – – – Others 1,564 196 78 70 48 Total 3,915 2,776 2,708 1,913 1,745 Income tax expenses
Income tax expenses represent our current tax expenses and deferred taxation expenses. The table below sets out a breakdown of our income tax expenses for the periods indicated: For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Current income tax 73,486 88,575 91,787 73,729 79,902 Deferred tax 7,691 (13,222) (6,697) (3,013) (384) Total 81,177 75,353 85,090 70,716 79,518 We are subject to taxation on entity basis on profit arising in or derived from the tax jurisdictions where the entities comprising our Group are domiciled and operate. The major operating entities comprising our Group operated in the PRC during the Track Record Period, and thus their profits were subject to the PRC Enterprise Income Tax. Under the EIT Law and its implementation rules, the enterprises that are qualified as “high and new technology enterprises strongly supported by the State” are entitled to enjoy a preferential enterprise
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FINANCIAL INFORMATION
income tax rate of15%, however, the preferential enterprise tax rate is subject to review and approval by tax authority every three years.The major operating entities comprising our Group including, but not limited to, our Company, Livzon Group Livzon Pharmaceutical Factory (
), Sichuan Guangda Pharmaceutical Manufacturing Co., Ltd. (
) and Livzon Group Limin Pharmaceutical Factory ( ) were qualified as “high and new technology enterprises strongly supported by the State” and were entitled to the preferential enterprise income tax rate of15% during the Track Record Period. The income tax rates applicable to the entities comprising our Group are disclosed in Note III to theAccountants’ Report in Appendix I. Our effective tax rate, computed based on income tax expenses divided by profit before income tax for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 was approximately15.21%,16.26%,15.19% and16.63%, respectively.
Other comprehensive income/loss
Our other comprehensive income/loss represents mainly changes in fair value of available-for-sale financial assets.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Nine months ended 30 September 2013 compared to nine months ended 30 September 2012
Operating income from principal activities
Our operating income from principal activities was approximately RMB3,218.13 million for the nine months ended 30 September 2013, representing an increase of approximately RMB323.41 million, or approximately11.17%, from approximately RMB2,894.71 million for the same period in 2012. The increase in the operating income from principal activities was mainly attributable to the increase in the sales volume of Shenqi Fuzheng Injection (
),LeuprorelinAcetateMicrospheresforInjection( )andUrofollitropinforInjection ( ). The increase in sales volume reflected the continued increase in demand for those products.The table below sets out the period on period sales volume growth of those products: Period on period Product categories growth in sales volume Chinese drug preparation
• Shenqi Fuzheng Injection ( ) 21.29% Gonadotropic hormones
• Leuprorelin Acetate Microspheres for Injection ( ) 87.09%• Urofollitropin for Injection ( ) 17.90% The average selling price of Shenqi Fuzheng Injection ( ), Leuprorelin Acetate Microspheres for Injection ( ) and Urofollitropin for Injection ( ) remained stable for the nine months ended 30 September 2013.
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FINANCIAL INFORMATION
The increase in the operating income from principal activities contributed by sales of aforementioned products was partially offset by decrease in the operating income from principal activities contributed by sales of our major bulk medicines and intermediates products, such as Phenylalanine ( ), Mevastatin ( ) and Colistin ( ). The decrease in sales of Phenylalanine ( ) and Mevastatin ( ) was mainly attributable to decrease in the sales volume by approximately30.63% and18.66% respectively as a result of the weakened demand for those products. The decrease in sales of Colistin (
) was mainly attributable to the fact that the average selling price of our Colistin (
) products was reduced by approximately30% in order to respond to intensified market competition.
Operating costs from principal activities
Our operating costs from principal activities were approximately RMB1,150.21 million for the nine months ended 30 September 2013, representing an increase of approximatelyRMB20.14million,orapproximately1.78%,fromapproximatelyRMB1,130.07millionforthe same period in 2012. The slight increase in our operating costs from principal activities of1.78% was mainly attributable to the combined effect of the increase in sales of our drug preparation products and the decrease in sales of our bulk medicines and intermediates.
Gross profit from principal activities
OurgrossprofitfromprincipalactivitieswasapproximatelyRMB2,067.91millionforthe nine months ended 30 September 2013, representing an increase of approximately RMB303.26 million, or approximately17.18%, from approximately RMB1,764.65 million for the same period in 2012. The increase was mainly attributable to the increase in sales volume of Shenqi Fuzheng Injection ( ), Leuprorelin Acetate Microspheres for Injection ( ) and Urofollitropin for Injection ( ). Our gross profit margin from principal activities increased from approximately60.96% for the nine months ended 30 September 2012 to approximately64.26% for the nine months ended 30 September 2013. The increase in gross profit margin was mainly due to the fact that an increasing percentage of our operating income came from the sale of Shenqi Fuzheng Injection ( ) which has a high gross margin.
Business taxes and surcharges
Our business taxes and surcharges were approximately RMB41.38 million for the nine months ended 30 September 2013, which was fairly stable as compared to that of approximately RMB40.44 million for the same period in 2012.
Selling expenses
Our selling expenses were approximately RMB1,274.35 million for the nine months ended 30 September 2013, representing an increase of approximately RMB211.74 million, orapproximately19.93%,fromapproximatelyRMB1,062.61millionforthesameperiodin2012. The increase was mainly attributable to the increase in marketing and promotional expenses,
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FINANCIAL INFORMATION
especially the service fee paid to third-party sales representatives. The increase in the service fee mainly reflected the expansion of the third-party sales representatives network to promote our major drug preparation products, especially Shenqi Fuzheng Injection ( ). Administrative expenses
Our administrative expenses were approximately RMB296.76 million for the nine months ended 30 September 2013, representing an increase of approximately RMB56.91 million, or approximately23.73%, from approximately RMB239.85 million for the same period in 2012. This increase was mainly attributable to (i) an increase in our investment in research and development of new pharmaceutical products, reflecting our continued focus on research and development of new pharmaceutical products; and (ii) recognition of part of professional fees in relation to the Listing.
Financial income and expenses
Net financial income amounted to approximately RMB10.95 million for the nine months ended 30 September 2013, representing a decrease of approximately RMB0.91 million, or approximately7.67%, from approximately RMB11.86 million for the same period in 2012.The decrease was mainly attributable to a decrease in interest income which was partially offset by a decrease in interest expenses. Decrease in interest expenses was mainly attributable to capitalisation of part of interest expenses as our construction in progress.
Impairment losses
Our impairment loss was approximately RMB19.39 million for the nine months ended 30 September 2013, representing an increase of approximately RMB1.36 million, orapproximately7.54%,fromapproximatelyRMB18.03millionforthesameperiodin2012.The increase was mainly attributable to an increase in provision for bad debts as a result of an increase in accounts receivables balances.
Gains/losses from changes in fair value
Our gains/losses from changes in fair value changed from a net gain of approximately RMB4.80 million for the nine months ended 30 September 2012 to a net loss of approximately RMB3.53 million for the same period in 2013. The net loss represents mainly the fair value change in the tradable equities held by us in Hong Kong Stock Exchange listed equity.
Investment income
Our investment income was approximately RMB3.81 million for the nine months ended 30 September 2013, representing an increase of approximately RMB2.14 million, or approximately128.14%, from approximately RMB1.67 million for the same period in 2012. The increase in investment income was mainly attributable to the combined effect of recognition of gains on disposal of financial assets held for trading and a decrease in share of
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FINANCIAL INFORMATION
the net loss of an associate, namely Tongyikangshimei Chain (Shenzhen) Co., Ltd. (
( ) ). In 2013, the performance ofTongyikangshimei Chain (Shenzhen) Co., Ltd. ( ( ) ) greatly improved and its loss was greatly reduced for the nine months ended 30 September 2013.
Operating profit
As a result of the foregoing, our operating profit was approximately RMB448.14 million for the nine months ended 30 September 2013, representing an increase of approximately RMB26.41 million, or approximately6.26%, from approximately RMB421.73 million for the same period in 2012.
Non-operating income
Our non-operating income was approximately RMB31.65 million for the nine months ended 30 September 2013, representing an increase of approximately RMB15.70 million, or approximately98,43%, from approximately RMB15.95 million for the same period in 2012. The increase was mainly attributable to the significant increase in amortisation of deferred income relating to government grants.
Non-operating expenses
Our non-operating expenses were approximately RMB1.75 million for the nine months ended 30 September 2013, representing a decrease of approximately RMB0.16 million, or approximately8.38%, from approximately RMB1.91 million for the same period in 2012. The decrease was mainly attributable to a decrease in loss on disposal of fixed assets, which was partially offset by an increase in charity donation expenses.
Profit before income tax expenses
As a result of the foregoing, our profit before income tax expenses was approximately RMB478.05 million for nine months 30 September 2013, representing an increase of approximately RMB42.29 million, or approximately9.70%, from approximately RMB435.76 million for the same period in 2012.
Income tax expenses
Our income tax expenses were approximately RMB79.52 million for the nine months ended 30 September 2013, representing an increase of approximately RMB8.80 million, or approximately12.44%, from approximately RMB70.72 million for the same period in 2012. The slight increase in our income tax expenses was mainly attributable to a slight increase in taxable income. Accordingly, our effective tax rates increased slightly from approximately16.23% for the nine months ended 30 September 2012 to approximately16.63% for the nine months ended 30 September 2013.
Net profit for the period
Our net profit for the period was approximately RMB398.53 million for the nine months ended 30 September 2013, representing an increase of approximately RMB33.49 million, or
approximately9.17%, from approximately RMB365.04 million for the same period in 2012.
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FINANCIAL INFORMATION
Net profit for the period attributable to shareholders of our Company
The net profit for the period attributable to shareholders of our Company was approximatelyRMB378.52millionfortheninemonthsended30September2013,representing an increase of approximately RMB34.89 million, or approximately10.15%, from approximately RMB343.63 million for the same period in 2012.
Net profit for the period attributable to non-controlling interests
The net profit for the period attributable to non-controlling interests was approximately RMB20.01 million for the nine months ended 30 September 2013, representing a decrease of approximately RMB1.40 million, or approximately6.54%, from approximately RMB21.41 million for the same period in 2012.
Other comprehensive loss
Our other comprehensive loss was approximately RMB1.76 million for the nine months ended 30 September 2013, representing an increase of approximately RMB1.00 million, or approximately131.58%, from approximately RMB0.76 million for the same period in 2012. Year ended 31 December 2012 compared to year ended 31 December 2011
Operating income from principal activities
Our operating income from principal activities was approximately RMB3,923.50 million for the year ended 31 December 2012, representing an increase of approximately RMB787.16 million, or approximately25.10%, from approximately RMB3,136.34 million for the year ended 31 December 2011. The increase in our operating income from principal activities was attributable to the increase in the sales volume and average selling price of our major drug preparation products.
The increase in the sales volume of our major drug preparation products was mainly contributed by sale of Chinese drugs preparation products and gonadotropic hormones. The increase reflected (i) the increase in our effort on promoting those products through our own sales teams and third-party sales representatives; and (ii) the increase in demand for those products. The table below sets out the year on year sales volume growth of those products for the year ended 31 December 2012:
Year on year growth in Product categories sales volume Chinese drug preparation products
– Shenqi Fuzheng Injection ( ) 32.63%– Anti-viral Granules ( ) 16.62% Gonadotropic hormones
– Urofollitropin for Injection ( ) 42.51%
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FINANCIAL INFORMATION
The increase in the average selling price of Shenqi Fuzheng Injection ( ) mainly ( ) reflected (i) the marketing and promotional expenses incurred by our own sales teams and the service fee paid to the third-party sales representatives; and (ii) the increaseinmarketdemandfortheproduct.However,theaveragesellingpriceofUrofollitropin for Injection ( ) remained stable.
Operating costs from principal activities
Our operating costs from principal activities were approximately RMB1,549.90 million for the year ended 31 December 2012, representing an increase of approximately RMB172.51 million, or approximately12.52%, from approximately RMB1,377.39 million for the year ended 31 December 2011.The increase was generally in line with the increase of our operating income from principal activities. In general, the unit costs of our major products were fairly stable in 2012. The increase in our operating cost from principal activities was mainly driven by an increase in sales volume of our major drug preparation products.
Gross profit from principal activities
OurgrossprofitfromprincipalactivitieswasapproximatelyRMB2,373.59millionforthe year ended 31 December 2012, representing an increase of approximately RMB614.64 million, or approximately34.94%, from approximately RMB1,758.95 million for the year ended 31 December 2011. The increase was mainly attributable to the combine effect of (i) increase in sales volume of our major drug preparation products; and (ii) increase in the average selling price of our major drug preparation products (such as Shenqi Fuzheng Injection (
)). Our gross profit margin from principal activities increased from approximately56.08% for the year ended 31 December 2011 to approximately60.50% for the year ended 31 December 2012. The increase was mainly due to the fact that an increasing percentage of our operating income came from sale of high margin products (such as Shenqi Fuzheng Injection ( ) and gonadotropic hormones).
Business taxes and surcharges
Our business taxes and surcharges were approximately RMB54.55 million for the year ended 31 December 2012, representing an increase of approximately RMB13.82 million, or approximately33.93%, from approximately RMB40.73 million for the year ended 31 December 2011.The increase was mainly contributed by the increase in our urban construction tax and education surcharges from approximately RMB22.19 million and RMB16.34 million for the year ended 31 December 2011 to approximately RMB29.78 million and RMB22.63 millionfortheyearended31December2012,respectively.Increaseinbothurbanconstruction tax and education surcharges was mainly attributable to increase in our turnover tax amount to be paid during the year.
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FINANCIAL INFORMATION
Selling expenses
Our selling expenses were approximately RMB1,441.65 million for the year ended 31 December 2012, representing an increase of approximately RMB470.76 million, or approximately48.49%, from approximately RMB970.89 million for the year ended 31 December 2011. The significant increase was mainly attributable to the increase in marketing and promotional expenses on promoting our drug preparation products. Due to the reform of our sales strategy, we increased reliance on promoting our drug preparation products through our own sales teams and third-party sales representatives. Therefore, we incurred additional expenses for marketing and promotional activities, including service fee paid to the third-party sales representatives. The service fee paid to the third-party sales representatives is computed on the basis of the sales generated by them.The increase in the service fee reflected mainly the expansion of the third-party sales representatives network to promote our major drug preparation products, especially Shenqi Fuzheng Injection ( ).
Administrative expenses
Our administrative expenses were approximately RMB351.03 million for the year ended 31 December 2012, representing an increase of approximately RMB53.40 million, or approximately17.94%, from approximately RMB297.63 million for the year ended 31 December 2011. The increase was mainly attributable to (i) an increase in the investment on research and development of monoclonal antibody and vaccine products; and (ii) an increase in the number of administrative, finance and human resources staff to support our business growth.
Financial expenses
WerecordedanetfinancialincomeamountedtoapproximatelyRMB17.12millionforthe year ended 31 December 2012, representing a decrease of approximately RMB3.60 million, or approximately17.37%, from approximately RMB20.72 million for the year ended 31 December 2011. The decrease was mainly attributable to the exchange loss that we incurred during the year, which was partially offset by a decrease in interest expenses. The decrease in interest expenses was mainly attributable to capitalisation of part of interest expenses as construction in progress.
Impairment losses
Our impairment loss was approximately RMB45.49 million for the year ended 31 December 2012, representing an increase of approximately RMB11.35 million, or approximately33.25%, from approximately RMB34.14 million for the year ended 31 December 2011. The increase was mainly attributable to an increase in (i) provision for diminution in value of inventories; and (ii) provision for bad debts. The increase was partially offsetbyadecreaseinimpairmentlossinfixedassets.Theincreaseinprovisionfordiminution in value of inventories and provision for bad debts was in line with an increase in our inventories and accounts receivables balances.
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FINANCIAL INFORMATION
Gains/losses from changes in fair value
Our gains/losses from changes in fair value changed from a net loss of approximately RMB11.08 million for the year ended 31 December 2011 to a net gain of approximately RMB16.38 million for the year ended 31 December 2012. The net gain comprised mainly the fairvaluechangeinourtradableequityshareslistedonHongKongStockExchange.Thestock market in Hong Kong had a significant rebound since the third quarter in 2012 due to the combined effect of theU.S.’s further monetary easing policies and easing worries over the Eurozone debt crisis.
Investment income/losses
Our investment income/losses changed from a net loss of approximately RMB1.49 million for the year ended 31 December 2011 to a net income of approximately RMB4.14 million for the year ended 31 December 2012. Our investment income recognised for the year ended 31 December 2012 was mainly contributed by our share of the net profit of an associate, namely Guangdong Blue Treasure Pharmaceutical Co. Ltd. ( ). Guangdong Blue Treasure Pharmaceutical Co. Ltd. ( ) incurred a net loss for the year ended 31 December 2011. However its performance greatly improved and it made a net profit for the year ended 31 December 2012.
Operating profit
As a result of the foregoing, our operating profit was approximately RMB518.75 million for the year ended 31 December 2012, representing an increase of approximately RMB89.01 million, or approximately20.71%, from approximately RMB429.74 million for the year ended 31 December 2011.
Non-operating income
Our non-operating income was approximately RMB44.27 million for the year ended 31 December 2012, representing an increase of approximately RMB8.09 million, or approximately22.36%, from approximately RMB36.18 million for the year ended 31 December2011.Theincreasewasmainlyattributabletoanincreaseinamortisationofdeferred income of RMB10.02 million. Our deferred income represented mainly one-off governmental grants for our research and development projects. For discussion on our deferred income, please refer to the section headed “Certain Balance Sheet Items– Deferred Income” in this listing document.
Non-operating expenses
Our non-operating expenses were approximately RMB2.71 million for the year ended 31 December 2012, representing a decrease of approximately RMB0.07 million, or approximately2.52%, from approximately RMB2.78 million for the year ended 31 December 2011.
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FINANCIAL INFORMATION
Profit before income tax expenses
As a result of the foregoing, our profit before income tax expenses was approximately RMB560.31 million for the year ended 31 December 2012, representing an increase of approximately RMB97.16 million, or approximately20.98%, from approximately RMB463.15 million for the year ended 31 December 2011.
Income tax expenses
Our income tax expenses were approximately RMB85.09 million for the year ended 31 December 2012, representing an increase of approximately RMB9.74 million, or approximately12.93%, from approximately RMB75.35 million for the year ended 31 December 2011. The increase in our income tax expenses was mainly attributable to an increase in taxable income. However, our effective tax rate decreased slightly from approximately16.27% for the year ended 31 December 2011 to approximately15.19% for the year ended 31 December 2012.
Net profit for the year
Our net profit for the year was approximately RMB475.22 million for the year ended 31 December 2012, representing an increase of approximately RMB87.42 million, or approximately22.54%, from approximately RMB387.80 million for the year ended 31 December 2011.
Net profit for the year attributable to shareholders of our Company
ThenetprofitfortheyearattributabletoshareholdersofourCompanywasapproximately RMB441.67 million for the year ended 31 December 2012, representing an increase of approximately RMB82.30 million, or approximately22.90%, from approximately RMB359.37 million for the year ended 31 December 2011.
Net profit for the year attributable to non-controlling interests
The net profit for the year attributable to non-controlling interests was approximately RMB33.55 million for the year ended 31 December 2012, representing an increase of approximately RMB5.12 million, or approximately18.01%, from approximately RMB28.43 million for the year ended 31 December 2011.
Other comprehensive income/loss
Our other comprehensive income was approximately RMB0.10 million for the year ended 31 December 2012. For the year ended 31 December 2011, we recognised a loss of approximately RMB4.93 million.
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FINANCIAL INFORMATION
Year ended 31 December 2011 compared to year ended 31 December 2010
Operating income from principal activities
Our operating income from principal activities was approximately RMB3,136.34 million for the year ended 31 December 2011, representing an increase of approximately RMB446.14 million, or approximately16.58%, from approximately RMB2,690.20 million for the year ended 31 December 2010. The increase in our operating income from principal activities was attributable to the increase in sales of Chinese drug preparation products and gonadotropic hormones, but was partially offset by the decrease in sales of our bulk medicines and intermediates.
For the year ended 31 December 2011, the increase in sales of Chinese drug preparation products and gonadotropic hormones was mainly driven by (i) an increase in the sales volume of the major products of Chinese drug preparation and gonadotropic hormones and (ii) an increase in average selling price of Shenqi Fuzheng Injection ( ).
The table below sets out the year on year sales volume growth of our Chinese drug preparation products and gonadotropic hormones for the year ended 31 December 2011:
Year on year growth in Product categories sales volume Chinese drug preparation products
– Shenqi Fuzheng Injection ( ) 23.71%– Anti-viral Granules ( ) 48.44% Gonadotropic hormones
– Urofollitropin for Injection ( ) 51.15% The increase in the average selling price of Shenqi Fuzheng Injection ( ) mainly reflected (i) the marketing and promotional expenses incurred by our own sales teams andthethird-partysalesrepresentatives;and(ii)theincreasingmarketdemandfortheproduct. The decrease in sales of our bulk medicines and intermediates was mainly attributable to the effect of the introduction of the Notice on the Adjustment of Maximum Retail Price for Certain Types of Microbial and Circulatory System Drugs issued by the NDRC (
) in 2011. The sales volume and the average selling prices of Ceftriaxone Sodium ( ) and Cefuroxime Sodium ( ), both of which were antibiotics related bulk medicines, dropped significantly in 2011. Operating income from sale of Ceftriaxone Sodium ( ) and Cefuroxime Sodium ( ) dropped by approximately RMB94.74 million and approximately RMB154.46 million for the year ended 31 December 2011 as compared with the operating income from sale of those products for the year ended 31 December 2010, respectively.
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FINANCIAL INFORMATION
Operating costs from principal activities
Our operating costs from principal activities were approximately RMB1,377.39 million for the year ended 31 December 2011, representing an increase of approximately RMB109.46 million, or approximately8.63%, from approximately RMB1,267.93 million for the year ended 31 December 2010. The increase was generally in line with the increase of our operating income from principal activities. The increase in our operating cost from principal activities was mainly driven by (i) an increase in sales volume of our major drug preparation products; and (ii) an increase in the average unit cost of Shenqi Fuzheng Injection ( ) as a result of the dramatic increase in the price of its major raw materials, i.e. codonopsis ( ) and astragalus ( ).
Gross profit from principal activities
OurgrossprofitfromprincipalactivitieswasapproximatelyRMB1,758.95millionforthe year ended 31 December 2011, representing an increase of approximately RMB336.68 million, or approximately23.67%, from approximately RMB1,422.27 million for the year ended 31 December 2010. The increase was mainly attributable to the combined effect of (i) an increase in the sales volume of our major drug preparation products; and (ii) an increase in the average selling price of our major drug preparation products (such as Shenqi Fuzheng Injection (
)). Our gross profit margin from principal activities increased from approximately52.87% for the year ended 31 December 2010 to approximately56.08% in 2011. The increase in gross profit margin from principal activities was mainly attributable to the fact that an increasing percentage of our operating income came from sales of high margin products (such as Shenqi Fuzheng Injection ( )) and a decreasing percentage of our operating income came from sales of low margin bulk medicines and intermediates.
Business taxes and surcharges
Our business taxes and surcharges were approximately RMB40.73 million for the year ended 31 December 2011, representing an increase of approximately RMB31.87 million, or approximately359.71%, from approximately RMB8.86 million for the year ended 31 December 2010. The significant increase was mainly contributed by the increase in our urban construction tax and education surcharges from approximately RMB4.83 million and approximately RMB2.54 million for the year ended 31 December 2010 to approximately RMB22.19 million and approximately RMB16.34 million for the year ended 31 December 2011, respectively. The huge increase in both the urban construction tax and education surcharges was attributable to the combined effect of (i) our Company and our foreign invested subsidiaries paying urban construction tax and education surcharges since 1 December 2010 pursuant to the Notice of the State Council on Extending the Urban Maintenance and Construction Tax and Educational Surcharges from Domestic to Foreign Invested Enterprises and Individuals ( ); and (ii) our Company and our subsidiaries incorporated in Zhuhai paying additional education surcharges to local government since 1 January 2011 pursuant to Notice on the Provisional Measures for the Administration on the Collection of Education Surcharge in Guangdong Province ( ).
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FINANCIAL INFORMATION
Selling expenses
Our selling expenses were approximately RMB970.89 million for the year ended 31 December 2011, representing an increase of approximately RMB322.84 million, or approximately49.82%, from approximately RMB648.05 million for the year ended 31 December 2010. The increase was mainly attributable to the increase in our marketing and promotional expenses. Due to the reform of our sales strategy, we increased reliance on promoting our drug preparation products through our own sales teams and third-party sales representatives. Therefore, we incurred additional expenses for marketing and promotional activities including service fee paid to the third-party sales representatives. The service fee paid to the third-party sales representatives is computed on the basis of the sales generated by them. The increase in the service fee mainly reflected the expansion of the third-party sales representatives network to promote our major drug preparation products, especially Shenqi Fuzheng Injection ( ).
Administrative expenses
Our administrative expenses were approximately RMB297.63 million for the year ended 31 December 2011, representing an increase of approximately RMB31.74 million, or approximately11.94%, from approximately RMB265.89 million for the year ended 31 December 2010. This increase was mainly attributable to (i) an increase in the investment on research and development of new pharmaceutical products; and (ii) an increase in the number of administrative, finance and human resources staff to support our business growth.
Financial expenses
WerecordedanetfinancialincomeamountedtoapproximatelyRMB20.72millionforthe year ended 31 December 2011, representing an increase of approximately RMB20.30 million, or approximately4,833.33%, from approximately RMB0.42 million for the year ended 31 December 2010. The significant increase was mainly attributable to an increase in our interest income resulting from an increase in bank deposits. The increase in interest income was partially offset by an increase in interest expense due to increased borrowings. The increase in our bank balance was mainly attributable to the collection of accounts receivables and cash received from short-term financing bills of RMB400 million.
Impairment losses
Our impairment loss was approximately RMB34.14 million for the year ended 31 December 2011, representing an increase of approximately RMB23.19 million, or approximately211.78%, from approximately RMB10.95 million for the year ended 31 December 2010. The increase was mainly attributable to (i) an increase in impairment loss in fixed assets; (ii) an increase in provision for diminution in value of inventories; and (iii) an increase in provision for bad debts. The increase in the impairment loss of fixed assets was mainly attributable to the impairment loss being made for certain production facilities and production plants of Livzon Group Livzon Pharmaceutical Factory ( ) which would not be used after relocating to our new production plant in Jinwan District, Zhuhai.
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FINANCIAL INFORMATION
Losses/Gains from changes in fair value
Our gains/losses from changes in fair value changed from a net gain of approximately RMB10.78 million for the year ended 31 December 2010 to a net loss of approximately RMB11.08 million for the year ended 31 December 2011. The loss comprised mainly the fair value change in our tradable equity shares on Hong Kong Stock Exchange. In 2011, the stock market in Hong Kong had a downward adjustment due to the adverse effect arising from the European debt crisis and the slowdown of the global economy recovery.
Investment losses
Our investment loss was approximately RMB1.49 million for the year ended 31 December2011,representinganincreaseofapproximatelyRMB0.21million,orapproximately16.41%, from RMB1.28 million for the year ended 31 December 2010. The increase in investment loss was mainly attributable to an increase in our share of net loss of an associate, namely Guangdong Blue Treasure Pharmaceutical Co. Ltd. ( ).
Operating profit
As a result of the foregoing, our operating profit was approximately RMB429.74 million for the year ended 31 December 2011, representing a decrease of approximately RMB86.67 million, or approximately16.78%, from approximately RMB516.41 million for the year ended 31 December 2010.
Non-operating income
Our non-operating income was approximately RMB36.18 million for the year ended 31 December 2011, representing an increase of approximately RMB15.01 million, or approximately70.90%, from approximately RMB21.17 million for the year ended 31 December2010.Theincreasewasmainlyattributabletoanincreaseinamortisationofdeferred income relating to the government grants of approximately RMB18.84 million and was partially offset by a decrease in gains from disposal of fixed assets of approximately RMB5.96 million.
Non-operating expenses
Our non-operating expenses were RMB2.78 million for the year ended 31 December 2011, representing a decrease of approximately RMB1.13 million, or approximately28.90%, from approximately RMB3.91 million for the year ended 31 December 2010.
Profit before income tax expenses
As a result of the foregoing, our profit before income tax expenses was approximately RMB463.15 million for the year ended 31 December 2011, representing a decrease of approximately RMB70.52 million, or approximately13.21%, from approximately RMB533.67 million for the year ended 31 December 2010.
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FINANCIAL INFORMATION
Income tax expenses
Our income tax expenses were approximately RMB75.35 million for the year ended 31 December 2011, representing a decrease of approximately RMB5.83 million, or approximately7.18%, from approximately RMB81.18 million for the year ended 31 December 2010. The decrease in our income tax expenses was mainly attributable to a decrease in taxable income. However, our effective tax rate increased from approximately15.21% for the year ended 31 December 2010 to approximately16.27% for the year ended 31 December 2011.
Net profit for the year
Our net profit for the year was approximately RMB387.80 million for the year ended 31 December 2011, representing a decrease of approximately RMB64.69 million, or approximately14.30%, from approximately RMB452.49 million for the year ended 31 December 2010.
Net profit for the year attributable to shareholders of our Company
ThenetprofitfortheyearattributabletoshareholdersofourCompanywasapproximately RMB359.37 million for the year ended 31 December 2011, representing a decrease of approximately RMB58.81 million, or approximately14.06%, from approximately RMB418.18 million for the year ended 31 December 2010.
Net profit for the year attributable to non-controlling interests
The net profit for the year attributable to non-controlling interests was approximately RMB28.43 million for the year ended 31 December 2011, representing a decrease of approximately RMB5.88 million, or approximately17.14%, from approximately RMB34.31 million for the year ended 31 December 2010.
Other comprehensive loss for the year
Our other comprehensive loss was approximately RMB4.93 million for the year ended 31 December 2011, representing a decrease of approximately RMB0.70 million, or approximately12.43%, from approximately RMB5.63 million for the year ended 31 December 2010.
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FINANCIAL INFORMATION
LIQUIDITY AND FINANCIAL RESOURCES
Summary of cash flows
The table below summarises our cash flows for the periods indicated:
For the nine months For the year ended 31 December ended 30 September 2010 2011 2012 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Net cash inflows
from operating
activities 633,296 708,201 593,965 529,219 359,415 Net cash outflows
from investing
activities (330,494) (422,269) (895,490) (742,387) (684,523) Net cash
(outflows)/inflows
from financing
activities (14,118) 304,090 47,205 94,608 161,270 Cash and cash
equivalents at the
beginning of the
year/period 558,263 844,482 1,432,175 1,432,175 1,178,636 Effect of foreign
exchange rate
changes on cash
and cash
equivalents (2,465) (2,329) 781 1,238 (654) Cash and cash
equivalents at the
end of the
year/period 844,482 1,432,175 1,178,636 1,314,853 1,014,144
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FINANCIAL INFORMATION
Cash flows from operating activities
For the nine months ended 30 September 2013, our net cash inflow from operating activities was approximately RMB359.42 million. This net cash inflow from operating activities was mainly attributable to (i) cash received from sale of goods and rendering of services of approximately RMB3,227.44 million; (ii) cash received relating to other operating activities of approximately RMB123.96 million; and (iii) cash received relating to refund of taxes of approximately RMB12.65 million, but was partially offset by (i) cash paid for goods and services of approximately RMB826.27 million; (ii) cash paid to and for employees of approximately RMB284.97 million; (iii) cash paid relating to other operating activities of approximately RMB1,425.92 million; and (iv) cash paid for all types of taxes of approximately RMB467.47 million.
For the year ended 31 December 2012, our net cash inflow from operating activities was approximately RMB593.97 million. This net cash inflow from operating activities was mainly attributable to (i) cash received from sale of goods and rendering of services of approximately RMB3,837.90 million; (ii) cash received relating to other operating activities of approximately RMB170.18 million; and (iii) cash received relating to refund of taxes of approximately RMB18.55 million, but was partially offset by (i) cash paid for goods and services of approximately RMB1,096.65 million; (ii) cash paid to and for employees of approximately RMB318.51 million; (iii) cash paid relating to other operating activities of approximately RMB1,456.04 million; and (iv) cash paid for all types of taxes of approximately RMB561.47 million.
For the year ended 31 December 2011, our net cash inflow from operating activities was approximately RMB708.20 million. This net cash inflow from operating activities was mainly attributable to (i) cash received from sale of goods and rendering of services of approximately RMB3,196.89 million; (ii) cash received relating to other operating activities of approximately RMB147.19 million; and (iii) cash received relating to refund of taxes of approximately RMB7.22 million, but was partially offset by (i) cash paid for goods and services of approximately RMB937.04 million; (ii) cash paid to and for employees of approximately RMB284.99 million; (iii) cash paid relating to other operating activities of approximately RMB963.01 million; and (iv) cash paid for all types of taxes of approximately RMB458.06 million.
For the year ended 31 December 2010, our net cash inflow from operating activities was approximately RMB633.30 million. This net cash inflow from operating activities was mainly attributable to (i) cash received from sale of goods and rendering of services of approximately RMB2,676.63 million; (ii) cash received relating to other operating activities of approximately RMB77.11 million; (iii) cash received relating to refund of taxes of approximately RMB7.91 million, but was partially offset by (i) cash paid for goods and services of approximately RMB901.98million;(ii)cashpaidtoandforemployeesofapproximatelyRMB245.10million; (iii) cash paid relating to other operating activities of approximately RMB658.98 million; and (iv) cash paid for all types of taxes of approximately RMB322.29 million.
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FINANCIAL INFORMATION
Our net cash inflow from operating activities kept fairly stable in the range of approximately RMB600.00 million to RMB700.00 million from 2010 to 2012. Compared with 30 September 2012, our net cash inflow from operating activities for the nine months ended 30 September 2013 decreased by approximately RMB169.80 million. The decrease was mainly attributable to the combined effect of decrease in prepayment made by our customers and increase in use of bank acceptance bills by our customers to settle their trade debts due to us. Cash flows from investing activities
For the nine months ended 30 September 2013, our net cash used in investing activities was approximately RMB684.52 million. This net cash used in investing activities was mainly attributableto(i)cashpaidforacquisitionoffixedassets,intangibleassetsandotherlong-term assets of approximately RMB730.75 million; and (ii) cash paid for other investing activities of approximately RMB5.40 million, but was partially offset by cash received from disposal of investments of approximately RMB46.73 million.
For the year ended 31 December 2012, our net cash used in investing activities was approximately RMB895.49 million. This net cash used in investing activities was mainly attributableto(i)cashpaidforacquisitionoffixedassets,intangibleassetsandotherlong-term assets of approximately RMB762.30 million; and (ii) cash paid for acquisition of investments of approximately RMB151.53 million, but was partially offset by cash received from disposal of investments of approximately RMB16.86 million.
For the year ended 31 December 2011, our net cash used in investing activities was approximately RMB422.27 million. This net cash used in investing activities was mainly attributableto(i)cashpaidforacquisitionoffixedassets,intangibleassetsandotherlong-term assets of approximately RMB348.83 million; and (ii) cash paid for acquisition of investments of approximately RMB75.33 million, but was partially offset by cash received from return or investments of approximately RMB1.23 million.
For the year ended 31 December 2010, our net cash used in investing activities was approximately RMB330.49 million. This net cash used in investing activities was mainly attributableto(i)cashpaidforacquisitionoffixedassets,intangibleassetsandotherlong-term assets of approximately RMB336.95 million; and (ii) cash paid for acquisition of investments of approximately RMB2.38 million, but was partially offset by cash received from cash received from disposal of fixed assets, intangible assets and other long-term assets of approximately RMB7.68 million.
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FINANCIAL INFORMATION
Cash flows from financing activities
For the nine months ended 30 September 2013, our net cash inflow from financing activities was approximately RMB161.27 million. The net cash inflow from financing activities was mainly attributable to (i) cash received from borrowings of approximately RMB890.63 million; and (ii) cash received from issue of medium-term financing bills of RMB400.00 million, but was partially offset by (i) cash repayments of borrowings of approximately RMB989.99 million; and (ii) cash paid for dividends, profit distributions or interest of approximately RMB186.87 million.
For the year ended 31 December 2012, our net cash inflow from financing activities was approximately RMB47.21 million. The net cash inflow from financing activities was mainly attributableto(i)cashreceivedfromissueofshort-termfinancingbillsofRMB400.00million; (ii) cash received from borrowings of approximately RMB502.26 million; and (iii) cash received relating to other financing activities of approximately RMB13.25 million, but was partiallyoffsetby(i)cashrepaymentsofborrowingsofapproximatelyRMB620.75million;(ii) cash paid for dividends, profit distributions or interest of approximately RMB216.70 million; and (iii) cash paid relating to other financing activities of approximately RMB30.85 million. For the year ended 31 December 2011, our net cash inflow from financing activities was approximately RMB304.09 million. The net cash inflow from financing activities was mainly attributableto(i)cashreceivedfromissueofshort-termfinancingbillsofRMB400.00million; (ii) cash received from borrowings of approximately RMB229.86 million; (iii) cash received from investors of approximately RMB40.67 million; and (iv) cash received relating to other financing activities of approximately RMB6.20 million, but was partially offset by (i) cash repayments of borrowings of approximately RMB311.59 million; and (ii) cash paid for dividends, profits distributions or interest of approximately RMB59.45 million.
For the year ended 31 December 2010, our net cash outflow from financing activities was approximately RMB14.12 million. The net cash outflow from financing activities was mainly attributable to (i) cash repayments of borrowings of approximately RMB414.59 million; and (ii) cash paid for dividends, profits distributions or interest of approximately RMB65.21 million, but was partially offset by (i) cash received from borrowings of approximately RMB455.29 million; and (ii) cash received from investors of approximately RMB9.80 million.
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FINANCIAL INFORMATION
Net current assets
The table below summarises our current assets, current liabilities and net current assets as at the dates indicated:
As at 30 As at 31 As at 31 December September December 2010 2011 2012 2013 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) Current assets
Cash at bank and
on hand 863,932 1,447,744 1,221,333 1,057,086 760,256 Financial assets
held for trading 57,866 44,343 59,320 9,164 11,335 Bills receivables 232,946 171,034 112,483 181,943 271,432 Accounts
receivables 438,764 562,146 774,021 911,537 1,056,740 Prepayments 67,923 213,818 207,181 231,142 206,140 Other receivables 44,079 44,488 53,040 61,483 38,850 Inventories 450,214 424,423 546,498 640,814 640,965 Total current
assets 2,155,724 2,907,996 2,973,876 3,093,169 2,985,718 --------- --------- --------- --------- --------- Current liabilities
Short-term loans 207,460 251,325 536,170 681,931 491,084 Bills payables – – 283,581 372,799 375,776 Account payables 164,678 207,941 311,814 381,624 435,746 Receipts in
advance 21,127 39,029 37,950 55,187 65,623 Employee benefits
payables 51,324 52,329 74,463 67,369 90,620 Taxes payables 83,838 90,202 96,658 82,554 89,309 Interest payables 943 16,841 10,454 11,280 15,435 Dividend payables 2,532 2,532 2,532 2,532 2,532 Other payables 322,912 460,448 622,164 748,181 766,950 Non-current
liabilities due
within one year 70,400 400 400 400 400 Other current
liabilities
(Note 1)
– 400,000 400,000 – – Total current
liabilities 925,214 1,521,047 2,376,186 2,403,857 2,333,475 --------- --------- --------- --------- --------- Net current assets 1,230,510 1,386,949 597,690 689,312 652,243 Note 1: The other current liabilities of RMB400 million represent short-term financing bills.
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FINANCIAL INFORMATION
Our net current assets were approximately RMB1,230.51 million, RMB1,386.95 million, RMB597.69 million and RMB689.31 million as at 31 December 2010, 2011 and 2012 and 30 September 2013, respectively. The significant decrease in our net current assets from approximately RMB1,386.95 million as at 31 December 2011 to approximately RMB689.31 million as at 30 September 2013 was mainly attributable to our strategy to rely on short-term financing including short-term bank loans, bills payables and short-term financing bills to fund our operations and construction projects with a view to enjoying a lower interest rate.
Bills receivables
Our bills receivables represented mainly bank acceptance bills received by us from our customers for settlement of their trade debts. As at 31 December 2010, 2011 and 2012 and 30 September 2013, our bills receivables were approximately RMB232.95 million, RMB171.03 million, RMB112.48 million and RMB181.94 million, respectively. Our bills receivables decreased gradually from 2010 to 2012 and was mainly attributable to fact that we have been endorsing bank acceptance bills that we received from our customers to settle our payables in relation to our construction projects. However, our bills receivables increased from approximately RMB112.48 million as at 31 December 2012 to approximately RMB181.94 millionasat30September2013.Theincreasewasmainlyattributableto(i)anincreaseinbank acceptance bills used by our customers to settle their trade debts due to us, (ii) a decrease in endorsing bank acceptance bills to settle our payables as a result of an increase in discount charges; and (iii) an increase in sales of our major drug preparation products (such as Shenqi Fuzheng Injection ( ) gonadotropic hormones). The maturity days of our bills receivables as 30 September 2013 are generally in the first quarter of 2014.
Accounts receivables
As at 31 December 2010, 2011 and 2012 and 30 September 2013, our accounts receivableswereapproximatelyRMB438.76million,RMB562.15million,RMB774.02million and RMB911.54 million, respectively. The increase in our accounts receivables was generally in line with the increase in our operating income from principal activities. The increase in our accounts receivables from approximately RMB438.76 million as at 31 December 2010 to approximately RMB562.15 million as at 31 December 2011 was mainly attributable to an increase in sales volume of and/or increase in average selling price of our major preparation drug products, especially Shenqi Fuzheng Injection ( ).
The increase in our accounts receivables from approximately RMB562.15 million as at 31 December 2011 to approximately RMB774.02 million as at 31 December 2012 was mainly attributable to (i) our antibiotics drug and bulk medicines and intermediates customers requiring a longer time to settle their trade debts due to an adverse business environment in the PRC antibiotic industry following the introduction of the Administrative Measures for the Clinical Application of Antibiotics ( ) in 2012 and (ii) an increaseinsalesvolumeandaveragesellingpriceofourmajorpreparationdrugproducts(such as Shenqi Fuzheng Injection ( )).
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FINANCIAL INFORMATION
The table below sets out our accounts receivables (net of the provision for bad debts) as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Accounts receivables
– Third parties 438,764 562,146 765,276 910,215– Related parties – – 8,745 1,322 Total 438,764 562,146 774,021 911,537 The accounts receivables from related parties represented mainly the trade debts arising from our provision of stream, power and sewage treatment to Guangdong Blue Treasure Pharmaceutical Co. Ltd. ( ), which is an associate of our Group.
The table below sets out an ageing analysis (based on dates of recognition of accounts receivables) of our accounts receivables as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 1 to 90 days 379,326 484,016 669,280 742,037 91 to 180 days 53,931 68,105 94,857 117,127 180 days to 1 year 18,111 27,315 32,913 79,742 1 to 2 years 8,388 9,400 14,736 17,401 Over 2 years 6,609 8,681 8,133 9,055 Less: provision for bad debts 27,601 35,371 45,898 53,825 Total 438,764 562,146 774,021 911,537 As at 31 December 2013, over84% of our accounts receivables as at 30 September 2013 had been settled.
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FINANCIAL INFORMATION
The table below sets out ourdebtors’ turnover days for the periods indicated:
For the nine months ended 30 For the year ended 31 December September 2010 2011 2012 2013Debtors’ turnover days1 54.3 57.8 61.8 70.4 Note 1:Debtors’turnoverdaysfortheyearsended31December2010,2011and2012andninemonthsended 30September2013werecomputedbasedonouraverageaccountsreceivables(sumofopeningand closing balances of accounts receivables of respective periods and divided by two) divided by our operating income of the respective periods and multiplied by 365 days or 270 days.
The increase indebtors’ turnover days from 54.3 days for the year ended 31 December 2010 to 70.4 days for the nine months ended 30 September 2013 was mainly attributable to the downturn of antibiotics drug market in the PRC. In 2012, the MOH introduced the Administrative Measures for the ClinicalApplication ofAntibiotics (
) to restrict the use of certain antibiotics drug. As some hospitals and medical institutions postponed their purchasing plans for antibiotics, there was an oversupply in the antibiotics drug products and antibiotic related bulk medicines products. Due to the adverse effect arising from the Administrative Measures for the Clinical Application of Antibiotics ( ), ourGroup’s antibiotics drugs and bulk medicines customers required more time to settle their trade debts. However, we imposed tighter credit policiesandstrengthenedthemonitoringmeasuresonourdrugpreparationproductscustomers, resulting in thedebtors’turnover days of our Group being kept fairly stable from 2010 to 2012. The increase in ourdebtors’ turnover days from approximately 61.8 days as at 31 December 2012 to approximately 70.4 days as at 30 September 2013 was mainly attributable to the combined effect of (i) an increase in the proportion of credit sales to ourGroup’s total sales after consolidation our network of pharmaceutical distributors and (ii) a higher sales recorded in September due to the fact that our customers accumulated stocks before the National Day Holidays.
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FINANCIAL INFORMATION
Inventories
The table below sets out the breakdown of our inventories as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Raw materials 173,302 200,561 207,640 216,321 Finished goods 197,922 117,262 163,682 227,272 Work in progress 58,598 62,651 106,512 105,415 Consumable biological assets 1,511 3,624 29,144 39,136 Proprietary semi-finished
goods – 17,415 24,783 27,595 Goods in transit – 99 – – Packaging materials 18,037 22,355 14,175 23,245 Low-valued consumables 61 124 562 1,641 Processing materials 783 332 – 189 Total 450,214 424,423 546,498 640,814 As at 31 December 2013, over75% of our inventories as at 30 September 2013 had been utilised.
The table below sets out our inventory turnover days for the periods indicated:
For the nine months For the year ended ended 30 31 December September 2010 2011 2012 2013 Inventory turnover days1 112.0 114.2 112.9 137.6 Note 1: Inventory turnover days for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 were computed based on our average inventories (sum of opening and closing balances of inventories of respective periods and divided by two) divided by our operating cost of the respective periods and multiplied by 365 days or 270 days.
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FINANCIAL INFORMATION
Our inventory balance increased from approximately RMB450.21 million as at 31 December 2010 to approximately RMB640.81 million as at 30 September 2013. Our inventory balance decreased from approximately RMB450.21 million as at 31 December 2010 to approximately RMB424.42 million as at 31 December 2011. The decrease was mainly attributable to the combined effect of a decrease in finished goods and an increase in raw materials. The decrease in finished goods was mainly attributable to depletion of stocks which we intentionally accumulated in 2011 for sale at the time of relocating two production lines of Livzon Group Livzon Pharmaceutical Factory ( ) to the new production plant in Jinwan District, Zhuhai in late 2011. The increase in raw materials was mainly attributable to our intentional accumulation of herbal medicines to counter the negative effect fromtheanticipatedsurgeinpricesofChineseherbalmedicines(suchasradixnotoginseng(
), astragalus ( ) and codonopsis ( )).
Our inventory balance increased significantly from approximately RMB424.42 million as at 31 December 2011 to approximately RMB640.81 million as at 30 September 2013. The significant increase in our inventory balance was mainly contributed by an increase in finished goods, work in progress and consumable biological assets. The increase in finished goods and work in progress was mainly attributable to our business growth. The increase in consumable biological assets was mainly attributable to the fact that we expanded cultivation of radix notoginseng ( ) and astragalus ( ) in our own plantation base in Wenshan, Yunnan Province with a view to reducing reliance on the supply of radix notoginseng ( ) and astragalus ( ) from external suppliers and countering the negative effect from the anticipatedsurgeinthepricesofChineseherbalmedicines.Assuch,weincreasedourpurchase of seedling of radix notoginseng ( ) and astragalus ( ) for planting in 2012 and 2013. Althoughourinventorybalanceincreasedfrom2010to2012,ourinventoryturnoverdays was maintained at almost the same level due to our adoption of a proactive sales strategy and strengthening the inventory management. Our inventory turnover days increased from 112.9 days as at 31 December 2012 to 137.6 days as at 30 September 2013. The increase was mainly attributable to the fact that we intended to maintain sufficient level of finished goods, raw materials and packaging materials to support the anticipated business growth; and (ii) we increasedourpurchaseofconsumablebiologicalassets(suchasseedlingsofradixnotoginseng ( ) and astragalus ( )) for plantation in our own plantation bases.
Shelf lives of our major products range from one year to three years. We make provision for diminution in value of inventories mainly for the price reduction of certain products and obsolete goods or raw materials. Provision for diminution in value of the inventories represented mainly the provision made for our drug preparation products with remaining valid period of six months. Our Directors consider that drug preparation products, which are within six months before their valid dates, are less marketable. Therefore, for prudence, we make full provision for our drug preparation products six months before their valid dates. The provision made for diminution in value of inventories for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 were approximately RMB5.76 million, RMB11.15 million, RMB18.04 million and RMB10.08 million, respectively.
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FINANCIAL INFORMATION
Account payables
The table below sets out our account payables as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Account payables
– Third parties 127,155 185,340 282,458 337,981– Related parties 37,523 22,601 29,356 43,643 Total 164,678 207,941 311,814 381,624 Our account payables to related parties represented mainly the trade payables to Jiaozuo Joincare which was one of our major suppliers during the Track Record Period.
Our account payables increased from approximately RMB164.68 million as at 31 December 2010 to approximately RMB381.62 million as at 30 September 2013. The increase was mainly attributable to the increase in our purchases of raw materials to satisfy the anticipated sales growth.
As at 31 December 2013, over50% of our account payables as at 30 September 2013 had been settled.
The table below sets out an ageing analysis (based on dates of recognition of account payables) of our account payables as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 1 to 90 days 147,694 168,037 252,023 264,007 91 to 180 days 1,222 22,294 30,820 41,240 180 days to 1 year 5,438 3,123 4,736 48,896 1 to 2 years 4,248 6,479 13,988 18,451 Over 2 years 6,076 8,008 10,247 9,030 Total 164,678 207,941 311,814 381,624
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FINANCIAL INFORMATION
The table below sets out ourcreditors’ turnover days for the periods indicated:
For the nine months For the year ended ended 30 31 December September 2010 2011 2012 2013Creditors’ turnover days1 49.2 48.7 60.4 80.4 Note 1:Creditors’turnover days for the years ended 31 December 2010, 2011 and 2012 and nine months ended30September2013werecomputedbasedouraverageaccountpayables(sumofopeningand closing balances of account payables of respective periods and divided by two) divided by our operating cost of the respective periods and multiplied by 365 days or 270 days.
Thecreditors’ turnover day of our Group remained fairly stable in 2010 and 2011 at approximately 49 days. However, thecreditors’ turnover day increased significantly from approximately 48.7 days for the year ended 31 December 2011 to approximately 60.4 days for the year ended 31 December 2012, and to approximately 80.4 days for the nine months ended 30 September 2013. The increase increditors’turnover day of our Group in 2012 was mainly attributable to an increase in purchase of raw materials for our production, and plant and equipment for production plants under construction. Since the progress on the construction of our new production plants was sped up in 2012, there was an increase in account payables in relation to purchase of plant and equipment for our production plants under construction. The increase in ourcreditors’ turnover day to 80.4 days as at 30 September 2013 was mainly attributable to maintaining sufficient level of raw materials and packaging materials for production in order to satisfy the anticipated sales growth.
Bills payables
Please refer to the section headed “Indebtedness” for the discussion of bills payables.
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FINANCIAL INFORMATION
Other payables
Our other payables comprised mainly accrued expenses. The table below sets out the breakdown of our other payables as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Accruals for advertising and
promotional expenses 169,248 215,316 348,885 384,361 Accruals for operating costs
of local offices 72,357 163,752 176,065 227,416 Accruals for business
meeting expenses 10,084 12,865 18,561 22,578 Accruals for segment
operating expenses 5,031 5,939 9,050 9,427 Accruals for research and
development expenses 1,675 1,866 4,655 4,660 Accruals for utilities 2,013 1,974 2,986 5,920 Deposits received 13,856 24,325 27,029 51,209 Others 48,648 34,411 34,933 42,610 Total 322,912 460,448 622,164 748,181 As at 31 December 2010, 2011 and 2012 and 30 September 2013, ourGroup’s other payables were approximately RMB322.91 million, RMB460.45 million, RMB622.16 million and RMB748.18 million, respectively. The significant increase in our other payables was mainly contributed by the increase in the accruals for operating costs of our local offices and advertising and promotional expenses. Since 2008, we have been undergoing a reform of the sales strategy by putting efforts on promotion of our products through our own sales teams and third-party sales representatives, as a result our operating costs of our local offices and advertisingandpromotionalexpenses,suchasexpensesincurredforpromotionalactivitiesand service fee paid to third-party sales representatives, and the relevant accruals increased significantly throughout the Track Record Period.
Working capital
Taking into account the internal resources available to our Group, our Directors are of the opinion that our Group has sufficient working capital for our present requirements for at least the next 12 months from the date of this listing document.
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FINANCIAL INFORMATION
Financial resources
Our liquidity requirements mainly relate to working capital needs, capital expenditure, debt services and business acquisitions. We historically met our working capital and other liquidity requirements. Our principal sources of liquidity are cash generated from our operations, various short-term and long-term bank borrowings and lines of credit and advances from our customers.
For information about our banking facilities, please refer to the section headed “Indebtedness” in this listing document.
CERTAIN BALANCE SHEET ITEMS
Fixed assets and construction in progress
Our fixed assets comprise mainly plant& buildings, machinery& equipment, motor vehicles and electronic devices. As at 31 December 2010, 2011 and 2012 and 30 September 2013, our fixed assets were approximately RMB803.94 million, RMB1,090.57 million, RMB1,127.29 million and RMB1,248.63 million, respectively. Our fixed assets balances were increasing gradually during the Track Record Period. The increase reflected the continuous advancement of our production facilities and investment in construction of new production plants.
Our construction in progress includes mainly our new production plant projects under construction and technology advancement projects in Zhuhai, Ningxia, Jiaozuo and Shaoguan. As at 31 December 2010, 2011 and 2012 and 30 September 2013, our construction in progress were approximately RMB317.91 million, RMB148.84 million, RMB1,028.77 million and RMB1,636.22 million, respectively. The above production facilities under construction will be reclassified as our fixed assets once they are put into commercial operation.
Intangible assets
Our intangible assets include mainly the land use rights, proprietary technology and software. Our proprietary technology was mainly purchased from third parties. Our intangible assetsarestatedatcostlessaccumulatedimpairmentlosses.Weestimatetheusefullivesofour intangible assets. If our intangible assets have finite useful life, the costs of intangible assets less their residual values will be amortised over their estimated useful lives on a straight-line method or other more appropriate methods that can reflect the pattern in which the intangibleassets’ economic benefits are expected to be realised. The estimated useful lives and the amortisation methods of our intangible assets are subject to review at each balance sheet date.
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FINANCIAL INFORMATION
During the Track Record Period, our intangible assets balances increased from approximately RMB163.77 million as at 31 December 2010 to approximately RMB227.69 million as at 30 September 2013.The increase in our intangible assets mainly reflected the cost of land use right which was acquired by Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd. ( ) in 2011. No impairment loss on our intangible assets was recognised during the Track Record Period.
Goodwill
Our goodwill arose from the acquisition of certain subsidiaries. Our goodwill is not amortised and is stated at cost less accumulated impairment losses. However, the carrying amounts of our goodwill is subject to review at each balance sheet date based on the internal andexternalsourcesofinformationtodetermineifthereisanyindicationofimpairment.Ifany indication exists that our goodwill may be impaired, the recoverable amount of our goodwill is estimated. In addition, we estimate the recoverable amounts of goodwill at no later than each year-end,irrespectiveofwhetherthereisanyindicationofimpairmentornot.DuringtheTrack Record Period, no impairment loss on our goodwill was recognised.
Deferred income
The deferred income represents mainly the government grants for the research and development of our pharmaceutical products or technical know-how developed by us. Government grant is either recognised (i) as deferred income initially and amortised in income statement subsequently; or (ii) as income at the time of the government grant being received. All such government grants were granted on a one-off basis. During the Track Record Period, the deferred income increased from approximately RMB28.56 million as at 31 December 2010 to approximately RMB67.47 million as at 30 September 2013. The significant increase in our deferredincomewasmainlyattributabletoanincreaseingovernmentgrantwhichreflectedthe PRCGovernment’s support on the pharmaceutical industry. During the Track Record Period, the highest amount of government grant received by us was granted by the NDRC for our innovative products, namely Ilaprazole ( ). The amount of the government grant for Ilaprazole ( ) was approximately RMB49.90 million.
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FINANCIAL INFORMATION
INDEBTEDNESS
We finance our operations mainly through cash flows from our operations and short-term financing during the Track Record Period. Set out below is a breakdown of our indebtedness as at the dates indicated with 30 November 2013 being the latest practicable date for the purpose of indebtedness statement:
As at 30 As at 30 As at 31 December September November 2010 2011 2012 2013 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) Bank borrowings
– Letters of credit 237,534 183,226 495,627 524,150 333,955– Guarantee loans 42,683 56,749 12,163 279,231 278,929– Pledge loans 17,243 11,350 28,380 27,750 27,686– Pledge guarantee
loans 46,097 500 – – – 343,557 251,825 536,170 831,131 640,570 --------- --------- --------- --------- --------- Bank acceptance bills – – 283,581 372,799 379,827 Short-term
financing bills – 400,000 400,000 – – Medium-term
financing bill – – – 400,000 400,000 Interest free loans 1,100 1,100 1,100 1,100 1,100 Total 344,657 652,925 1,220,851 1,605,030 1,421,497 As at 30 As at 30 As at 31 December September November 2010 2011 2012 2013 2013RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) Short-term borrowings 277,861 651,725 1,220,151 1,055,130 871,597 Long-term borrowings 66,796 1,200 700 549,900 549,900 Total 344,657 652,925 1,220,851 1,605,030 1,421,497
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FINANCIAL INFORMATION
As at 31 December 2010, 2011 and 2012, 30 September 2013 and 30 November 2013, we had bank borrowings comprising letters of credit, guarantee loans, pledge loans and pledge guarantee loans, amounted to approximately RMB343.56 million, RMB251.83 million, RMB536.17 million, RMB831.13 million and RMB640.57 million, respectively. The interest rates of our borrowings (excluding interest free loans) ranged from approximately2.67% to5.53% as at 31 December 2010, from approximately2.67% to5.70% as at 31 December 2011, from approximately1.96% to5.60% as at 31 December 2012, from approximately1.96% to6.15% as at 30 September 2013 and from approximately1.96% to6.15% as at 30 November 2013, respectively. Our guarantee loans were generally granted by banks to our subsidiaries and guaranteed by our Company. Our pledge loans and pledge guarantee loans were generally secured by our fixed deposit as well as plant and buildings.
In 2012, we used bank acceptance bills to settle part of our account payables, since we considered use of bank acceptance bills was a less expensive form of short-term financing to satisfy our working capital needs. Use of bank acceptance bills enabled us to extend our account payables for a longer credit term, thus enhancing our financing flexibility. We were onlyrequiredtopledgeacertainamountofbankbalanceasasecuritydeposittosecureacredit period of three to six months. We will settle our bank acceptance bills by remittance of cash into the relevant bank accounts before the maturity of our bills. As at 31 December 2012, 30 September 2013 and 30 November 2013, our bank acceptance bills were approximately RMB283.58 million, RMB372.79 million and RMB379.83 million, respectively. The acceptance period of the bank acceptance bills were generally within six months.
In 2011, we issued two tranches of short-term financing bills targeting at institutional investors of the national inter-bank bond market. The aggregate amount of the two tranches of short-term financing bills were RMB400.00 million at the interest rate ranging from approximately4.96% to5.60%. These two tranches of short-term financing bills matured and were repaid in the first and second quarter of 2012, respectively.After the maturity of the two tranches of short-term financing bills, we issued another tranche of short-term financing bills of the same amount in July 2012 for refinancing, with the interest rate of the short-term financing bills at4.27%. In May 2013, we issued a three-year medium-term financing bill of RMB400.00 million to refinance the repayment of the aforementioned short-term financing bills. The maturity of the medium-term financing bill is in May 2016 and its interest rate is at5.03%.
As at 31 December 2010, 2011 and 2012, 30 September 2013 and 30 November 2013, our interest free loans comprising an interest free loan from Fuzhou Bureau of Finance and an interest free loan from Fujian Overseas Chinese Trust& Investment Corp. amounted to approximately RMB0.70 million and RMB0.40 million, respectively.
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FINANCIAL INFORMATION
OurGroup’s indebtedness increased significantly from approximately RMB344.66 million as at 31 December 2010 to approximately RMB1,421.50 million as at 30 November 2013. The significant increase was mainly attributable to the increase in our borrowings to replenish our working capital and fund our capital expenditure in relation to our new production plant projects and expansion/technical advancement projects. Since we had a strategy to rely on short-term borrowings with a view to enjoy a lower interest rate, a substantial part of our indebtedness matured within one year. Since we expected the borrowing rate will increase in the medium term, we increased the proportion of medium/long-term borrowings in our debt portfolio to reduce the interest rate risk.
As at 30 November 2013, our Group had banking facilities of approximately RMB4,982.47 million, of which approximately RMB3,815.20 million had not been utilised. CONTINGENT LIABILITIES
As at 30 September 2013 and 30 November 2013, we did not have any hire purchase commitments, guarantees or other material contingent liabilities.
PLEDGE AND CHARGE OF ASSETS
Thetablebelowsetsoutthebreakdownofourassetspledgedtosecurethecreditfacilities granted to us as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Bank deposits 19,450 13,250 29,000 33,000 Deposits under guarantees for
letters of credit – 2,318 2,021 1,549 Deposit under bank
acceptance bills – – 11,676 8,393 Plant and buildings 60,128 20,778 – – Total 79,578 36,346 42,697 42,942
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FINANCIAL INFORMATION
CAPITAL EXPENDITURE AND COMMITMENTS
Our capital expenditure was incurred mainly for (i) fixed assets, (ii) construction in progress, (iii) construction supplies; and (iv) intangible assets. For the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our capital expenditure was approximately RMB363.16 million, RMB261.32 million, RMB1,121.35 million and RMB874.29 million, respectively.
During the Track Record Period, we entered into certain contracts in relation to purchase of property, plant and equipment. The table below sets out the breakdown of our capital commitments showing the capital expenditure contracted for but not provided in our financial statements as at the dates indicated:
As at 30 As at 31 December September 2010 2011 2012 2013RMB’000 RMB’000 RMB’000 RMB’000 Property, plant and equipment 99,035 345,916 362,451 229,609 Our capital commitments increased significantly from approximately RMB99.04 million as at 31 December 2010 to approximately RMB229.61 million as at 30 September 2013. The increase was mainly attributable to purchase of property, plant and equipment in relation to our new production plants and technological advancement projects of our existing production plants.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENT
As at the Latest Practicable Date, we had not entered into any material off-balance sheet transactions.
DISTRIBUTABLE RESERVES
As at 30 September 2013, ourCompany’s distributable reserves under CASBE consisted of ourCompany’s retained earnings amounted to approximately RMB526.52 million.
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FINANCIAL INFORMATION
FINANCIAL RATIOS
The table below summarises our key financial ratios during the Track Record Period: As at/For the nine months As at/For the year ended ended 30 31 December September 2010 2011 2012 2013 Return on equity Netprofit/Shareholders’ 17.15%12.88%14.94% 11.45% equity x100%
Return on total Net profit/Total assets x 12.36% 8.43% 8.44% 6.13% assets 100%
Current ratio Current assets/Current 2.33 1.91 1.25 1.29 liabilities
Quick ratio Current assets– 1.84 1.63 1.02 1.02 Inventories/Current
liabilities
Gearing ratio Totaldebt/Shareholders’ 13.06%21.68%38.39% 46.12% equity x100%
Debt to equity Netdebt1/Shareholders’ -19.68%-26.39%-0.02% 15.74% ratio equity x100%
Note 1: Net debts represent our borrowings net of our cash and cash equivalents.As at 31 December 2010, 2011 and 2012, our cash and cash equivalents were more than our debts.
Return on equity
Return on equity reflects our efficiency in generating net profit from every dollar of net assets it invested. For the years ended 31 December 2010, 2011 and 2012 and the nine months ended 30 September 2013, our return on equity were approximately17.15%,12.88%,14.94%and11.45%,respectively.Thelowerreturnonequityfortheyearended31December2011was mainly attributable to a decrease in our net profit. The higher return on equity for the year ended 31 December 2012 compared with 2011 was mainly attributable to our improved business performance with increased profitability.
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FINANCIAL INFORMATION
Return on assets
Return on assets reflects our profitability in terms of our total assets and our efficiency in using our assets to generate net profit. For the years ended 31 December 2010, 2011 and 2012 and the nine months end 30 September 2013, our return on total assets were approximately12.36%,8.43%,8.44% and6.13%, respectively.
Our return on assets decreased significantly from approximately12.36% for the year ended 31 December 2010 to approximately8.43% for the year ended 31 December 2011. Thedecreasewasmainlyattributabletoadecreaseinournetprofitby14.30%.Ourreturnonassets was stable at approximately8.44% for the year ended 31 December 2012 due to the combined effect of (i) an increase in our net profit in 2012 by approximately22.54%, as compared to our net profit in 2011; and (ii) an increase in our total assets for the year ended 31 December 2012 by approximately22.40%, as compared to our total assets for the year ended 31 December 2011.Theincreaseinourtotalassetswascontributedbyanincreaseinconstructioninprogress which was not generating any profit before being put into commercial operation.
Current ratio and quick ratio
As at 31 December 2010, 2011 and 2012 and 30 September 2013, our current ratios were approximately 2.33, 1.91, 1.25 and 1.29, respectively.As at 31 December 2010, 2011 and 2012 and 30 September 2013, our quick ratio were approximately 1.84, 1.63, 1.02 and 1.02, respectively. Both our current ratio and quick ratio showed a decreasing trend during theTrack Record Period. The decrease in the ratios was mainly attributable to the combined effect of (i) an increase in short-term financing to fund our working capital needs; (ii) an increase in utilisation of our funds in the construction of its new production plants; and (iii) an increase in other payables which was mainly attributable to the increase in salary payable to our sales and marketing personnel and payable for advertising and promotional expenses.
Gearing ratio and debt to equity ratio
Our gearing ratio increased from approximately13.06% as at 31 December 2010 to approximately46.12% as at 30 September 2013. Our debt to equity ratio turned from approximately-19.68% as at 31 December 2010 to approximately15.74% as at 30 September 2013. During the Track Record Period, we had four new production plant projects and a number of expansion/technological advancement projects where we applied our internal financial resources to fund the capital expenditure in relation to those projects. We therefore replenished our working capital by means of banking borrowings, short-term financing bills and medium-term financing bill to support our business growth.Accordingly, our gearing ratio and debt to equity increased during the Track Record Period.
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FINANCIAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign currency risk
We conduct our operation primarily in the PRC. Substantially all of our transactions were denominated and settled in Renminbi. However, we still have certain imports and exports businesses regarding bulk medicines and intermediates as well as diagnostic reagents and equipment,forwhichtheyaresettledinU.S.dollarsandJapaneseYen.OurbusinessesinHong Kong are settled in Hong Kong dollars. In respect of the above, we are still exposed to certain foreign currency risks. Taking into account the foreign currency risks acceptable by us, we do not use derivates to hedge foreign currency risks. However, with respect to the foreign exchange risk in loans, we shall closely monitor the trend on the exchange rate of Renminbi, and timely adjust the extent of our borrowings, so as to reduce the risks to the minimum.
Interest rate risk
Our exposures in interest rate risk are mainly derived from bank borrowings. The bank lending rates are affected by the macro monetary policies of China, so that we can bear the risks arising from fluctuation of interest rates in future. We also used medium-term financing bills as a direct channel in financing since the middle of 2013. The interest rate risk in respect of the issue of medium-term financing bills arose from tight money supply in the market upon the issue of such financing bills.
Credit risk
Credit risk is primarily attributable to cash and cash equivalents, restricted cash at bank, accounts receivable and other receivables. In respect of cash deposited at banks, they were placed at several banks with good reputations, for which the credit risk was limited. In respect of accounts receivable, we shall assess the credit limit granted to our customers for credit purpose. Moreover, as our customer base is large, the credit risk on accounts receivable is not concentrated.Inrespectofbillsreceivablesforsettlementpurpose,alotofbillsreceivablesare used to settle external payments, which significantly limit the balance of bills receivables to the maximum extent. Moreover, our bills receivables are quality bills having maturity within three months. Therefore there should not be any significant credit risk. In addition, our provision made on accounts receivables and other receivables are adequate to manage the credit risk.
Liquidity risk
We adopt a prudent liquidity risk management, so as to ensure the sufficiency of our sources of monetary funds and liquidity by maintaining adequate monetary funds and reserve of banking facilities so that we can secure credit loans from banks. Apart from indirect financing from banks, a number of financing channels were opened, such as direct financing by inter-bank market including short-term financing bills, medium-term financing bills and corporate bonds etc. These instruments can appropriately reduce the effects arising from the scale of financing by inter-bank market and the macro monetary policies of China, which shall secure adequate funds in a flexible manner.
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FINANCIAL INFORMATION
NO MATERIALADVERSE CHANGE
Our Directors have confirmed that, since 30 September 2013 and up to the date of this listing document, there had been no material adverse change in our financial position or prospectsandnoeventhadoccurredthatwouldmateriallyandadverselyaffecttheinformation shown in the consolidated financial information in Appendix I to this listing document.
PROFIT ESTIMATE FOR THE YEAR ENDED 31 DECEMBER 2013
Estimated consolidated profit
attributable to our
Shareholders(Note 1)
Not less than RMB486 million Unaudited pro forma estimated earnings
per
Share(Note 2)
Not less than RMB1.64 Notes:
1. TheaboveprofitestimatehasbeenpreparedinaccordancewiththebasessetforthinAppendixIItothis listing document.
2. The calculation of the estimate earnings per share on a pro forma basis is based on the estimate consolidatedprofitattributabletoourShareholdersfortheyearended31December2013,assumingthat a total of 295,721,852 Shares were in issue during the entire year.
DIVIDEND POLICY
SubjecttoapprovalbyourShareholders,ourDirectorsmaydeclaredividendsaftertaking into account, among other things, our results of operations, cash flows and gearing, working capital and capital expenditure requirements, the amount of distributable profits based on CASBE, the Articles of Association, the Company Law, applicable laws and regulations and other factors that our Directors consider relevant. In particular, under applicable PRC laws and the Articles of Association, our Company can only distribute dividends out of our after-tax profit after the following allocations have been made: (i) recovery of accumulated losses, if any; (ii) mandatory allocations to the statutory common reserve fund equivalent to10% of our after-tax profit, unless the common reserve fund reaches50% of ourCompany’s registered capital or above; and (iii) allocations to discretionary common reserve fund, subject to ourShareholders’ approval at the Shareholders meeting.
We declared and paid cash dividends in the amount of approximately RMB29.57 million, RMB147.86 million and RMB147.86 million in respect of the years ended 31 December 2010, 2011 and 2012, respectively, representing RMB0.10, RMB0.50 and RMB0.50 per Share. Our Shareholders will have an equal right to distributable profit in respect of the year ending 31 December 2013 and thereafter. Pursuant to the Articles of Association, the cumulative profit distribution in cash by our Company for any last three years period shall be not less than30% of the average of the same threeyears’ annual distributable profits. Dividends paid in prior years may not be indicative of future dividend payments. We cannot guarantee when, if and in what form dividends will be paid in the future.
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FINANCIAL INFORMATION
RECENT DEVELOPMENT
Basedonourunauditedconsolidatedfinancialstatementsfortheyearended31December 2013, we recorded an operating income from principal activities of approximately RMB4,569.39 million and a gross profit from principal activities of approximately RMB2,916.00 million. Compared with 2012, our operating income from principal activities and gross profit from principal activities increased by approximately16.46% and22.85%, respectively. The increase was mainly driven by an increase in the sales of Shenqi Fuzheng Injection( )andUrofollitropinforInjection( )byapproximately26.00% and26.96%, respectively. The increase in sales reflected the continued increase in demand for those products. Our gross profit margin from principal activities increased from approximately60.50% for the year ended 31 December 2012 to approximately63.81% for the year ended 31 December 2013. The increase was attributable to an increasing percentage of our operating income came from the sale of high margin products (such as Shenqi Fuzheng Injection (
) and gonadotropic hormones).
Our Directors have confirmed that, since 30 September 2013 and up to the date of this listing document, there had been no material adverse change in (a) ourGroup’s financial position or prospects and no event had occurred that would materially and adversely affect the information shown in the consolidated financial information in Appendix I to this listing document; (b) the regulatory environment which we are subject to; and (c) the market for our major products.
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REASONS FOR THE LISTING
REASONS FOR THE LISTING
Our Company has noted that the trading of B Shares has historically been rather inactive in the PRC securities market. The B Share market lacks liquidity and the B Shareholders have found it difficult to fully realise the value of their investment in our Company. As at the date of this listing document, the total number of issued Shares of our Company was 295,721,852 Shares, comprising 183,728,498 A Shares and 111,993,354 B Shares, respectively. Although the total number of B Shares in issue is approximately60.96% of the total number ofAShares in issue, the trading of the B Shares is far less active compared to that of the A Shares. As a result, the B Share price had been substantially lower than the A Share price during the Track Record Period.As at the Latest Practicable Date, the average closing price for theAShares for thefivetradingdaysimmediatelyprecedingtheLatestPracticableDatewasRMB40.57andthe average closing price for the B Shares for the five trading days up to 20 December 2013 (being the last trading day of B Shares) wasHK$37.76. The current status of the B Share market affects the valuation of our B Shares adversely which is not in line with the interests of our B Shareholders as a whole. Our Company believes that the Listing may provide our Shareholders with more liquidity in our Shares and more opportunities to realise the value of their investment.
In addition, our Company believes that the Listing will enable us to promote our international presence, develop our international business, establish and improve our international sales and marketing system so as to accelerate the process of internationalisation of our Group. In addition, upon the completion of the Listing, our Company will gain direct access to the international capital markets from which we hope would increase our fund raising capacity and improve our competitiveness in the international market.
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SUBSTANTIAL SHAREHOLDERS
As at the Latest Practicable Date, the following shareholders directly controlled, or were entitled to control the exercise of, more than5% of the relevant classes of our issued Shares: Approximate Approximate percentage of percentage of our total the relevant issued share No. of Shares Held class of Shares capital Joincare 77,510,167 A Shares 42.19% 26.21% 5,892,943 A
Shares(Note 1)
3.21% 1.99% 6,059,428 A
Shares(Note 2)
3.30% 2.05% 50,660,052 B
Shares(Note 3)
45.23% 17.13% Topsino(Note 3)
50,660,052 B Shares 45.23% 17.13% Gaoling Fund 10,787,347 B Shares 9.63% 3.65% First Shanghai
Securities
Limited 10,751,097 B Shares 9.60% 3.64% Notes:
(1) These 5,892,943AShares were held by Shenzhen Haibin, a wholly-owned subsidiary of Joincare.
(2) On2January2004,Begol,ZhuhaiLishiInvestmentCo.,Ltd.( )andJoincare entered into a share transfer and custody agreement and a share pledge agreement, pursuant to which the 6,059,428 A Shares held by Begol has been transferred to, held in custody by and pledged to Joincare.AsattheLatestPracticableDate,theregistrationproceduresforthesharetransferwasnotyet completed.
(3) Topsino is a wholly-owned subsidiary of Joincare.
(4)Pleaserefertothesectionheaded“HistoryandDevelopment–OurShareholdingandGroupStructure” in this listing document for further details on the shareholding information of our Company.
(5) Upon Listing, each of our B Shares will be automatically converted into an H Share.
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SHARE CAPITAL
SHARE STRUCTURE
As at the Latest Practicable Date, our issued share capital was RMB295,721,852, which comprised 183,728,498 A Shares and 111,993,354 B Shares as categorised below:
Approximate Number of percentage of Shares share capital A Shares 183,728,498 62.13% B Shares 111,993,354 37.87% Total 295,721,852 100.00% Immediately after the completion of the Listing, our total share capital would be as follows:
Approximate Number of percentage of Shares share capital A Shares 183,728,498 62.13% H Shares 111,993,354 37.87% Total 295,721,852 100.00% After the exercise of the Cash Option, as at 9 January 2014, there were 5,139 public BShareholdersholdinginaggregate61,333,302BShares,representingapproximately20.74%of the total number of issued Shares, and the three largest public B Shareholders (of which one is Gaoling Fund who acquired 19,570 B Shares pursuant to the exercise of the Cash Option by the B Shareholders during the period from 30 December 2013 to 6 January 2014) in aggregate hold approximately21.18% of the total number of B Shares in the public hands. Accordingly, our Company is able to meet the minimum public float and market capitalisation requirement under Rules 8.08 and 8.09 of the Hong Kong Listing Rules, respectively.
Upon the approval of the securities regulatory authority of the State Council, our domestic shares can be transferred to overseas investors and such shares can be listed and traded on overseas stock exchanges. The listing and trading of the transferred shares on the overseas stock exchanges shall also in all respects comply with the regulatory procedures, regulations and requirements prescribed by the relevant overseas stock exchanges. No class shareholder voting is required for the listing and trading of the transferred shares on an overseas stock exchange.
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SHARE CAPITAL
RANKING
ASharesandHSharesareordinarySharesinthesharecapitalofourCompany.However, unless otherwise approved by relevant authorities, H Shares could not be subscribed by, or traded between legal or natural persons of the PRC. Domestic investors (who are not Qualified Domestic Institutional Investors) holding H Shares of our Company due to the conversion of our B Shares to H Shares can only hold or sell the H Shares but cannot purchase H Shares on the Hong Kong Stock Exchange. A Shares, on the other hand, can only be subscribed by, and traded between legal or natural persons of the PRC or qualified foreign institutional investors or eligible foreign strategic investors, and must be traded in Renminbi. All dividends or distributions declared, paid or made in respect of the A Shares and H Shares after the date of this listing document will rank
pari passu
with each other. All dividends in respect of the H Shares are to be paid by us in Hong Kong dollars whereas all dividends in respect ofAShares are to be paid by us in Renminbi.
Our A Shares have been listed on the Shenzhen Stock Exchange since 28 October 1993. The market prices of our A Shares and H Shares may be different. Please refer to the section headed “Risk Factors” in this listing document for the associated risks.
Except as described above and in relation to the despatch of notices and financial reports to shareholders, dispute resolution, registration of shares on different registers of shareholders, the method of share transfer and the appointment of dividend receiving agents, are all provided for in our Articles of Association and summarised in Appendix IV to this listing document. RULE 9.09 OF THE HONG KONG LISTING RULES
We have applied for, and the Hong Kong Stock Exchange has granted to our Company, a waiver from strict compliance with Rule 9.09(b) of the Hong Kong Listing Rules in respect of any dealings in our Shares by Shareholders who currently hold less than10% of the total issued Shares but who may acquire further Shares and become Substantial Shareholders during the period from four clear business days before the expected hearing date for the Listing until the Listing is granted. Please refer to the section headed “Waivers from Strict Compliance withtheHongKongListingRules–DealingsinSharespriortotheListing”inthislistingdocument for further details of such waiver. Save as disclosed in this listing document, any other connected persons of our Company are restricted from dealing in our Shares in the aforesaid period under Rule 9.09(b) of the Hong Kong Listing Rules.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
LISTINGS
Our Company intends to convert the B Shares into H Shares which will be listed by way of introduction on the Main Board of the Hong Kong Stock Exchange. The Listing is conditional upon the Listing Committee granting the listing of, and permission to deal in, the H Shares on the Hong Kong Stock Exchange. Upon completion of the Listing, all B Shares in issue will be, due to the change of the listing venue, converted into H Shares and the H Shares will be listed on the Main Board of the Hong Kong Stock Exchange by way of introduction. Our Company also has A Shares which are traded on the Shenzhen Stock Exchange. As at 9 January 2014 (being the latest practicable date for inclusion of B Shareholders information in this listing document before its publication), our Company had 17,427 Shareholders, of which 12,287 Shareholders were A Shareholders and 5,140 Shareholders were B Shareholders.
THE ARRANGEMENT
Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares) ofHK$37.92, the market capitalisation of the 61,333,302 H Shares to be held by public H Shareholders is expected to be approximatelyHK$2.33 billion. Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares)ofHK$37.92,theclosingpriceofASharesofRMB41.00on9January2014andthetranslation of Renminbi into HK dollars at the rate of RMB0.78769 toHK$1.00, the market capitalisation of ourCompany’s total issued Shares of 295,721,852 Shares is expected to be approximatelyHK$13.81 billion. The market capitalisation of ourCompany’s total issued H Shares of 111,993,354 H Shares is expected to be approximatelyHK$4.25 billion. Accordingly, our Company expects to be able to meet the market capitalisation requirement under Rule 8.09(1), (2) and (3) of the Hong Kong Listing Rules.
As at 9 January 2014, there were at least 432 public beneficial B Shareholders with securities accounts opened in Hong Kong with Guosen HK Brokerage or other eligible Hong Kong or overseas securities corporations holding in aggregate 23,088,652 B Shares, representing approximately20.62% of the total number of issued B Shares and approximately7.81% of the total number of issued Shares, who are ready to trade their H Shares on the Hong Kong Stock Exchange upon the commencement of trading of H Shares on the Listing Date. Based on the closing price of B Shares on 20 December 2013 (being the last trading day of the B Shares) ofHK$37.92, the market capitalisation of the 23,088,652 B Shares held by such 432 public beneficial B Shareholders is approximatelyHK$875.52 million, which is already larger than the entire market capitalisation of a large number of Hong Kong-listed companies. Therefore, our Company expects that there will be adequate liquidity of H Shares upon the Listing.
Upon Listing, the Cash Option Providers will hold in total 10,806,916 H Shares (including19,570SharesacquiredbyGaolingFundand19,569SharesacquiredbyGuosenHK Asset Management upon exercise of the Cash Option by the B Shareholders). Such H Shares arenotsubjecttoanylock-upperiodandcanbetradedontheHongKongStockExchangeonce Listing occurs.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
In addition, our Company intends to make the following announcements:
• an announcement on the websites of the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and our Company on Tuesday, 14 January 2014 on (i) the closing price ofAShares on 13 January 2014 and 14 January 2014 and the closing price of B Shares on 20 December 2013 (being the last trading day of B Shares), and (ii) the price per B Share payable by the Cash Option Providers to B Shareholders pursuant to the Cash Option; and
• an announcement on the websites of the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and our Company on Wednesday, 15 January 2014 on (i) obtaining the final listing approval in writing from the Hong Kong Stock Exchange; (ii) the closing price of A Share on 15 January 2014 and the closing price of B Shares on 20 December 2013 (being the last trading day of B Shares); and (iii) the price per B Share payable by the Cash Option Providers to B Shareholders pursuant to the Cash Option.
REGISTRATION
Our Company has established a register of members for H Shares in Hong Kong (the “H Share Register”) which is maintained by the H Share Registrar, namely, Tricor Investor Services Limited, whose address is 26/F Tesbury Centre, 28Queen’s Road East, Hong Kong. All the then existing issued H Shares will be registered with the H Share Registrar in the name of the CSDC one day before the Listing Date.
Certificates in respect of the H Shares registered on the H Share Register will, as far as practicable,andunlessotherwiserequested,beissuedtorepresentthetotalnumberofHShares held by each H Shareholder.
SHARE CERTIFICATES
Share certificates for the H Shares will be issued by the H Share Registrar.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
TYPES OF INVESTORS
Investors of the H Shares are classified into three types, namely domestic investors, domestically trading overseas investors and non-domestically trading overseas investors according to the following basis:
Type of investors of H Shares Basis for classification
Domestic investors PRC investors who did not (i) dispose of their B Shares before the last trading day on the Shenzhen Stock Exchange; and (ii) take up the Cash Option. Their B Shares will be converted, due to the change of the listing venue, into H Shares upon the Listing, and the PRC investors can either continue to hold their H Shares or sell their H Shares via trading systems of the PRC securities companies only. Such trading systems are the same as the trading systems of the B Shares currently adopted except for (i) “purchase” orders cannot be placed; and (ii) all “sell” orders will be placed through SSSCC to Guosen HK Brokerage. Domestically trading overseas investors Overseas investors who did not (i) dispose of their B Shares before the last trading day on the Shenzhen Stock Exchange; (ii) take up the Cash Option; and (iii) transfer their H Shares from the CSDC nominee account to their individual Hong Kong securities accounts such that their H Shares will be traded on the Main Board of the Hong Kong Stock Exchange through Guosen HK Brokerage or other eligible Hong Kong securities or overseas corporations. Such overseas investors can either continue to hold their H Shares or sell their H Shares via the trading systems of the PRC securities companies only. Such trading systems are the same as the trading systems of the B Shares currently adopted except for (i) “purchase” orders cannot be placed and (ii) all “sell” orders will be placed through SSSCC to Guosen HK Brokerage.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Type of investors of H Shares Basis for classification
Non-domestically trading overseas Overseas investors who did not (i) dispose investors of their B Shares before the last trading day on the Shenzhen Stock Exchange; and (ii) take up the Cash Option, and they agree to transfer their H Shares from the CSDC nominee account to their individual Hong Kong securities accounts with Guosen HK Brokerage or other eligible Hong Kong or overseas securities corporations such that their H Shares will be traded on the Main Board of the Hong Kong Stock Exchange through Guosen HK Brokerage or other eligible Hong Kong or overseas securities corporations upon the commencement of trading of the H Shares on the date of the Listing. Such overseas investors can place both “purchase” and “sell” orders through such eligible Hong Kong or overseas securities corporations.
Domestic investors and domestically trading overseas investors will be collectively referred to as investors trading through PRC securities companies. Such investors cannot buy the H Shares but can either continue to hold their H Shares or sell their H Shares.
Non-domesticallytradingoverseasinvestorswillberegardedasinvestorstradingthrough eligible Hong Kong or overseas securities corporations. Such investors can place both “purchase” and “sell” orders through eligible Hong Kong or overseas securities corporations.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
There are no differences between investors trading through the trading system of PRC securities companies and investors trading through eligible Hong Kong or overseas securities corporations in respect of their shareholder rights, entitlements and obligations except as described below:
• Under the current regulatory system of the PRC, except otherwise explicitly permitted by the relevant PRC laws and regulations and in accordance with the respective procedures, regulations and requirements, PRC individuals or enterprises are not allowed to directly invest in overseas listed securities including, but not limited to, investment through purchase, subscription, participating in placement or rights issue, etc. Since the H Shares of investors trading through PRC securities companies will be held by the CSDC, which is a company incorporated in the PRC, as the nominee upon the Listing, those investors therefore can only either continue to hold the H Shares or sell the H Shares, but cannot invest in any additional H Shares, such as by participating in a rights issue of our Company. No such restrictions apply to investors trading through eligible Hong Kong or overseas securities corporations. Our Company confirms that it will not conduct rights issue until(i)thedomesticinvestorsareallowedtosubscribefororpurchasetheHShares under the relevant PRC laws and regulations; or (ii) we do not have any domestic investor holding our H Shares.
• Forotherdifferencesinrights,entitlementsandobligationssuchasthetradinghours and trading fee between the investors trading through eligible Hong Kong or overseassecuritiescorporationsandtheinvestorstradingthroughthePRCsecurities companies,pleaserefertotheparagraphheaded“Investorsawareness–Comparison of trading restrictions and differences among domestic investors, domestically trading overseas investors and non-domestically trading overseas investors upon the Listing” of this section in this listing document.
DEALINGS
Dealings in the H Shares on the Hong Kong Stock Exchange will be conducted in Hong Kong dollars. The H Shares will be traded on the Hong Kong Stock Exchange in board lots of 100 H Shares.
Trading mechanism
Investors trading through PRC securities companies can only place trading instructions in the form of “sell” orders to their relevant PRC securities companies and are not allowed to place the trading instructions in the form of “purchase” orders. Only non-domestically trading overseas investors can place the trading instructions in the form of both “sell” and “purchase” orders. When the investors trading through PRC securities companies place sell orders, the relevant PRC securities company of such investors will first check whether the investors have sufficient H Shares at the CSDC before sending the trading instructions through SSSCC to Guosen HK Brokerage for execution. All trading instructions received by Guosen HK
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Brokerage will be double-checked again with regard to the validity of the trading instructions before the instructions are sent to the Hong Kong Stock Exchange for execution. Under the trading mechanism, no short-sell order is expected to be sent to the Hong Kong Stock Exchange for execution. Apart from short-sell monitoring, Guosen HK Brokerage will also handle the trading instructions in the following manner:
(i) H Shares with odd lot size (the “Odd Lot H Shares”) will be fully disposed of in one single transaction. The available balance of the Odd Lot H Shares held by the investors after such single transaction shall be zero. The trading instructions for the Odd Lot H Shares may be given independently for execution or together with the trading instructions of the board lots of H Shares for execution. Guosen HK Brokerage will coordinate the disposal of the Odd Lot H Shares to ensure that the Odd Lot H Shares will be given assured trading at a trading price equivalent to90% of the then prevailing trading price of H Shares upon the execution of Odd Lot H Shares order.
(ii) If the number of H Shares under the trading instruction exceeds one board lot, H Shares with board lot size (the “Board Lot H Shares”) under the trading instruction will be transferred to the Hong Kong Stock Exchange for execution. After the execution of the trading instruction of the Board Lot H Shares, Guosen HK Brokerage will coordinate the disposal of the Odd Lot H Shares to ensure that the Odd Lot H Shares will be given assured trading at a trading price equivalent to90% of the average executed trading price of the Board Lot H Shares.
(iii) All Odd Lot H Shares will be reported to the Hong Kong Stock Exchange after execution.
After the trading instruction has been executed, the executed information of H Shares held by theCSDC’s securities account opened with Guosen HK Brokerage will be sent toSD&C via SSSCC and then forwarded to the relevantinvestors’ PRC securities companies. There is no material timing difference in relation to the placing of “sell” order of H Shares through the trading systems of the PRC securities companies as compared with the placing of “sell” orders of H Shares through eligible Hong Kong or overseas securities corporations.
The trading mechanism for investors trading through eligible Hong Kong or overseas securitiescorporationswillbethesameasthoseinvestorsofHsharesofothercompanieslisted on the Hong Kong Stock Exchange.
Real-time trading information
Real-time trading information in respect of the H Shares can be obtained from the following sources:
• through the PRC securities companies with upgraded system with which the PRC investors have securities accounts at no cost; or
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• through service providers that provide such facilities at the PRCinvestors’ own expense. Such service will be provided on and subject to the terms and conditions of the relevant service provider.
Set out below is a flow chart illustrating the trading mechanism and the provision of real-time trading information for the investors trading through PRC securities companies:
Hong Kong Stock Exchange
Order executions
Real Time Quote Guosen HK Brokerage
Sell orders
execution reports
SSSCC
Real time quote
|||
|-|-|
|Real time quote|Sell ordersexecution reports|

Price quotation PRC securities
vendors companies
|||
|-|-|
|Real time quote|Sell ordersexecution reports|

Investors trading through
PRC securities companies
Transaction costs
The transaction costs of dealings in H Shares on the Hong Kong Stock Exchange will include a brokerage commission of0.1% and settlement fee of0.002% of the consideration of a transaction charged by Guosen HK Brokerage, a trading fee of0.005% charged per side of the consideration of a transaction, an SFC transaction levy of0.003% charged per side of the consideration of a transaction and ad valorem stamp duty on both the buyer and the seller charged at the rate of0.1% each of the consideration of the H Shares transferred.
Immediately upon the Listing, the investors trading through PRC securities companies will need to pay more fees, charges and costs than they need to pay for trading their B Shares. Please refer to the section headed “Risk Factors– Risks Relating to this Listing– Certain risksthatourBShareholdersshouldbeawareof–Riskregardingincreasedtransactioncosts”inthis listing document for details.
Investors trading through eligible Hong Kong or overseas securities corporations
In addition to the H Share Transaction Cost, the brokerage commission charged by the
eligible Hong Kong or overseas securities corporations in respect of trading of H Shares on the
Hong Kong Stock Exchange is freely negotiable.
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Investors trading through PRC securities companies
In addition to the H Share Transaction Cost, the brokerage commission charged by Guosen HK Brokerage in respect of the trading of H Shares of such kind of investors on the Hong Kong Stock Exchange is0.1%. In addition to such brokerage commission, the brokerage commission charged by the PRC securities companies on the relevant investors is freely negotiable.
SETTLEMENT
If the Hong Kong Stock Exchange grants the listing of, and permission to deal in, the H SharesontheHongKongStockExchangeandourCompanycomplieswiththestockadmission requirements of HKSCC, the H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in H Shares on the Hong Kong Stock Exchange or any other date that HKSCC chooses.
The CCASS stock settlement fee payable by each counterparty to a trade in the HongKongStockExchangeiscurrently0.002%ofthegrosstransactionvalue,subjecttoaminimum fee ofHK$2 and a maximum fee ofHK$100 per trade.
Investors trading through eligible Hong Kong or overseas securities corporations
Investors trading through eligible Hong Kong or overseas securities corporations must settle their trades executed on the Hong Kong Stock Exchange through their brokers directly or through custodians. For investors who have deposited their H Shares in their securities accounts in Hong Kong or in their designated CCASSParticipant’s stock accounts maintained with CCASS, settlement will be effected in CCASS in accordance with the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. For an investor who holds physical share certificates, such certificates and the duly executed transfer form(s) must be delivered to his broker or custodian before the settlement date.
An investor may arrange with his broker or custodian on a settlement date in respect of his trades executed on the Hong Kong Stock Exchange. Under the General Rules of CCASS and CCASS Operational Procedures in effect from time to time, the date of settlement must not be later than the second business day following the trade date (“T”) on which the settlement services of CCASS are open for use by CCASS Participants(T+2). For trades settled under CCASS, the General Rules of CCASS and CCASS Operational Procedures currently in effect providethatthedefaultingbrokermaybecompelledtocompulsorilybuy-inbyHKSCCtheday after the date of settlement(T+3), or if it is not practicable to do so onT+3, at any time thereafter. HKSCC may also impose fines fromT+2 onwards.
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Investors trading through PRC securities companies
As mentioned above, under the General Rules of CCASS and CCASS Operational Procedures in effect from time to time, the date of settlement must not be later than the second business day following the trade date(T+2) on which the settlement services of CCASS are open for use by CCASS Participants.
Before4:30p.m.ofT,informationontheexecutedtransactions(notincludingtransaction costs) will be provided by Guosen HK Brokerage toSD&C, andSD&C will forward such information to the PRC securities companies to update their respectiveclients’ record on the same day. Before 9:00 a.m. ofT+1, Guosen HK Brokerage will provideSD&C with the information on the executed transactions (including transaction costs mentioned in the sub-section headed “Transaction costs” above). Before noon ofT+2, Guosen HK Brokerage will settle withSD&C on Real Time Delivery Versus Payment basis. Settlement amount will credit to the CSDC designated bank account with Hong Kong Securities Clearing Company Limited at the same time.SD&C will transfer the settlement proceeds to the relevant PRC securities companies of the investors according to the information of executed transactions. The PRC investors will receive the settlement information and settlement proceeds onT+2. Set out below is a flowchart illustrating the settlement mechanism for the investors trading through PRC securities companies:
T+2: Settlement
proceeds
HKSCC Guosen HK Brokerage
T+2: H Shares
T: Information on T+1: Pre-matchingT+2: Settlement
executed transactions settlement information on Real Time Delivery Versus Payment basisT+2: Settlement
T: Information on
information and
executed
Investors trading through
proceeds
transactions
PRC securities companies SD&C
PRC securities companies
T+2: Settlement
information and
proceeds
Dividends
Dividends in respect of the H Shares will be declared in Renminbi and will be converted into Hong Kong dollars before being paid to the H Shareholders that carried out the trading activities on the Hong Kong Stock Exchange via the trading systems of PRC securities companies or eligible Hong Kong or overseas securities corporations.
As for the investors trading through PRC securities companies, since dividends in respect of the H Shares will be converted into Hong Kong dollars from Renminbi and be paid to the H Shareholders that carried out the trading activities on the Hong Kong Stock Exchange via the trading systems of PRC securities companies, before paying the dividends to the CSDC which holds the H Shares on behalf of the PRC investors as a nominee, our Company shall
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withhold10% of the dividend according to the relevant PRC tax laws and regulations. For the investors trading through eligible Hong Kong or overseas securities corporations, as disclosed in the section headed “Risk Factors– Risks Relating to this Listing– Foreign individual holdersofourHSharesaresubjecttoPRCincometaxandthereareuncertaintiesastothePRC taxobligationsofforeignenterprisesthatareholdersofourHShares”inthislistingdocument, non-PRC resident enterprise holders of our H Shares may be subject to PRC withholding tax on dividends.
General Meetings
In addition to the arrangement as stipulated in the Articles of Association of our Company, the PRC securities companies will be responsible for collecting the reply slips in respect of general meetings from their clients and forwarding the same toSD&C after the closure of register of members of our Company.SD&C will forward all the reply slips in respect of general meetings received to CCASS, and CCASS will follow the instructions as given by the PRC investors in such reply slips.
INVESTOR AWARENESS
Arrangement involving our Company and the PRC securities companies
Prior to the Listing, our Company and the PRC securities companies will cooperate to inform the investor community in the PRC of general information about our Company. Further, an announcement on the recent closing prices of A Shares and B Shares will be posted on the websites of the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and our Company on each trading day during the period from the date of this listing document to the day before the Listing Date. After the Listing, our Company and the PRC securities companies may continue to take measures to educate the PRC investors. The following measures have been or will be taken to enhance transparency of our Company:
• SD&C has informed the PRC securities companies and custodian banks the publication of the Transaction Guide and requested the PRC securities companies and custodian banks to inform the investors;
• the Transaction Guide has been published on the websites of the Shenzhen Stock Exchange, the CSDC and our Company so that the investors may have free access to it;
• information,whereapplicable,includingamongothers,theclosingpriceandtrading volume of (i) the A Shares as at 13 January 2014, 14 January 2014 and 15 January 2014; and (ii) B Shares as at 20 December 2013 will be disclosed on the website of the Hong Kong Stock Exchange on 14 January 2014 and 15 January 2014, respectively;
• information brochures based on the Transaction Guide have been published and, together with the Transaction Guide, will be made available at various branches of the relevant PRC securities companies;
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• SD&C has notified the investors about the major information of the announcement inrelationtotheListingandthemajorinformationoftheTransactionGuidethrough the electronic displays or bulletin boards etc in the branch offices of the PRC securities companies; and
• copies of this listing document will be made available during normal business hours on 14 January 2014 and 15 January 2014 at the office of Guosen Securities (HK) CapitalCompanyLimitedatUnitNos.1604-06,16thFloor,InfinitusPlaza,199Des Voeux Road Central, Hong Kong and the office of ourCompany’s Hong Kong legal advisers, King& Wood Mallesons, at 13/F, Gloucester Tower, The Landmark, 15Queen’s Road Central, Central, Hong Kong. In addition, electronic copies of this listing document will be disseminated through the websites of our Company, the Shenzhen Stock Exchange and the Hong Kong Stock Exchange from 14 January 2014.
Change of custodians of investors trading through PRC securities companies
The change of custodian by domestic investors may only be made among the PRC securitiescompanies(the“ChangeofDomesticCustodian”)whilethechangeofcustodianby domestically trading overseas investors may be made among the PRC securities companies or from PRC securities companies to eligible Hong Kong or overseas securities corporations (the “Change of Overseas Custodian”).
Change of Domestic Custodian
Prior to applying for the Change of Domestic Custodian, the domestic investor should open a cash account with the business department of a PRC securities company which the investor intends to transfer his/her H Shares to and ascertain the code number of that business department, so as to fill in the application form for the Change of Domestic Custodian.
The operational flow for the Change of Domestic Custodian is as follows:
(i) On the first business day (“Y”), the domestic investor should bring along his/her identification documents and fill in the application form for the Change of Domestic Custodian for H Shares in person at the business department of the PRC securities company with which he/she maintains a securities account.
(ii) After the business department of the PRC securities company with which the domestic investor maintains a securities account has verified his/her identification documents and the application form for the Change of Domestic Custodian, the application will be processed in accordance with the method of trade offer applicable to general B shares companies listed on the Shenzhen Stock Exchange and such application will be forwarded toSD&C.
(iii) OnthefirstbusinessdayfollowingY,thedomesticinvestormayenquirethebalance of his/her transferred H Shares in the corresponding securities account opened with the business department of the new PRC securities company.
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(iv) In the event that the trading system of the PRC securities company with which the domestic investor maintains a securities account has not been updated and is not able to process the Change of Domestic Custodian by way of trade offer applicable to general B shares companies listed on the Shenzhen Stock Exchange,SD&C will process the application by reference to the process flow for Change of Overseas Custodian.
Change of Overseas Custodian
Prior to applying for the Change of Overseas Custodian, domestically trading overseas investors should open a securities account with a securities corporation or custodian bank in Hong Kong or overseas at his/her choice and provide details of such securities account when applying for the Change of Overseas Custodian.
The process flow for the Change of Overseas Custodian is as follows:
(i) On Y day, the domestically trading overseas investor should bring along his/her identification documents and fill in the application form for the Change of Overseas Custodian for H Shares in person at the business department of the PRC securities company with which he/she maintains a securities account.
(ii) After the business department of the PRC securities company with which the domestically trading overseas investor maintains a securities account has verified his/her identification documents and the application form for Change of Overseas Custodian, the form will be signed under the seal of the business department of such PRC securities company and H Shares of the domestically trading overseas investor inrelationtotheChangeofOverseasCustodianwillbefrozen,whiletheapplication for the Change of Overseas Custodian will be submitted toSD&C.
(iii)SD&C will collect all applications for the Change of Overseas Custodian from various PRC securities companies for processing.
TheChangeofOverseasCustodiancannotbeprocessedinthesamemannerasthechange of custodian by way of trade offer applicable to general B shares companies listed on the Shenzhen Stock Exchange.
Time for application for change of custodian
(i) An investor should submit his/her application to the business department of the PRC securities company with which he/she maintains a securities account before 11:00 a.m. on each common trading day of the Hong Kong Stock Exchange and the Shenzhen Stock Exchange.
(ii) PRC securities companies should submit their applications toSD&C before 2:00 p.m. on each common trading day of the Hong Kong Stock Exchange and the Shenzhen Stock Exchange.
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Cancellation and adjustment of change of custodian
(i) The change of custodian may be cancelled on the same day of its application. The investor and the business department of the PRC securities company with which he/shemaintainsasecuritiesaccountshouldsignandsealontheoriginalapplication forms for the change of custodian to confirm cancellation. The process for cancellation of application is identical with that for the application of change of custodian, and the timing will be the same as the timing requirements for the application for change of custodian.
(ii) Where errors are identified after a Change of Domestic Custodian, the investor should fill in an application form for rectification of errors and the matter will be sent toSD&C for carrying out the rectification.
(iii) No rectification of securities account may be applied for after completion of a Change of Overseas Custodian.
Fees for change of custodian
The Change of Domestic Custodian is free of charge.
The Change of Overseas Custodian is subject to a handling fee ofHK$50 per application and0.002% of the aggregate closing value of the H Shares that are subject to such Change of Overseas Custodian on the previous trading day (subject to a minimum fee ofHK$2), to be charged by the CSDC to the new custodian via CCASS on a delivery-versus-payment basis.A domestically trading overseas investor who submits an application form for the change between the PRC securities companies with which he/she maintains a securities account is not subject to any fees or charges.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Comparison of major differences regarding the trading of B Shares and H Shares
To facilitateinvestors’understanding on the differences regarding the trading of B Shares and H Shares, the following table sets out certain major differences regarding the trading of B Shares and H Shares:
Item for comparison B Shares H Shares
Trading dates From Monday to Friday; From Monday to Friday;
market closed on market closed on
Saturdays, Sundays and Saturdays, Sundays and
statutory national holidays public holidays of Hong
of the PRC Kong
Method of placing orders Orders at market price: At-auction order: an order and prices quotations may only be with no specified price and made during consecutive such order may only be
trading hours submitted during the pre- opening session
Limit orders: to be made
according to designated Limit orders: an order with prices specified price
Processing of trade 9:15 a.m.– 9:20 a.m.: 9:00 a.m.– 9:15 a.m.:
submissions by the stock trade submissions are submission, modification
exchange trading system admissible and also and cancellation of limit
in the pre-trading period cancellable orders and at-auction
orders acceptable
9:20 a.m.– 9:25 a.m.:
trade submissions are 9:15 a.m.– 9:20 a.m.: only admissible but no at-auction orders are
cancellations may be made acceptable; limit orders
and at-auction order
9:25 a.m.– 9:30 a.m.: already put in queue
trade submissions and cannot be modified or
cancellations are admitted cancelled
but not processed
9:20 a.m.– 9:28 a.m.: no input, modification and
cancellation of orders are allowed. Orders will be
matched in order type (at- auction order first)
9:28 a.m.– 9:30 a.m.: no terminal activities are
allowed
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Item for comparison B Shares H Shares
Continuous trading hours Morning: 9:30 a.m.– Morning: 9:30 a.m.–
11:30 a.m. Afternoon: 1:00 12:00 p.m. Afternoon: 1:00 p.m.– 2:57 p.m. p.m.– 4:00 p.m. No
afternoon sessions on
Christmas Eve, NewYear’s Eve and Chinese New
Year’s Eve
Minimum trading volume 100 B Shares 100 H Shares
for each order
Trading volumes below the B Shares with odd lot size, Odd Lot H Shares to be
minimum requirement to be sold on a one-off acquired by specialised
for each order basis agencies at trading prices equivalent to85% to90% of the then prevailing
market price of H Shares or the average executed
trading price of the Board Lot H Shares, where
applicable, and must be
sold in full in one single
transaction
Minimum price fluctuationHK$0.01 HK$0.001
Price movement limits 10% Nil
Day trade Not permissible Permissible
Settlement T+3 T+2
Margin financing and Nil Yes
securities lending
The differences stated above are arrived at solely by comparison between the trading of the B Shares and the H Shares, and may not be relevant to all investors of H Shares converted from B Shares. Different trading rules apply to different types of investors. For details please refer to the paragraphs headed “Types of Investors”, “Comparison of trading restrictions and differences among domestic investors, domestically-trading overseas investors and non- domestically trading overseas investors upon the Listing” in this section.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Comparison of trading restrictions and differences among domestic investors, domestically-trading overseas investors and non-domestically trading overseas investors upon the Listing
Comparison among domestic investors, domestically-trading overseas investors and non-domestically trading overseas investors indicates certain trading restrictions and differences upon the Listing. Investors should find out which type of investors they belong to and fully inform themselves of the relevant restrictions and differences before dealings in the H Shares. The following table sets out major differences in trading restrictions:
Domestically- Non-domestically Domestic trading overseas trading overseas
investors investors investors
Stock code 299902 299902 1513
Short name of H H in
stock Chinese and Livzon Pharma in English Trading Selling only; restriction on purchase Buying and selling authorisation permissible
Trading day Common trading day of the Hong Kong Trading day of the Stock Exchange and the Shenzhen Stock Hong Kong Stock Exchange Exchange
Types of buy/sell Limit orders At-auction orders
orders permitted and limit orders
Trading hours Morning: 9:15 a.m.– 11:30 a.m. Morning: 9:00 a.m.– 12:00 noon
Afternoon: 1:00 p.m.– 3:00 p.m.
Afternoon: 1:00
Afternoon: 3:00 p.m.– 4:00 p.m.: p.m.– 4:00 p.m.
No new trading instructions may be
submitted and all pending trading
instructions submitted cannot be cancelled
or amended but are still valid
Settlement time T+2 (ifT+2 is not a trading day of the T+2
Shenzhen Stock Exchange, settlement will
be postponed to the next common trading
day)
Day trade Not permissible Not permissible Permissible
Margin financing Not permissible Not permissible Permissible
trade
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Domestically- Non-domestically Domestic trading overseas trading overseas
investors investors investors
Trading fee The brokerage commission of0.1% of the The brokerage
consideration of a H Share trading commission
transaction charged by Guosen HK charged by Guosen Brokerage and the settlement fee of HK Brokerage or
0.002% of the consideration of a H Share
other eligible Hong trading transaction (subject to a minimum
Kong or overseas
fee ofHK$2 and maximum fee of
securities
corporations and
HK$100 per trade)+ B Share trading
settlement fee of
commission charged by the PRC
0.002% of the
securities company with which the
consideration of a investor maintained a securities account
H Share trading
(at the same rate as that charged for the
transaction (subject B Shares)+ the H Share Transaction Cost
to a minimum fee (Please also refer to the paragraph headed
ofHK$2 and
“Certain risks that our B Shareholders
maximum fee of
should be aware of– Risk regarding
HK$100 per trade) increased transaction costs.” under the
+ the H Share
section headed “Risk Factors” of this
Transaction Cost
listing document for details of the risk
regarding the increasing transaction costs)
Change of Change of Change of Change of
custodian Domestic Domestic custodian among
Custodian Custodian and the Hong Kong or permitted Change of overseas securities Overseas Custodian companies
permitted permitted
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Historical trading information in respect of B Shares on the Shenzhen Stock Exchange For the information purposes only, please see the table below in relation to high, low, period closing and period averages of ourCompany’s trading information on the Shenzhen Stock Exchange since 1 January 2007 and up to 20 December 2013 (being the last trading day of our B Shares):
Historical price
Average
High Low close Period end(HK$) (HK$) (HK$) (HK$) 2007
January 6.80 4.94 6.07 5.79 February 7.39 5.77 6.62 6.74 March 7.20 6.20 6.65 7.00 April 11.51 7.06 8.85 11.51 May 16.85 12.66 15.45 15.70 June 16.22 12.93 15.01 14.30 July 17.98 14.60 16.18 17.90 August 20.10 16.99 18.43 17.39 September 17.90 16.38 17.06 17.78 October 19.52 17.77 18.76 19.40 November 18.88 16.03 17.43 17.06 December 20.00 17.31 18.24 20.00 2008
January 20.5 17.09 18.84 17.42 February 19.25 16.85 17.94 16.88 March 17.16 12.05 14.70 13.10 April 12.36 12.30 12.33 12.36 May (Note) – – – – June 14.29 11.50 12.74 12.10 July 12.98 10.61 11.70 11.08 August 11.09 8.46 9.40 8.77 September 8.65 5.99 7.28 7.27 October 6.95 5.74 6.29 6.13 November 7.68 6.15 6.99 7.68 December 9.26 8.45 8.89 9.05 Note: The trading of our B Shares was suspended on 3 April 2008 and was resumed on 5 June 2008.
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Historical price
Average
High Low close Period end(HK$) (HK$) (HK$) (HK$) 2009
January 9.54 9.20 9.33 9.39 February 10.12 9.29 9.78 9.43 March 10.46 9.61 10.16 10.07 April 11.47 10.09 10.60 11.40 May 12.66 11.22 12.07 12.66 June 14.23 12.96 13.42 14.15 July 15.42 14.61 15.08 14.98 August 15.44 13.75 14.77 14.36 September 16.30 13.74 15.75 15.82 October 17.76 15.90 16.81 17.76 November 20.59 18.00 19.28 19.25 December 20.00 18.45 19.37 19.32 2010
January 21.12 19.50 20.31 20.75 February 21.92 19.75 20.47 21.92 March 21.59 20.80 21.16 20.99 April 24.45 20.66 22.43 22.94 May 23.50 21.20 22.19 21.93 June 22.23 19.85 21.19 20.09 July 21.55 18.90 20.11 21.37 August 23.18 21.40 22.27 23.18 September 26.44 22.98 24.99 26.44 October 28.01 26.48 27.34 27.49 November 30.84 28.21 29.44 28.99 December 28.77 26.85 27.98 27.95 2011
January 27.96 26.26 27.03 26.26 February 27.17 25.03 26.48 25.03 March 26.04 24.95 25.31 24.95 April 24.90 22.50 24.01 22.99 May 23.66 20.49 22.45 21.35 June 21.66 19.22 20.25 20.38 July 22.15 20.22 21.21 22.06 August 22.34 15.74 18.49 16.26 September 16.20 13.11 14.80 13.25 October 15.03 13.06 14.01 15.03 November 17.43 15.00 16.20 17.20 December 18.39 15.01 16.23 15.49
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LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Historical price
Average
High Low close Period end(HK$) (HK$) (HK$) (HK$) 2012
January 16.42 14.66 15.66 16.30 February 19.25 16.18 17.94 18.60 March 18.06 19.49 18.80 18.39 April 19.56 18.10 18.62 19.56 May 20.14 18.66 19.43 19.59 June 19.76 18.80 19.25 19.13 July 19.92 17.22 19.30 17.37 August 20.44 17.76 18.90 18.65 September 19.81 18.31 19.05 18.95 October 21.50 18.70 20.27 21.50 November 24.60 21.40 23.79 24.51 December 27.84 23.35 25.00 27.84 2013
January 31.13 28.30 29.72 31.13 February 38.75 32.40 35.52 38.75 March 41.80 37.07 39.05 38.05 April 39.75 35.00 38.49 35.98 May 40.09 34.90 38.50 39.00 June 39.52 31.01 36.99 34.74 July 35.49 33.00 34.58 34.65 August 38.20 34.50 36.68 35.80 September 36.18 34.78 35.46 36.18 October 36.90 33.59 35.90 33.59 November 35.14 32.99 34.05 34.55 December (up to 20
December, being the last
trading day of B Shares) 38.70 34.00 36.59 37.92
– 369–
LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
For the information purposes only, please see the table below in relation to the average daily trading volume and turnover for each period of our B Shares trading information on the Shenzhen Stock Exchange since 1 January 2007 and up to 20 December 2013 (being the last trading day of our B Shares):
Average Average daily daily trading volume turnover(as% of
total issued
(B Shares) B Shares) (HK$) 2007
January 1,899,133 1.70% 11,600,517 February 1,009,470 0.90% 6,791,747 March 533,239 0.48% 3,600,229 April 1,837,104 1.64% 16,573,063 May 3,409,169 3.04% 53,872,331 June 1,786,820 1.60% 26,703,976 July 1,320,580 1.18% 21,520,223 August 1,309,070 1.17% 24,427,681 September 718,895 0.64% 12,362,325 October 1,021,855 0.91% 19,208,898 November 404,478 0.36% 7,103,515 December 514,496 0.46% 9,632,603 2008
January 510,300 0.46% 9,672,539 February 502,257 0.45% 9,044,949 March 333,354 0.30% 4,718,684 April 451,985 0.40% 5,700,280 May (Note) – – – June 487,961 0.44% 6,366,793 July 347,048 0.31% 4,039,193 August 204,149 0.18% 1,918,875 September 289,467 0.26% 2,040,760 October 237,380 0.21% 1,479,551 November 349,933 0.31% 2,490,410 December 539,324 0.48% 4,758,011 Note: The trading of our B Shares was suspended on 3 April 2008 and was resumed on 5 June 2008.
– 370–
LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Average Average daily daily trading volume turnover(as% of
total issued
(B Shares) B Shares) (HK$) 2009
January 230,680 0.21% 2,157,197 February 429,507 0.38% 4,209,875 March 200,169 0.18% 2,031,634 April 520,438 0.46% 5,554,561 May 454,272 0.41% 5,473,669 June 497,413 0.44% 6,688,286 July 489,835 0.44% 7,375,497 August 717,746 0.64% 10,654,800 September 454,057 0.41% 7,129,678 October 485,000 0.43% 8,192,395 November 877,114 0.78% 16,989,003 December 357,102 0.32% 6,941,825 2010
January 510,276 0.46% 10,428,090 February 310,703 0.28% 6,449,350 March 409,300 0.37% 8,662,135 April 605,063 0.54% 13,649,612 May 416,879 0.37% 9,269,417 June 324,441 0.29% 6,886,251 July 260,114 0.23% 5,232,021 August 313,090 0.28% 6,976,259 September 449,895 0.40% 11,164,561 October 446,409 0.40% 12,147,270 November 394,177 0.35% 11,552,042 December 219,987 0.20% 6,139,873 2011
January 99,950 0.09% 2,698,002 February 228,339 0.20% 5,996,675 March 209,892 0.19% 5,310,388 April 148,511 0.13% 3,556,849 May 94,638 0.08% 2,113,071 June 83,355 0.07% 1,695,260 July 160,581 0.14% 3,426,395 August 210,656 0.19% 3,870,935 September 93,579 0.08% 1,370,008 October 136,448 0.12% 1,923,838 November 217,774 0.19% 3,584,855 December 144,188 0.13% 2,421,148
– 371–
LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Average Average daily daily trading volume turnover(as% of
total issued
(B Shares) B Shares) (HK$) 2012
January 117,018 0.10% 1,831,673 February 265,482 0.24% 4,905,702 March 132,376 0.12% 2,497,838 April 124,552 0.11% 2,348,133 May 111,512 0.10% 2,181,991 June 75,150 0.07% 1,454,773 July 125,430 0.11% 2,414,551 August 237,245 0.21% 4,533,306 September 99,542 0.09% 1,907,614 October 258,959 0.23% 5,301,346 November 382,134 0.34% 9,033,708 December 211,213 0.19% 5,317,306 2013
January 221,029 0.20% 6,314,075 February 575,196 0.51% 20,142,927 March 348,597 0.31% 13,596,121 April 161,750 0.14% 6,152,444 May 129,727 0.12% 4,959,891 June 111,733 0.10% 4,137,433 July 53,371 0.05% 1,849,386 August 162,196 0.14% 5,949,346 September 166,617 0.15% 5,907,547 October 190,569 0.17% 6,841,543 November 67,803 0.06% 2,318,050 December (up to 20 December, being
the last trading day of B Shares) 323,063 0.29% 11,992,758 Historical share prices of B Shares may not be indicative of the share price at which the H Shares will trade following completion of the Listing. Please refer to the section headed “Risk Factors– Risk Relating to this Listing– Certain risks that our B Shareholders should be aware of” in this listing document for the associated risks.
– 372–
LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
INVESTOR COMPENSATION
The SFO, which became effective from 1 April 2003, provides for the establishment of the Investor Compensation Fund (the “Fund”). The Fund is established to pay compensation to investors of any nationality who suffer pecuniary losses as a result of default of a licenced intermediaryorauthorisedfinancialinstitutioninrelationexchange-tradedproductsinHongKong. The objective of the Fund is to provide certain level of security to retail investors. The client of a defaulting intermediary is eligible to claim. However, the following investors (the “Unqualified Investors”) cannot claim against the Fund:
(a) A licenced corporation
(b) An authorised financial institution
(c) Arecognised exchange company, a recognised exchange controller, or a recognised clearing house
(d) An authorised automated trading services provider
(e) An authorised insurer
(f) A manager or operator of an authorised collective investment scheme
(g) A person who is authorised, licenced or exempt by a competent authority in a jurisdiction outside Hong Kong for any activity that is the same as or similar to any of the activities carried on by a person referred to in (a) to (f) above
(h) An associate of the defaulting intermediary which is a corporation
(i) An employee of the defaulting intermediary who has committed breach of trust, defalcation, fraud or misfeasance
(j) The Hong Kong Government or an overseas government
(k) A person acting as a trustee or custodian of the above persons, schemes or arrangement.
Investors trading through eligible Hong Kong or overseas securities corporations
The investors which are not classified as Unqualified Investors are eligible to claim against the Fund.
Investors trading through PRC securities companies
Given that the CSDC acts as a nominee to hold the H Shares on behalf of the PRC investors and the CSDC is a recognised clearing house in the PRC, therefore the CSDC is regarded as an Unqualified Investor and is not eligible to claim against the Fund and the investors trading through PRC securities companies of which the CSDC acts as nominee to hold the H Shares are also not able to claim against the Fund.
– 373–
LISTINGS, REGISTRATION, DEALINGS AND SETTLEMENT
Based on Measures for the Administration of Securities Investor Protection Fund (
) (the “Administrative Measures”) issued by the CSRC effective from 1 July 2005, in the PRC, The Securities Investors Protection Fund ( ) (the “PRC Protection Fund”) is raised, managed and used by China Securities Investors Protection Fund Corporation Limited ( ), a wholly state-owned company (the “Fund Company”), to protect the interests of securities investors by preventing and disposing of the risks of PRC securities companies. According to the Administrative Measures and other relevant regulations, only when securities companies are dissolved, closed or declared bankrupt, or compulsory supervision measures are taken such as administrative takeover and trustee operation ( ) by the CSRC, can the PRC Protection Fund be applied by the Fund Company to indemnify the creditors of the PRC securities companies in accordance with the relevant procedures, regulations and requirements. Investors trading through PRC securities companies can only claim against the PRC Protection Fund under the abovementioned circumstances, but cannot be compensated for other pecuniary losses as a result of default of the PRC securities companies.
– 374–
APPENDIX I ACCOUNTANTS’ REPORT The following is the text of a report, prepared for the purpose of incorporation in this listing documents, received from theCompany’s reporting accountants, Ruihua Certified Public Accountants (LLP) (formerly known as Crowe Horwath China Certified Public Accountants (LLP)).
(cid:17994)(cid:16863)(cid:3424)(cid:3440)(cid:726) (cid:2375)(cid:1244)(cid:5170)(cid:9127)(cid:9200)(cid:2410)(cid:16303)(cid:3339)(cid:10719)(cid:1117)(cid:17439)16(cid:2599)(cid:19602)2(cid:2599)(cid:8108)4(cid:4722)
Postal Address(cid:726)4th Floor of Tower 2,No.16 Xisihuanzhong Road,Haidian District, Beijing
(cid:18142)(cid:7023)(cid:13638)(cid:11825)(cid:708)Post Code(cid:709)(cid:726)100039
(cid:11109)(cid:16909)(cid:708)Tel(cid:709)(cid:726)+86(10)88219191
(cid:1360)(cid:11599)(cid:708)Fax(cid:709)(cid:726)+86(10)88210558
Rui Hua Shen Zi[2013] No. 845A0008 14 January 2014
The Directors
Livzon Pharmaceutical Group Inc.
Guosen Securities (HK) Capital Company Limited
Dear Sirs,
We set out below our report on the financial statements (the “Financial Statements”) of LivzonPharmaceuticalGroupInc.(the“Company”)anditssubsidiaries(hereaftercollectively referred to as the “Group”), which comprise the consolidated balance sheets of the Group and balance sheets of the Company as at 31 December 2010, 2011 and 2012 and 30 September 2013, the consolidated income statements, cash flow statements, statements of changes in equity of the Group, and income statements, cash flow statements, statements of changes in equity of the Company for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, and the comparative consolidated income statements, cash flow statements and statements of change in equity of the Group for the nine months ended 30 September 2012, together with the notes thereto, for the inclusion inAppendix I of the listing document of the Company in connection with the listing of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited.
In March 1992, the Company was formed as a sino-foreign fund raising company limitedbysharespursuanttotheapprovaldocument[1992]No.29issuedbyZhuhaiEconomicSystemReformCommissionandapprovaldocument[1992]No.45jointlyissuedbyJointExamination Group for Pilot Joint Stock Enterprise in Guangdong Province and Guangdong Economic System Reform Committee.
As at the date of this report, the details of direct and indirect interests of the Company in its major subsidiaries and associates are set out in note IV and note V.9 of the Financial Statements.
All companies comprising the Group and associates of the Group have adopted 31 December as their financial year end dates.
– I-1–
APPENDIX I ACCOUNTANTS’ REPORT The consolidated financial statements of the Group as at and for the year ended 31 December 2010 and 2011 were audited by Reanda Certified Public Accountants Company Limited. The consolidated financial statements of the Group as at and for the year ended 31 December 2012 and nine months ended 30 September 2013 were audited by Ruihua Certified Public Accountants (LLP) (formerly known as Crowe Horwath China Certified Public Accountants (LLP)) pursuant to separate terms of engagement with the Company.
ThedirectorsoftheCompanyareresponsibleforthepreparationofconsolidatedfinancial statements of the Group that give a true and fair view in accordance with the Accounting Standards for Business Enterprises issued by the Ministry of Finance of thePeople’s Republic of China.
The Financial Statements set out in this report have been prepared in accordance with the audited financial statements of the Group, with no adjustments made thereon.
I. Directors’ responsibility for the Financial Statements
The directors are responsible for the preparation and fair presentation of the Financial Statements. Such responsibilities include (1) the preparation of the Financial Statements in accordance with Accounting Standards for Business Enterprises, and the presentation of them in a fair manner; (2) the design, implementation and maintenance of internal controls that are necessary to enable that the Financial Statements are free from material misstatement, whether due to fraud or error.
II. Reportingaccountants’ responsibility
For the Financial Statements of the Group and the Company for each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, our responsibility is to express an opinion on these Financial Statements based on our audit. We conducted our audit in accordance with China Standards on Auditing for Certified Public Accountants, and we had carried out procedures in accordance with the Auditing Guideline 3.340 “Prospectus and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with China Code of Ethics for Certified Public Accountants, and plan and perform the audit in order to obtain reasonable assurance on whether these Financial Statements are free from material misstatement.
For the comparative consolidated income statements, cash flow statements, statements of change in equity of the Group for the nine months ended 30 September 2012, together with the notes thereto (the “Comparative Information”), it is our responsibility to form an independentconclusion,basedonourreview,ontheComparativeInformationandtoreportour conclusion to you. We have reviewed the Comparative Information in accordance with China Standards on Review Engagements No. 2101 “Engagements to Review Financial Statements”. A review consists principally of making enquiries of theGroup’s management and applying analytical procedures to the financial information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the Comparative Information.
– I-2–
APPENDIX I ACCOUNTANTS’ REPORT III. Opinion
1. Opinion on Financial Statements
In our opinion, for the purpose of this report, the Financial Statements give a true and fair view, in all material respects of the state of affairs of the Group and of the Company as at 31 December 2010, 2011 and 2012 and 30 September 2013, and consolidated results and consolidated cash flows of the Group, and the results and cash flows of the Company for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013 in accordance with the requirements of Accounting Standards for Business Enterprises.
2. Conclusion upon the review of Comparative Information
Basedonourreview,forthepurposeofthisreport,nothinghascometoourattention that causes us to believe that the Comparative Information has not been prepared, in all material respect in accordance with the accounting policies set out in note 2 of the Financial Statements.
– I-3–
APPENDIX I ACCOUNTANTS’ REPORT CONSOLIDATED BALANCE SHEET
31December 31December 31December 30September ASSETS 2010 2011 2012 2013 Notes RMB RMB RMB RMB Currentassets
Cashatbankandonhand V.1 863,931,857.59 1,447,743,555.70 1,221,332,802.40 1,057,086,280.70 Financialassetsheldfortrading V.2 57,865,790.18 44,343,013.65 59,319,616.94 9,164,160.31 Billsreceivables V.3 232,945,814.77 171,033,783.72 112,482,782.18 181,942,920.98 Accountsreceivables V.4 438,763,726.58 562,146,013.18 774,021,470.88 911,536,507.50 Prepayments V.5 67,922,719.62 213,817,751.28 207,180,789.68 231,141,906.24 Interestreceivables – – – – Dividendsreceivables – – – – Otherreceivables V.6 44,079,280.01 44,488,052.86 53,040,257.13 61,482,862.37 Inventories V.7 450,214,441.42 424,422,841.35 546,497,999.53 640,814,018.61 Non-currentassetsduewithinone
year – – – – Othercurrentassets – – – – Totalcurrentassets 2,155,723,630.17 2,907,995,011.74 2,973,875,718.74 3,093,168,656.71 Non-currentassets
Available-for-salefinancialassets V.8 10,572,886.89 9,238,787.30 10,612,859.66 10,547,652.80 Held-to-maturityinvestments – – – – Long-termreceivables – – – – Long-termequityinvestments V.10 45,920,620.54 118,529,007.91 120,961,203.38 123,031,687.94 Investmentproperties – – – – Fixedassets V.11 803,942,036.05 1,090,566,880.22 1,127,285,485.37 1,248,632,218.31 Constructioninprogress V.12 317,906,371.50 148,841,628.16 1,028,769,050.48 1,636,215,778.35 Constructionsupplies V.13 25,195,844.94 2,536,926.00 1,623,576.06 2,008,814.04 Fixedassetstobedisposed – – – – Intangibleassets V.14 163,772,276.26 170,385,550.58 205,129,693.66 227,689,241.03 Developmentcosts V.15 4,332,137.81 1,510,153.51 1,510,153.51 – Goodwill V.16 103,040,497.85 103,040,497.85 103,040,497.85 103,040,497.85 Long-termdeferredexpenses V.17 8,640,218.34 14,270,426.26 17,785,870.45 16,442,287.66 Deferredtaxassets V.18 22,945,107.60 35,994,112.21 43,159,851.98 43,804,856.53 Othernon-currentassets – – – – Totalnon-currentassets 1,506,267,997.78 1,694,913,970.00 2,659,878,242.40 3,411,413,034.51 Totalassets 3,661,991,627.95 4,602,908,981.74 5,633,753,961.14 6,504,581,691.22
– I-4–
APPENDIX I ACCOUNTANTS’ REPORTLIABILITIESANDSHAREHOLDERS’ 31December 31December 31December 30September(OWNERS’)EQUITY 2010 2011 2012 2013 Notes RMB RMB RMB RMB Currentliabilities
Short-termloans V.21 207,460,286.80 251,324,743.01 536,169,502.91 681,931,195.20 Financialliabilitiesheldfortrading – – – – Billspayables V.22 – – 283,581,118.89 372,798,618.20 Accountspayables V.23 164,677,954.49 207,941,294.31 311,814,060.41 381,624,053.29 Receiptsinadvance V.24 21,127,228.70 39,028,703.01 37,950,040.42 55,187,059.87 Employeebenefitspayables V.25 51,323,701.39 52,328,883.82 74,462,512.02 67,368,767.52 Taxespayables V.26 83,837,811.52 90,201,700.34 96,658,310.36 82,554,276.56 Interestpayables V.27 943,224.90 16,841,492.68 10,454,004.86 11,280,270.92 Dividendspayables V.28 2,531,984.46 2,531,984.46 2,531,984.46 2,531,984.46 Otherpayables V.29 322,911,899.11 460,447,555.37 622,164,203.12 748,180,606.93 Non-currentliabilitiesduewithin
oneyear V.30 70,400,000.00 400,000.00 400,000.00 400,000.00 Othercurrentliabilities V.31 – 400,000,000.00 400,000,000.00 – Totalcurrentliabilities 925,214,091.37 1,521,046,357.00 2,376,185,737.45 2,403,856,832.95 Non-currentliabilities
Long-termloans V.32 66,796,116.23 1,200,000.00 700,000.00 149,900,000.00 Notespayables V.33 – – – 400,000,000.00 Long-termpayables – – – – Specialpayables – – – – Deferredincome V.34 28,556,183.49 67,143,287.92 74,172,485.90 67,471,721.11 Accruedliabilities – – – – Deferredtaxliabilities V.35 2,274,648.21 1,901,504.87 2,576,489.15 2,827,124.19 Othernon-currentliabilities – – – – Totalnon-currentliabilities 97,626,947.93 70,244,792.79 77,448,975.05 620,198,845.30 Totalliabilities 1,022,841,039.30 1,591,291,149.79 2,453,634,712.50 3,024,055,678.25
– I-5–
APPENDIX I ACCOUNTANTS’ REPORTLIABILITIESANDSHAREHOLDERS’ 31December 31December 31December 30September(OWNERS’)EQUITY 2010 2011 2012 2013 Notes RMB RMB RMB RMBShareholders’(owners’)equity
Sharecapital V.36 295,721,852.00 295,721,852.00 295,721,852.00 295,721,852.00 Capitalreserve V.37 348,436,179.34 348,093,136.41 219,110,205.68 219,054,779.84 Less:Treasuryshares – – – – Specialreserve – – – – Surplusreserve V.38 443,274,429.10 479,211,417.19 490,319,036.90 490,319,036.90 Generalrisksprovision – – – – Retainedearnings V.39 1,446,714,876.09 1,740,645,868.60 2,023,348,842.58 2,254,007,381.30 Translationdifferencesoffinancial
statementsdenominatedin
foreigncurrency -16,709,226.29 -20,502,568.00 -20,484,128.53 -22,177,239.87 Totalequityattributableto
shareholdersoftheCompany 2,517,438,110.24 2,843,169,706.20 3,008,015,808.63 3,236,925,810.17 Non-controllinginterests V.40 121,712,478.41 168,448,125.75 172,103,440.01 243,600,202.80Totalshareholders’(owners’)equity 2,639,150,588.65 3,011,617,831.95 3,180,119,248.64 3,480,526,012.97Totalliabilitiesandshareholders’
(owners’)equity 3,661,991,627.95 4,602,908,981.74 5,633,753,961.14 6,504,581,691.22
– I-6–
APPENDIX I ACCOUNTANTS’ REPORT CONSOLIDATED INCOME STATEMENT
Yearended31December Ninemonthsended30September ITEMS 2010 2011 2012 2012 2013 Notes RMB RMB RMB RMB RMB (unaudited)
I. Totaloperatingincome 2,726,718,895.61 3,162,915,294.50 3,943,525,305.20 2,909,014,289.56 3,233,359,513.46 Including: Operatingincome V.41 2,726,718,895.61 3,162,915,294.50 3,943,525,305.20 2,909,014,289.56 3,233,359,513.46 II. Totaloperatingcosts 2,219,805,303.95 2,720,601,223.71 3,445,290,746.13 2,493,758,176.28 2,785,505,292.14 Including: Operatingcosts V.41 1,286,484,908.09 1,397,937,193.22 1,569,688,115.45 1,144,684,910.76 1,164,584,562.71 Businesstaxesandsurcharges V.42 8,857,917.19 40,730,415.53 54,545,405.98 40,442,078.86 41,375,251.54 Sellingexpenses V.43 648,046,346.21 970,891,282.10 1,441,654,242.80 1,062,612,062.72 1,274,345,124.48 Administrativeexpenses V.44 265,889,710.15 297,630,062.15 351,031,228.58 239,848,812.08 296,759,586.12 Financialexpenses V.45 -424,853.91 -20,723,598.52 -17,122,110.76 -11,860,825.07 -10,947,356.38 Impairmentloss V.46 10,951,276.22 34,135,869.23 45,493,864.08 18,031,136.93 19,388,123.67 Add:Gains/(losses)fromchangesinfairvalue([–]
representslosses) V.47 10,780,224.20 -11,083,794.52 16,381,681.02 4,800,246.93 -3,528,802.12Investment(losses)/income([–]represents
losses) V.48 -1,278,935.84 -1,485,522.49 4,136,556.80 1,668,506.76 3,810,605.58 Including: (Losses)/incomefrom
investmentinassociates
andjointlycontrolled
enterprises -2,468,715.50 -2,717,372.63 2,432,195.47 76,655.33 2,070,484.56Exchangegains/(losses)([–]representslosses) – – – – – III. Operatingprofit 516,414,880.02 429,744,753.78 518,752,796.89 421,724,866.97 448,136,024.78 Add: Non-operatingincome V.49 21,167,315.00 36,182,313.09 44,267,854.06 15,945,423.03 31,654,243.21 Less: Non-operatingexpenses V.50 3,914,899.76 2,775,836.34 2,707,911.81 1,913,000.47 1,745,335.73 Including: Lossesfromdisposalof
non-currentassets 834,836.01 161,267.88 1,081,686.28 1,047,694.38 4,620.05 IV. Profitbeforeincometax 533,667,295.26 463,151,230.53 560,312,739.14 435,757,289.53 478,044,932.26 Less: Incometaxexpenses V.51 81,177,253.79 75,352,829.72 85,089,640.18 70,716,571.44 79,517,813.24 V. Netprofitfortheyear/period 452,490,041.47 387,798,400.81 475,223,098.96 365,040,718.09 398,527,119.02 Including: Profitderivedfromthe
acquireesbefore
consolidation – – – – – Netprofitattributabletotheshareholdersofthe
Company 418,180,831.06 359,369,880.94 441,671,519.69 343,630,861.86 378,519,464.72 Non-controllinginterests 34,309,210.41 28,428,519.87 33,551,579.27 21,409,856.23 20,007,654.30 VI. Earningspershare:
(1)Basicearningspershare 1.41 1.22 1.49 1.16 1.28 (2)Dilutedearningspershare 1.41 1.22 1.49 1.16 1.28 VII. Othercomprehensiveincomeforthe
year/period V.52 -5,631,094.05 -4,927,326.37 101,902.85 -758,679.52 -1,759,428.69 VIII. Totalcomprehensiveincomeforthe
year/period 446,858,947.42 382,871,074.44 475,325,001.81 364,282,038.57 396,767,690.33 Totalcomprehensiveincomeattributabletothe
shareholdersoftheCompany 412,549,737.01 354,442,554.57 441,774,851.77 342,872,182.34 376,770,927.54 Totalcomprehensiveincomeattributabletonon-
controllinginterests 34,309,210.41 28,428,519.87 33,550,150.04 21,409,856.23 19,996,762.79
– I-7–
APPENDIX I ACCOUNTANTS’ REPORT CONSOLIDATED CASH FLOW STATEMENT
Yearended31December Ninemonthsended30September ITEMS 2010 2011 2012 2012 2013 Notes RMB RMB RMB RMB RMB (unaudited)
I. Cashflowsfromoperatingactivities
Cashreceivedfromsaleofgoodsand
renderingofservices 2,676,632,558.09 3,196,889,077.14 3,837,904,425.46 2,979,324,386.94 3,227,439,086.56 Refundoftaxes 7,910,784.84 7,223,091.58 18,549,397.36 15,341,233.91 12,652,412.75 Cashreceivedrelatingtootheroperating
activities V.53 77,107,100.37 147,188,143.34 170,178,750.63 193,038,701.95 123,962,759.77 Sub-totalofcashinflowsfromoperating
activities 2,761,650,443.30 3,351,300,312.06 4,026,632,573.45 3,187,704,322.80 3,364,054,259.08 Cashpaidforgoodsandservices 901,984,028.95 937,041,619.49 1,096,651,444.82 742,838,101.48 826,265,689.33 Cashpaidtoandforemployees 245,102,615.05 284,985,114.64 318,506,211.16 234,507,204.82 284,973,796.20 Cashpaidforalltypesoftaxes 322,290,125.83 458,059,355.80 561,470,340.88 429,747,964.16 467,474,986.86 Cashpaidrelatingtootheroperating
activities V.54 658,977,365.56 963,012,885.55 1,456,039,912.29 1,251,391,775.83 1,425,924,929.89 Sub-totalofcashoutflowsfromoperating
activities 2,128,354,135.39 2,643,098,975.48 3,432,667,909.15 2,658,485,046.29 3,004,639,402.28 Netcashinflowsfromoperatingactivities 633,296,307.91 708,201,336.58 593,964,664.30 529,219,276.51 359,414,856.80 II. Cashflowsfrominvestingactivities
Cashreceivedfromdisposalofinvestments – – 16,855,285.74 1,979,144.92 46,725,339.60 Cashreceivedfromreturnoninvestments 1,158,622.99 1,231,850.14 1,148,151.21 1,033,253.97 892,281.75 Netcashreceivedfromdisposaloffixed
assets,intangibleassetsandotherlong-
termassets 7,684,268.40 654,100.00 341,498.60 315,123.60 153,808.00 Cashreceivedfromdisposalofsubsidiaries – – – – – Cashreceivedrelatingtootherinvesting
activities V.55 – – – – 3,860,000.00 Sub-totalofcashinflowsfrominvesting
activities 8,842,891.39 1,885,950.14 18,344,935.55 3,327,522.49 51,631,429.35 Cashpaidforacquisitionoffixedassets,
intangibleassetsandotherlong-termassets 336,954,461.39 348,828,871.27 762,302,440.55 669,948,180.40 730,754,488.52 Cashpaidforacquisitionofinvestments 2,382,447.84 75,325,760.00 151,532,596.80 75,766,298.43 – Netcashpaidforacquisitionofsubsidiaries
andotheroperatingentities – – – – – Cashpaidrelatingtootherinvesting
activities V.56 – – – – 5,400,000.00 Sub-totalofcashoutflowsfrominvesting
activities 339,336,909.23 424,154,631.27 913,835,037.35 745,714,478.83 736,154,488.52 Netcashoutflowsfrominvestingactivities -330,494,017.84 -422,268,681.13 -895,490,101.80 -742,386,956.34 -684,523,059.17
– I-8–
APPENDIX I ACCOUNTANTS’ REPORT Yearended31December Ninemonthsended30September ITEMS 2010 2011 2012 2012 2013 Notes RMB RMB RMB RMB RMB (unaudited)
III. Cashflowsfromfinancingactivities
Cashreceivedfrominvestors 9,800,000.00 40,670,000.00 – – 51,500,000.00 Including: Cashreceivedfrom
non-controlling
shareholdersof
subsidiaries 9,800,000.00 40,670,000.00 – – 51,500,000.00 Cashreceivedfromborrowings 455,292,047.48 229,859,704.00 502,257,886.64 502,257,886.64 890,630,519.37 Cashreceivedfromissueoffinancingbills – 400,000,000.00 400,000,000.00 400,000,000.00 400,000,000.00 Cashreceivedrelatingtootherfinancing
activities V.57 1,186,821.82 6,200,000.00 13,250,000.00 13,250,000.00 – Sub-totalofcashinflowsfromfinancing
activities 466,278,869.30 676,729,704.00 915,507,886.64 915,507,886.64 1,342,130,519.37 Cashrepaymentsofborrowings 414,589,480.02 311,590,658.34 620,750,531.16 620,250,531.16 989,988,044.60 Cashpaidfordividends,profitdistributions
orinterest 65,212,021.70 59,448,565.13 216,702,279.93 199,049,650.22 186,872,025.95 Including: Dividendsandprofitspaid
tonon-controlling
shareholdersof
subsidiaries 9,298,624.00 22,359,672.00 31,433,731.21 – – Cashpaidrelatingtootherfinancingactivities V.58 595,000.00 1,600,000.00 30,850,000.00 1,600,000.00 4,000,000.00 Sub-totalofcashoutflowsfromfinancing
activities 480,396,501.72 372,639,223.47 868,302,811.09 820,900,181.38 1,180,860,070.55 Netcash(outflows)/inflowsfromfinancing
activities([–]representsnetoutflows) -14,117,632.42 304,090,480.53 47,205,075.55 94,607,705.26 161,270,448.82 IV. Effectofforeignexchangeratechangeson
cashandcashequivalents -2,465,396.80 -2,329,198.79 780,867.69 1,237,771.65 -654,024.48 V. Netincrease/(decrease)incashandcash
equivalents([–]representsdecrease) 286,219,260.85 587,693,937.19 -253,539,494.26 -117,322,202.92 -164,491,778.03 Add:Cashandcashequivalentsatthe
beginningoftheyear/period 558,262,596.74 844,481,857.59 1,432,175,794.78 1,432,175,794.78 1,178,636,300.52 VI. Cashandcashequivalentsattheendofthe
year/period 844,481,857.59 1,432,175,794.78 1,178,636,300.52 1,314,853,591.86 1,014,144,522.49
– I-9–
APPENDIX I ACCOUNTANTS’ REPORT
– I-10–
YTIUQE’SREDLOHERAHSNISEGNAHCFOTNEMETATSDETADILOSNOC
0102
ynapmoCehtfosredloherahsotelbatubirttA
noitalsnarT fosecnereffid laicnanif
latoTstnemetats’sredloherahsgnillortnoc-noNnidetanimoneddeniateRsksirlareneGyrusaerT:sseL ytiuqestseretniycnerrucngierofsgninraenoisivorpevresersulpruSevreserlaicepSserahsevreserlatipaClatipacerahSSMETI BMRBMRBMRBMRBMRBMRBMRBMRBMRBMR30.345,854,522,200.707,373,6745.349,947,31-49.504,017,411,1–99.543,654,104––46.571,649,05300.258,127,5929002rebmeceD13taecnalaB.I––––––––––seicilopgnitnuoccanisegnahcfostceffE:ddA
roirpnisrorrenonoitcerrocfostceffE
––––––––––sraey––––––––––srehtO30.345,854,522,200.707,373,6745.349,947,31-49.504,017,411,1–99.543,654,104––46.571,649,05300.258,127,5920102yraunaJ1taecnalaB.II
stneserper]–[(raeyehtrofytiuqenisegnahC.III
26.540,296,31414.177,833,5457.282,959,2-51.074,400,233–11.380,818,14––03.699,905,2-–)esaerced74.140,094,25414.012,903,43–60.138,081,814––––––raeyehtroftiforpteN)I(50.490,136,5-–57.282,959,2-–––––03.118,176,2-–raeyehtrofemocnievisneherpmocrehtO)II(24.749,858,64414.012,903,4357.282,959,2-60.138,081,814––––03.118,176,2-–)II(&)I(folatot-buS
foesaerceddnasnoitubirtnoc’sredloherahS)III(
00.581,823,0200.581,823,02––––––––latipac00.581,823,0200.581,823,02––––––––sredloherahsybsnoitubirtnoC.1
ytiuqe’sredloherahsniesaercnI.2
––––––––––stnemyapdesab-erahsmorfdetluser––––––––––srehtO.308.109,656,35-00.426,892,9-–19.063,671,68-–11.380,818,14––––stiforpfonoitairporppA)VI(–––11.380,818,14-–11.380,818,14––––evresersulprusfonoitairporppA.1
sksirlarenegfonoitairporppA.2
––––––––––noisivorp08.109,656,35-00.426,892,9-–08.772,853,44-––––––sredloherahsotsnoitubirtsiD.3––––––––––srehtO.4––––––––––ytiuqe’sredloherahsforefsnarT)V(
erahsotderrefsnartevreserlatipaC.1
––––––––––latipac
erahsotderrefsnartevresersulpruS.2
––––––––––latipac
deniaterotderrefsnartsevresersulpruS.3
––––––––––derrucnisessolrofsgninrae––––––––––srehtO.4––––––––––evreserlaicepS)IV(––––––––––evreserlaicepsfonoitairporppA.1––––––––––evreserlaicepsfonoitasilitU.200.518,161–––––––00.518,161–srehtO)IIV(56.885,051,936,214.874,217,12192.622,907,61-90.678,417,644,1–01.924,472,344––43.971,634,84300.258,127,5920102rebmeceD13taecnalaB.VI
APPENDIX I ACCOUNTANTS’ REPORT
|||
|-|-|
|–––90.889,639,53-–90.889,639,53––––evresersulprusfonoitairporppA.1 ––––––––––noisivorpsksirlarenegfonoitairporppA.2 78.277,468,15-35.278,263,22-–43.009,105,92-––––––sredloherahsotsnoitubirtsiD.3 ––––––––––srehtO.4 ––––––––––ytiuqe’sredloherahsforefsnarT|––––––––––latipac ––––––––––latipac ––––––––––derrucnissolrofsgninrae ––––––––––srehtO.4deniaterotderrefsnartsevresersulpruS.3erahsotderrefsnartevreserlatipaC.1 erahsotderrefsnartevresersulpruS.2|

– I-11–
APPENDIX I ACCOUNTANTS’ REPORT
|||
|-|-|
|–––17.916,701,11-–17.916,701,11––––evresersulprusfonoitairporppA.1 ––––––––––noisivorpsksirlarenegfonoitairporppA.2 12.756,492,971-12.137,334,13-00.629,068,741-––––––sredloherahsotsnoitubirtsiD.3 ––––––––––srehtO.4 ––––––––––ytiuqe’sredloherahsforefsnarT|––––––––––latipac –––––––––––latipac –––––––––––derrucnissolrofsgninrae ––––––––––srehtO.4deniaterotderrefsnartsevresersulpruS.3erahsotderrefsnartevreserlatipaC.1 erahsotderrefsnartevresersulpruS.2|

– I-12–
APPENDIX I ACCOUNTANTS’ REPORT
|||
|-|-|
|––––––––––evresersulprusfonoitairporppA.1 ––––––––––noisivorpsksirlarenegfonoitairporppA.2 12.756,440,761-12.137,381,91-–00.629,068,741-––––––sredloherahsotsnoitubirtsiD.3 ––––––––––srehtO.4 ––––––––––ytiuqe’sredloherahsforefsnarT|––––––––––latipac ––––––––––latipac ––––––––––derrucnissolrofsgninrae ––––––––––srehtO.4deniaterotderrefsnartsevresersulpruS.3erahsotderrefsnartevreserlatipaC.1 erahsotderrefsnartevresersulpruS.2|

– I-13–
APPENDIX I ACCOUNTANTS’ REPORT
|||
|-|-|
|––––––––––evresersulprusfonoitairporppA.1 ––––––––––noisivorpsksirlarenegfonoitairporppA.2 00.629,068,741-––00.629,068,741-––––––sredloherahsotsnoitubirtsiD.3 ––––––––––srehtO.4 ––––––––––ytiuqe’sredloherahsforefsnarT|––––––––––latipac ––––––––––latipac ––––––––––derrucnissolrofsgninrae ––––––––––srehtO.4deniaterotderrefsnartsevresersulpruS.3erahsotderrefsnartevreserlatipaC.1 erahsotderrefsnartevresersulpruS.2|

– I-14–
APPENDIX I ACCOUNTANTS’ REPORT BALANCE SHEET OF THE COMPANY
31December 31December 31December 30September ASSETS 2010 2011 2012 2013 Notes RMB RMB RMB RMB Currentassets:
Cashatbankandonhand 671,878,797.62 1,321,193,456.29 1,140,415,395.77 932,965,251.61 Financialassetsheldfortrading – – – – Billsreceivables 36,943,041.55 11,041,114.87 18,838,299.32 85,646,375.56 Accountsreceivables VI.1 178,746,580.44 255,482,126.08 356,944,182.17 469,385,519.54 Prepayments 4,111,999.69 9,137,814.04 11,947,252.36 19,974,228.94 Interestreceivables – – – – Dividendsreceivables – – – – Otherreceivables VI.2 389,773,156.54 275,891,035.87 672,875,015.59 1,214,648,111.92 Inventories 71,349,271.13 110,291,112.80 80,003,596.83 86,140,592.23 Non-currentassetsduewithin
oneyear – – – – Othercurrentassets – – – – Totalcurrentassets 1,352,802,846.97 1,983,036,659.95 2,281,023,742.04 2,808,760,079.80 Non-currentassets:
Available-for-salefinancialassets 10,572,886.89 9,238,787.30 10,612,859.66 10,547,652.80 Held-to-maturityinvestments – – – – Long-termreceivables – – – – Long-termequityinvestments VI.3 1,137,263,264.48 1,526,671,374.58 1,660,096,199.25 1,711,460,502.16 Investmentproperties – – – – Fixedassets 88,379,927.98 91,805,857.98 89,894,096.64 86,941,465.35 Constructioninprogress – – – – Constructionsupplies – – – – Fixedassetstobedisposed – – – – Intangibleassets 32,657,247.08 34,053,322.48 33,297,100.50 31,617,790.19 Developmentcosts 1,289,662.78 1,289,662.78 1,289,662.78 – Goodwill – – – – Long-termdeferredexpenses – – – – Deferredtaxassets 11,550,335.20 12,369,049.28 13,899,260.85 14,154,046.08 Othernon-currentassets – – – – Totalnon-currentassets 1,281,713,324.41 1,675,428,054.40 1,809,089,179.68 1,854,721,456.58 Totalassets 2,634,516,171.38 3,658,464,714.35 4,090,112,921.72 4,663,481,536.38
– I-15–
APPENDIX I ACCOUNTANTS’ REPORT LIABILITIESAND
SHAREHOLDERS’ 31December 31December 31December 30September(OWNERS’)EQUITY 2010 2011 2012 2013 Notes RMB RMB RMB RMB Currentliabilities:
Short-termloans 101,583,700.00 82,699,143.01 403,190,102.91 551,900,515.20 Financialliabilitiesheldfortrading – – – – Billspayables – – 565,951,118.89 657,216,167.48 Accountspayables 200,455,422.69 181,117,755.18 117,634,591.39 180,630,486.19 Receiptsinadvance 8,250,583.82 11,373,981.60 7,154,698.64 10,347,671.77 Employeebenefitspayables 15,430,849.29 20,721,517.12 24,141,017.37 15,222,749.58 Taxespayables 9,358,777.21 10,233,643.04 24,119,667.76 45,630,288.27 Interestpayables 331,286.62 15,068,501.59 9,058,796.48 10,420,823.75 Dividendspayables 20,174.46 20,174.46 20,174.46 20,174.46 Otherpayables 780,904,308.11 1,390,842,714.00 1,042,693,215.88 1,337,863,114.04 Non-currentliabilitiesduewithin
oneyear 70,000,000.00 – – – Othercurrentliabilities – 400,000,000.00 400,000,000.00 – Totalcurrentliabilities 1,186,335,102.20 2,112,077,430.00 2,593,963,383.78 2,809,251,990.74 Non-currentliabilities:
Long-termloans 20,000,000.00 – – – Notespayables – – – 400,000,000.00 Long-termpayables – – – – Specialpayables – – – – Deferredincome 10,453,489.34 24,138,969.42 9,311,879.60 6,360,398.37 Accruedliabilities – – – – Deferredtaxliabilities 1,212,428.40 1,012,313.47 1,218,424.33 1,208,643.31 Othernon-currentliabilities – – – – Totalnon-currentliabilities 31,665,917.74 25,151,282.89 10,530,303.93 407,569,041.68 Totalliabilities 1,218,001,019.94 2,137,228,712.89 2,604,493,687.71 3,216,821,032.42Shareholders’(owners’)equity:
Sharecapital 295,721,852.00 295,721,852.00 295,721,852.00 295,721,852.00 Capitalreserve 339,085,167.66 337,951,183.00 339,119,144.50 339,063,718.66 Less:Treasuryshares – – – – Specialreserve – – – – Surplusreserve 260,712,690.11 274,248,363.61 285,355,983.32 285,355,983.32 Generalrisksprovision – – – – Retainedearnings 520,995,441.67 613,314,602.85 565,422,254.19 526,518,949.98Totalshareholders’(owners’)equity 1,416,515,151.44 1,521,236,001.46 1,485,619,234.01 1,446,660,503.96Totalliabilitiesandshareholders’
(owners’)equity 2,634,516,171.38 3,658,464,714.35 4,090,112,921.72 4,663,481,536.38
– I-16–
APPENDIX I ACCOUNTANTS’ REPORT INCOME STATEMENT OF THE COMPANY
Ninemonths ended Yearended31December 30September ITEMS 2010 2011 2012 2013 Notes RMB RMB RMB RMB I. Operatingincome VI.4 1,011,257,871.61 1,347,646,402.74 1,794,286,022.12 1,573,266,002.03 Less: Operatingcosts VI.4 486,561,924.68 751,674,769.08 815,430,745.46 621,512,847.93 Businesstaxesandsurcharges VI.5 821,663.29 11,323,267.12 20,545,856.28 18,720,658.02 Sellingexpenses 352,088,727.94 458,844,331.73 788,328,327.59 722,899,912.19 Administrativeexpenses 96,232,084.24 102,455,982.45 120,472,848.61 99,362,732.22 Financialexpenses -5,269,470.27 -22,331,788.41 -10,089,297.64 -12,572,593.44 Impairmentloss 3,702,437.86 5,810,982.80 17,758,281.32 4,583,398.26 Add: Gains/(losses)fromchanges
infairvalue – – – –Investmentincome([–]
representslosses) VI.6 19,654,504.23 98,340,761.54 63,630,243.57 1,072,418.27 Including: Lossesfrom
investmentin
associatesand
jointly
controlled
enterprises -2,874,600.46 -1,563,849.90 -304,103.24 364,302.91 II. Operatingprofit 96,775,008.10 138,209,619.51 105,469,504.07 119,831,465.12 Add: Non-operatingincome 13,395,543.29 2,588,009.96 11,990,618.58 4,955,607.50 Less: Non-operatingexpenses 1,256,290.01 1,701,524.44 115,734.07 1,134,580.78 Including: Lossesfrom
disposalof
non-current
assets 5,592.48 22,485.09 – 4,620.05 III. Profitbeforeincometax 108,914,261.38 139,096,105.03 117,344,388.58 123,652,491.84 Less: Incometaxexpenses 9,889,382.59 3,739,370.01 6,268,191.53 14,694,870.05 IV. Netprofitforthe
year/period 99,024,878.79 135,356,735.02 111,076,197.05 108,957,621.79 V. Earningspershare
(1)Basicearningspershare ----------–----------–----------–----------– (2)Dilutedearningspershare ----------–----------–----------–----------– VI. Othercomprehensiveincome
fortheyear/period -2,671,811.30 -1,133,984.66 1,167,961.50 -55,425.84 VII. Totalcomprehensiveincome
fortheyear/period 96,353,067.49 134,222,750.36 112,244,158.55 108,902,195.95
– I-17–
APPENDIX I ACCOUNTANTS’ REPORT CASH FLOW STATEMENT OF THE COMPANY
Ninemonths ended Yearended31December 30September ITEMS 2010 2011 2012 2013 Notes RMB RMB RMB RMB I. Cashflowsfromoperating
activities:
Cashreceivedfromsaleof
goodsandrenderingofservices 1,085,429,107.12 1,372,817,936.71 1,756,700,972.20 1,588,718,737.36 Refundoftaxes – – – – Cashreceivedrelatingto
otheroperatingactivities 35,216,679.79 103,798,719.29 223,774,247.00 70,846,971.86 Sub-totalofcashinflows
fromoperatingactivities 1,120,645,786.91 1,476,616,656.00 1,980,475,219.20 1,659,565,709.22 Cashpaidforgoodsand
services 451,060,442.59 844,887,590.99 667,109,629.27 668,163,378.69 Cashpaidtoandfor
employees 78,750,917.34 82,431,251.40 75,035,649.34 61,750,294.46 Cashpaidforalltypesof
taxes 99,664,843.39 107,174,810.55 176,162,533.14 174,016,114.15 Cashpaidrelatingtoother
operatingactivities 348,491,440.60 479,915,261.25 985,230,737.06 721,821,264.72 Sub-totalofcashoutflows
fromoperatingactivities 977,967,643.92 1,514,408,914.19 1,903,538,548.81 1,625,751,052.02 Netcashinflows/(outflows)
fromoperatingactivities
([–]representsnet
outflows) 142,678,142.99 -37,792,258.19 76,936,670.39 33,814,657.20 II. Cashflowsfrominvesting
activities:
Cashreceivedfromdisposal
ofinvestments – – 14,884,600.00 – Cashreceivedfromreturnon
investments 30,064,115.12 99,904,611.44 65,017,415.70 708,115.36 Netcashreceivedfrom
disposaloffixedassets,
intangibleassetsandother
long-termassets 200.00 185,000.00 168,000.00 73,000.00 Cashreceivedfromdisposal
ofsubsidiaries – – – – Cashreceivedrelatingto
otherinvestingactivities – – – – Sub-totalofcashinflows
frominvestingactivities 30,064,315.12 100,089,611.44 80,070,015.70 781,115.36 Cashpaidforacquisitionof
fixedassets,intangible
assetsandotherlong-term
assets 9,126,787.75 22,028,970.02 14,286,026.11 18,068,956.71 Cashpaidforacquisitionof
investments 56,568,943.14 391,655,760.00 154,696,596.80 51,000,000.00 Netcashpaidforacquisition
ofsubsidiariesandother
operatingentities – – – – Sub-totalofcashoutflows
frominvestingactivities 65,695,730.89 413,684,730.02 168,982,622.91 69,068,956.71 Netcashoutflowsfrom
investingactivities -35,631,415.77 -313,595,118.58 -88,912,607.21 -68,287,841.35
– I-18–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonths ended Yearended31December 30September ITEMS 2010 2011 2012 2013 Notes RMB RMB RMB RMB III. Cashflowsfromfinancing
activities:
Cashreceivedfrominvestors – – – – Borrowingsreceivedfrom
subsidiaries 193,336,673.82 739,873,367.97 – 152,286,120.93 Cashreceivedfrom
borrowings 230,882,550.00 85,070,944.00 477,852,886.64 610,126,709.37 Cashreceivedfromissueof
financingbills – 400,000,000.00 400,000,000.00 400,000,000.00 Cashreceivedrelatingto
otherfinancingactivities 73,938,570.12 5,134,525.95 – – Sub-totalofcashinflows
fromfinancingactivities 498,157,793.94 1,230,078,837.92 877,852,886.64 1,162,412,830.30 Cashrepaymentsof
borrowings 223,418,400.00 190,027,800.11 559,848,551.16 851,359,055.40 Cashpaidfordividends,
profitdistributionsor
interest 51,525,628.67 32,612,806.00 200,570,037.31 174,246,684.96 Advancestosubsidiaries – – 282,559,237.99 – Cashpaidrelatingtoother
financingactivities 86,178,654.95 1,600,000.00 30,850,000.00 301,359,165.91 Sub-totalofcashoutflows
fromfinancingactivities 361,122,683.62 224,240,606.11 1,073,827,826.46 1,326,964,906.27 Netcashinflows/(outflows)
fromfinancingactivities
([–]representsnet
outflows) 137,035,110.32 1,005,838,231.81 -195,974,939.82 -164,552,075.97 IV. Effectofforeignexchange
ratechangesoncashand
cashequivalents -42,089.53 -1,670.42 291,788.29 -237,533.55 V. Netincrease/(decrease)in
cashandcashequivalents
([–]representsdecrease) 244,039,748.01 654,449,184.62 -207,659,088.35 -199,262,793.67 Add: Cashandcash
equivalentsatthe
beginningofthe
year/period 408,389,049.61 652,428,797.62 1,306,877,982.24 1,099,218,893.89 VI. Cashandcashequivalents
attheendofthe
year/period 652,428,797.62 1,306,877,982.24 1,099,218,893.89 899,956,100.22
– I-19–
APPENDIX I ACCOUNTANTS’ REPORT
– I-20–
YNAPMOCEHTFOYTIUQE’SREDLOHERAHSNISEGNAHCFOTNEMETATS
0102
latoT sredloherahsdeniateRsksirlareneGsulpruSlaicepSyrusaerT:sseLlatipaC ytiuqesgninraenoisivorpevreserevreserserahsevreserlatipacerahSSMETI BMRBMRBMRBMRBMRBMRBMRBMR57.163,025,463,165.823,132,674–32.202,018,052––69.879,657,14300.258,127,5929002rebmeceD13taecnalaB.I––––––––seicilopgnitnuoccanisegnahcfostceffE:ddA––––––––sraeyroirpnisrorrenonoitcerrocfostceffE––––––––srehtO57.163,025,463,165.823,132,674–32.202,018,052––69.879,657,14300.258,127,5920102yraunaJ1taecnalaB.II
stneserper]–[(raeyehtrofytiuqenisegnahC.III
96.987,499,1511.311,467,44–88.784,209,9––03.118,176,2-–)esaerced97.878,420,9997.878,420,99––––––raeyehtroftiforpteN)I(03.118,176,2-–––––03.118,176,2-–raeyehtrofemocnievisneherpmocrehtO)II(94.760,353,6997.878,420,99––––03.118,176,2-–)II(&)I(folatot-buS––––––––latipacfoesaerceddnasnoitubirtnoc’sredloherahS)III(––––––––sredloherahsybsnoitubirtnoC.1
morfdetluserytiuqe’sredloherahsniesaercnI.2
––––––––stnemyapdesab-erahs––––––––srehtO.308.772,853,44-86.567,062,45-–88.784,209,9––––stiforpfonoitairporppA)VI(–88.784,209,9-–88.784,209,9––––evresersulprusfonoitairporppA.108.772,853,44-08.772,853,44-––––––sredloherahsotsnoitubirtsiD.2––––––––srehtO.3––––––––ytiuqe’sredloherahsforefsnarT)V(––––––––latipacerahsotderrefsnartevreserlatipaC.1––––––––latipacerahsotderrefsnartevresersulpruS.2
deniaterotderrefsnartrofsevresersulpruS.3
––––––––derrucnisessolrofsgninrae––––––––srehtO.4––––––––evreserlaicepS)IV(––––––––evreserlaicepsfonoitairporppA.1––––––––evreserlaicepsfonoitasilitU.2––––––––srehtO)IIV( 44.151,515,614,176.144,599,025–11.096,217,062––66.761,580,93300.258,127,5920102rebmeceD13taecnalaB.VI
APPENDIX I ACCOUNTANTS’ REPORT
– I-21–
1102
latoT sredloherahsdeniateRsksirlareneGsulpruSlaicepSyrusaerT:sseLlatipaC ytiuqesgninraenoisivorpevreserevreserserahsevreserlatipacerahSSMETI BMRBMRBMRBMRBMRBMRBMRBMR44.151,515,614,176.144,599,025–11.096,217,062––66.761,580,93300.258,127,5920102rebmeceD13taecnalaB.I––––––––seicilopgnitnuoccanisegnahcfostceffE:ddA––––––––sraeyroirpnisrorrenonoitcerrocfostceffE––––––––srehtO44.151,515,614,176.144,599,025–11.096,217,062––66.761,580,93300.258,127,5921102yraunaJ1taecnalaB.II
stneserper]–[(raeyehtrofytiuqenisegnahC.III
20.058,027,40181.161,913,29–05.376,535,31––66.489,331,1-–)esaerced20.537,653,53120.537,653,531––––––raeyehtroftiforpteN)I(66.489,331,1-–––––66.489,331,1-–raeyehtrofemocnievisneherpmocrehtO)II(63.057,222,43120.537,653,531––––66.489,331,1-–)II(&)I(folatot-buS––––––––latipacfoesaerceddnasnoitubirtnoc’sredloherahS)III(––––––––sredloherahsybsnoitubirtnoC.1
morfdetluserytiuqe’sredloherahsniesaercnI.2
––––––––stnemyapdesab-erahs––––––––srehtO.343.009,105,92-48.375,730,34-–05.376,535,31––––stiforpfonoitairporppA)VI(–05.376,535,31-–05.376,535,31––––evresersulprusfonoitairporppA.143.009,105,92-43.009,105,92-––––––sredloherahsotsnoitubirtsiD.2––––––––srehtO.3––––––––ytiuqe’sredloherahsforefsnarT)V(––––––––latipacerahsotderrefsnartevreserlatipaC.1––––––––latipacerahsotderrefsnartevresersulpruS.2
sgninraedeniaterotrefsnartrofsevresersulpruS.3
––––––––derrucnisessolrof––––––––srehtO.4––––––––evreserlaicepS)IV(––––––––evreserlaicepsfonoitairporppA.1––––––––evreserlaicepsfonoitasilitU.2––––––––srehtO)IIV( 64.100,632,125,158.206,413,316–16.363,842,472––00.381,159,73300.258,127,5921102rebmeceD13taecnalaB.VI
APPENDIX I ACCOUNTANTS’ REPORT
– I-22–
2102
latoT sredloherahsdeniateRsksirlareneGsulpruSlaicepSyrusaerT:sseLlatipaC ytiuqesgninraenoisivorpevreserevreserserahsevreserlatipacerahSSMETI BMRBMRBMRBMRBMRBMRBMRBMR64.100,632,125,158.206,413,316–16.363,842,472––00.381,159,73300.258,127,5921102rebmeceD13taecnalaB.I––––––––seicilopgnitnuoccanisegnahcfostceffE:ddA––––––––sraeyroirpnisrorrenonoitcerrocfostceffE––––––––srehtO64.100,632,125,158.206,413,316–16.363,842,472––00.381,159,73300.258,127,5922102yraunaJ1taecnalaB.II
stneserper]–[(raeyehtrofytiuqenisegnahC.III
54.767,616,53-66.843,298,74-–17.916,701,11––05.169,761,1–)esaerced50.791,670,11150.791,670,111––––––raeyehtroftiforpteN)I(05.169,761,1–––––05.169,761,1–raeyehtrofemocnievisneherpmocrehtO)II(55.851,442,21150.791,670,111––––05.169,761,1–)II(&)I(folatot-buS––––––––latipacfoesaerceddnasnoitubirtnoc’sredloherahS)III(––––––––sredloherahsybsnoitubirtnoC.1
morfdetluserytiuqe’sredloherahsniesaercnI.2
––––––––stnemyapdesab-erahs––––––––srehtO.300.629,068,741-17.545,869,851-–17.916,701,11––––stiforpfonoitairporppA)VI(–17.916,701,11-–17.916,701,11––––evresersulprusfonoitairporppA.100.629,068,741-00.629,068,741-––––––sredloherahsotsnoitubirtsiD.2––––––––srehtO.3––––––––ytiuqe’sredloherahsforefsnarT)V(––––––––latipacerahsotderrefsnartevreserlatipaC.1––––––––latipacerahsotderrefsnartevresersulpruS.2
deniaterotderrefsnartrofsevresersulpruS.3
––––––––derrucnisessolrofsgninrae––––––––srehtO.4––––––––evreserlaicepS)IV(––––––––evreserlaicepsfonoitairporppA.1––––––––evreserlaicepsfonoitasilitU.2–––––––srehtO)IIV( 10.432,916,584,191.452,224,565–23.389,553,582––05.441,911,93300.258,127,5922102rebmeceD13taecnalaB.VI
APPENDIX I ACCOUNTANTS’ REPORT
– I-23–
3102rebmetpeS03dedneshtnomeniN
latoT sredloherahsdeniateRsksirlareneGyrusaerT:sseL ytiuqesgninraenoisivorpevresersulpruSevreserlaicepSserahsevreserlatipaClatipacerahSSMETI BMRBMRBMRBMRBMRBMRBMRBMR10.432,916,584,191.452,224,565–23.389,553,582––05.441,911,93300.258,127,5922102rebmeceD13taecnalaB.I––––––––seicilopgnitnuoccanisegnahcfostceffE:ddA––––––––sraeyroirpnisrorrenonoitcerrocfostceffE––––––––srehtO10.432,916,584,191.452,224,565–23.389,553,582––05.441,911,93300.258,127,5923102yraunaJ1taecnalaB.II
stneserper]–[(doirepehtrofytiuqenisegnahC.III
50.037,859,83-12.403,309,83-––––48.524,55-–)esaerced97.126,759,80197.126,759,801––––––doirepehtroftiforpteN)I(48.524,55-–––––48.524,55-–doirepehtrofemocnievisneherpmocrehtO)II(59.591,209,80197.126,759,801––––48.524,55-–)II(&)I(folatot-buS––––––––latipacfoesaerceddnasnoitubirtnoc’sredloherahS)III(––––––––sredloherahsybsnoitubirtnoC.1
morfdetluserytiuqe’sredloherahsniesaercnI.2
––––––––stnemyapdesab-erahs––––––––srehtO.300.629,068,741-00.629,068,741-––––––stiforpfonoitairporppA)VI(––––––––evresersulprusfonoitairporppA.100.629,068,741-00.629,068,741-––––––sredloherahsotsnoitubirtsiD.2––––––––srehtO.3––––––––ytiuqe’sredloherahsforefsnarT)V(––––––––latipacerahsotderrefsnartevreserlatipaC.1––––––––latipacerahsotderrefsnartevresersulpruS.2
deniaterotderrefsnartrofsevresersulpruS.3
––––––––derrucnisessolrofsgninrae––––––––srehtO.4––––––––evreserlaicepS)IV(––––––––evreserlaicepsfonoitairporppA.1––––––––evreserlaicepsfonoitasilitU.2––––––––srehtO)IIV( 69.305,066,644,189.949,815,625–23.389,553,582––66.817,360,93300.258,127,5923102rebmetpeS03taecnalaB.VI
APPENDIX I ACCOUNTANTS’ REPORT NOTES TO FINANCIAL STATEMENTS
1 January 2010 to 30 September 2013
(Amounts are presented in RMB, unless otherwise stated)
I. COMPANY STATUS
1. History and development
In March 1992, Livzon Pharmaceutical Group Inc. ( ) was transformed into a sino-foreign fund raising company limited by shares. Funds were raised from its seven promoters namely, Macau Nam Yue (Group) Co., Ltd. ( ( ) ), Zhuhai Credit Cooperative Union ( ), Guangdong Medicine Group Co., Ltd. ( ), Zhuhai Medicine Corporation ( ), Guangzhou Medicines& Health Products Imp.& Exp. Corp. ( ), Zhuhai Trust and Consultancy of the Bank of China ( ) and Zhuhai Guihua Employees Mutual Aid Association ( ), which converted their interests in theCompany’s net assets into shares, as wellasfromotherdomesticlegalpersonsandinternalstaffpursuanttotheapprovaldocuments[1992]No.29issuedby Zhuhai Economic System Reform Commission ( ) and[1992] No. 45 jointly issued by JointExaminationGroupforPilotJointStockEnterpriseinGuangdongProvince( ) and Guangdong Economic System Reform Committee ( ).
In 1993, pursuant toYue Zheng Jian Fa Zi[1993] No. 001 document ( [1993]001 ) issued by Guangdong Securities Regulatory Commission ( ), Shen Ren Yin Fu Zi[1993] No. 239 document( [1993] 239 )issuedbyShenzhenSpecialEconomicZonebranchofthePeople’sBankof China( )andZhengJianFaShenZi[1993]No.19document( [1993]19 )issuedbyChinaSecuritiesRegulatoryCommission(“CSRC”),theCompanywaslistedontheShenzhenStock Exchange.
In 1998, the promoters of the Company, namely Zhuhai Credit Cooperative Union ( ), GuangdongMedicineGroupCo.,Ltd.( ),ZhuhaiGuihuaEmployeesMutualAidAssociation( ) and Zhuhai branch of Bank of China ( ) entered into an equity interests transferagreementwithChinaEverbright(Group)Corporation( ( ) )respectively,andtransferred all shares held by them to China Everbright (Group) Corporation ( ( ) ). Upon the completion of the transfer, China Everbright (Group) Corporation ( ( ) ) held 38,917,518 domestic legal person shares of the Company. Macau NamYue (Group) Co., Ltd. ( ( ) ), the foreign promoter of the Company,enteredintoanequityintereststransferagreementwithChinaEverbrightPharmaceuticalCo.,Ltd.(
), and transferred all of the 18,893,448 foreign-invested legal person shares held by it to China Everbright Pharmaceutical Co., Ltd. ( ).
On 12 April 2002, China Everbright (Group) Corporation ( ( ) ) entered into an equity custody agreement withXi’an Dongsheng Group Co., Ltd. ( ) and assigned the 38,917,518 domestic legal person shares of the Company held by it in the custody ofXi’an Dongsheng Group Co., Ltd. (
).On21December2004,Xi’anDongshengGroupCo.,Ltd.( )acceptedthe transferof38,917,518domesticlegalpersonsharesheldbyChinaEverbright(Group)Corporation( ( ) ).Asat31December2004,ChinaEverbright(Group)Corporation( ( ) )didnotholdanyshareintheCompany.38,917,518domesticlegalpersonshareswerehelddirectlybyXi’anDongshengGroupCo., Ltd. ( ), which represented12.72% of the total share capital of the Company.
On 4 February 2005, Joincare Pharmaceutical Group Industry Co., Ltd. ( ) (hereinafter referred to as the “Joincare”) entered into an equity transfer agreement and an equity interests pledge agreement withXi’an Dongsheng Group Co., Ltd. ( ).Xi’an Dongsheng Group Co., Ltd. ( )directlytransferredandpledgedthe38,917,518domesticlegalpersonsharesoftheCompany (representing12.72% of the total share capital in the Company) to Joincare. On 3August 2006, the procedures for the transfer of the 38,917,518 domestic legal person shares to Joincare was completed.
As at 31 December 2012, Joincare and its subsidiaries held a total of 140,122,590 shares of the Company through transfer agreements and direct purchase from secondary market, representing47.3832% of the total share capitaloftheCompany,whichbecamethesinglelargestshareholderoftheCompanyandhaddefactocontrolinthe Company. Of which 6,059,428 legal person shares held in the name of Guangzhou Begol Trading Corporation ( ) did not complete the procedures for the transfer to Joincare.
– I-24–
APPENDIX I ACCOUNTANTS’ REPORT In the First ExtraordinaryShareholders’ Meeting held in 2008, the Company examined and passed the “Resolution in respect of the Repurchase of Domestically Listed Foreign Investment Shares (B Shares) of Livzon PharmaceuticalGroupInc”.Asof2December2009(theexpirydateofimplementingtherepurchase),theCompany accumulatively repurchased 10,313,630 B shares. On 4 December 2009, the Company completed the cancellation proceduresinrespectoftherepurchasedshareswithChinaSecuritiesDepositoryandClearingCorporationLimited (Shenzhen branch) ( ). The total share capital of the Company was reduced by 10,313,630 shares, and the registered capital of the Company was reduced from RMB306,035,482 to RMB295,721,852. The Company completed the registration procedures at the Administration of Industry and Commerce on 20April 2010, and obtained the business licence with number of 440400400032571.
2. Industry of the Company
The Company is engaged in the industry of manufacturing pharmaceutical products.
3. Scope of business
The scope of business for the Company as approved was the production and sales of bulk medicines for traditional Chinese and western medicines, pharmaceutical intermediates, traditional Chinese herbal medicines, traditional Chinese medicine drink tablets, medical equipment, sanitary materials, healthcare products, medical cosmetics, overt-the-counter drugs for traditional Chinese and western medicines biochemical reagents, as well as chemicals, food, information business, and bulk medicines; import& export of proprietary products and relevant auxiliary service; wholesale of over-the-counter traditional Chinese medicines, chemical bulk medicines and their preparations,antibioticsbulkmedicinesandtheirpreparations,biologicalproducts(exceptforpreventivebiological products),biochemicaldrugs(wherethoseproductsareadministratedwithquotalicenceorspecialregulations,they shall be subject to the relevant national rules; for other projects that require administrative permits, the Company shall only engage in the same upon the approval being obtained).
4. Change of principal activities
During the reporting period, there was no change in the principal activities of the Company.
II. SIGNIFICANT ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND ACCOUNTING ERRORS FOR PRIOR PERIODS
(I) Basis of preparation for the Financial Statements
The Financial Statements have been prepared by the Company on the basis of going concern, actual transactions and events. The Financial Statements were prepared in accordance with theAccounting Standards forBusinessEnterprisesissuedbytheMinistryofFinanceofthePeople’sRepublicofChina(the“PRC”)on15February 2006 on the basis of the significant accounting policies and accounting estimates set out below.
(II) Statement of compliance on theAccounting Standards for Business Enterprises
The Financial Statements have been prepared by the Company in accordance with the requirements of the Accounting Standards for Business Enterprises, which truly and completely present the information on financial position, financial performance and cash flows of the Group.
(III) Accounting year
The accounting year of the Company is from 1 January to 31 December.
(IV) Functional currency
The functional currency of the Company is Renminbi.
– I-25–
APPENDIX I ACCOUNTANTS’ REPORT (V) Principles of accounting and measurement
The Group uses the accrual method as its basis of accounting.
Withtheadoptionoftheaccrualmethod,accountingitemsaregenerallymeasuredathistoricalcost.Whenthe amount of accounting items recognised conforms to the requirements of Accounting Standards for Business Enterprises and can be measured reliably, they can be calculated by replacement cost, net realisable value, present value and fair value.
(1) Measurement basis adopted in the reporting period
Under the measurement by historical cost, assets are measured based on the amount of cash or cash equivalentspaiduponacquisitionorbasedonthefairvalueofconsiderationspaiduponacquisitionofassets. Liabilities are measured based on the payment or amount of assets received upon settlement of obligation or the amount of contract upon settlement of present obligation, or the amount of cash or cash equivalents expected to pay upon settlement of liabilities in the ordinary course of business.
HistoricalcostisusedasthebasisofmeasurementinthepreparationoftheFinancialStatementsofthe Group during the period, except financial assets held for trading and available-for-sale financial assets are measured at fair value.
(2) Changes in the basis of measurement during in reporting period
During the reporting period, there is no change in the basis of measurement.
(VI) Accounting treatments for business combinations involving enterprises under and those not under common control
(1) Business combinations involving enterprises under common control
For a business combination involving enterprises under common control, the assets and liabilities obtained are measured at the carrying amounts as recorded by the enterprise being combined at the combination date. The difference between the carrying amount of the net assets acquired and the carrying amount of consideration paid for the combination (or the total face value of shares issued) is adjusted in the capitalreserve.Ifthebalanceofthecapitalreserveisinsufficient,anyexcessisadjustedtoretainedearnings. Anycostsdirectlyattributabletothecombination,includingtheauditfees,valuationfeesandlegalfees,shall be recognised in profit or loss for the current period as incurred.
(2) Business combinations involving enterprises not under common control
For a business combination involving enterprises not under common control, the cost arising from the business combination is the fair value of the assets transferred, liabilities incurred or assumed, and equity securities issued by the acquirer for the acquisition of controlling interests in the acquiree at the acquisition date.Forabusinesscombinationconcludedfromtwoormoretransactions,thecostsarisingfromthebusiness combinationshallbetheaggregateofthecostsofeveryindividualtransactions.Otheracquisition-relatedcosts arising from the business combination, apart from the issuance cost on bonds and equity instruments, are recognisedasexpensesintheperiodsinwhichthecostsareincurred.Theacquisitiondateisthedateonwhich the acquirer effectively obtains control of the acquiree.
Where the costs arising from the business combination by the acquirer exceeds the fair value at the acquisition date of theacquiree’s identifiable net assets, the difference is recognised as goodwill in the consolidatedbalancesheet.Wherethecostsarisingfromthebusinesscombinationbytheacquirerislessthan the fair value of theacquiree’s identifiable net assets, the difference is recognised in profit or loss for the currentperiodintheeventthecostsarisingfromthebusinesscombinationbytheacquirerisstilllessthanthe fair value of theacquiree’s identifiable net assets after review.
– I-26–
APPENDIX I ACCOUNTANTS’ REPORT (VII) Preparation of consolidated financial statements
(1) Determination in the scope of consolidation
The consolidated financial statements were prepared in accordance with “Accounting Standards forBusinessEnterprisesNo.33–ConsolidatedFinancialStatements”issuedinFebruary2006bytheMinistryof Finance of the PRC. The scope of consolidated financial statements is based on control and the financial statements comprise of the Company, the subsidiaries directly or indirectly controlled by it and the special purpose entities. Control is the power to govern the financial and operating policies of the investees so as to obtain benefits from their operating activities.
Where there are evidences indicating that the Group does not have control over a particular investee, the financial statements of the investee are not consolidated.
(2) Treatments on the acquisition or disposal of interests in the subsidiaries
The acquisition date and the disposal date are determined at the time when the significant risk and rewards of ownership of the equity interests in the subsidiaries acquired or disposed are transferred. For the acquisitionordisposalofsubsidiariesthroughabusinesscombinationinvolvingenterprisesnotundercommon control, the operating results and cash flows after the acquisition date and prior to the disposal date are included in the consolidated income statement and consolidated cash flow statement as appropriate. For the acquisition of subsidiaries through a business combination involving enterprises under common control, the operatingresultandcashflowfromthebeginningofreportingperiodtothedateofbusinesscombinationare also included in the consolidated income statement and consolidated cash flow statement and are presented separately. The comparative figures in consolidated financial statements are also restated.
If the Group acquires non-controlling interest in a subsidiary fromsubsidiary’s non-controlling shareholders, the difference between the investment cost for acquiring the non-controlling interest and theGroup’sinterestinthenetassetsofthenon-controllinginterestacquiredisadjustedintheshareholder’sequity (capital reserve). If the credit balance of capital reserve is insufficient, any excess is adjusted to retained earnings.
(3) When the accounting period or accounting policies of a subsidiary are different from those of the Group, necessary adjustments shall be made to the financial statements of the subsidiary.
WhentheaccountingpoliciesadoptedbyasubsidiaryaredifferentfromthoseoftheGroup,theGroup makes necessary adjustments to the financial statements of the subsidiary based on theGroup’s own accounting policies upon the consolidation of the financial statements. Where a subsidiary was acquired through a business combination involving enterprises not under common control, the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the acquisition date are adjusted in the financial statements of the subsidiary.
(4) Method of consolidation
Intra-groupbalancesandtransactionsareeliminatedinpreparingtheconsolidatedfinancialstatements. Thenetassetsofthesubsidiaryattributabletonon-controllingshareholdersarepresentedseparatelyintheconsolidatedfinancialstatementswithintheshareholders’equity.Whentheamountoflossforthecurrent period attributable to the non-controlling shareholders of a subsidiary exceeds the non-controllingshareholders’portionoftheopeningbalanceofshareholders’equityofthesubsidiaryoftheperiod,theexcess is allocated against the non-controlling interest.
(VIII) Cash and cash equivalents
Inthepreparationofthecashflowstatement,thoseinvestmentsthatareshort-term(tobematuredwithinthree months at the time of acquisition), highly liquid, readily convertible into known amounts of cash and subject to an insignificant risk of change in value are classified as cash and cash equivalents. Equity investments are not treated as cash and cash equivalents.
(IX) Foreign currency transactions
ForeigncurrencytransactionsincurredbytheCompanyaretranslatedtoRenminbiatthespotexchangerates on the dates of the transactions, which is normally the median exchange rate quoted by thePeople’s Bank of China of that day.
– I-27–
APPENDIX I ACCOUNTANTS’ REPORT Monetary items denominated in foreign currencies are translated to functional currency at the spot exchange rateatthebalancesheetdate.Theresultingexchangedifferencesarisingfromdifferencesinexchangerateadopted ondifferentaccountingdatesarerecognisedinprofitorlossforthecurrentperiod.Non-monetaryitemsdenominated in foreign currencies that are measured at historical cost are translated to functional currency using the foreign exchangerateatthetransactiondate.Non-monetaryitemsdenominatedinforeigncurrenciesthataremeasuredatfair value are translated using the foreign exchange rate at the date the fair value is determined; the resulting exchange differences are dealt with as the change in fair value and recognised in profit or loss for the current period.
(X) Translation of financial statements in foreign currency
1. The assets and liabilities of foreign operations are translated to the functional currency at the spot exchange rates at the balance sheet date. Items undershareholders’ equity, excluding “retained earnings”, are translated to functional currency at the spot exchange rates at the transaction dates.
2. Theincomeandexpensesofforeignoperationaretranslatedtothefunctionalcurrencyattheratesthat approximate the spot exchange rates at the transaction dates.
Thedifferencesresultingfromthetranslationoffinancialstatementsinforeigncurrenciesassetoutaboveare recognised in a separate component undershareholders’equity in the balance sheet.
3. Inthecashflowstatement,thecashflowsaretranslatedtothefunctionalcurrencyatthespotexchange rate at transaction dates. The effect of exchange difference on cash is adjusted and presented as a separate component in the cash flow statement.
(XI) Recognition and measurement of financial instruments
1. The financial instruments are classified into five categories in accordance with the purposes of investment and their economic substance:
(i) Financial assets or financial liabilities at fair value through profit and loss, including financial assetsorfinancialliabilitiesheldfortradingandfinancialassetsorfinancialliabilitiesdesignated at fair value through profit or loss;
(ii) Held-to-maturity investments;
(iii) Loans and receivables;
(iv) Available-for-sale financial assets;
(v) Other financial liabilities.
2. Initial recognition and subsequent measurement
(i) Financial assets and financial liabilities at fair value through profit or loss: they are initially statedatfairvalueatthetimeofacquisition,andanyrelateddirectlyattributabletransactioncosts are recognised in profit or loss for the current period. The dividend or the interest declared are included in the consideration paid and recognised as receivables separately. The interest or dividend received after acquisition is recognised as investment income.As at the balance sheet date, the change in fair value is recognised in profit or loss for the current period.
(ii) Held-to-maturity investments: They are initially stated at fair value with related directly attributable transaction costs. The dividend or the interest declared are included in the considerationpaidandrecognisedasreceivablesseparately.Theinterestincomeisrecognisedin investment income as accrued using effective interest rate method.
(iii) Receivables:They are initially recognised in accordance with the consideration receivable from thebuyerundercontractoragreement,andaresubsequentlymeasuredatamortisedcostusingthe effective interest rate method. Gains or losses arising from de-recognition, impairment or amortisation are recognised in profit or loss for the current period.
– I-28–
APPENDIX I ACCOUNTANTS’ REPORT (iv) Available-for-salefinancialassets:Theyareinitiallyrecognisedatfairvaluewithrelateddirectly attributable transaction costs. The dividend or the interest declared are included in the considerationpaidandrecognisedasreceivablesseparately.Theinterestordividendreceivedis recognisedasinvestmentincome.Attheendofthereportingperiod,available-for-salefinancial assetsaremeasuredatfairvalue,withtheresultantchangeoffairvaluebeingrecognisedinthe capital reserve (other capital reserve).
(v) Other financial liabilities: They are initially recognised at fair value with related directly attributable transaction costs, and are subsequently measured at amortised cost. Gains or losses arisingfromde-recognitionoramortisationarerecognisedinprofitorlossforthecurrentperiod. 3. Determination of fair values of financial assets and financial liabilities
(i) For financial assets or financial liabilities where there is an active market, the fair value is determined by reference to quoted price in the active market.
(ii) Ifnoactivemarketexistsforafinancialinstrument,avaluationtechniqueisusedtoestablishthe fair value.
(iii) Thefairvalueoffinancialassetsacquiredorfinancialliabilitiesassumedisinitiallydetermined based on the transaction prices in the market.
(iv) For the fair value of financial instruments determined by discounted future cash flows, market yield rates of other financial instruments with substantively similar contract terms and features areadoptedastheirdiscountingrates.Fortheshort-termreceivablesandpayableswithoutstated interest rate and the effect of discounting would be immaterial, they are stated at actual transaction price.
4. Impairment of financial assets
Attheendofthereportingperiod,ifthereisobjectiveevidenceofimpairmentinrelationtothefinancial assetsotherthanthefinancialassetsatfairvaluethroughprofitorloss,impairmentlossisdeterminedbythe excess of the carrying amount of the financial asset over the estimated present value of future cash flows. (1) Receivables (including accounts receivables and other receivables)
Criteriaandmethodofprovisionforbaddebtofreceivablesthatareindividuallysignificantand impairment provided on an individual basis:
Judgment criteria or amount of receivables Amount of more than10% of the balance that are individually significant of receivables
Methods of providing bad debts for single If there is objective evidence of impairment receivables with significant amount on noted in the individual impairment test,
individual provision basis provisions for bad debts are made based on the excess of the carrying amount of the
financial asset over the present value of
future cash flows. For those not impaired in the individual impairment test, provisions for bad debts are made based on the portfolio of credit risk using ageing analysis method.
Bad debt provision for receivables by portfolio:
Basis for determining portfolio of credit
Basis for determining the portfolio risk by ageing
Method for bad debt provision by portfolio Ageing analysis method
– I-29–
APPENDIX I ACCOUNTANTS’ REPORT Method of bad debts provision of receivables based on portfolio of credit risk by ageing:
Percentage of Percentage of provision for provision for accounts other Ageing receivables receivables Within 1 year (inclusive) 5% 5% 1-2 years (inclusive) 6% 6% 2-3 years (inclusive) 20% 20% 3-4 years (inclusive) 70% 70% 4-5 years (inclusive) 90% 90% Over 5 years 100% 100% No bad debts provision is made on receivables from intra-group transactions in the scope of consolidation.
If there is any indication that there is a significant difference between the recoverability of individual receivable and other receivables with the same age as indicated by a portfolio test, and the bad debt provision made in accordance with the portfolio of credit risk using ageing analysis method cannottrulyreflecttherecoverableamountofthatindividualreceivable,provisionofbaddebtwillbe made on individual basis.
Criteria and method of provision for bad debt for receivables that are individually insignificant but impairment provided on an individual basis
Amount that are not individually
Basis for determining the portfolio significant and aged over 3 years
Methods of bad debts provision For the individual impairment test, provisions for bad debts are made as the excess of the carrying amount over the estimated present value of future cash flows. If the present
value of future cash flows cannot be
estimated accurately, provisions for bad debts are made based on the portfolio of credit risk using ageing analysis method.
Forotherreceivables(includingbillsreceivable,prepayments,interestreceivableandlong-term receivables), provisions for bad debts are made based on the excess of the carrying amount over the estimated present value of future cash flows.
Theaboveamountsthatarenotrecoverablearewrittenoffagainstthecorrespondingreceivables after approval.
(2) Held-to-maturity investments
Fortheheld-to-maturityinvestments,impairmentisassessedcollectivelywheretheinvestments sharesimilarcharacteristicsincreditrisk.Ifthereisanyobjectiveevidenceofimpairment,impairment loss is provided as the excess of the carrying amount over the estimated present value of future cash flows.
Animpairmentlossisreversedifthereisanyobjectiveevidencethatthereisafavourablechange in the estimates used to determine the recoverable amount and the change can be linked objectively to aneventoccurringaftertheimpairmentlosswasrecognised.Areversalofanimpairmentlossislimited to theasset’s carrying amount that would have been determined as if no impairment loss had been recognised in the prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.
(3) Available-for-sale financial assets
If there is a significant or prolonged decline in the fair value of available-for-sale financial assets, impairmentlossisprovidedastheexcessofthecarryingamountovertheestimatedpresentvalueoffuture cashflows.
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APPENDIX I ACCOUNTANTS’ REPORT When an available-for-sale financial asset is impaired, the accumulated loss that had been recognised directly in equity is reclassified to profit or loss.
Animpairmentlossinrespectofanavailable-for-saledebtinstrumentisreversedthroughprofit orlossifthefairvalueofthedebtinstrumentincreasesinthesubsequentperiodsandtheincreasecan be linked objectively to an event occurring after the impairment loss was recognised.An impairment loss in respect of an available-for-sale equity instrument is reversed in equity.
(XII) Inventories
1. Classification of inventories
Inventories include raw materials, packaging materials, work in progress, finished goods, sub- contracting materials and low-value consumables.
2. Inventory system: The Group maintains a perpetual inventory system.
3. Methodofcosting:Inventoriesareinitiallymeasuredatcost.Costofinventoriescomprisesallcostsof purchase and other expenditures incurred in bringing the inventories to their present location and condition. Cost of inventories is calculated using the weighted average cost method. Low-value consumables and packaging materials are amortised in full upon the use.
4. The underlying factors in the determination and the basis of provision for diminution in value of inventories:
At the end of the reporting period, provision for diminution in value of inventories will be made after a thorough inspection of the inventories and adjusted at the lower of cost and the net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion,sellingexpensesandrelatedtaxes.Provisionfordiminutioninthevalueofinventoriesisnormally determinedonanitem-by-itembasisandonacollectivegroupbasiswheninventoriesarenumerousandwith low unit price. For items of inventories relating to a product line that is produced and marketed in the same geographical area and with the same or similar uses or purposes, which cannot be evaluated separately from other items in that product line, provision for diminution in value of inventories are determined on an aggregate basis.
Atthebalancesheetdate,ifthecircumstancesresultinginthewrite-downofinventoriesnolongerexist, theamountoftheprovisionfordiminutioninvalueofinventoriesthathasbeenmadeisreversed.Theamount of reversal is recognised in the profit or loss for the current period.
(XIII) Long-term equity investments
1. Initial recognition
(1) Long-term equity investments acquired through a business combination
(i) The initial investment cost of a long-term equity investment acquired through a businesscombinationinvolvingentitiesundercommoncontrolistheGroup’sshareinthecarrying amount of theacquiree’s equity at the combination date.The difference between the cost and the carrying amounts of the consideration paid in cash, through transfer of non-cash assetsorassumptionofliabilitiesisadjustedincapitalreserve.Ifthebalanceofthecapital reserve is insufficient, any excess is adjusted to retained earnings. If the Group issues equity securities as the consideration of the combination, the cost of a long-term equity investment is theGroup’s share in the carrying amount of theacquiree’s equity at the combinationdate.Thedifferencebetweenthecostofthelong-termequityinvestmentand totalfacevalueofthesharesissuedisadjustedinthecapitalreserve.Ifthebalanceofthe capital reserve is insufficient, any excess is adjusted to the retained earnings. All costs directly attributable to the combination, including audit fees and valuation fees and legal fees, shall be recognised in the profit or loss.
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APPENDIX I ACCOUNTANTS’ REPORT (ii) Foralong-termequityinvestmentacquiredthroughabusinesscombinationnotinvolving enterprises under common control, the cost initially recognised is comprised of the fair valueoftheassetstransferred,liabilitiesincurredorassumed,andequitysecuritiesissued by the acquirer at the acquisition date, in exchange for control of the acquiree. Thedifferencebetweenthecostinitiallyrecognisedandtheacquirer’sinterestinthefairvalue of theacquiree’s identifiable net assets shall be recognised as goodwill or in the profit or loss for the current period.The excess of the cost of business combination over the share offairvalueofidentifiableassetsacquiredarerecognisedasgoodwillintheconsolidated balancesheet.Theexcessoftheshareoffairvalueofidentifiableassetsacquiredoverthe cost of business combination is recognised in the profit or loss for the current period.All acquisition-relatedcostsarisingfromthebusinesscombinationarerecognisedasexpenses in the profit or loss for the current period (except the issuance costs of bonds and equity instruments).
(2) Long-term equity investments acquired otherwise than through a business combination
(i) If a long-term equity investment is acquired by cash, the actual cost paid shall be cost of investment initially recognised. The cost of investment initially recognised include the expensesdirectlyattributabletotheacquisitionoflong-termequityinvestment,taxesand other expenditures.
(ii) Ifalong-termequityinvestmentisacquiredbytheissueofequitysecurities,theinitialcost of investment is initially recognised at the fair value of the equity securities issued.
(iii) If a long-term equity investment is contributed by shareholders, the initial cost of investment is initially recognised at the value stipulated in the investment contract or agreement.
(iv) Ifalong-termequityinvestmentisacquiredbyexchangeofnon-monetaryassets,andthe transactioniscommercialinnatureandthefairvalueoftheassetsreceivedortransferred can be measured reliably, the initial cost of investment is initially recognised at the fair valueoftheassetstransferredwiththerelevanttaxes.Thedifferencebetweenthefairvalue andthecarryingamountoftheassetstransferredisrecognisedintheprofitorlossforthe currentperiod.Fortheexchangeofnon-monetaryassetsthatdoesnotmeetbothconditions above, the investment is initially recognised at the carrying amount of the assets transferred with the relevant taxes.
(v) Ifalong-termequityinvestmentisacquiredbydebtrestructuring,initialcostofinvestment isinitiallyrecognisedatthefairvalueoftheequityinvestmentacquired,andthedifference betweentheinitialinvestmentcostandthecarryingamountofthedebtisrecognisedinthe profit or loss for the current period.
2. Subsequent measurement
(1) Long-term equity investments in subsidiaries are accounted for using the cost method, and is adjustedinaccordancewiththeequitymethoduponthepreparationoftheconsolidatedfinancial statements.
(2) For investments that the Group does not have common control or significant influence over the investee, and investments that are not quoted in an active market and their fair value cannot be reliablymeasured,itisaccountedforusingthecostmethod.Cashdividendorprofitdistributions declared by the investee and attributable to the Group are recognised as investment income, exceptthosethathavebeendeclaredbutunpaidatthetimeofacquisitionandthereforeincluded in the consideration.
(3) For a long-term equity investment in an investee which the Group has common control orsignificantinfluence,itisaccountedforusingtheequitymethod.TheGroup’sshareinprofitor loss of the investee is recognised as investment gains or losses and is adjusted in the carrying amount of the long-term equity investment accordingly.The Group discontinues recognising its shareinthenetlossesoftheinvesteeafterthecarryingamountofthelong-termequityinvestmentandanylong-terminterestformingpartoftheGroup’snetinvestmentintheinvesteeisreduced tozero,excepttotheextentthattheGrouphasanobligationtoassumeadditionallosses.Where net profits are subsequently made by the investee, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.
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APPENDIX I ACCOUNTANTS’ REPORT (4) WhentheaccountingperiodoraccountingpoliciesofaninvesteeisdifferentfromtheGroup,the Group recognises its share of theinvestee’s net profit or losses after making appropriate adjustments to the financial statements of the investee to align the accounting periods or accountingpolicieswiththeGroup.Othermovementsintheequityoftheinvesteeisrecognised in theshareholders’ equity of the Company and the carrying amount of the long-term equity investment is adjusted accordingly.
(5) Uponthedisposalofalong-termequityinvestment,thedifferencebetweenthecarryingamount oftheinvestmentandthesalesproceedsreceivedisrecognisedintheprofitorlossforthecurrent period. For the disposal of a long-term equity investment that is accounted for using equity method,othermovementsintheequityoftheinvesteeapartfromnetprofitorlossrecognisedintheshareholders’equityoftheCompanyattributabletosuchinvesteeistransferredinproportion to the profit or loss for the current period.
3. Determination and provision on the impairment of long-term equity investment
For long-term equity investments accounted for using the cost method that are not quoted in active marketandwhosefairvaluecannotbereliablymeasured,theimpairmentlossisrecognisedasthedifference betweenitscarryingamountanditsdiscountedpresentvalueoffuturecashflowsusingreturnrateofsimilar financialassetsinthemarket.Forotherlong-termequityinvestment,ifthereisevidencethattherecoverable amountofthelong-termequityinvestmentislessthanitscarryingamount,thedifferencewillberecognised astheimpairmentlossoftheasset.Onceanimpairmentlossisrecognisedonalong-termequityinvestment, it is not reversed.
(XIV) Investment properties
Investment properties are properties held either to earn rental income or for capital appreciation or for both, which include leased land use rights, land use rights held for sale after appreciation and leased buildings.
Investmentpropertiesareaccountedforusingthecostmodel,andaredepreciatedoramortisedinaccordance with the depreciation or amortisation policies for the fixed assets and intangible asset of the Group. When the investmentpropertyisconvertedtootherassetsorviceversa,thecarryingamountofthepropertyorassetspriorto the conversion is recognised as the initial cost after conversion. When an investment property is sold, transferred, discarded, damaged or destroyed, the amount of disposal proceeds less the carrying amount of the property and relevanttaxesisrecognisedasgainondisposalintheprofitorlossforthecurrentperiod.Iftherecoverableamount of an individual investment property is less than its carrying amount, impairment loss are made on the difference between its carrying amount in excess of its recoverable amount. Once the provision for impairment loss is made, it is not reversed.
(XV) Fixed assets
1. Recognition of fixed assets
Fixed assets represent the tangible assets for use in the production of goods or supply of services, for rental to others or for operation and administrative purposes with useful lives over one year. Fixed asset is recognised when it meets the following conditions:
(1) it is probable that the economic benefits associated with the fixed asset will flow to the Group; (2) its cost can be reliably measured.
2. Classification of fixed assets
Fixed assets include plant and building, machinery and equipment, motor vehicles, electronic devices and others.
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APPENDIX I ACCOUNTANTS’ REPORT 3. Measurement of fixed assets
Fixed assets are initially recognised at cost.
(1) Wherethepaymentforacquisitionofafixedassetispostponedbeyondthenormalcreditterms, which constitutes financing transaction in substance, the present value of the purchase price is recognised as the cost of fixed assets.
(2) Thefixedassetsacquiredfromdebtorunderdebtrestructuringaremeasuredatthefairvalue,and thedifferencebetweenthecarryingamountoftherestructureddebtandthefairvalueofthefixed assets acquired from debtor under debt restructuring is recognised in the profit or loss for the current period. If the exchange of non-monetary assets transaction is commercial in nature and the fair value of the assets received or transferred can be reliably measured, the fixed assets received in the exchange of non-monetary assets transaction shall normally be measured at the fairvalueoftheassetstransferred,unlessthereisobjectiveevidenceindicatingthatthefairvalue oftheassetsreceivedismorereliable;Fortheexchangeofnon-monetaryassetstransactionwhich doesnotmeettheaboveconditions,thecostoffixedassetsreceivedisinitiallyrecognisedatthe carrying amount of the assets transferred with the relevant taxes, and no gain or loss are recognised in the profit or loss.
(3) The fixed assets acquired in the business combinations involving enterprises under common control are measured at the carrying amount of the fixed assets recognised by the acquiree.The fixed assets acquired in the business combinations involving enterprises not under common control are recognised at its fair value.
The present value of the initial estimate for the costs of dismantling and removing the fixed assets is recognised in the carrying amount of fixed assets.
The subsequent cost on fixed assets is recognised in the carrying amount of fixed assets provided that the economic benefits associated with fixed assets and the addition item exceeding those upon its initial recognition will flow to the Group, and the carrying amount does not exceed the recoverable amount of the fixed assets.
4. Methodfordepreciationoffixedassets:Fixedassetsaredepreciatedusingthestraight-linemethodover their estimated useful lives from the month they are available for intended use. The estimated useful lives, residual values and depreciation rates of each class of fixed assets are as follows:
Annual
Depreciation depreciation Estimated Class of fixed assets period rate residual values (years)
Plant and building 20 4.5%-4.75% 5%-10% Machinery and equipment 10 9%-9.5% 5%-10% Motor vehicles 5 18%-19% 5%-10% Electronic devices and others 5 18%-19% 5%-10% 5. Recognitionofprovisionforimpairmentonfixedassets:Thefixedassetsarereviewedattheendofeach reportingperiodtodeterminewhetherthereisobjectiveevidenceofimpairment.Ifsuchevidenceexists, therecoverableamountofthefixedassetsisestimated.Therecoverableamountofanassetisthehigher of its fair value less costs to sell and the present value of the estimated future cash flows expected to be derived from the asset. If the recoverable amount of an asset is less than its carrying amount, an impairmentlossisrecognisedbasedontheexcessofthecarryingamountovertherecoverableamount. Provisionforimpairmentoffixedassetsismadeonanitem-by-itembasis.Onceanimpairmentlossis made for an asset, it is not reversed in subsequent accounting periods.
When a fixed asset with provision on impairment made is depreciated, the rates and amounts of depreciationarerecomputedbasedonthecarryingamountofthefixedassetsandtheremainingusefullives. No depreciation is recognised for fixed asset that is impaired in full.
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APPENDIX I ACCOUNTANTS’ REPORT (XVI) Construction in progress
1. Classification of construction in progress
Construction in progress is classified into individual projects.
2. Conversion of construction in progress to fixed assets
All costs directly attributable to bringing the assets to working condition for its intended use are included in construction in progress before it is transferred to fixed assets when they are ready for their intendeduse.Iftheconstructioninprogressachievedinastagethattheassetsconstructedarereadyfortheir intended use but the final account of the completed project has not been issued, the cost of fixed asset is recognised at the date when the asset is ready for their intended use based on the estimated cost determined bytheconstructionbudget,constructionpriceoractualcostandthedepreciationisrecognisedinaccordance withtheestimatedcost.Whenthefinalaccountofcompletedprojectisissued,theestimatedcostisadjusted according to the actual cost, while the depreciation charged is not adjusted.
3. Impairment of construction in progress: At the end of the reporting period, the Group reviewed the construction in progress projects to determine whether there is objective evidence of impairment. For construction in progress that has been suspended and is not expected to resume within three years, provision for impairment of construction in progress is recognised based on the excess of carrying amount over the recoverable amount of the project. Any provision for impairment of construction in progress made is not reversed.
(XVII) Borrowing costs
1. For the borrowing costs incurred by the Group directly attributable to the acquisition, construction or production of a qualifying asset, they are capitalised as part of the cost of the asset. Other borrowing costs are recognised as expenses when incurred and charged to profit or loss for the current period. Qualifyingassetsareassets(fixedassets,investmentproperty,inventories,etc.)thatnecessarilytakea substantialperiodoftimeforacquisition,constructionorproductiontogetreadyfortheirintendeduse orsale.Thecapitalisationofborrowingcostscommencesonlywhenallofthefollowingconditionsare satisfied:
(1) expendituresfortheassetarebeingincurred.Expendituresfortheassetincludepaymentbycash, transfer of non-cash asset, undertaking of interest bearing liability to construct or produce qualifying assets;
(2) borrowing costs are being incurred;
(3) activitiesrelatingtotheacquisition,constructionorproductionoftheassetthatarenecessaryto prepare the asset for its intended use or sale have commenced.
2. During the capitalisation period, the amount of interest (including amortisation of any discount or premium on borrowing) to be capitalised in each accounting period is determined as follows:
(1) Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of interest to be capitalised is the interest expense calculated using effective interest rates during the period less any interest income earned from depositing the borrowed funds or any investment income on the temporary investment of those funds before being used on the asset.
(2) Where funds are borrowed generally and used for the acquisition, construction or production of a qualifying asset, the amount of interest to be capitalised on such borrowings is determined by applying a capitalisation rate to the weighted average of the excess amounts of cumulative expendituresontheassetovertheaboveamountsofspecificborrowings.Thecapitalisationrate is the weighted average of the interest rates applicable to the general-purpose borrowings. The capitalisationperiodistheperiodfromthedateofcommencementofcapitalisationofborrowing coststothedateofcessationofcapitalisation,excludinganyperiodoverwhichcapitalisationis suspended.
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APPENDIX I ACCOUNTANTS’ REPORT 3. Where there is any discount or premium for the borrowings, the amount of discounts or premiums is amortisedduringeachaccountingperiodbytheeffectinterestmethodandadjustedtototheamountof interests in each period.
4. During the capitalisation period, exchange differences related to the principal and interest on a specific-purpose borrowing denominated in foreign currency are capitalised as part of the cost of the qualifying asset.
5. Capitalisation of borrowing costs for the acquisition, construction or production of a qualifying asset ceaseswhentheassetsbecomereadyfortheirintendeduseorsale.Borrowingcostsbeingincurredafter the assets that are ready for their intended use or sale are recognised as expenses in the profit or loss for the period when they are incurred.
(XVIII) Biological assets
1. Determination and classification of biological assets
TheGroup’s biological assets are consumable biological assets which include traditional Chinese medical herbal plant species.
A biological asset is initially recognised at cost. The cost of biological assets includes the cost of purchase, relevant taxes, insurance premiums and other costs directly attributable to the purchase of such assets. For biological assets contributed by investors, the cost of the biological assets is initially recognised at the value stipulated in the investment contract or agreement with relevant taxes. If the value stipulated in the investment contract or agreement is not its fair value, the cost of biological assets is initially recognised atthefairvalue.Costofselfcultivatedconsumablebiologicalassetsincludestheessentialcostsincurredprior tocrownclosure,suchasafforestationfees,tending,forestoperatingfacilities,seedtestingfees,surveydesign fees,interestscapitalisedandshareofanyindirectcosts.Thecostsofmaintenance,protectionandcultivationoftheGroup’sbiologicalassetssubsequenttocrownclosureoraftertheassetsbecomereadyfortheirintended production use are recognised in the profit or loss for the period incurred.
Thecarryingamountofconsumablebiologicalassetsisrecognisedinprofitorlossbyweightedaverage method when they are harvested.
2. Impairment test on biological assets and provision of impairment loss
The consumable biological assets are reviewed at least once at the end of each reporting period to determine whether there is objective evidence of impairment as a result of natural disasters, pests, invasion fromanimalsordiseasesorchangeinmarketdemand.Ifthereisanyevidenceindicatingthatthenetrealisable valueoftheconsumablebiologicalassetsortherecoverableamountofthebearerbiologicalassetsarelower than their carrying amounts, provision of impairment loss is recognised in the profit or loss as the excess of carrying amounts over the net realisable value or the recoverable amount.
If the factors affecting the diminution in value of consumable biological assets no longer exist, the impairment loss is reversed in the profit or loss for the current period.
(XIX) Intangible assets
1. Recognition of intangible assets
An intangible asset is an identifiable non-monetary asset without physical substance owned or controlled by the Group. The intangible asset is recognised when it meets the following conditions:
(1) It is probable that the economic benefits associated with the intangible assets will flow to the Group;
(2) The cost of the intangible asset can be reliably measured.
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APPENDIX I ACCOUNTANTS’ REPORT 2. Measurement of intangible assets
Intangible assets are measured initially at cost.
(1) Where the payment for acquisition of an intangible asset is postponed beyond the normal credit terms, which constitutes financing transaction in substance, the present value of the purchase price is recognised as the cost of fixed assets.
(2) Theintangibleassetsacquiredfromdebtorunderdebtrestructuringaremeasuredatthefairvalue, andthedifferencebetweenthecarryingamountoftherestructureddebtandthefairvalueofthe intangibleassetsacquiredfromdebtorunderdebtrestructuringisrecognisedinprofitorlossfor thecurrentperiod.Iftheexchangeofnon-monetaryassetstransactioniscommercialinnatureand thefairvalueoftheassetsreceivedortransferredcanbereliablymeasured,theintangibleassets received in the exchange of non-monetary assets transaction shall be measured at the fair value oftheassetstransferred,unlessthereareobjectiveevidencesindicatingthatthefairvalueofthe assets received is more reliable. For the exchange of non-monetary assets transaction that does notmeettheaboveconditions,thecostofintangibleassetsreceivedisinitiallyrecognisedatthe carrying amount of the assets transferred with the relevant taxes, and no gain or loss are recognised in the profit or loss.
(3) Theintangibleassetsacquiredfrombusinesscombinationsinvolvingenterprisesundercommon controlaremeasuredatthecarryingamountoftheintangibleassetsrecognisedbytheacquiree. The intangible assets acquired in the business combinations involving enterprises not under common control are recognised at its fair value.
3. Useful life and amortisation of intangible assets
The Group shall determine the useful life of intangible assets upon acquisition according to its judgement.Forintangibleassetswithfiniteusefullife,usefullifeisestimatedfromthelengthof,ornumber of production or similar units constituting. When there is no foreseeable limit to the period over which an intangibleassetisexpectedtogenerateeconomicbenefitsfortheGroup,itisregardedashavinganindefinite useful life.
Amortisationofintangibleassets:Intangibleassetswithfiniteusefullifeareamortisedintheprofitor lossusingthestraight-linemethodovertheestimatedusefullife.Anintangibleassetwithindefiniteusefullife isnotamortised.Theusefullifeforanintangibleassetwithafiniteusefullifeandthemethodofamortisation arereviewedatleastonceattheendofeachyear.Iftheusefullifeandamortisationmethodfortheintangible assets are different from the previous estimate, the change of amortisation is recognised prospectively.
4. Impairmentofintangibleassetsisaccountedforusingtheaccountingpoliciesinrespectofimpairment of assets. Once an impairment loss is made on an intangible asset, it is not reversed in subsequent accounting periods.
(XX) Research and development expenditures
Expendituresonaninternalresearchanddevelopmentprojectareclassifiedintoexpendituresontheresearch phase and expenditures on the development phase.
Expenditures on the research phase refer to the costs incurred for original and planned investigations undertaken with the prospect of gaining new scientific or technical knowledge and understanding for further developmentactivities.Ifthereisuncertaintythatthedevelopmentphasecannotbeachieved,intangibleassetscannot be created as a result of the research phase.
Expenditures on the development phase refer to the cost incurred for the application of research findings or otherknowledgetoaplanordesignfortheproductionofneworsubstantiallyimprovedmaterials,devices,products orprocessesbeforethestartofcommercialproductionoruse.Thedevelopmentphaseistheapplicationoftheresult of the research phase with the entity capable to demonstrate the feasibility of completing new products or new technologies.
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APPENDIX I ACCOUNTANTS’ REPORT Expenditures on a research phase are recognised in profit or loss when incurred. Expenditures on a development phase are recognised as intangible assets if an entity can demonstrate all of the following:
1. Thetechnicalfeasibilityofcompletingtheintangibleassetsothatitwillbeavailableforuseorforsale. 2. Its intention to complete the intangible asset and use or sell it.
3. The intangible asset will generate future economic benefits.
4. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible assets.
5. Theexpendituresattributabletosuchintangibleassetsduringitsdevelopmentcanbereliablymeasured. (XXI) Amortisation of long-term deferred expenses
MajorrepairandmaintenanceexpendituresonfixedassetsoftheGroupareamortisedovertheintervalperiod using a straight-line method. Other long-term deferred expenses are amortised over the beneficial period using a straight-line method.
(XXII) Impairment of assets
1. Determination for impairment of assets
Impairmentofassetsmeanstherecoverableamountofassetislessthanitscarryingamount.TheGroup reviews at each balance sheet date to determine whether there is any indication for impairment of assets. If there is any indication that an asset may be impaired, the recoverable amount of the asset is estimated. An impairmentlossisrecognisedintheprofitorlossbasedontheexcessofthecarryingamountoftheassetover itsrecoverableamount.Onceanimpairmentlossisrecognisedforanasset,itisnotreversedinasubsequent period.Upontherecognitionofimpairmentlossofanasset,thedepreciationoramortisationexpensesofthe impaired asset is adjusted accordingly in the future periods for the remaining useful life of the asset on a systematic basis. Objective evidence of impairment includes one or more of the following loss events:
(1) The current market price of assets declines significantly, which is beyond the expectation based on the advance of time or normal use.
(2) Significant changes in the economic, technological or legal environment in which the Group operates or in the market in which the fixed assets is located, that have an adverse effect on the Group.
(3) Market interest rates or any other rates of investment return increase significantly during theperiod,whichaffectthediscountrateusedincalculatingtheasset’spresentvalueoftheexpected future cash flows and result in a significant decrease in the fixedasset’s recoverable amount. (4) Any evidence indicates that the assets become expired or physical damage has occurred.
(5) The assets have been or will be idle, or terminated for use, or disposed ahead of schedule.
(6) Any evidence in the internal report of the Group shows that the economic performance of the assetshavebeenorwillbelowerthantheexpectedperformance,forexample,thenetcashflow generated by assets or the operating profit (or loss) realised is lower (higher) than the excepted amount, etc.
(7) Other circumstances indicate that the asset may have been impaired.
2. Recognition of impairment loss of assets
(1) At the end of the reporting period, the Group reviews its long-term equity investments, fixed assets,constructioninprogress,intangibleassetsandgoodwill,soastodeterminewhetherthere is any indication for impairment of assets. Goodwill arising from business combination and intangibleassetswithindefiniteusefulperiodshallbetestedforimpairmentannuallywhetheror not there is any indication of impairment.
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APPENDIX I ACCOUNTANTS’ REPORT (2) If any indication exists that an asset may be impaired, the recoverable amount of the asset is estimated.Therecoverableamountofanassetisthehigherofitsfairvaluelesscoststoselland itspresentvalueofexpectedfuturecashflows.Iftherecoverableamountofanassetislessthan itscarryingamount,animpairmentlossisrecognisedinprofitorlossastheexcessofthecarrying amount over the recoverable amount. Goodwill is allocated to each asset group (or sets of asset group, the same below) for the purpose of impairment test. The goodwill stated in the consolidated financial statement does not include the goodwill attributable to non-controlling interest. For the purpose of impairment test of goodwill, the goodwill attributable to non- controlling interest is included in the carrying amount of the asset group.The adjusted carrying amount of the asset group is compared with its recoverable amount to determine whether an impairmentofassetgroup(includinggoodwill)exists.Theamountofimpairmentlossrelatedto an asset group is allocated to goodwill attributable to non-controlling interest and the Group on aproratabasis.Onceanimpairmentlossismadeforalong-termequityinvestment,investment property measured by using cost method, fixed asset, intangible asset and goodwill, it is not reversed in subsequent accounting periods.
3. Identification of asset group
(1) TheGroupshallnormallyestimatetherecoverableamountbasedonsingleasset.Ifitisdifficult to estimate the recoverable amount of a single asset, the recoverable amount of the asset group that the single asset belongs is determined. The identification of an asset group is based on whether the major cash inflows generated by the asset group are largely independent of those generated by other assets or other asset groups, with the considerations of theGroup’s management of production and operational activities and the decision making process of continuous use or disposal of assets. Once the asset group is recognised, it will be consistently applied to each accounting period.
(2) Therecoverableamountofanassetgrouporsetofassetgroupsisthehigherofitsfairvalueless costs to sell and its present value of expected future cash flows.
(3) Iftherecoverableamountofanassetgrouporsetofassetgroupsislessthanitscarryingamount, impairmentlossisrecognisedintheprofitorloss.Forimpairmentlossesrelatedtoanassetgroup or a set of asset groups, the amount is deducted first from the carrying amount of any goodwill allocated to the asset group or set of asset groups, and then reduce the carrying amount of the other assets in the asset group or set of asset groups on a pro rata basis.
(XXIII) Provisions
1. Principles for the recognition of provisions
The provision of the Group are recognised as liabilities when all of the following conditions are satisfied:
(1) an entity has a present obligation;
(2) it is probable that an outflow of economic benefits will be required to settle the obligation;
(3) the amount of the obligation can be estimated reliably.
The loss from contracts and the obligations assumed from restructuring by the Group that satisfy the conditions above are recognised as provisions.
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APPENDIX I ACCOUNTANTS’ REPORT 2. Determination for the best estimate of provisions
If there is a range of the estimated amount required to settle the obligation, the best estimate is determined as the median of the range. In other cases, the best estimate is determined by the following:
(1) If the provision is related to a single outcome, the best estimate is determined by the amount required to settle the obligation of the most likely outcome;
(2) Iftheprovisionisrelatedtoseveraloutcomes,thebestestimateiscalculatedanddeterminedin accordance with all possible outcomes with the relevant probabilities. When all or part of the liabilities of the Group is expected to be compensated by a third-party, the compensation is separately recognised as an asset only when it is virtually certain that the compensation will be received. The amount of asset recognised in respect of compensation should not exceed the carrying amounts of the liabilities recognised.
(XXIV) Repurchase of shares of the Company
For capital reduction by means of repurchase of the shares of the Company under statutory approval, the capitalisreducedbythetotalnominalvalueofthesharescancelled.Thedifferencebetweentheconsiderationpaid for the repurchase of shares (including the transaction costs) and the nominal value of the shares is adjusted in theshareholders’equity.Theexcessofconsiderationpaidoverthetotalnominalvalueisadjustedinthecapitalreserve (share premium), surplus reserve and retained profits in sequence. The shortfall from the total nominal value is credited to capital reserve (share premium).
Priortocancellationortransferofsharesrepurchased,theCompanyrecognisesallexpendituresarisingfrom share repurchase as cost of treasury shares in the treasury share account.
Uponthetransferoftreasuryshares,theexcessofproceedsfromthetransferoverthecostoftreasuryshares is credited to capital reserve (share premium); whereas the shortfall from the cost of treasury shares is adjusted in the capital reserve (share premium), surplus reserve and unallocated profits in sequence.
(XXV) Revenue recognition
1. Sale of goods
(1) General principles
Revenue is recognised when the significant risks and rewards of ownership of goods have been transferredbytheGrouptothebuyer,andtheGroupretainsneithercontinuingmanagerialinvolvement to the degree usually associated with ownership nor effective control over the goods sold, and when it isprobablethattheeconomicbenefitswillflowtotheGroupandtheamountofrevenueandcostscan be measured reliably.
(2) Methodology
The Group sells goods by the way of distribution and enters into sales contracts with dealers. Revenue from sales are recognised according to the invoiced amount upon the delivery of goods according to the orders received from dealers.
2. Rendering of services
At the balance sheet date, where the outcome of a transaction involving the rendering of services can be estimated reliably, revenue from the rendering of services is recognised by reference to the stage of completion of the transaction. The stage of completion of the transaction is determined according to the progress of work performed by the following methods:
(1) Survey of work performed.
(2) Services performed to date as a percentage of total services to be performed.
(3) The proportion of the costs incurred to date bear to the estimated total costs of the transaction.
– I-40–
APPENDIX I ACCOUNTANTS’ REPORT Total revenue from rendering of services is determined by the amount received or receivable from the partyreceivingtheserviceasstatedinthecontractoragreementunlesstheamountreceivedorreceivableas statedinthecontractoragreementisnotatfairvalue.Atthebalancesheetdate,therevenuearisingfromthe rendering of services for the current period is recognised with reference to the total revenue of rendering of services multiplied by percentage of completion (net of the cumulative amount of revenue recognised in the prior accounting periods).
Where outcome of rendering of services cannot be estimated reliably at the balance sheet date, the revenue is determined as follows:
(1) Ifthecostsincurredareexpectedtoberecoverable,revenuesarerecognisedtotheextentthatthe costsincurredthatareexpectedtoberecoverable,andanequivalentamountischargedasservice cost.
(2) Ifthecostsincurredarenotexpectedtoberecoverable,thecostsincurredarerecognisedinprofit or loss for the current period and no service revenue is recognised.
3. Assignment of asset use rights
If it is probable that economic benefits associated with the transaction will flow to the Group, and the amount of revenue can be reliably estimated, the Group recognises the revenue from the assignment of asset use rights by the following methods:
(1) Interest income is recognised on a time proportion basis with reference to the principal outstanding the applicable effective interest rate.
(2) Licensing revenue is recognised by reference to the period and method stated under relevant contract or agreement.
(XXVI) Government grant
1. Principles of recognitions: A government grant is recognised when the following conditions are satisfied.
(1) There is reasonable assurance that the Group will comply with the conditions attaching to the grant by the government;
(2) The grant will be received by the Group from the government.
2. Measurement: If a government grant is in the form of a transfer of a monetary asset, it is measured at the amount that is received or receivable. If a government grant is in the form of a transfer of a non-monetary asset, it is measured at its fair value. If its fair value cannot be measured reliably, it is measured at its nominal amount.
3. Accounting treatment:Agovernment grant related to assets is recognised initially as deferred income and amortised to profit or loss on a straight-line basis over the useful life of the asset.Agovernment grant measured at its nominal amount is recognised in profit or loss for the current period.
Agovernment grant related to income is recognised by the following methods:
(1) AgrantthatcompensatestheGroupforexpensesorlosstobeincurredinthesubsequentperiods isrecognisedinitiallyasdeferredincomeandrecognisedinprofitorlossinthesameperiodsin which the expenses are recognised.
(2) A grant that compensates for expenses incurred is recognised in profit or loss for the current period.
(XXVII)Recognitions of deferred tax assets and liabilities
Deferredtaxassetsandliabilitiesarisefromdeductibleandtaxabletemporarydifferencesrespectively,being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases (for items not yet recognised as assets and liabilities that have their tax bases determined by reference to the provisions in the relevant tax laws, the difference between such tax bases and their carrying amounts is applied). Deferredtaxassetsanddeferredtaxliabilitiesaremeasuredattaxratesthatareexpectedtobeappliedintheperiod when the assets are recovered or the liabilities are settled.
– I-41–
APPENDIX I ACCOUNTANTS’ REPORT Deferredtaxassetsarerecognisedtotheextentthatitisprobablethatfuturetaxableprofitswillbeavailable against which deductible temporary differences can be utilised. At the balance sheet date, if there is objective evidencethatfuturetaxableprofitswillbeavailableagainstwhichdeductibletemporarydifferencescanbeutilised, deferred tax assets not recognised in prior accounting periods is recognised.
Thecarryingamountofadeferredtaxassetisreviewedateachbalancesheetdateandisreducedtotheextent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised.Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.
(XXVIII)Accounting treatment for income taxes
The balance sheet approach is applied by the Group for the accounting of income tax.
1. Recognition of deferred tax assets
(1) Apart from the following exceptions, deferred tax asset are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary difference can by utilised:
(i) The transactions are not business combinations;
(ii) The transactions affect neither accounting nor taxable profit (or deductible loss).
(2) Deductible temporary difference related to investments in subsidiaries, associates and joint ventures are recognised as deferred tax assets if the following conditions are satisfied:
(i) It is probable that the deductible temporary difference will be reversed in the foreseeable future;
(ii) FutureTaxableprofitswillbeavailableagainstwhichdeductibletemporarydifferencecan be utilised.
(3) Deferredtaxassetsinrelationtotaxlossarerecognisedtotheextentthatitisprobablethatfuture taxable profits will be available against which the tax loss can be utilised.
2. Recognition of deferred tax liabilities
AlldeferredtaxliabilityoftheGrouparisingfromtaxabletemporarydifferencearerecognisedexcept for the following situations:
(1) Initial recognition of goodwill;
(2) Initial recognition of assets or liabilities satisfying both the below conditions:
(i) The transactions are not business combinations;
(ii) The transactions affect neither accounting nor taxable profit (or deductible loss).
(3) Taxabletemporarydifferencerelatedtoinvestmentsinsubsidiaries,associatesandjointventures if the following conditions are satisfied:
(i) the Group controls the timing of reversal of the taxable temporary difference;
(ii) it is probable that the taxable temporary difference will not reverse in the foreseeable future.
– I-42–
APPENDIX I ACCOUNTANTS’ REPORT 3. Measurement of income taxes
ThecurrentincometaxesanddeferredtaxoftheGroupinthecurrentperiodarerecognisedasincome tax expenses or incomes in the profit or loss for the current period, except for the income taxes arising from the following circumstances:
(i) Business combinations;
(ii) The transactions or events directly recognised in theshareholders’equity.
(XXIX) Change in accounting policies, accounting estimates and correction to previous errors
Thereisnochangeinaccountingpolicies,accountingestimatesandcorrectiontopreviouserrorsoftheGroup during this accounting period.
III. TAXATION
The main taxes and taxes rates applicable to the Group are set out as follows:
Types of tax Basis of taxation Tax rate
Value added tax (“VAT”) Income from the sales of VAT rate for the sales of
products and raw materials biological preparation:6%,
VAT rate for other sales:17%. Business tax Taxable operating income 5%
Urban maintenance and Turnover tax to be paid 5%,7%
construction tax
Education surcharges Turnover tax to be paid 3%
Local education surcharges Turnover tax to be paid Note 1
Enterprise income tax Taxable income Note 2
Note1.Pursuant to the Notice for the ProvisionalApplication andAdministration Measures on the Collection ofLocalEducationSurchargesaspublishedbyGuangdongProvince(
)((YueFuBan[2011]No.10( [2011]10 )),theCompanyandthose subsidiaries that are incorporated in Zhuhai shall pay local education surcharges that is charged as2% of the turnover tax to be paid since 1 January 2011. Other subsidiaries shall pay local education surcharges according to the tax rate as specified at its place of incorporation on the basis of turnover tax to be paid.
Note2.The enterprise income tax rate applicable to the Company and its subsidiaries are set out as follows: Taxrate
in
January
Taxrate Taxrate Taxrate to
Nameofcompanies in in in September Remarks
2010 2011 2012 2013
Lizhu(HongKong) 16.5% 16.5% 16.5% 16.5% Policiesregarding
Co.,Limited HongKong
( ( ) ), ProfitsTaxareapplicable AndoDevelopment
Limited(
)
– I-43–
APPENDIX I ACCOUNTANTS’ REPORT Taxrate
in
January
Taxrate Taxrate Taxrate to
Nameofcompanies in in in September Remarks
2010 2011 2012 2013
SichuanGuangda 15% 15% 15% 15% Preferentialtreatment
Pharmaceutical policiesasstipulatedin
ManufacturingCo.,Ltd. variousdocumentson
( ) enterpriseincometaxfor thedevelopmentat
WesternChina,namely
Noticeonthe
Implementationof
TransitionalPreferential PoliciesforEnterprise
IncomeTax(GuoFa
[2007]No.39)*(
([2007]39 ))andNoticeonthe
PreferentialTaxation
PoliciesIssuesregarding theDevelopmentof
WesternChinapublished bytheMinistryof
Finance,State
AdministrationofTaxation andGeneral
AdministrationofCustoms(CaiShui[2001]No.
202)*( ,
,
([2001]202 )) areapplicable.The
enterpriseincometaxrate ofthecompanyinin2010was15%.Itwas
recognisedasahighand newtechnologyenterprise in2011foravalidperiod ofthreeyears.
LivzonPharmaceuticalGroup 15% 15% 15% 15% Theseentitieswere
Inc.( recognisedashighand
),LivzonGroup newtechnologyenterprises LiminPharmaceutical in2008foravalidperiod ManufacturingFactory( ofthreeyears.
),Livzon Subsequentlytheseentities GroupLivzon passedthecertificationof PharmaceuticalFactory( highandnewtechnology ),Zhuhai enterprisesuponreviewin FTZLivzonHecheng 2011andrenewedthe
Pharmaceutical statusforanothervalid
ManufacturingCo.,Ltd. periodofthreeyears.
(
),
ShanghaiLivzon
Pharmaceutical
ManufacturingCo.,Ltd.
( ),
LidaPharmaceuticalCo.,
Ltd.ofZhuhaiFreeTrade
Zone
(
)
– I-44–
APPENDIX I ACCOUNTANTS’ REPORT Taxrate
in
January
Taxrate Taxrate Taxrate to
Nameofcompanies in in in September Remarks
2010 2011 2012 2013
LivzonGroupXinbeijiang 15% 15% 15% 15% Theseentitieswere
Pharmaceutical recognisedashighand
ManufacturingInc. newtechnologyenterprises ( in2010foravalidperiod ), ofthreeyears.These
ZhuhaiLivzonDiagnostic entitiesareapplyingfor
ReagentsInc.( renewalofthestatusin
), 2013.
LivzonGroupFuzhouFuxing 25% 15% 15% 15% Itwasrecognisedasahigh PharmaceuticalCo.,Ltd. andnewtechnology
( enterprisein2011fora
) validperiodofthreeyears. GutianFuxing 25% 25% 25% 25%
PharmaceuticalCo.,Ltd.
( ),
DatongLivzonQiyuan
MedicineCo.,Ltd.(
),
LongxiLivzonShenyuan
MedicineCo.,Ltd.
(
),JiaozuoLivzon
HechengPharmaceutical
ManufacturingCo.,Ltd.
(
),ZhuhaiLivzonMAB
BiologicalTechnologyCo.,
Ltd.(
),Livzon
GroupVaccineEngineering
Inc.(
)
WenshanLivzonSanqi – 25% 25% 25%
PlantationCo.,Ltd.
(
),LivzonGroup
NingxiaXinbeijiang
Pharmaceutical
ManufacturingCo.,Ltd.
(
),LivzonGroup
NingxiaFuxing
Pharmaceutical
ManufacturingCo.,Ltd.
(
)
ShanghaiLivzon – – – 25%
BiotechnologyCo.,Ltd.
CompanhiadeMacau – – 12% 12% Progressivetaxrates,witha CarasonLimitada rateof12%wherethe
( ) taxableincomeisMOP
300,000ormore
– I-45–
APPENDIX I ACCOUNTANTS’ REPORT Taxrate
in
January
Taxrate Taxrate Taxrate to
Nameofcompanies in in in September Remarks
2010 2011 2012 2013
Othersubsidiaries 22% 24% 25% 25% PursuanttotheNoticeissued bytheStateCouncil
[2007]No.39onthe
Implementationof
Transitionaland
PreferentialTreatmentin EnterpriseIncomeTax,
enterprisespreviously
entitledthelowtaxratein preferentialtreatmentshall graduallyincreasetothe statutorytaxratewithin
fiveyearsince1January 2008afterthenewtaxlaw wasimplemented.Of
which,thoseenterprises
thatareentitledtoan
enterpriseincometaxrateof15%shalluse22%as itstaxratein2010,anduse24%asitstaxratein2011and25%asitstax ratein2012.
IV. BUSINESS COMBINATIONSAND CONSOLIDATED FINANCIALSTATEMENTS
(I) Principal subsidiaries acquired through establishment or investment
Typeofthe Placeof Natureof
Nameofthesubsidiary subsidiary incorporationbusiness Registeredcapital Scopeofbusiness
AndoDevelopmentLimited Wholly-owned HongKong Investment HKD500,000–
( subsidiary
Lizhu(HongKong)Co., Wholly-owned HongKong Investment HKD61,000,000–
Limited subsidiary
( ( ) )
ZhuhaiModernChinese Wholly-owned Zhuhai Provisionof RMB6,000,000 Researchanddevelopmentof MedicineHighTechnology subsidiary services Chinesemedicine,Chinese Co.,Ltd.( medicineengineering
) technologiesandequipment, technicalservicesand
consulting
LivzonGroupLivzon Wholly-owned Zhuhai Manufacture RMB442,109,309.13 ProductionandsaleofChinese PharmaceuticalFactory( subsidiary ofmedicine andwesternmedicine,
) medicalequipment,sanitary materials
LivzonGroupLivzon Wholly-owned Zhuhai Salesofgoods RMB20,000,000 Salesofpharmaceutical
PharmaceuticalMarketing subsidiary productsproducedbythe
Co.,Ltd.( companyanditssubordinate ) pharmaceuticalfactories
– I-46–
APPENDIX I ACCOUNTANTS’ REPORT Typeofthe Placeof Natureof
Nameofthesubsidiary subsidiary incorporationbusiness Registeredcapital Scopeofbusiness
ZhuhaiLivzonPharmaceutical Wholly-owned Zhuhai Salesofgoods RMB60,000,000 ImportandexportofChinese TradingCo.,Ltd. subsidiary andwesterndrug
( preparations,rawmaterials ) andpharmaceutical
intermediates.Preparations andrawmaterials,
pharmaceuticalintermediates, chemicalrawmaterials,
sanitarymaterials,hygiene products,healthfood
supplements,biological
products,chemicaland
biologicalagentsand
reagents,medicalcosmetics, medicaldevicesforChinese andwesternmedicine
ShanghaiLivzon Controlled Shanghai Manufacture RMB87,330,000 Productionandsalesofwater Pharmaceutical subsidiary ofmedicine injections,capsules,powders, Manufacturing tablets,lyophilised,
Co.,Ltd.( biochemicalandpolypeptide)*1 bulkmedicine
ZhuhaiFTZLivzonHecheng Wholly-owned Zhuhai Manufacture RMB128,280,000 Productionandsalesof
Pharmaceutical subsidiary ofmedicine proprietarybulkmedicines, Manufacturing pharmaceuticalpreparations, Co.,Ltd.( pharmaceuticalintermediates, ) chemicalproducts
ZhuhaiLivzonDiagnostic Controlled Zhuhai Manufacture RMB46,450,000 Productionandsalesof
ReagentsInc.( subsidiary ofmedicine proprietarybiochemical,
) immunologicalandchemical agents,biologicalproducts, hygieneproductsandmedical analysisequipment
DatongLivzonQiyuan Asubsidiaryof Hunyuan Cropfarming RMB4,000,000 Plantingandprocessingof
MedicineCo.,Ltd.( controlled County astragalus,acquisitionsand ) subsidiary operationsofChineseherbal medicines(exceptthose
restrictedbyChina)
LongxiLivzonShenyuan Asubsidiaryof Longxi Cropfarming RMB4,000,000 Procurement,planting,
MedicineCo.,Ltd.( controlled County processingandstorage
) subsidiary Chinesemedicinesallowed byChina
– I-47–
APPENDIX I ACCOUNTANTS’ REPORT Typeofthe Placeof Natureof
Nameofthesubsidiary subsidiary incorporationbusiness Registeredcapital Scopeofbusiness
LivzonPharmaceutical Wholly-owned HongKong Provisionof HK$10,000 Biologicaltechnologies,
BiotechnologyCo.,Limited subsidiary services trading,investment
( )
ZhuhaiLivzonAdvertisingCo., Wholly-owned Zhuhai Provisionof RMB1,000,000 Design,production,agencyand Ltd.( subsidiary services publicationforallkindsof ) advertisementinChinaand overseas
ZhuhaiLivzonBaiameng Controlled Zhuhai Manufacture RMB12,000,000 Productionandsalesofwet
BiologicalMaterialsCo., subsidiary ofmedicine synthetichydroxyapatite
Ltd.( – powder(
) ),plasmasprayHA-Ti dentalImplants(
HA-Ti )and
artificialhip( ), HAporousceramicparticles (HA ),porous hydroxyapatiteceramic
products(
)producedbythe
companyitself
ZhuhaiLivzonMeidaxin Wholly-owned Zhuhai Provisionof RMB1,000,000 Technologicalresearchand
TechnologicalDevelopment subsidiary services developmentofmedicine,
Co.,Ltd.( healthcareproducts,
) technicalconsulting,
technologyservices
LivzonGroupLivzonMedical Wholly-owned Zhuhai Provisionof RMB10,000,000 Researchanddevelopmentof ResearchCentre( subsidiary services Chineseandwestern
) medicine,pharmaceuticalraw materials,pharmaceutical
intermediates,herbal
medicines,Chineseherbal
medicine,healthtonics,
medicinalcosmetics,sanitary materials,biochemical
reagents,medicaldevices,
andtheconsultationand
transferofrelevant
technologies
– I-48–
APPENDIX I ACCOUNTANTS’ REPORT Typeofthe Placeof Natureof
Nameofthesubsidiary subsidiary incorporationbusiness Registeredcapital Scopeofbusiness
JiaozuoLivzonHecheng Wholly-owned Jiaozuo Manufacture RMB70,000,000 Productionandsalesof
Pharmaceutical subsidiary ofmedicine pharmaceuticalintermediates, Manufacturing chemicalproducts(aboveall Co.,Ltd.( freeofdangerouschemicals ) andhazardouschemicals)
(anyprojectinvolvingspecial licenceoutofthescopeshall engageinproduction
operationwithapermitor approvaldocument)
ZhuhaiLivzonMABBiological Controlled Zhuhai Provisionof RMB300,000,000 Researchanddevelopmentof TechnologyCo.,Ltd.( subsidiary services technologiesforbio-
pharmaceuticalproductsand)*2 antibiotics
LivzonGroupVaccine Controlled Zhuhai Provisionof RMB65,000,000 Researchanddevelopmentof EngineeringInc. subsidiary services technologiesforbio-
( pharmaceuticalproductsand)*3 vaccines
WenshanLivzonSanqi Controlled Wenshan Cropfarming RMB9,200,000 Plantationandsaleofradix
PlantationCo.,Ltd.( subsidiary notoginseng( ),
)*4 marketingandsalesof
agriculturalby-products
(excludinggrain
procurement)
LivzonGroupNingxia Controlled Pingluo Manufacture RMB100,000,000 Productionandsalesof
XinbeijiangPharmaceutical subsidiary ofmedicine intermediates,chemicalraw ManufacturingCo.,Ltd. materials(anyproject
( involvingalicenceshall
)*5 engageinproduction
operationwithinthescope approvedinthelicence)
LivzonGroupNingxiaFuxing Wholly-owned Pingluo Manufacture RMB100,000,000 Productionandsalesof
Pharmaceutical subsidiary ofmedicine intermediates,chemicalraw ManufacturingCo.,Ltd. materials(anyproject
( involvingalicenceshall
)*6 engageinproduction
operationwithinthescope approvedinthelicence)
CompanhiadeMacauCarason Asubsidiaryof Macau Salesofgoods MOP100,000–
Limitada controlled
( )*7 subsidiary
LiZhu(Macau)Limitada( Wholly-owned Macau Provisionof MOP100,000–
( ) )*8 subsidiary services
ShanghaiLivzonBiotechnology Controlled Shanghai Provisionof RMB10,000,000 Biotechnology,finechemical Co.,Ltd.( subsidiary services producttechnologyinthe
)*10 fieldoftechnology
development,technology
consulting,technology
services,technologytransfer, chemicalrawmaterialsand products(exceptfor
dangerouschemicals,
controlledchemicals,
fireworks,civilexplosives, precursorchemicals),
laboratoryequipment,
instrumentationequipment, salesofglassproducts,
importandexportofgoods andtechnologyinbusiness, investmentadvisory(except brokers),investment
management
– I-49–
APPENDIX I ACCOUNTANTS’ REPORT Balanceof
otheritems
substantially
Actual comprisingthe
investment actualnet
amountatthe amountof
endofthe investmentin Percentageof Proportionof Nameofthesubsidiary reportingperiod thesubsidiary shareholding votingrights% % AndoDevelopmentLimited
( ) HKD500,000 119,761,335.92 100% 100% Lizhu(HongKong)
Co.,Limited( ( ) ) HKD61,000,000 19,639,866.43 100% 100% ZhuhaiModernChineseMedicine
HighTechnologyCo.,Ltd.
( ) RMB6,000,000 – 100% 100% LivzonGroupLivzon
PharmaceuticalFactory
RMB423,250,000 – 100% 100% LivzonGroupLivzonPharmaceutical
MarketingCo.,Ltd.
( ) RMB20,000,000 – 100% 100% ZhuhaiLivzonPharmaceutical
TradingCo.,Ltd.
( ) RMB60,000,000 – 100% 100% ShanghaiLivzonPharmaceutical
ManufacturingCo.,Ltd.
( )*1 RMB67,440,000 – 75.99% 100% ZhuhaiFTZLivzonHecheng
PharmaceuticalManufacturing
Co.,Ltd.
( ) RMB128,280,000 – 100% 100% ZhuhaiLivzonDiagnostic
ReagentsInc.
( ) RMB23,690,000 – 51% 51% DatongLivzonQiyuanMedicine
Co.,Ltd.
( ) RMB3,700,000 – 92.50% 92.50% LongxiLivzonShenyuanMedicine
Co.,Ltd.
( ) RMB3,600,000 – 90% 90% LivzonPharmaceuticalBiotechnology
Co.,Ltd.
( ) – – 100% 100% ZhuhaiLivzonAdvertisingCo.,Ltd.
( ) RMB1,000,000 – 100% 100% ZhuhaiLivzonBaiamengBiological
MaterialsCo.,Ltd.
( –
) RMB9,840,000 – 82% 82% ZhuhaiLivzonMeidaxin
TechnologicalDevelopment
Co.,Ltd.
(
) RMB1,000,000 – 100% 100% LivzonGroupLivzonMedical
ResearchCentre
( ) RMB10,000,000 – 100% 100% JiaozuoLivzonHecheng
PharmaceuticalManufacturing
Co.,Ltd. RMB52,500,000;
( ) HKD19,868,500 – 100% 100%
– I-50–
APPENDIX I ACCOUNTANTS’ REPORT Balanceof
otheritems
substantially
Actual comprisingthe
investment actualnet
amountatthe amountof
endofthe investmentin Percentageof Proportionof Nameofthesubsidiary reportingperiod thesubsidiary shareholding votingrights% % ZhuhaiLivzonMABBiological
TechnologyCo.,Ltd.
(
)*2 RMB102,000,000 – 51% 51% LivzonGroupVaccineEngineeringInc.
( )*3 RMB54,500,000 – 83.85% 83.85% WenshanLivzonSanqiPlantation
Co.,Ltd.
( )*4 RMB4,694,000 – 51% 51% LivzonGroupNingxiaXinbeijiang
PharmaceuticalManufacturing
Co.,Ltd.
(
)*5 RMB100,000,000 – 99.214% 99.214% LivzonGroupNingxiaFuxing
PharmaceuticalManufacturing
Co.,Ltd.
( )*6 RMB100,000,000 – 100% 100% CompanhiadeMacau
CarasonLimitada
( )*7 MOP100,000 – 51% 51% LiZhu(Macau)Limitada
( ( ) )*8 – – 100% 100% ShanghaiLivzonBiotechnology
Co.,Ltd
( ) RMB7,500,000 – 56.99% 75% Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
AndoDevelopmentLimited Yes – – PatrickWong 2010to2012 ( ) C.P.A.Limited
Lizhu(HongKong) Yes – – PatrickWong 2010to2012 Co.,Limited C.P.A.Limited
( ( ) )
– I-51–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
ZhuhaiModernChinese Yes – – ReandaCertified 2010and2011 MedicineHighTechnology Public
Co.,Ltd. Accountants
( CompanyLimited
) RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupLivzon Yes – – ReandaCertified 2010and2011 PharmaceuticalFactory Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupLivzon Yes – – ReandaCertified 2010and2011 PharmaceuticalMarketing Public
Co.,Ltd. Accountants
( CompanyLimited
) RuihuaCertified 2012
Public
Accountants
(LLP)
ZhuhaiLivzonPharmaceutical Yes – – ReandaCertified 2010and2011 TradingCo.,Ltd. Public
( Accountants
) CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
ShanghaiLivzon Yes 20,967,668.89 – ReandaCertified 2010and2011 Pharmaceutical Public
ManufacturingCo.,Ltd. Accountants
( )*1 CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
– I-52–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
ZhuhaiFTZLivzonHecheng Yes – – ReandaCertified 2010and2011 Pharmaceutical Public
ManufacturingCo.,Ltd. Accountants
( CompanyLimited
) RuihuaCertified 2012
Public
Accountants
(LLP)
ZhuhaiLivzonDiagnostic Yes 106,312,130.05 – ReandaCertified 2010and2011 ReagentsInc. Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
DatongLivzonQiyuan Yes 125,049.07 – ReandaCertified 2010and2011 MedicineCo.,Ltd. Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
LongxiLivzonShenyuan Yes 211,272.04 – ReandaCertified 2010and2011 MedicineCo.,Ltd. Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonPharmaceutical Yes – – PatrickWong 2010to2012 BiotechnologyCo.,Limited C.P.A.Limited
( )
– I-53–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
ZhuhaiLivzonAdvertising Yes – – ReandaCertified 2010and2011 Co.,Ltd. Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
ZhuhaiLivzonBaiameng Yes 1,111,467.95 – ReandaCertified 2010and2011 BiologicalMaterialsCo.,Ltd. Public
( – Accountants
) CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
ZhuhaiLivzonMeidaxin Yes – – ReandaCertified 2010and2011 TechnologicalDevelopment Public
Co.,Ltd. Accountants
( CompanyLimited
) RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupLivzonMedical Yes – – ReandaCertified 2010and2011 ResearchCentre Public
( ) Accountants
CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
JiaozuoLivzonHecheng Yes – – ReandaCertified 2010and2011 Pharmaceutical Public
ManufacturingCo.,Ltd. Accountants
( ) CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
– I-54–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
ZhuhaiLivzonMABBiological Yes 85,341,469.40 – ReandaCertified 2010and2011 TechnologyCo.,Ltd. Public
( Accountants
)*2 CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupVaccine Yes 4,665,143.66 – ReandaCertified 2010and2011 EngineeringInc. Public
( Accountants
)*3 CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
WenshanLivzonThirty-seven Yes 4,665,641.72 – ReandaCertified 2010and2011 PlantingLtd. Public
( Accountants
)*4 CompanyLimited
RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupNingxia Yes – – ReandaCertified 2010and2011 XinbeijiangPharmaceutical Public
ManufacturingCo.,Ltd. Accountants
( CompanyLimited
)*5 RuihuaCertified 2012
Public
Accountants
(LLP)
LivzonGroupNingxiaFuxing Yes – – ReandaCertified 2010and2011 Pharmaceutical Public
ManufacturingCo.,Ltd. Accountants
( CompanyLimited
)*6 RuihuaCertified 2012
Public
Accountants
(LLP)
CompanhiadeMacauCarason Yes 639,053.72 – Notapplicable Nostatutory Limitada audit
( )*7 performedyet
– I-55–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
thatallocated
Non- tonon-
Includedin controlling controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
LiZhu(Macau)Limitada Yes – – Notapplicable Nostatutory ( ( ) )*8 audit
performedyet ShanghaiLivzonBiotechnology Yes 2,500,000.00 – Notapplicable Nostatutory Co.,Ltd.( audit
)*10 performedyet*1. Pursuant to the equity interest transfer agreement entered into with Ding Gongcai ( ) on 24 July 2009, Ding Gongcai ( ) accepted the transfer of49% equity interests in Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. ( ) at a consideration of RMB40,449,894.58.Until2012,theCompanyreceivedRMB19,884,600.00astheconsiderationforthetransferofequityinterests,andaccountedfor49%oftheconsiderationasmentionedabove.Asitwas agreedthatDingGongcai( )wouldnotbeentitledtothedistributionofprofitsinthatcompanybeforetheconsiderationforthetransferofequityinterestswasfullysettled,henceonly24.01%equity interests(49%*49%) in Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. (
)wererecognisedinsuchtransferanddidnotrecogniserelevantinterestsinsameproportion.TheCompanyisstillentitledto100%votingrightsinShanghaiLivzonPharmaceuticalManufacturingCo., Ltd. ( ).
*2. It was resolved in theTwenty-First Meeting for the Sixth Board of the Company on 8 June 2010 that, the Company would establish Zhuhai Livzon MAB Biological Technology Co., Ltd. (
)jointlywithJoincarePharmaceuticalGroupIndustryCo.,Ltd(
) by way of cash contribution. The proportion of shareholding is51% and49% respectively with a registered capital of RMB100 million. The contribution of registered capital was verified by Reanda Certified Public Accountants Company Limited with the issue of capital verification report Reanda Yan Zi[2011] No. B-1045 ( [2011] B-1045 ). It was resolved in the First Extraordinary General Meeting of Zhuhai Livzon MAB Biological Technology Co., Ltd. (
) on 3 June 2013 that its registered capital would be increased to RMB300 million, which would be contributed by the shareholders of that company according to the existing proportionofshareholding.Ofwhich,thecontributionsforthefirstphrasewouldbepaidupby30June 2013, whilst the remaining contributions would be paid up within 36 months after 30 June 2013. The capital increase as aforesaid was resolved and approved in the Second Extraordinary General Meeting oftheCompanyon7June2013.ThecontributionsforthefirstphraseatanamountofRMB100million were provided by the Company and Joincare Pharmaceutical Group Industry Co., Ltd. (
)on9June2013.ThecontributionofregisteredcapitalwasverifiedbyRuihuaCertified PublicAccountants (LLP), Zhuhai Branch with the issue of capital verification report Guo Hao Zhue Yan Zi[2013] No. 841C0001 ( [2013]841C0001 ).
*3. ItwasresolvedbytheBoardoftheCompanyon1July2010that,theCompanywouldestablishLivzon Group Vaccine Engineering Inc. ( ) jointly with Guangzhou Galaxy Sunshine Biological Pharmaceutical Co., Ltd. ( ). The Company contributed RMB53,000,000, of which RMB44,000,000 was contributed by way of cash and RMB9,000,000wascontributedbyappraisedvalueofthenon-patentedtechnologyinpurifiedinactivate vaccine for the adsorption of Japanese encephalitis ( ), and accountedfor81.54%ofregisteredcapital.GuangzhouGalaxySunshineBiologicalCo.,Ltd.(
) contributed RMB12,000,000 and accounted for18.46% of registered capital by way of the non-patented technology in that has an appraised value of RMB12,000,000. The registered capital was RMB65,000,000, which was verified by Reanda Certified Public AccountantsCompanyLimitedwiththeissueofcapitalverificationreportReandaYanZi[2010]No.B-1033(
[2010] B-1033 ). Pursuant to the equity interest transfer agreement dated 20 October 2010, Guangzhou Galaxy Sunshine Biological Co., Ltd. ( ) transferred
– I-56–
APPENDIX I ACCOUNTANTS’ REPORT 1,500,000 shares held by it to the Company. After such transfer, the shareholding by the Companyamountedto83.85%,whilsttheshareholdingbyGuangzhouGalaxySunshineBiologicalCo.,Ltd.( ) was16.15%.
*4. The Company established Wenshan Livzon Sanqi Plantation Co., Ltd. ( ) jointly with Chen Gaoze ( ) on 17 May 2011 by way of cash contribution. The proportion of shareholding was51% and49% respectively. The registered capital was RMB3,000,000, which was verified by Wenshan Anxin Certified Public Accountants ( ) with the issue of capital verification report Wan An Hui Shi Yan Zi[2011] No. 113 ( [2011]113 ). The capital was increased to RMB9,200,000 in 2012, with the proportion of shareholding between both parties remained unchanged.
*5. The Company established Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd. ( ) jointly with Livzon Group Xinbeijiang Pharmaceutical Manufacturing Inc. ( ) on 17 August 2011 by way of cashcontribution.Theproportionofshareholdingwas90%and10%respectively.Theregisteredcapitalwas RMB100million,whichwasverifiedbyGuangdongYuexinCertifiedPublicAccountants(
) with the issue of capital verification reportYuexin[2011]Yan Zi No. 11056 ( [2011] 11056 ).
*6. TheCompanyestablishedLivzonGroupNingxiaFuxingPharmaceuticalManufacturingCo.,Ltd.(
)jointlywithLivzonGroupFuzhouFuxingPharmaceuticalCo.,Ltd.(
) on 17 August 2011 by way of cash contribution. The proportion of shareholding was90% and10% respectively. The registered capital was RMB100 million, which was already verified by GuangdongYuexin Certified PublicAccountants ( ) with the issue of capital verification report Yuexin[2011] Yan Zi No. 11055 ( [2011] 11055 ).
*7. On26March2012,ZhuhaiLivzonDiagnosticReagentsInc.( )contributedUS$12,550.00 to establish Companhia de Macau Carason Limitada ( ) in MacauupontheissueofoverseasinvestmentcertificatebytheMinistryofCommerceofthePeople’sRepublic of China approval No. 4400201200159.
*8. On 11 July 2012, Lizhu (Hong Kong) Co., Limited ( ( ) ) and Ando Development Limited ( ) established Li Zhu (Macau) Limitada ( ( ) ) in Macau.*9. On 31 October 2011, it was resolved by the board of Zhuhai FTZ Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) to merge with Lida Pharmaceutical Co., Ltd.ofZhuhaiFreeTradeZone( )bywayofabsorption.Themergerwas completedon21June2012andtheindustryandcommerceregistrationofLidaPharmaceuticalCo.,Ltd. of Zhuhai Free Trade Zone ( ) was cancelled pursuant to the laws.
*10. Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. ( ) established ShanghaiLivzonBiotechnologyCo.,Ltd.( )withZhengFusang( )on 27August 2013 by way of investment in an equity joint venture. The proportion of shareholding was75% and25% respectively with a registered capital of RMB10 million. The contribution of registered capitalwasverifiedbyShanghaiShenyaCPALimited( )withtheissueofcapitalverificationreportShenYaHuiYanZi[2013]No.SY1321( [2013] SY1321 ). (II) Subsidiaries acquired from business combinations involving enterprises not under common control: Name of the Type of the Place of Nature of Registered Scope of
subsidiary subsidiary incorporation business capital business
Sichuan Wholly-owned Pengzhou Manufacture of RMB149,000,000 Research,
Guangda subsidiary medicine development, Pharmaceutical production
Manufacturing and sales of Co., Ltd. ( Chinese and western
)*1 medicine,
Chinese and western over- the-counter medicine
– I-57–
APPENDIX I ACCOUNTANTS’ REPORT Name of the Type of the Place of Nature of Registered Scope of
subsidiary subsidiary incorporation business capital business
Livzon Group Controlled Qingyuan Manufacture of RMB134,930,000 Exports and
Xinbeijiang subsidiary medicine production of Pharmaceutical proprietary
Manufacturing products and Inc. related
( technologies )
Livzon Group Wholly-owned Shaoguan Manufacture of RMB61,560,000 Production of Limin subsidiary medicine drug
Pharmaceutical preparations, Manufacturing pharmaceutical Factory raw
( materials,
)*2 food
additives,
feed
additives,
nutritional
healthcare
products
Livzon Group Wholly-owned Fuzhou Manufacture of USD41,700,000 Production of Fuzhou subsidiary medicine bulk
Fuxing medicines,
Pharmaceutical intermediates Co., Ltd. and drug
( preparations and chemical)*3 raw materials for
pharmaceutical production of antibiotics
(excluding
inflammable and explosive and
hazardous
chemicals
and those
involving
licences to
operate)
Gutian Fuxing Wholly-owned Gutian Manufacture of RMB26,700,000 Production and Pharmaceutical subsidiary medicine sales of bulk Co., Ltd. medicines
( (kanamycin ) monosulfate (
),
tetracycline hydrochloride ( ), hydrochloric chlortetracycline ( )
– I-58–
APPENDIX I ACCOUNTANTS’ REPORT Balanceofother
items
substantially
Actual comprisingthe
investment actualnet
amountatthe amountof
endofthe investmentinthe Percentageof Proportionof Nameofthesubsidiary reportingperiod subsidiary shareholding votingrights% % SichuanGuangdaPharmaceutical
ManufacturingCo.,Ltd.
( )*1 RMB149,000,000 – 100% 100% LivzonGroupXinbeijiang
PharmaceuticalManufacturingInc.
( ) RMB124,320,000 – 92.14% 92.14% LivzonGroupLiminPharmaceutical
ManufacturingFactory
( )*2 RMB207,720,000 – 100% 100% LivzonGroupFuzhouFuxing
PharmaceuticalCo.,Ltd.
( )*3 USD41,700,000 – 100% 100% GutianFuxingPharmaceutical
Co.,Ltd.
( ) RMB26,700,000 – 100% 100% Amountofloss
attributableto
non-controlling
shareholders
Non- thatallocatedto
Includedin controlling non-controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
SichuanGuangda Yes – – ReandaCertified 2010and2011 Pharmaceutical PublicAccountants
ManufacturingCo.,Ltd. CompanyLimited
( )*1 RuihuaCertified 2012
PublicAccountants
(LLP)
LivzonGroupXinbeijiang Yes 17,061,306.30 –– 2010and2011 Pharmaceutical RuihuaCertified 2012
ManufacturingInc. PublicAccountants
( (LLP)
)
LivzonGroupLimin Yes – – ReandaCertified 2010and2011 Pharmaceutical PublicAccountants
ManufacturingFactory CompanyLimited
( )*2 RuihuaCertified 2012
PublicAccountants
(LLP)
– I-59–
APPENDIX I ACCOUNTANTS’ REPORT Amountofloss
attributableto
non-controlling
shareholders
Non- thatallocatedto
Includedin controlling non-controlling Year(s)of
Nameofsubsidiary consolidation interests interests Auditors audit
LivzonGroupFuzhouFuxing Yes – – ReandaCertified 2010and2011 PharmaceuticalCo.,Ltd. PublicAccountants
( CompanyLimited
)*3 RuihuaCertified 2012
PublicAccountants
(LLP)
GutianFuxing Yes – – ReandaCertified 2010and2011 PharmaceuticalCo.,Ltd. PublicAccountants
( ) CompanyLimited
RuihuaCertified 2012
PublicAccountants
(LLP)
*1. On 17 January 2011, Sichuan Guangda Pharmaceutical Manufacturing Co., Ltd. (
)increaseditsregisteredcapitalbyRMB54,000,000pursuanttotheprovisionsinthefifthitemunder its resolutions in the Seventh Meeting of the Third Board and the amendments to the articles of association. The registered capital after the increase was RMB149,000,000, which was verified by Reanda Certified Public Accountants Company Limited with the issue of capital verification report Reanda Yan Zi[2011] No. B-2005 ( [2011] B-2005 ).
*2. According to the equity transfer agreement entered into by the Company and the non-controlling shareholders of Livzon Group Limin Pharmaceutical Manufacturing Factory ( ) on 26 July 2012, the Company accepted the transfer of11.91% equity interests in Livzon Group Limin Pharmaceutical Manufacturing Factory ( ) at a consideration ofRMB151,532,596.80.Uponthecompletionoftheacquisition,theCompanyholdsatotalof100%equity interests in Livzon Group Limin Pharmaceutical Manufacturing Factory ( ).
*3.PursuanttotheapprovaldocumentMinWeiJingMoWeiZhi[2011]No.99( [2011]99 ) granted by Fujian Provincial ForeignTrade and Economic Cooperation Bureau and the resolutions made by the Twelfth Board Meeting of the Third Session of Livzon Group Fuzhou Fuxing Pharmaceutical Co., Ltd. ( ) and the respective provisions in the contractandarticlesofassociationasamended,LivzonGroupFuzhouFuxingPharmaceuticalCo.,Ltd. ( ) applied for an increase in registered capital toUS$8,000,000. Of which, the Company contributedUS$6,000,000 and accounted for75% of the increase in registered capital,whichwassettledinRenminbiatthespotexchangeratequotedinthemarketonthatday.Ando Development Limited ( ) contributedUS$2,000,000 and accounted for25% of the increase in registered capital, which was settled in the form of cash. The registered capital after theincreasewasUS$41,700,000.US$31,275,000wascontributedbytheCompanyandaccountedfor75%oftheincreasedregisteredcapital.US$10,425,000wascontributedbyAndoDevelopmentLimited( ) and accounted for25% of the increased registered capital. The contribution was verified by Reanda Certified Public Accountants Company Limited with the issue of the capital verification report Reanda Yan Zi[2011] No. B-2004 ( [2011] B-2004 ).
– I-60–
APPENDIX I ACCOUNTANTS’ REPORT (III) Subsidiaries acquired business combinations involving enterprises under common control: Nil.
(IV) Subsidiaries newly included in the scope of consolidation for the reporting period:
Net profit for
Net asset as at the year of
the end of the establishment Year of year of or investment inclusion to establishment included in the the or investment consolidated consolidated included in financial financial Name of subsidiary consolidation statements statements Zhuhai Livzon MAB Biological Technology
Co., Ltd. ( ) 18,051,011.47 -1,948,988.53 2010 Livzon Group Vaccine Engineering Inc.
( ) 61,309,604.07 -3,880,395.93 2010 Wenshan Livzon Sanqi Plantation Co., Ltd.
( ) 2,633,738.87 -366,261.13 2011 Livzon Group Ningxia Fuxing Pharmaceutical
Manufacturing Co., Ltd. (
) 98,984,300.17 -1,015,699.83 2011 Livzon Group Ningxia Xinbeijiang
Pharmaceutical Manufacturing Co., Ltd.
( ) 98,648,170.26 -1,351,829.74 2011 Companhia de Macau Carason Limitada
( ) 788,342.53 419,610.27 2012 Li Zhu (Macau) Limitada ( ( ) ) – – 2012 Shanghai Livzon Biotechnology Co., Ltd.
( ) 10,000,000.00 – 2013
– I-61–
APPENDIX I ACCOUNTANTS’ REPORT V. NOTES TO THE KEY COMPONENTS OFTHE CONSOLIDATED FINANCIALSTATEMENTS
1. Cash at bank and on hand
31December2010 31December2011 31December2012 30September2013
Original Exchange Reporting Original Exchange Reporting Original Exchange Reporting Original Exchange Reporting Item currency rate currency currency rate currency currency rate currency currency rate currency Cashonhand 150,354.63 232,609.61 134,187.07 113,549.31 Ofwhich:Renminbi 96,979.53 157,310.55 134,187.07 113,549.31 Euro 5,150.00 8.8065 45,353.47 9,225.00 8.1625 75,299.06 – 8.3176 – – – – Singaporedollar 1,567.00 5.1191 8,021.63 – 4.8679 – – 5.0881 – – – – Bankdeposits 862,999,246.37 1,442,741,276.37 1,204,722,004.87 1,045,660,158.99 Ofwhich:Renminbi 794,955,764.71 1,395,390,891.88 1,184,329,952.82 989,098,699.83 HKdollar 62,761,209.94 0.85093 53,405,396.37 38,498,172.86 0.81070 31,210,468.74 16,507,820.51 0.81085 13,385,366.26 46,079,664.17 0.79287 36,535,183.33 U.S.dollar 2,156,678.66 6.6227 14,283,035.76 2,371,030.00 6.3009 14,939,622.93 1,033,704.57 6.2855 6,497,350.07 2,649,517.44 6.1480 16,289,233.22 JapaneseYen 77,119.00 0.08126 6,266.69 8,263,260.00 0.081103 670,175.18 2,541,145.00 0.073049 185,628.10 31,548,504.00 0.062793 1,981,025.21 Euro 39,605.16 8.8065 348,782.84 64,945.50 8.1625 530,117.64 29,435.13 8.3176 244,829.64 24,035.70 8.2983 199,455.45 MOP – 0.8265 – – 0.7886 – 101,073.78 0.7804 78,877.98 2,030,739.66 0.7665 1,556,561.95 Othercashatbankand
onhand 782,256.59 4,769,669.72 16,476,610.46 11,312,572.40 Ofwhich:Renminbi 275,006.10 2,549,998.85 14,081,836.93 10,692,675.47 HKdollar 596,113.07 0.85093 507,250.49 2,737,968.26 0.81070 2,219,670.87 2,953,411.27 0.81085 2,394,773.53 781,839.31 0.79287 619,896.93 Total 863,931,857.59 1,447,743,555.70 1,221,332,802.40 1,057,086,280.70 (1) Other cash at bank and on hand are deposits for investments and guarantee for letter of credit and security for bank acceptance bills.
(2) Asat30September2013,RMB33,000,000.00ofbankdepositswerepledgedforshort-termborrowings. RMB1,549,151.39 of other cash at bank and on hand were guaranteed for letter of credit and RMB8,392,606.82 were security for bank acceptance bills. As at 31 December 2012, RMB29,000,000.00 of bank deposits were pledged for short-term borrowings. RMB2,020,501.88 of othercashatbankandonhandwereguaranteeforletterofcreditandRMB11,676,000.00weresecurity forbankacceptancebills.Asat31December2011,RMB13,250,000.00ofbankdepositswerepledged for short-term borrowings. RMB2,317,760.92 of other cash at bank and on hand were guarantee for letter of credit. As at 31 December 2010, RMB19,450,000.00 of bank deposits were pledged for short-term borrowings. The abovementioned restricted funds were deducted from cash and cash equivalentsincashflowstatement.Apartfromtherestrictedfunds,thereisnoothercharge,pledgeor lockuponthebalanceofcashatbankandonhandthatmaylimititsuse,keptoutsideChinaandmay have probable risks in its collection.
2. Financial assets held for trading
31December2010 31December2011 31December2012 30September2013
Changein Changein Changein Changein
Item Cost fairvalue Fairvalue Cost fairvalue Fairvalue Cost fairvalue Fairvalue Cost fairvalue Fairvalue Shares 54,728,390.39 2,457,245.02 57,185,635.41 52,140,958.83 -8,321,422.37 43,819,536.46 50,726,360.42 8,053,732.39 58,780,092.81 4,247,826.52 4,346,884.28 8,594,710.80 Funds 150,000.00 530,154.77 680,154.77 150,000.00 373,477.19 523,477.19 150,000.00 389,524.13 539,524.13 150,000.00 419,449.51 569,449.51 Total 54,878,390.39 2,987,399.79 57,865,790.18 52,290,958.83 -7,947,945.18 44,343,013.65 50,876,360.42 8,443,256.52 59,319,616.94 4,397,826.52 4,766,333.79 9,164,160.31 (1)Thebalanceoffinancialassetsheldfortradingasat30September2013decreasedby84.55%fromthe beginning of the year, which was mainly attributable to the partial disposal of shares held during the period. The change in the balance of financial assets held for trading between 2010-2012 was mainly attributabletothechangeinthemarketvalueofthesharesheld.Duringthereportingperiods,theshares held by the Group were listed and trading on The Stock Exchange of Hong Kong Limited. The funds held by the Group were listed and trading on Shenzhen Stock Exchange.
(2) As at 30 September 2013, no restrictive financial assets held for trading was realised.
– I-62–
APPENDIX I ACCOUNTANTS’ REPORT 3. Bills receivables
(1) Classification of bills receivables
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Bank acceptance bills 232,945,814.77 171,033,783.72 112,482,782.18 181,826,340.98 Short-term commercial
papers – – – 116,580.00 Total 232,945,814.77 171,033,783.72 112,482,782.18 181,942,920.98 (2) The balance of bills receivables as at 30 September 2013 increased by61.75% from the beginning of theyear,whichwasmainlyattributabletotheincreaseinreceivablesonsalesofgoodssettledbybank acceptance bills. The balance of bills receivables as at 31 December 2012 decreased by34.23% from the beginning of the year, which was mainly attributable to increase of settlement of account payables and project construction fees by way of endorsement of bills.
(3) As at 30 September 2013, no bills receivables of the Group was pledged.
(4) As at 30 September 2013, bills not yet mature but already endorsed to other parties were set out as follows:
Type of bill Period of maturity Amount Bank acceptance bills 31 March 2014 110,256,243.30 (5) Asat30September2013,therewasnoamounttransferredtoaccountsreceivablesfromacceptancebills upon the non-performance of the bills issuers.
4. Accounts receivables
(1) Categories of accounts receivables
31December2010 31December2011 31December2012 30September2013
Baddebts Netbook Baddebts Netbook Baddebts Netbook Baddebts Netbook Item Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Individuallysignificantand
impairmentprovidedonan
individualbasis – – – – – – – – – – – – – – – – Assessedforimpairment
collectively 465,041,535.8899.72% 26,277,809.30 438,763,726.58 595,971,817.9299.74% 33,825,804.74 562,146,013.18 819,352,306.3199.93% 45,330,835.43 774,021,470.88 964,795,288.4099.94% 53,258,780.90 911,536,507.50 Receivablesthatareindividually
insignificantbutimpairment
providedonanindividualbasis 1,322,888.640.28% 1,322,888.64 – 1,544,607.210.26% 1,544,607.21 – 566,871.410.07% 566,871.41 – 566,871.410.06% 566,871.41 – Total 466,364,424.52100.00% 27,600,697.94 438,763,726.58 597,516,425.13100.00% 35,370,411.95 562,146,013.18 819,919,177.72100.00% 45,897,706.84 774,021,470.88 965,362,159.81100.00% 53,825,652.31 911,536,507.50 (2) AccordingtothecreditpoliciesoftheGroup,theGroupusuallygrantacreditperiodrangingfrom30 to 90 days to its customers. The balance of accounts receivables at 31 December 2012 increased by37.69% from the beginning of the year, which was mainly attributable to the sluggish performance of thebulkmedicinesmarketinChinawithslowrecoveryofreceivablesfromthedownstreamoperations, which resulted in longer receivable turnover of the Group.
– I-63–
APPENDIX I ACCOUNTANTS’ REPORT (3) The ageing analysis of accounts receivables (based on dates of recognition of accounts receivables): 31 December 31 December 31 December 30 September Age 2010 2011 2012 2013 1 to 90 days 379,325,996.40 484,016,125.19 669,279,711.25 742,037,281.42 91 to 180 days 53,930,583.60 68,104,581.74 94,857,408.76 117,127,255.50 181 days to 1 year 18,111,013.85 27,315,186.23 32,912,686.71 79,742,295.99 1 to 2 years 8,387,980.29 9,399,665.32 14,736,404.89 17,400,744.89 Over 2 years 6,608,850.38 8,680,866.65 8,132,966.11 9,054,582.01 Less: provision for bad debts 27,600,697.94 35,370,411.95 45,897,706.84 53,825,652.31 Total 438,763,726.58 562,146,013.18 774,021,470.88 911,536,507.50 (4) Ageinganalysisofaccountsreceivablesthatareindividuallyinsignificantbutimpairmentprovidedon an individual basis:
31December2010 31December2011 31December2012 30September2013
Baddebts Netbook Baddebts Netbook Baddebts Netbook Baddebts Netbook Ageing Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value 1to2years 11,695.400.88% 11,695.40 – – – – – 43,010.007.59% 43,010.00 – – – – – 2to3years 5,000.000.38% 5,000.00 – – – – – – – – – 43,010.007.59% 43,010.00 – Over3years 1,306,193.2498.74% 1,306,193.24 – 1,544,607.21100.00% 1,544,607.21 – 523,861.4192.41% 523,861.41 – 523,861.4192.41% 523,861.41 – Total 1,322,888.64100.00% 1,322,888.64 – 1,544,607.21100.00% 1,544,607.21 – 566,871.41100.00% 566,871.41 – 566,871.41100.00% 566,871.41 – (5) Ageing analysis of accounts receivables that are assessed for impairment collectively:
31December2010 31December2011 31December2012 30September2013
Provisionfor Netbook Provisionfor Netbook Provisionfor Netbook Provisionfor Netbook Ageing Amount Percentage baddebts value Amount Percentage baddebts value Amount Percentage baddebts value Amount Percentage baddebts value Within1year 451,367,593.8597.06% 22,568,379.78 428,799,214.07 579,435,893.1697.22% 28,971,794.66 550,464,098.50 797,049,806.7297.28% 39,852,490.35 757,197,316.37 938,906,832.9197.32% 46,945,341.64 891,961,491.27 1to2years 8,376,284.891.80% 502,577.10 7,873,707.79 9,399,665.321.58% 563,979.93 8,835,685.39 14,736,404.891.80% 884,184.30 13,852,220.59 17,400,744.891.80% 1,044,044.69 16,356,700.20 2to3years 2,133,016.980.46% 426,603.40 1,706,413.58 2,863,539.840.48% 572,707.98 2,290,831.86 3,023,759.200.37% 604,751.84 2,419,007.36 3,359,928.860.35% 671,985.77 2,687,943.09 Over3years 3,164,640.160.68% 2,780,249.02 384,391.14 4,272,719.600.72% 3,717,322.17 555,397.43 4,542,335.500.55% 3,989,408.94 552,926.56 5,127,781.740.53% 4,597,408.80 530,372.94 Total 465,041,535.88100.00% 26,277,809.30 438,763,726.58 595,971,817.92100.00% 33,825,804.74 562,146,013.18 819,352,306.31100.00% 45,330,835.43 774,021,470.88 964,795,288.40100.00% 53,258,780.90 911,536,507.50 (6) During the reporting period, the Group had written off accounts receivables due from non-related parties of RMB1,545,962.10, of which RMB762,082.82 were written off during the nine months ended 30 September 2013,RMB435,749.37werewrittenoffin2012,RMB65,545.11werewrittenoffin2011andRMB282,584.80 werewrittenoffin2010.Ananalysisofthemajoraccountsreceivableswrittenoffissetoutasfollows:
Amount
Name of debtor written off Nature Reason Related party NanyangTopcon Group Heng U
QUEEN Ltd.( Not
) 714,000.00 Sales of goods recoverable No
Not
UKDo-I Co.,Ltd 435,749.37 Sales of goods recoverable No
Jinan Oucai Medical Science
andTechnology Development
Co., Ltd.
( Not
) 99,762.00 Sales of goods recoverable No
Jinan Hongrun Biotechnology
Co., Ltd. ( Not
) 67,128.00 Sales of goods recoverable No
Chengdu Meide Southern
Biotechnology Co., Ltd.
( Not
) 19,000.00 Sales of goods recoverable No
Zhejiang Province Blood Centre Not
( ) 10,000.00 Sales of goods recoverable No
Total 1,345,639.37
– I-64–
APPENDIX I ACCOUNTANTS’ REPORT (7) Asat30September2013,theamountofaccountsreceivablesduefromtopfivecustomerswereanalysed as follows:
Relationship
withthe Natureor Proportionto Nameofdebtor Company Amountdue description Timeoverdue totalamount BIOCONLIMITED Non-relatedparty 26,454,269.16 Salesofgoods Within1year 2.74% NorthChina Non-relatedparty 23,502,276.20 Salesofgoods Within1year 2.44% PharmaceuticalHebei
HuaminPharmaceutical
Co.,Ltd.
(
)
YuekangPharmaceutical Non-relatedparty 15,925,219.06 Salesofgoods Within1year 1.65% GroupCo.,Ltd.
( )
NorthChina Non-relatedparty 15,916,277.34 Salesofgoods Within1year: 1.65% PharmaceuticalCo.,Ltd. RMB15,119,142.00,
( ) 1-2years:
RMB797,135.34
HassRichPharmaceutical Non-relatedparty 15,471,588.00 Salesofgoods Within1year 1.60% Co.,Ltd.
( )
Total 97,269,629.76 10.08% (8)Asat30September2013,therewasnoamountduefromashareholderholding5%(inclusive)ormore of voting rights in the Company.
(9) Please see note VII for the details of amounts due to related parties.
5. Prepayments
(1) Ageing analysis
31December 31December 31December 30September
Ageing 2010 Proportion 2011 Proportion 2012 Proportion 2013 Proportion Within1year 60,549,846.12 89.15% 187,411,846.41 87.65% 170,504,919.52 82.30% 192,455,133.23 83.26% 1to2years 6,799,403.50 10.01% 20,119,685.37 9.41% 19,092,658.75 9.21% 20,331,134.72 8.80% 2to3years 573,470.00 0.84% 5,716,219.50 2.67% 16,822,905.65 8.12% 1,216,098.75 0.53% Over3years – – 570,000.00 0.27% 760,305.76 0.37% 17,139,539.54 7.41% Total 67,922,719.62 100.00% 213,817,751.28 100.00% 207,180,789.68 100.00% 231,141,906.24 100.00% (2)Thebalanceofprepaymentsat31December2011increasedby214.80%fromthebeginningofthatyear, which was mainly attributable to the increase in prepayments for new construction projects.
(3) Prepayments over one year mainly represented prepaid land costs and prepayments on purchases of goods.
– I-65–
APPENDIX I ACCOUNTANTS’ REPORT (4) As at 30 September 2013, the top five prepayments amounts were analysed as follows:
Relationship
withthe Natureor Proportionto Nameofdebtor Company Amountdue description Timeoverdue totalamount SiemensMedical Non-relatedparty 23,525,676.23 Costofraw Within1year 10.18% DiagnosticProducts materials
(Shanghai)Co.,Ltd.
(
( ) )
HebeiInstallation Non-relatedparty 20,484,236.08 Costof Within1year: 8.86% EngineeringCompany construction RMB16,949,072.08,
( ) works 1-2years:
RMB3,535,164.00
SichuanPengzhou Non-relatedparty 20,425,185.00 Landcosts 1-2years: 8.84% IndustrialDevelopment RMB6,732,904.09,
ZoneManagement Over3years:
Committee RMB13,692,280.91
(
)
LongxiYongfa Non-relatedparty 11,620,000.00 Costofraw Within1year 5.03% PharmaceuticalCo.,Ltd. materials
( )
ShanghaiMacroprocess Non-relatedparty 11,063,345.19 Salesofgoods Within1year 4.78% CleanTechnology
Co.,Ltd.
(
)
Total 87,118,442.50 37.69% (5)Asat30September2013,therewasnoamountduefromashareholderholding5%(inclusive)ormore of voting rights in the Company.
(6) Please see note VII for the details of amounts due to related parties.
6. Other receivables
(1) Categories of other receivables
31December2010 31December2011 31December2012 30September2013
Baddebts Netbook Baddebts Netbook Baddebts Netbook Baddebts Netbook Item Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Individuallysignificant
andimpairment
providedonan
individualbasis – – – – – – – – – – – – – – – – Assessedforimpairment
collectively 49,049,731.4599.08% 4,970,451.44 44,079,280.01 48,004,392.1397.80% 3,516,339.27 44,488,052.86 58,140,626.5498.26% 5,100,369.41 53,040,257.13 67,176,392.0798.47% 5,693,529.70 61,482,862.37 Receivablesthatare
individually
insignificantbut
impairmentprovided
onanindividualbasis 456,347.930.92% 456,347.93 – 1,078,270.562.20% 1,078,270.56 – 1,026,860.561.74% 1,026,860.56 – 1,041,860.561.53% 1,041,860.56 – Total 49,506,079.38100.00% 5,426,799.37 44,079,280.01 49,082,662.69100.00% 4,594,609.83 44,488,052.86 59,167,487.10100.00% 6,127,229.97 53,040,257.13 68,218,252.63100.00% 6,735,390.26 61,482,862.37
– I-66–
APPENDIX I ACCOUNTANTS’ REPORT (2) Ageing analysis of other receivables that are individually insignificant but impairment provided on an individual basis:
31December2010 31December2011 31December2012 30September2013
Baddebts Netbook Baddebts Netbook Baddebts Netbook Baddebts Netbook Ageing Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Within1year 250,000.0054.78% 250,000.00 – 51,338.004.76% 51,338.00 – – – – – – – – – 1to2years – – – – 250,072.0023.19% 250,072.00 – – – – – – – – – 2to3years – – – – – – – – 250,000.0024.35% 250,000.00 – – – – – Over3years 206,347.9345.22% 206,347.93 – 776,860.5672.05% 776,860.56 – 776,860.5675.65% 776,860.56 – 1,041,860.56100.00% 1,041,860.56 – Total 456,347.93100.00% 456,347.93 – 1,078,270.56100.00% 1,078,270.56 – 1,026,860.56100.00% 1,026,860.56 – 1,041,860.56100.00% 1,041,860.56 – (3) Ageing analysis of other receivables that are assessed for impairment collectively:
31December2010 31December2011 31December2012 30September2013
Baddebts Netbook Baddebts Netbook Baddebts Netbook Baddebts Netbook Ageing Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Amount Percentage provision value Within1year 43,549,098.3788.78% 2,177,454.92 41,371,643.45 38,276,235.2079.74% 1,913,811.77 36,362,423.43 46,904,509.6680.67% 2,345,225.48 44,559,284.18 54,655,724.6481.36% 2,732,786.24 51,922,938.40 1to2years 2,060,313.694.20% 123,618.81 1,936,694.88 7,968,636.7816.60% 478,118.21 7,490,518.57 2,641,311.234.54% 158,478.67 2,482,832.56 3,679,590.975.48% 220,775.45 3,458,815.52 2to3years 332,108.870.68% 66,421.77 265,687.10 711,894.081.48% 142,378.82 569,515.26 7,352,432.9312.65% 1,470,486.59 5,881,946.34 7,395,428.5111.01% 1,479,085.70 5,916,342.81 Over3years 3,108,210.526.34% 2,602,955.94 505,254.58 1,047,626.072.18% 982,030.47 65,595.60 1,242,372.722.14% 1,126,178.67 116,194.05 1,445,647.952.15% 1,260,882.31 184,765.64 Total 49,049,731.45100.00% 4,970,451.44 44,079,280.01 48,004,392.13100.00% 3,516,339.27 44,488,052.86 58,140,626.54100.00% 5,100,369.41 53,040,257.13 67,176,392.07100.00% 5,693,529.70 61,482,862.37 (4) During the reporting period, the Group had written off other receivables due from non-related parties ofRMB29,393.34,ofwhichRMB7,754.62werewrittenoffin2011andRMB21,638.72werewrittenoff in 2010.
(5) As at 30 September 2013, the top five amounts of other receivables were analysed as follows:
Relationship
withthe Natureor Proportionto Nameofdebtor Company Amountdue description Timeoverdue totalamount GuangzhouGalaxy Non-relatedparty 5,000,000.00 Borrowings 2-3years 7.33% SunshineBiological
ProductsCo.,Ltd.(
)
BeijingMangge Non-relatedparty 2,030,000.00 Borrowingsfor Within1year: 2.98% Pharmaceutical projects RMB430,000.00,
TechnologyCo.,Ltd. 1-2years:
( RMB40,000.00,2-3
) years:
RMB1,560,000.00
Taxrefundsonexports Non-relatedparty 1,950,851.62 Taxrefundson Within1year 2.86% exports
DaiQizhi( ) Non-relatedparty 1,425,000.00 Standbycapital Within1year 2.09% GuangdongBlueTreasure Relatedparty 1,265,868.81 Powercosts Within1year 1.86% PharmaceuticalCo.,Ltd.
( )
Total 11,671,720.43 17.12% (6)Asat30September2013,therewasnoamountduefromashareholderholding5%(inclusive)ormore of voting rights in the Company.
(7) Please see note VII for the details of amounts due to related parties.
– I-67–
APPENDIX I ACCOUNTANTS’ REPORT 7. Inventories
(1) Categories of inventories
31December2010 31December2011 31December2012 30September2013
Provisionfor Provisionfor Provisionfor Provisionfor
diminutionin Netbook diminutionin Netbook diminutionin Netbook diminutionin Netbook Item Amount value value Amount value value Amount value value Amount value value Rawmaterials 173,827,402.38 525,090.95 173,302,311.43 202,423,005.91 1,861,885.09 200,561,120.82 208,936,291.88 1,296,162.85 207,640,129.03 217,087,064.61 765,586.99 216,321,477.62 Packagingmaterials 18,071,271.33 34,756.43 18,036,514.90 22,461,455.53 106,644.99 22,354,810.54 14,252,721.41 78,275.32 14,174,446.09 23,284,035.54 39,258.54 23,244,777.00 Workinprogress 58,626,391.25 28,818.42 58,597,572.83 62,881,651.61 230,499.98 62,651,151.63 106,904,120.64 391,869.11 106,512,251.53 105,423,087.94 8,244.29 105,414,843.65 Finishedgoods 200,361,514.59 2,439,441.65 197,922,072.94 124,204,642.82 6,942,721.66 117,261,921.16 172,366,395.81 8,684,390.52 163,682,005.29 232,600,587.44 5,328,948.07 227,271,639.37 Processingmaterials 783,213.31 – 783,213.31 332,203.60 – 332,203.60 – – – 189,462.82 – 189,462.82 Low-valued
consumables 61,397.65 – 61,397.65 123,902.99 – 123,902.99 562,067.18 – 562,067.18 1,641,047.17 – 1,641,047.17 Goodsintransit – – – 98,691.41 – 98,691.41 – – – – – – Consumablebiological
assets 1,511,358.36 – 1,511,358.36 3,623,758.25 – 3,623,758.25 29,144,084.11 – 29,144,084.11 39,135,853.61 – 39,135,853.61 Proprietarysemi-
finishedgoods – – – 18,439,392.00 1,024,111.05 17,415,280.95 27,855,418.10 3,072,401.80 24,783,016.30 27,599,266.14 4,348.77 27,594,917.37 Total 453,242,548.87 3,028,107.45 450,214,441.42 434,588,704.12 10,165,862.77 424,422,841.35 560,021,099.13 13,523,099.60 546,497,999.53 646,960,405.27 6,146,386.66 640,814,018.61 The consumable biological assets of the Group represent the planting of Chinese herbal medicines, including astragalus and radix notoginseng, which are the raw materials for the production of Chinese drug preparations.
(2) Provision for diminution in value of inventories
2010
Written back during
the period
Provision Reversal Write-off
Type of 31 December made for during the for the 31 December inventory 2009 the period period period 2010 Raw materials 955,214.00 244,287.26 – 674,410.31 525,090.95 Packaging
materials 50,043.57 96,013.29 – 111,300.43 34,756.43 Work in progress 493,257.73 34,991.37 – 499,430.68 28,818.42 Finished goods 10,128,351.33 5,385,223.69 – 13,074,133.37 2,439,441.65 Total 11,626,866.63 5,760,515.61 – 14,359,274.79 3,028,107.45
– I-68–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Written back for
the period
Provision Reversal Write-off
Type of 31 December made for for the for the 31 December inventory 2010 the period period period 2011 Raw materials 525,090.95 1,413,417.88 – 76,623.74 1,861,885.09 Packaging
materials 34,756.43 370,525.94 – 298,637.38 106,644.99 Work in progress 28,818.42 230,499.98 – 28,818.42 230,499.98 Finished goods 2,439,441.65 8,110,885.51 – 3,607,605.50 6,942,721.66 Proprietary semi-
finished goods – 1,024,111.05 – – 1,024,111.05 Total 3,028,107.45 11,149,440.36 – 4,011,685.04 10,165,862.77 2012
Written back for
the period
Provision Reversal Write-off
Type of 31 December made for for the for the 31 December inventory 2011 the period period period 2012 Raw materials 1,861,885.09 939,702.89 – 1,505,425.13 1,296,162.85 Packaging
materials 106,644.99 66,733.47 – 95,103.14 78,275.32 Work in progress 230,499.98 161,369.13 – 0.00 391,869.11 Finished goods 6,942,721.66 14,818,938.19 – 13,077,269.33 8,684,390.52 Proprietary semi-
finished goods 1,024,111.05 2,048,290.75 – – 3,072,401.80 Total 10,165,862.77 18,035,034.43 – 14,677,797.60 13,523,099.60 Nine months ended 30 September 2013
Written back for
the period
Provision
31 December made forthe Reversal for Write-off for 30 September Type of inventory 2012 period the period the period 2013 Raw materials 1,296,162.85 2,332,293.34 – 2,862,869.20 765,586.99 Packaging
materials 78,275.32 210,437.29 – 249,454.07 39,258.54 Work in progress 391,869.11 191,223.45 – 574,848.27 8,244.29 Finished goods 8,684,390.52 9,443,756.13 2,285,260.33 10,513,938.25 5,328,948.07 Proprietary semi-
finished goods 3,072,401.80 190,577.04 – 3,258,630.07 4,348.77 Total 13,523,099.60 12,368,287.25 2,285,260.33 17,459,739.86 6,146,386.66 Provision for diminution in value of inventories was recognised as the excess of the carrying amounts of inventories over their net realisable value at the balance sheet date. Net realisable value is the estimated selling prices in the normal course of business less any estimated costs to completion, estimated selling expenses and related taxes necessary to make the sale.
– I-69–
APPENDIX I ACCOUNTANTS’ REPORT 8. Available-for-sale financial assets
By category
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Available-for-sale equity
instruments 10,572,886.89 9,238,787.30 10,612,859.66 10,547,652.80 Of which: shares 10,572,886.89 9,238,787.30 10,612,859.66 10,547,652.80 During the reporting periods, the available-for-sale equity instruments held by the Group were listed and trading on Shanghai Stock Exchange or Shenzhen Stock Exchange.
9. Investments in associates
2010
Proportion ofvoting Placeof Legal Natureof Registered Shareholding rightinthe Nameofinvestee Typeofentity incorporation representative business capital percentage investee(%) (%) GuangdongBlue Limited Qingyuan AnNing Production USD7,530,000 35.91% 35.91% Treasure liability ( ) andsalesof
Pharmaceutical (Sino-foreign bulk
Co.Ltd. joint medicines
( venture)
)
LivzonMedical Limited Zhuhai XuXiaoxian Ceaseof RMB3,620,000 28% 28% Electronic liability ( ) business
Equipment
(Plant)Co.,Ltd.
(
( ) )
Tongyikangshimei Limited Shenzhen HuangQianli Salesof RMB100,000,000 35% 35% Chain(Shenzhen) liability ( ) goods
Co.,Ltd.(
(
) )
Total
Totalassetsat liabilitiesat Netassetsat
theendof theendof theendof Totalrevenue Netprofitfor Nameofinvestee theyear theyear theyear fortheyear theyear GuangdongBlueTreasure
PharmaceuticalCo.Ltd.
( ) 92,748,217.17 9,271,621.06 83,476,596.11 11,309,180.83 562,157.36 LivzonMedicalElectronic
Equipment(Plant)Co.,Ltd.
( ( )
) – – – – – TongyikangshimeiChain
(Shenzhen)Co.,Ltd.
( ( )
) 25,883,326.11 5,701,972.70 20,181,353.41 11,634,920.48 -7,458,274.45 Total 118,631,543.28 14,973,593.76 103,657,949.52 22,944,101.31 -6,896,117.09
– I-70–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Proportion ofvoting Placeof Legal Natureof Registered Shareholding rightinthe Nameofinvestee Typeofentity incorporation representative business capital percentage investee(%) (%) GuangdongBlue Limited Qingyuan AnNing Production USD7,530,000 35.91% 35.91% Treasure liability ( ) andsalesof
Pharmaceutical (Sino-foreign bulk
Co.Ltd. joint medicines
( venture)
)
LivzonMedical Limited Zhuhai XuXiaoxian Ceaseof RMB3,620,000 28% 28% Electronic liability ( ) business
Equipment
(Plant)Co.,Ltd.
(
( ) )
Tongyikangshimei Limited Shenzhen HuangQianli Salesof RMB100,000,000 35% 35% Chain(Shenzhen) liability ( ) goods
Co.,Ltd.(
( ) )
Total
Totalassetsat liabilitiesat Netassetsat
theendof theendof theendof Totalrevenue Netprofitfor Nameofinvestee theyear theyear theyear fortheyear theyear GuangdongBlueTreasure
PharmaceuticalCo.Ltd.
( ) 92,997,652.63 13,398,443.87 79,599,208.76 20,053,712.03 -3,877,398.35 LivzonMedicalElectronic
Equipment(Plant)Co.,Ltd.
( ( )
) – – – – – TongyikangshimeiChain
(Shenzhen)Co.,Ltd.(
( ) ) 20,977,919.81 4,323,057.78 16,654,862.03 16,257,665.43 -4,336,279.57 Total 113,975,572.44 17,721,501.65 96,254,070.79 36,311,377.46 -8,213,677.92
– I-71–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Proportion ofvoting Placeof Legal Natureof Registered Shareholding rightinthe Nameofinvestee Typeofentity incorporation representative business capital percentage investee(%) (%) GuangdongBlue Limited Qingyuan AnNing Production USD7,530,000 35.91% 35.91% Treasure liability ( ) andsalesof
Pharmaceutical (Sino-foreign bulk
Co.Ltd.( joint medicines
) venture)
LivzonMedical Limited Zhuhai XuXiaoxian Ceaseof RMB3,620,000 28% 28% Electronic liability ( ) business
Equipment
(Plant)Co.,Ltd.
(
( ) )
Tongyikangshimei Limited Shenzhen HuangQianli Salesof RMB100,000,000 35% 35% Chain(Shenzhen) liability ( ) goods
Co.,Ltd.(
(
) )
Total
Totalassetsat liabilitiesat Netassetsat
theendof theendof theendof Totalrevenue Netprofitfor Nameofinvestee theyear theyear theyear fortheyear theyear GuangdongBlueTreasure
PharmaceuticalCo.Ltd.
( ) 96,984,146.03 8,187,294.55 88,796,851.48 90,415,511.12 9,891,118.34 LivzonMedicalElectronic
Equipment(Plant)Co.,Ltd.
( ( )
) – – – – – TongyikangshimeiChain
(Shenzhen)Co.,Ltd.
( ( )
) 14,590,033.00 1,037,750.59 13,552,282.41 14,452,547.21 -3,102,579.62 Total 111,574,179.03 9,225,045.14 102,349,133.89 104,868,058.33 6,788,538.72
– I-72–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Proportion ofvoting Placeof Legal Natureof Registered Shareholding rightinthe Nameofinvestee Typeofentity incorporation Representative business capital Percentage investee(%) (%) GuangdongBlue Limited Qingyuan AnNing Production USD7,530,000 35.91% 35.91% TreasureCo., liability ( ) andsalesof
Ltd.( (Sino-foreign bulk
) joint medicines
venture)
LivzonMedical Limited Zhuhai XuXiaoxian Ceaseof RMB3,620,000 28% 28% Electronic liability ( ) business
Equipment
(Plant)Co.,Ltd.
(
( ) )
Tongyikangshimei Limited Shenzhen HuangQianli Salesof RMB100,000,000 35% 35% Chain(Shenzhen) liability ( ) goods
Co.,Ltd.(
(
) )
Total
Totalassetsat liabilitiesat Netassetsat
theendof theendof theendof Totalrevenue Netprofitfor Nameofinvestee theperiod theperiod theperiod fortheperiod theperiod GuangdongBlueTreasure
Co.,Ltd.
( ) 97,782,393.64 3,250,477.78 94,531,915.86 45,947,998.76 6,508,932.78 LivzonMedicalElectronic
Equipment(Plant)Co.,Ltd.
( ( )
) – – – – – TongyikangshimeiChain
(Shenzhen)Co.,Ltd.
( ( )
) 15,643,431.75 2,443,085.22 13,200,346.53 12,487,569.99 -351,935.88 Total 113,425,825.39 5,693,563.00 107,732,262.39 58,435,568.75 6,156,996.90
– I-73–
APPENDIX I ACCOUNTANTS’ REPORT 10. Long-term equity investments
(1) Long-term equity investments and provision for impairment
31December2010 31December2011 31December2012 30September2013
Provisionfor Carrying Provisionfor Carrying Provisionfor Carrying Provisionfor Carrying Item Grossamount impairment amount Grossamount impairment amount Grossamount impairment amount Grossamount impairment amount Investmentsunder
costmethod 27,527,348.84 20,600,000.00 6,927,348.84 102,853,108.84 20,600,000.00 82,253,108.84 102,853,108.84 20,600,000.00 82,253,108.84 102,853,108.84 20,600,000.00 82,253,108.84 Investmentsunder
equitymethod 40,193,271.70 1,200,000.00 38,993,271.70 37,475,899.07 1,200,000.00 36,275,899.07 39,908,094.54 1,200,000.00 38,708,094.54 41,978,579.10 1,200,000.00 40,778,579.10 Total 67,720,620.54 21,800,000.00 45,920,620.54 140,329,007.91 21,800,000.00 118,529,007.91 142,761,203.38 21,800,000.00 120,961,203.38 144,831,687.94 21,800,000.00 123,031,687.94 (2) Long-term equity investments under cost method
2010
Disposal
31December Additionsfor duringthe 31December Shareholding Cash Nameofinvestee Initialcost 2009 theperiod period 2010 percentage dividend ZhuhaiBranchofGuangdongDevelopmentBank
( ) 177,348.84 105,000.00 72,348.84 – 177,348.84 0.0004% – BeijingMedicalSuppliesJointOperating
Corporation( ) 100,000.00 100,000.00 – – 100,000.00 0.821% – DoumenSanzhouIndustrialCityCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 1.6% – ZhuhaiCityCommercialBankCo.,Ltd.
( ) 20,000,000.00 20,000,000.00 – – 20,000,000.00 1.5065% – RuihengMedicalTechnologyInvestment
Co.,Ltd.( ) 6,250,000.00 6,250,000.00 – – 6,250,000.00 5.681% – ShanghaiHaixinPharmaceuticalCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 4.55% – Total 27,527,348.84 27,455,000.00 72,348.84 – 27,527,348.84 – 2011
Disposal
31December Additionsfor duringthe 31December Shareholding Cash Nameofinvestee Initialcost 2010 theperiod period 2011 percentage dividend GuangdongDevelopmentBankCo.,Ltd.
( ) 177,348.84 177,348.84 – – 177,348.84 0.0004% – BeijingMedicalSuppliesJointOperating
Corporation( ) 100,000.00 100,000.00 – – 100,000.00 0.821% – DoumenSanzhouIndustrialCityCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 1.6% – ZhuhaiChinaResourcesBankCo.,Ltd.
( )* 95,325,760.00 20,000,000.00 75,325,760.00 – 95,325,760.00 1.5065% – RuihengMedicalTechnologyInvestmentCo.,
Ltd.( ) 6,250,000.00 6,250,000.00 – – 6,250,000.00 5.681% – ShanghaiHaixinPharmaceuticalCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 4.55% – Total 102,853,108.84 27,527,348.84 75,325,760.00 – 102,853,108.84 –
– I-74–
APPENDIX I ACCOUNTANTS’ REPORT* Note for the change of name for Zhuhai City Commercial Bank Co., Ltd. (
):UpontheapprovalbyChinaBankingRegulatoryCommissionandtheverificationby the Administration of Industry and Commerce of Zhuhai, “Zhuhai City Commercial Bank Co., Ltd. ( )” was renamed as “Zhuhai China Resources Bank Co., Ltd. ( )”andbecameofficiallyeffectiveon11April2011.Accordingtothe share offer scheme of Zhuhai China Resources Bank Co., Ltd. ( ) in June2011,allshareholderswereofferednewsharesonapro-ratabasiswith3.2468sharesfor1 share held at an offer price of RMB1.16 per share. On 11 July 2011, the Company entered into theletterofsubscriptionwithZhuhaiChinaResourcesBankCo.,Ltd.(
), and subscribed for 64,936,000 shares. The consideration for subscription of RMB75,325,760.00wassettledon15July2011.TheCompanyholds84,936,000sharesinZhuhai ChinaResourcesBankCo.,Ltd.( )andtheshareholdingpercentageis1.5065%.
2012
Disposal
31December Additionsfor duringthe 31December Shareholding Cash Nameofinvestee Initialcost 2011 theperiod period 2012 percentage dividend GuangdongDevelopmentBankCo.,Ltd.
( ) 177,348.84 177,348.84 – – 177,348.84 0.0004% – BeijingMedicalSuppliesJointOperating
Corporation( ) 100,000.00 100,000.00 – – 100,000.00 0.821% – DoumenSanzhouIndustrialCityCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 1.6% – ZhuhaiChinaResourcesBankCo.,Ltd.
( )* 95,325,760.00 95,325,760.00 – – 95,325,760.00 1.5065% – RuihengMedicalTechnologyInvestment
Co.,Ltd.( ) 6,250,000.00 6,250,000.00 – – 6,250,000.00 5.681% – ShanghaiHaixinPharmaceuticalCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 4.55% – Total 102,853,108.84 102,853,108.84 – – 102,853,108.84 – Nine months ended 30 September 2013
Disposal
31December Additionsfor duringthe 30September Shareholding Cash Nameofinvestee Initialcost 2012 theperiod period 2013 percentage dividend GuangdongDevelopmentBankCo.,Ltd.
( ) 177,348.84 177,348.84 – – 177,348.84 0.0004% – BeijingMedicalSuppliesJointOperating
Corporation
( ) 100,000.00 100,000.00 – – 100,000.00 0.821% – DoumenSanzhouIndustrialCityCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 1.6% – ZhuhaiChinaResourcesBankCo.,Ltd.
( ) 95,325,760.00 95,325,760.00 – – 95,325,760.00 1.5065% – RuihengMedicalTechnologyInvestment
Co.,Ltd.
( ) 6,250,000.00 6,250,000.00 – – 6,250,000.00 5.681% 343,750.00 ShanghaiHaixinPharmaceuticalCo.,Ltd.
( ) 500,000.00 500,000.00 – – 500,000.00 4.55% – Total 102,853,108.84 102,853,108.84 – – 102,853,108.84 343,750.00
– I-75–
APPENDIX I ACCOUNTANTS’ REPORT (3) Long-term equity investments under equity method
2010
Increase Decrease
31December duringthe duringthe 31December Shareholding Cash Nameofinvestee Investmentcost 2009 period period 2010 percentage dividend LivzonMedicalElectronicEquipment(Plant)
Co.,Ltd.( ( ) ) 1,200,000.00 1,200,000.00 – – 1,200,000.00 28% – GuangdongBlueTreasurePharmaceutical
Co.Ltd.( ) 11,227,540.45 31,407,945.89 521,852.12 – 31,929,798.01 35.91% – TongyikangshimeiChain(Shenzhen)
Co.,Ltd.( ( ) ) 35,000,000.00 10,054,041.31 – 2,990,567.62 7,063,473.69 35% – FujianProvinceGutianHuaminAntibioticsCo.,
Ltd.
( )* 2,400,000.00 2,400,000.00 – 2,400,000.00 – 24% – Total 49,827,540.45 45,061,987.20 521,852.12 5,390,567.62 40,193,271.70 –* Decrease during the period represented the write off the investment in Fujian Province Gutian HuaminAntibiotics Co., Ltd. ( ).
2011
Increase Decrease
31December duringthe duringthe 31December Shareholding Cash Nameofinvestee Investmentcost 2010 period period 2011 percentage dividend LivzonMedicalElectronicEquipment(Plant)
Co.,Ltd.( ( ) ) 1,200,000.00 1,200,000.00 – – 1,200,000.00 28% – GuangdongBlueTreasurePharmaceutical
Co.Ltd.( ) 11,227,540.45 31,929,798.01 – 1,483,100.65 30,446,697.36 35.91% – TongyikangshimeiChain(Shenzhen)Co.,Ltd.
( ( ) ) 35,000,000.00 7,063,473.69 – 1,234,271.98 5,829,201.71 35% – Total 47,427,540.45 40,193,271.70 – 2,717,372.63 37,475,899.07 – 2012
Increase Decrease
31December duringthe duringthe 31December Shareholding Cash Nameofinvestee Investmentcost 2011 period period 2012 percentage dividend LivzonMedicalElectronicEquipment(Plant)
Co.,Ltd.( ( ) ) 1,200,000.00 1,200,000.00 – – 1,200,000.00 28% – GuangdongBlueTreasurePharmaceutical
Co.Ltd.( ) 11,227,540.45 30,446,697.36 3,518,098.34 – 33,964,795.70 35.91% – TongyikangshimeiChain(Shenzhen)Co.,Ltd.
( ( ) ) 35,000,000.00 5,829,201.71 – 1,085,902.87 4,743,298.84 35% – Total 47,427,540.45 37,475,899.07 3,518,098.34 1,085,902.87 39,908,094.54 –
– I-76–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Increase Decrease
31December duringthe duringthe 30September Shareholding Cash Nameofinvestee Investmentcost 2012 period period 2013 percentage dividend LivzonMedicalElectronicEquipment(Plant)
Co.,Ltd.
( ( ) ) 1,200,000.00 1,200,000.00 – – 1,200,000.00 28% – GuangdongBlueTreasurePharmaceutical
Co.,Ltd.
( ) 11,227,540.45 33,964,795.70 2,193,662.12 – 36,158,457.82 35.91% – TongyikangshimeiChain(Shenzhen)Co.,Ltd.
( ( ) ) 35,000,000.00 4,743,298.84 – 123,177.56 4,620,121.28 35% – Total 47,427,540.45 39,908,094.54 2,193,662.12 123,177.56 41,978,579.10 – (4) Provision for impairment of long-term equity investments
2010
Provision Write-off Reason of
31 December made for for the 31 December provision
Name of investee 2009 the period period 2010 made
Doumen Sanzhou
Industrial City
Co., Ltd.
( Net asset less ) 500,000.00 – – 500,000.00 than zero Zhuhai City
Commercial Bank
Co., Ltd.
(
) 20,000,000.00 – – 20,000,000.00 Loss-making Livzon Medical
Electronic
Equipment (Plant)
Co., Ltd.
( Net asset less ( ) ) 1,200,000.00 – – 1,200,000.00 than zero Beijing Medical
Supplies Joint
Operating
Corporation Business
( registration ) 0.00 100,000.00 – 100,000.00 revoked
Fujian Province
Gutian Huamin
Antibiotics
Co., Ltd.
( Cease of
) 2,400,000.00 – 2,400,000.00 – business
Total 24,100,000.00 100,000.00 2,400,000.00 21,800,000.00
– I-77–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Provision Write-off Reason of
31 December made for the for the 31 December provision
Name of investee 2010 period period 2011 made
Doumen Sanzhou
Industrial City
Co., Ltd.
( Net asset less ) 500,000.00 – – 500,000.00 than zero Zhuhai China
Resources Bank
Co., Ltd.
(
) 20,000,000.00 – – 20,000,000.00 Loss-making Livzon Medical
Electronic
Equipment (Plant)
Co., Ltd.
( Net asset less ( ) ) 1,200,000.00 – – 1,200,000.00 than zero Beijing Medical
Supplies Joint
Operating
Corporation Business
( registration ) 100,000.00 – – 100,000.00 revoked
Total 21,800,000.00 – – 21,800,000.00
2012
Provision Write-off Reason of
31 December made for the for the 31 December provision
Name of investee 2011 period period 2012 made
Doumen Sanzhou
Industrial City
Co., Ltd.
( Net asset less ) 500,000.00 – – 500,000.00 than zero Zhuhai China
Resources Bank
Co., Ltd.
(
) 20,000,000.00 – – 20,000,000.00 Loss-making Livzon Medical
Electronic
Equipment (Plant)
Co., Ltd.
( Net asset less ( ) ) 1,200,000.00 – – 1,200,000.00 than zero Beijing Medical
Supplies Joint
Operating
Corporation Business
( registration ) 100,000.00 – – 100,000.00 revoked
Total 21,800,000.00 – – 21,800,000.00
– I-78–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Provision Reason for 31 December made for the Write-off for 30 September provision Name of investee 2012 period the period 2013 made Doumen Sanzhou
Industrial City
Co., Ltd.
( Net asset less ) 500,000.00 – – 500,000.00 than zero Zhuhai China
Resources Bank
Co., Ltd.
(
) 20,000,000.00 – – 20,000,000.00 Loss-making Livzon Medical
Electronic
Equipment (Plant)
Co., Ltd.
( Net asset less ( ) ) 1,200,000.00 – – 1,200,000.00 than zero Beijing Medical
Supplies Joint
Operating
Corporation Business
( registration ) 100,000.00 – – 100,000.00 revoked
Total 21,800,000.00 – – 21,800,000.00
– I-79–
APPENDIX I ACCOUNTANTS’ REPORT 11. Fixed assets and accumulated depreciation
(1) Breakdown
2010
31December Additionsfor Disposalduring 31December Item 2009 theperiod theperiod 2010 Costoffixedassets:
Plant&buildings 789,938,986.44 14,403,614.68 8,586,737.63 795,755,863.49Machinery&equipment 863,067,485.73 64,914,790.20 10,894,288.28 917,087,987.65 Motorvehicles 26,575,356.84 3,041,277.22 1,072,718.41 28,543,915.65 Electronicdevicesandothers 140,414,525.63 14,077,786.76 2,880,936.39 151,611,376.00 Total 1,819,996,354.64 96,437,468.86 23,434,680.71 1,892,999,142.79 Accumulateddepreciation:
Plant&buildings 337,925,677.26 33,505,428.54 5,982,556.01 365,448,549.79Machinery&equipment 473,680,331.59 59,873,057.43 8,358,189.12 525,195,199.90 Motorvehicles 15,731,367.40 1,991,362.51 979,664.52 16,743,065.39 Electronicdevicesandothers 104,216,384.49 12,176,238.49 2,557,931.10 113,834,691.88 Total 931,553,760.74 107,546,086.97 17,878,340.75 1,021,221,506.96 Netamountoffixedassets: 888,442,593.90 871,777,635.83 Provisionforimpairmentof
fixedassets:
Plant&buildings 24,768,735.49 – 1,057.79 24,767,677.70Machinery&equipment 41,863,273.00 776,233.91 473,445.75 42,166,061.16 Motorvehicles 116,203.04 0.00 950.00 115,253.04 Electronicdevicesandothers 776,118.32 39,007.72 28,518.16 786,607.88 Total 67,524,329.85 815,241.63 503,971.70 67,835,599.78 Netbookvalueoffixedassets: 820,918,264.05 803,942,036.05 2011
31December Additionsfor Disposalduring 31December Item 2010 theperiod theperiod 2011 Costoffixedassets:
Plant&buildings 795,755,863.49 252,690,067.64 2,105,524.77 1,046,340,406.36Machinery&equipment 917,087,987.65 154,908,410.96 17,954,131.89 1,054,042,266.72 Motorvehicles 28,543,915.65 8,023,278.79 2,344,960.30 34,222,234.14 Electronicdevicesandothers 151,611,376.00 14,241,868.99 3,174,376.06 162,678,868.93 Total 1,892,999,142.79 429,863,626.38 25,578,993.02 2,297,283,776.15 Accumulateddepreciation:
Plant&buildings 365,448,549.79 41,158,653.85 1,084,848.24 405,522,355.40Machinery&equipment 525,195,199.90 69,643,779.99 12,839,968.98 581,999,010.91 Motorvehicles 16,743,065.39 2,629,097.72 2,163,112.19 17,209,050.92 Electronicdevicesandothers 113,834,691.88 11,333,232.91 2,735,219.61 122,432,705.18 Total 1,021,221,506.96 124,764,764.47 18,823,149.02 1,127,163,122.41 Netamountoffixedassets: 871,777,635.83 1,170,120,653.74
– I-80–
APPENDIX I ACCOUNTANTS’ REPORT 31December Additionsfor Disposalduring 31December Item 2010 theperiod theperiod 2011 Provisionforimpairmentof
fixedassets:
Plant&buildings 24,767,677.70 12,787,546.49 – 37,555,224.19Machinery&equipment 42,166,061.16 2,990,640.29 4,170,548.05 40,986,153.40 Motorvehicles 115,253.04 – 19,692.60 95,560.44 Electronicdevicesandothers 786,607.88 184,637.49 54,409.88 916,835.49 Total 67,835,599.78 15,962,824.27 4,244,650.53 79,553,773.52 Netbookvalueoffixedassets: 803,942,036.05 1,090,566,880.22 2012
31December Additionsfor Disposalduring 31December Item 2011 theperiod theperiod 2012 Costoffixedassets:
Plant&buildings 1,046,340,406.36 62,313,012.77 4,310,655.86 1,104,342,763.27Machinery&equipment 1,054,042,266.72 94,275,093.64 27,972,562.83 1,120,344,797.53 Motorvehicles 34,222,234.14 9,205,970.18 1,932,514.25 41,495,690.07 Electronicdevicesandothers 162,678,868.93 21,452,123.99 4,833,638.37 179,297,354.55 Total 2,297,283,776.15 187,246,200.58 39,049,371.31 2,445,480,605.42 Accumulateddepreciation:
Plant&buildings 405,522,355.40 43,192,548.62 1,962,012.05 446,752,891.97Machinery&equipment 581,999,010.91 74,036,428.19 23,125,236.91 632,910,202.19 Motorvehicles 17,209,050.92 3,494,011.85 1,770,744.11 18,932,318.66 Electronicdevicesandothers 122,432,705.18 10,917,110.49 3,833,087.97 129,516,727.70 Total 1,127,163,122.41 131,640,099.15 30,691,081.04 1,228,112,140.52 Netamountoffixedassets: 1,170,120,653.74 1,217,368,464.90 Provisionforimpairmentof
fixedassets:
Plant&buildings 37,555,224.19 10,721,700.00 1,122,714.05 47,154,210.14Machinery&equipment 40,986,153.40 3,973,853.63 3,131,590.55 41,828,416.48 Motorvehicles 95,560.44 – – 95,560.44 Electronicdevicesandothers 916,835.49 267,463.72 179,506.74 1,004,792.47 Total 79,553,773.52 14,963,017.35 4,433,811.34 90,082,979.53 Netbookvalueoffixedassets: 1,090,566,880.22 1,127,285,485.37
– I-81–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
31December Additionsfor Disposalforthe 30September Item 2012 theperiod period 2013 Costoffixedassets:
Plant&building 1,104,342,763.27 121,320,017.62 – 1,225,662,780.89Machinery&equipment 1,120,344,797.53 81,555,783.53 5,644,931.18 1,196,255,649.88 Motorvehicles 41,495,690.07 8,868,993.54 1,260,795.81 49,103,887.80 Electronicdevicesandothers 179,297,354.55 17,684,282.76 998,715.79 195,982,921.52 Total 2,445,480,605.42 229,429,077.45 7,904,442.78 2,667,005,240.09 Accumulateddepreciation:
Plant&buildings 446,752,891.97 38,328,874.37 – 485,081,766.34Machinery&equipment 632,910,202.19 53,197,378.90 5,144,458.65 680,963,122.44 Motorvehicles 18,932,318.66 4,705,967.90 1,114,435.69 22,523,850.87 Electronicdevicesandothers 129,516,727.70 10,869,517.24 516,481.74 139,869,763.20 Total 1,228,112,140.52 107,101,738.41 6,775,376.08 1,328,438,502.85 Netamountoffixedassets: 1,217,368,464.90 1,338,566,737.24 Provisionforimpairmentof
fixedassets:
Plant&building 47,154,210.14 – – 47,154,210.14Machinery&equipment 41,828,416.48 – 137,745.95 41,690,670.53 Motorvehicles 95,560.44 – 108.30 95,452.14 Electronicdevicesandothers 1,004,792.47 – 10,606.35 994,186.12 Total 90,082,979.53 – 148,460.60 89,934,518.93 Netbookvalueoffixedassets: 1,127,285,485.37 1,248,632,218.31 (2) During the reporting period, construction in progress of RMB754,174,653.97 were completed and transferred to fixed assets. Of which, RMB193,456,860.63 were transferred during the nine months ended 30 September 2013, RMB129,798,453.94 were transferred in 2012, RMB377,422,874.63 were transferred in 2011 and RMB53,496,464.77 were transferred in 2010.
– I-82–
APPENDIX I ACCOUNTANTS’ REPORT (3) As at 30 September 2013, the breakdown of temporarily idled fixed assets was as follows:
Estimated
Accumulated Provisionfor Netbook time
Item Cost depreciation impairment value foruse
Plant&buildings 12,348,694.42 3,131,565.79 – 9,217,128.63 2014
Machinery&
equipment 17,437,576.27 9,884,096.00 – 7,553,480.27 2014
Office&other
equipment 3,321,190.04 3,030,457.38 – 290,732.66 2014
Total 33,107,460.73 16,046,119.17 – 17,061,341.56
(4) As at 30 September 2013, the breakdown of fixed assets intended to be disposed was as follows:
Estimated
Accumulated Provisionfor Netbook timeof
Item Cost depreciation impairment value disposal
Plant&buildings 118,735,567.25 79,945,745.41 26,478,548.20 12,311,273.64 2014
Machinery&
equipment 66,910,849.52 56,592,852.61 6,431,351.04 3,886,645.87 2014
Office&other
equipment 14,573,171.18 13,251,335.10 227,245.76 1,094,590.32 2014
Total 200,219,587.95 149,789,933.12 33,137,145.00 17,292,509.83
(5) During the reporting period, the Group did not have fixed assets held under finance leases.
(6) As at 30 September 2013, the breakdown of fixed assets leased out under operating leases was as follows:
Accumulated Provision for Net book Item Cost depreciation impairment value Plant& buildings 4,745,771.65 2,976,231.47 26,479.77 1,743,060.41 (7) As at 30 September 2013, fixed assets with pending certificates for ownership were as follows:
Accumulated Provisionfor Netbook
Item Cost depreciation impairment value Reason
Newconstruction project,beingPlant&buildings 431,181,790.42 60,190,317.92 – 370,991,472.50 inprogress
(8) Asat30September2013,nofixedassetwaspledgedorsecured.Theparticularsforthepledgeoffixed assets during the reporting period were set out in note V. 20.
– I-83–
APPENDIX I ACCOUNTANTS’ REPORT 12. Construction in progress
(1) Construction in progress
31December2010 31December2011 31December2012 30September2013
Provision Provision Provision Provision
for Netbook for Netbook for Netbook for Netbook Categoriesofproject Cost impairment value Cost impairment value Cost impairment value Cost impairment value Constructionofnew
productionplants 229,360,063.70 – 229,360,063.70 57,274,311.70 – 57,274,311.70 563,825,749.23 – 563,825,749.23 870,144,351.65 – 870,144,351.65 Installationof
equipment 63,002,300.98 – 63,002,300.98 18,546,510.54 – 18,546,510.54 377,069,920.09 – 377,069,920.09 613,586,539.88 – 613,586,539.88 Technologyupgrade 6,310,762.47 – 6,310,762.47 2,413,856.54 – 2,413,856.54 1,181,953.85 – 1,181,953.85 9,385,381.56 – 9,385,381.56 Workshopmodification 14,849,030.38 – 14,849,030.38 26,320,944.15 – 26,320,944.15 11,765,670.48 – 11,765,670.48 59,937,244.87 – 59,937,244.87 Others 4,384,213.97 – 4,384,213.97 44,286,005.23 – 44,286,005.23 74,925,756.83 – 74,925,756.83 83,162,260.39 – 83,162,260.39 Total 317,906,371.50 – 317,906,371.50 148,841,628.16 – 148,841,628.16 1,028,769,050.48 – 1,028,769,050.48 1,636,215,778.35 – 1,636,215,778.35 (2) Breakdown
2010
Percentageof Transferredto costincurred Budgeted 31December Additionsfor fixedassetfor Other 31December Sourcesof overbudgeted Categoriesofproject amount 2009 theperiod theperiod deduction 2010 funds amount Constructionofnew Borrowingsand
productionplants 409,609,000.00 81,421,653.78 151,890,713.73 3,952,303.81 – 229,360,063.70 self-funding 56.96% Installationof
equipment 88,567,651.50 2,741,355.70 85,702,075.71 25,091,438.38 349,692.05 63,002,300.98 Self-funding 99.86% Technologyupgrade 60,883,971.93 10,159,510.43 8,684,130.41 12,480,228.37 52,650.00 6,310,762.47 Self-funding 30.95% Workshop
modification 80,536,705.41 5,649,482.91 19,029,696.56 9,748,169.09 81,980.00 14,849,030.38 Self-funding 30.64% Others 77,220,214.88 3,867,742.54 2,740,796.55 2,224,325.12 – 4,384,213.97 Self-funding 8.56% Total 716,817,543.72 103,839,745.36 268,047,412.96 53,496,464.77 484,322.05 317,906,371.50
Thebalanceofconstructioninprogressat31December2010increasedby206.15%fromthebeginning of that year, which was mainly attributable to the additions of costs for “construction of new production plants”.
2011
Percentageof Transferredto costincurred Budgeted 31December Additionsfor fixedassetfor Other 31December Sourcesof overbudgeted Categoriesofproject amount 2010 theperiod theperiod deduction 2011 funds amount Constructionofnew Borrowingsand
productionplants 489,609,000.00 229,360,063.70 69,936,110.36 242,021,862.36 – 57,274,311.70 self-funding 61.13% Installationof
equipment 158,053,865.49 63,002,300.98 70,520,022.04 114,975,812.48 – 18,546,510.54 Self-funding 84.48% Technologyupgrade 132,813,422.83 6,310,762.47 1,921,872.71 5,167,047.22 651,731.42 2,413,856.54 Self-funding 6.20% Workshop
modification 77,141,976.41 14,849,030.38 16,679,251.60 5,164,618.27 42,719.56 26,320,944.15 Self-funding 40.87% Others 77,020,214.88 4,384,213.97 49,995,325.56 10,093,534.30 – 44,286,005.23 Self-funding 70.60% Total 934,638,479.61 317,906,371.50 209,052,582.27 377,422,874.63 694,450.98 148,841,628.16
– I-84–
APPENDIX I ACCOUNTANTS’ REPORTThebalanceofconstructioninprogressat31December2011decreasedby53.18%fromthebeginning of that year, which was mainly attributable to the transfer of projects completed to fixed assets during the period.
2012
Percentageof Transferredto costincurred Budgeted 31December Additionsfor fixedassetfor Other 31December Sourcesof overbudgeted Categoriesofproject amount 2011 theperiod theperiod deduction 2012 funds amount Constructionofnew Borrowingsand
productionplants 1,085,431,002.34 57,274,311.70 539,551,135.88 32,999,698.35 – 563,825,749.23 self-funding 54.99% Installationof
equipment 807,421,398.49 18,546,510.54 411,475,153.84 52,951,744.29 – 377,069,920.09 Self-funding 53.26% Technologyupgrade 50,876,932.95 2,413,856.54 11,673,709.24 12,905,611.93 – 1,181,953.85 Self-funding 27.69% Workshop
modification 54,009,900.00 26,320,944.15 11,150,987.30 25,706,260.97 – 11,765,670.48 Self-funding 69.38% Others 86,889,830.00 44,286,005.23 35,874,890.00 5,235,138.40 – 74,925,756.83 Self-funding 92.26% Total 2,084,629,063.78 148,841,628.16 1,009,725,876.26 129,798,453.94 – 1,028,769,050.48
Thebalanceofconstructioninprogressat31December2012increasedby591.18%fromthebeginning of that year, which was mainly attributable to the additions of costs for Ningxia project and “construction of new production plants” for the period.
Nine months ended 30 September 2013
Percentageof Transferredto costincurred Budgeted 31December Additionsfor fixedassetfor Other 30September Sourcesof overbudgeted Categoriesofproject amount 2012 theperiod theperiod deduction 2013 funds amount Constructionofnew Borrowingsand
productionplants 1,532,192,145.77 563,825,749.23 419,253,615.90 112,935,013.48 – 870,144,351.65 self-funding 64.16% Installationof
equipment 1,063,431,940.00 377,069,920.09 314,643,761.39 78,070,068.00 57,073.60 613,586,539.88 Self-funding 65.05% Technologyupgrade 11,262,425.82 1,181,953.85 9,354,644.32 1,151,216.61 – 9,385,381.56 Self-funding 93.56% Workshop
modification 82,530,682.62 11,765,670.48 49,250,708.90 1,073,208.54 5,925.97 59,937,244.87 Self-funding 73.93% Others 86,889,830.00 74,925,756.83 8,463,857.56 227,354.00 – 83,162,260.39 Self-funding 95.97% Total 2,776,307,024.21 1,028,769,050.48 800,966,588.07 193,456,860.63 62,999.57 1,636,215,778.35
Thebalanceofconstructioninprogressat30September2013increasedby59.05%fromthebeginningofthe period,whichwasmainlyattributabletoadditionsofcostsfor“constructionofnewproductionplants”fortheperiod and the additions of costs of equipment for Livzon Group Limin Pharmaceutical Manufacturing Factory (
).
– I-85–
APPENDIX I ACCOUNTANTS’ REPORT (3) During the reporting period, the interest capitalised in the projects under construction in progress was as follows:
2010
Transferredto
31December Additionsfor fixedassetfor Other 31December Categoriesofproject 2009 theperiod theperiod deduction 2010 Constructionofnew
productionplants 7,737,045.90 4,509,279.38 – – 12,246,325.28 2011
Transferredto
31December Additionsfor fixedassetfor Other 31December Categoriesofproject 2010 theperiod theperiod deduction 2011 Constructionofnew
productionplants 12,246,325.28 6,154,250.65 15,160,902.28 – 3,239,673.65 2012
Transferredto
31December Additionsfor fixedassetfor Other 31December Categoriesofproject 2011 theperiod theperiod deduction 2012 Constructionofnew
productionplants 3,239,673.65 13,799,972.48 4,442,313.91 – 12,597,332.22 Nine months ended 30 September 2013
Transferredto
31December Additionsfor fixedassets Other 30September Categoriesofproject 2012 theperiod fortheperiod deduction 2013 Constructionofnew
productionplants 12,597,332.22 33,544,832.73 7,215,904.40 – 38,926,260.55 The capitalised rate of capitalised borrowing cost for construction in progress adopted the specific lending rate offered by the banks.
– I-86–
APPENDIX I ACCOUNTANTS’ REPORT 13. Construction supplies
31 December 31 December 31 December 30 September Categories of supplies 2010 2011 2012 2013 Specialised materials 398,200.00 – – – Specialised equipment 24,797,644.94 2,536,926.00 1,623,576.06 2,008,814.04 Total 25,195,844.94 2,536,926.00 1,623,576.06 2,008,814.04 The balance of construction supplies at 31 December 2012 decreased by36.00% from the beginning of thatyearandthebalanceofconstructionsuppliesat31December2011decreasedby89.93%fromthebeginningofthat year, which was mainly attributable to the transfer of specialised equipment purchased to construction in progress. 14. Intangible assets and accumulated amortisation
(1) Breakdown
2010
Disposal
31 December Additions for during 31 December Item 2009 the period the period 2010 (i) Cost
Land use rights 156,246,944.89 – – 156,246,944.89 Technical know-how 85,337,778.89 30,582,906.69 – 115,920,685.58 Software 7,402,016.90 238,188.88 – 7,640,205.78 Trademark rights 24,000.00 – – 24,000.00 Total 249,010,740.68 30,821,095.57 – 279,831,836.25 (ii) Accumulated amortisation
Land use rights 40,137,494.30 2,938,631.64 – 43,076,125.94 Technical know-how 54,790,007.88 9,031,554.01 – 63,821,561.89 Software 5,438,865.29 1,337,180.04 – 6,776,045.33 Trademark rights 24,000.00 – – 24,000.00 Total 100,390,367.47 13,307,365.69 – 113,697,733.16 (iii) Provision for impairment
of intangible assets
Land use rights 981,826.94 – – 981,826.94 Technical know-how 1,379,999.89 – – 1,379,999.89 Software – – – – Trademark rights – – – – Total 2,361,826.83 – – 2,361,826.83 (iv) Carrying amount of
intangible assets
Land use rights 115,127,623.65 -2,938,631.64 – 112,188,992.01 Technical know-how 29,167,771.12 21,551,352.68 – 50,719,123.80 Software 1,963,151.61 -1,098,991.16 – 864,160.45 Trademark rights – – – – Total 146,258,546.38 17,513,729.88 – 163,772,276.26
– I-87–
APPENDIX I ACCOUNTANTS’ REPORT The additions in technical know-how for the period were mainly attributable to (i) the contribution to LivzonGroupVaccineEngineeringInc.( ),anewlyestablishedsubsidiarywas made partially from the contribution of technical know-how at an amount of RMB21,190,000 and (ii) the technical know-how for Mouse Nerve Growth Factor for Injection ( ) was transferred from prepayments at an amount of RMB5,000,000.
2011
Disposal
31 December Additions for during 31 December Item 2010 the period the period 2011 (i) Cost
Land use rights 156,246,944.89 – – 156,246,944.89 Technical know-how 115,920,685.58 17,125,709.00 1,553,054.56 131,493,340.02 Software 7,640,205.78 6,049,168.46 – 13,689,374.24 Trademark rights 24,000.00 – – 24,000.00 Total 279,831,836.25 23,174,877.46 1,553,054.56 301,453,659.15 (ii) Accumulated amortisation
Land use rights 43,076,125.94 2,962,895.64 – 46,039,021.58 Technical know-how 63,821,561.89 12,160,935.66 1,213,838.11 74,768,659.44 Software 6,776,045.33 1,098,555.39 – 7,874,600.72 Trademark rights 24,000.00 – – 24,000.00 Total 113,697,733.16 16,222,386.69 1,213,838.11 128,706,281.74 (iii) Provision for impairment
of intangible assets
Land use rights 981,826.94 – – 981,826.94 Technical know-how 1,379,999.89 – – 1,379,999.89 Software – – – – Trademark rights – – – – Total 2,361,826.83 – – 2,361,826.83 (iv) Carrying amount of
intangible assets
Land use rights 112,188,992.01 -2,962,895.64 – 109,226,096.37 Technical know-how 50,719,123.80 4,625,556.89 – 55,344,680.69 Software 864,160.45 4,950,613.07 – 5,814,773.52 Trademark rights – – – – Total 163,772,276.26 6,613,274.32 – 170,385,550.58 Theadditionsintechnicalknow-howfortheperiodweremainlyattributableto(i)thepurchasecostfor the technical know-how regardingAnti-TNF acquired by Livzon Group Vaccine Engineering Inc. (
), a subsidiary of the Company, for the period at an amount of RMB10,000,000, (ii) technologiesonrawmaterialsofblonanserin( )transferredfromprepaymentsatanamount of RMB2,000,000, (iii) the purchase cost for the technical know-how regarding raw materials and tablets on clopidogrelbisulfate( )atanamountofRMB830,000,and(iv)thecapitalisedcost onthetechnicalknow-howregardingenramycintechnology( )atanamountofRMB2,200,000.
– I-88–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Disposal
31 December Additions for during 31 December Item 2011 the period the period 2012 (i) Cost
Land use rights 156,246,944.89 38,043,416.31 – 194,290,361.20 Technical know-how 131,493,340.02 7,550,000.00 – 139,043,340.02 Software 13,689,374.24 9,497,818.26 – 23,187,192.50 Trademark rights 24,000.00 – – 24,000.00 Total 301,453,659.15 55,091,234.57 – 356,544,893.72 (ii) Accumulated amortisation
Land use rights 46,039,021.58 4,083,088.98 – 50,122,110.56 Technical know-how 74,768,659.44 12,796,296.99 – 87,564,956.43 Software 7,874,600.72 3,467,705.52 – 11,342,306.24 Trademark rights 24,000.00 – – 24,000.00 Total 128,706,281.74 20,347,091.49 – 149,053,373.23 (iii) Provision for impairment
of intangible assets
Land use rights 981,826.94 – – 981,826.94 Technical know-how 1,379,999.89 – – 1,379,999.89 Software – – – – Trademark rights – – – – Total 2,361,826.83 – – 2,361,826.83 (iv) Carrying amount of
intangible assets
Land use rights 109,226,096.37 33,960,327.33 – 143,186,423.70 Technical know-how 55,344,680.69 -5,246,296.99 – 50,098,383.70 Software 5,814,773.52 6,030,112.74 – 11,844,886.26 Trademark rights – – – – Total 170,385,550.58 34,744,143.08 – 205,129,693.66 The additions in the technical know-how for the current period were mainly attributable to (i) the purchase cost for the technical know-how regarding Anti-CD20 monoclonal antibody ( ) acquired by Livzon Pharmaceutical Group Inc. ( ) for the period at an amount of RMB6,000,000and(ii)thepurchasecostforthetechnicalknow-howregardingargininestrains( ) FM128. Teicoplanin and daptomycin ( , ) acquired by Livzon Group Fuzhou Fuxing PharmaceuticalCo.,Ltd.( ),asubsidiaryoftheCompany,fortheperiodatan amount of RMB1,550,000 in total.
– I-89–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Disposal
31 December Additions for during the 30 September Item 2012 the period period 2013 (i) Cost
Land use rights 194,290,361.20 28,796,648.00 – 223,087,009.20 Technical know-how 139,043,340.02 5,288,355.14 – 144,331,695.16 Software 23,187,192.50 2,883,156.41 – 26,070,348.91 Trademark rights 24,000.00 – – 24,000.00 Total 356,544,893.72 36,968,159.55 – 393,513,053.27 (ii) Accumulated amortisation
Land use rights 50,122,110.56 3,323,250.64 – 53,445,361.20 Technical know-how 87,564,956.43 8,421,425.46 – 95,986,381.89 Software 11,342,306.24 2,663,936.08 – 14,006,242.32 Trademark rights 24,000.00 – – 24,000.00 Total 149,053,373.23 14,408,612.18 – 163,461,985.41 (iii) Provision for impairment
of intangible assets
Land use rights 981,826.94 – – 981,826.94 Technical know-how 1,379,999.89 – – 1,379,999.89 Software – – – – Trademark rights – – – – Total 2,361,826.83 – – 2,361,826.83 (iv) Carrying amount of
intangible assets
Land use rights 143,186,423.70 25,473,397.36 – 168,659,821.06 Technical know-how 50,098,383.70 -3,133,070.32 – 46,965,313.38 Software 11,844,886.26 219,220.33 – 12,064,106.59 Trademark rights – – – – Total 205,129,693.66 22,559,547.37 – 227,689,241.03 (1) Theadditionsinthetechnicalknow-howforthecurrentperiodweremainlyattributabletothepurchase cost for the technical know-how regarding the production technology for pramipexole ( ) at a consideration of RMB1,300,000, the purchase cost for the technical know-how regarding the productiontechnologyforenramycin( )ataconsiderationofRMB500,000,thepurchasecost for the technical know-how regarding the production technology for recombinant human villi gonadotropin injections ( (HCG)) at a consideration of RMB1,500,000, the purchase cost for the technical know-how regarding the production technology for milbemycin oxime ( )andthepurchasecostforthetechnicalknow-howregardingtheproductiontechnology for moses avermectin ( ) at a consideration of RMB1,200,000.
(2) As at 30 September 2013, intangible assets with pending certificates for ownership were as follows: Accumulated Provisionfor Netbook
Item Cost depreciation impairment value Reason
Landuserights 21,305,948.48 3,473,935.65 – 17,832,012.83 Beinginprogress
– I-90–
APPENDIX I ACCOUNTANTS’ REPORT 15. Development costs
2010
Decreaseduringtheperiod
Recognisedin
profitorloss Recognised
31December Additionsfor forthecurrent asintangible 31December Item 2009 theperiod period assets 2010 Capitalisedcosts 7,369,974.29 1,320,490.73 3,399,826.24 958,500.97 4,332,137.81 2011
Decreaseduringtheperiod
Recognisedin
profitorloss Recognised
31December Additionsfor forthecurrent asintangible 31December Item 2010 theperiod period assets 2011 Capitalisedcosts 4,332,137.81 1,832,076.79 1,721,984.30 2,932,076.79 1,510,153.51 2012
Decreaseduringtheperiod
Recognisedin
profitorloss Recognised
31December Additionsfor forthecurrent asintangible 31December Item 2011 theperiod period assets 2012 Capitalisedcosts 1,510,153.51 – – – 1,510,153.51 Nine months ended 30 September 2013
Decreaseduringtheperiod
Recognisedin
profitorloss Recognised
31December Additionsfor forthecurrent asintangible 30September Item 2012 theperiod period assets 2013 Capitalisedcosts 1,510,153.51 – 921,798.37 588,355.14 – 16. Goodwill
31December2010 31December2011 31December2012 30September2013
Provisionfor Carrying Provisionfor Carrying Provisionfor Carrying Provisionfor Carrying Item Cost impairment amount Cost impairment amount Cost impairment amount Cost impairment amount Goodwill 121,799,561.00 18,759,063.15103,040,497.85121,799,561.00 18,759,063.15103,040,497.85121,799,561.00 18,759,063.15103,040,497.85121,799,561.00 18,759,063.15103,040,497.85
– I-91–
APPENDIX I ACCOUNTANTS’ REPORT The breakdown of cost of goodwill was as follows:
2010
Disposal
31December Additionsfor during 31December
Nameofinvestee 2009 theperiod theperiod 2010 Arisingfrom
LivzonGroupLivzon 47,912,269.66 – – 47,912,269.66 Excessofacquisition
PharmaceuticalFactory costoverfairvalueof ( ) identifiablenetassets acquired
SichuanGuangda 13,863,330.24 – – 13,863,330.24 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
LivzonGroupFuzhouFuxing 46,926,155.25 – – 46,926,155.25 Excessofacquisition
Pharmaceutical costoverfairvalueof Co.,Ltd. identifiablenetassets ( acquired
)
LivzonGroupXinbeijiang 7,271,307.03 – – 7,271,307.03 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingInc. identifiablenetassets ( acquired
)
ZhuhaiLivzonMeidaxin 287,756.12 – – 287,756.12 Excessofacquisition
TechnologicalDevelopment costoverfairvalueof Co.,Ltd. identifiablenetassets ( acquired
)
ShanghaiLivzon 2,045,990.12 – – 2,045,990.12 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
ZhuhaiFTZLivzonHecheng 3,414,752.58 – – 3,414,752.58 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( acquired
)
LidaPharmaceuticalCo.,Ltd. 78,000.00 – – 78,000.00 Excessofacquisition
ofZhuhaiFreeTradeZone costoverfairvalueof ( identifiablenetassets ) acquired
Total 121,799,561.00 – – 121,799,561.00
– I-92–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Disposal
31December Additionsfor during 31December
Nameofinvestee 2010 theperiod theperiod 2011 Arisingfrom
LivzonGroupLivzon 47,912,269.66 – – 47,912,269.66 Excessofacquisition
PharmaceuticalFactory costoverfairvalueof ( ) identifiablenetassets acquired
SichuanGuangda 13,863,330.24 – – 13,863,330.24 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
LivzonGroupFuzhouFuxing 46,926,155.25 – – 46,926,155.25 Excessofacquisition
PharmaceuticalCo.,Ltd. costoverfairvalueof ( identifiablenetassets ) acquired
LivzonGroupXinbeijiang 7,271,307.03 – – 7,271,307.03 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingInc. identifiablenetassets ( acquired
)
ZhuhaiLivzonMeidaxin 287,756.12 – – 287,756.12 Excessofacquisition
TechnologicalDevelopment costoverfairvalueof Co.,Ltd. identifiablenetassets ( acquired
)
ShanghaiLivzon 2,045,990.12 – – 2,045,990.12 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
ZhuhaiFTZLivzonHecheng 3,414,752.58 – – 3,414,752.58 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( acquired
)
LidaPharmaceuticalCo.,Ltd. 78,000.00 – – 78,000.00 Excessofacquisition
ofZhuhaiFreeTradeZone costoverfairvalueof ( identifiablenetassets ) acquired
Total 121,799,561.00 – – 121,799,561.00
– I-93–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Disposal
31December Additionsfor during 31December
Nameofinvestee 2011 theperiod theperiod 2012 Arisingfrom
LivzonGroupLivzon 47,912,269.66 – – 47,912,269.66 Excessofacquisition
PharmaceuticalFactory costoverfairvalueof ( ) identifiablenetassets acquired
SichuanGuangda 13,863,330.24 – – 13,863,330.24 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
LivzonGroupFuzhouFuxing 46,926,155.25 – – 46,926,155.25 Excessofacquisition
PharmaceuticalCo.,Ltd. costoverfairvalueof ( identifiablenetassets ) acquired
LivzonGroupXinbeijiang 7,271,307.03 – – 7,271,307.03 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingInc. identifiablenetassets ( acquired
)
ZhuhaiLivzonMeidaxin 287,756.12 – – 287,756.12 Excessofacquisition
TechnologicalDevelopment costoverfairvalueof Co.,Ltd. identifiablenetassets ( acquired
)
ShanghaiLivzon 2,045,990.12 – – 2,045,990.12 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
ZhuhaiFTZLivzonHecheng 3,414,752.58 78,000.00 – 3,492,752.58 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( acquired
)
LidaPharmaceuticalCo.,Ltd. 78,000.00 – 78,000.00 – Excessofacquisition
ofZhuhaiFreeTradeZone costoverfairvalueof ( identifiablenetassets ) acquired
Total 121,799,561.00 78,000.00 78,000.00 121,799,561.00
– I-94–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Disposal
31December Additionsfor duringthe 30September
Nameofinvestee 2012 theperiod period 2013 Arisingfrom
LivzonGroupLivzon 47,912,269.66 – – 47,912,269.66 Excessofacquisition
PharmaceuticalFactory costoverfairvalueof ( ) identifiablenetassets acquired
SichuanGuangda 13,863,330.24 – – 13,863,330.24 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
LivzonGroupFuzhouFuxing 46,926,155.25 – – 46,926,155.25 Excessofacquisition
PharmaceuticalCo.,Ltd. costoverfairvalueof ( identifiablenetassets ) acquired
LivzonGroupXinbeijiang 7,271,307.03 – – 7,271,307.03 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingInc. identifiablenetassets ( acquired
)
ZhuhaiLivzonMeidaxin 287,756.12 – – 287,756.12 Excessofacquisition
TechnologicalDevelopment costoverfairvalueof Co.,Ltd.( identifiablenetassets ) acquired
ShanghaiLivzon 2,045,990.12 – – 2,045,990.12 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( ) acquired
ZhuhaiFTZLivzonHecheng 3,492,752.58 – – 3,492,752.58 Excessofacquisition
Pharmaceutical costoverfairvalueof ManufacturingCo.,Ltd. identifiablenetassets ( acquired
)
Total 121,799,561.00 – – 121,799,561.00
– I-95–
APPENDIX I ACCOUNTANTS’ REPORT The breakdown of impairment of goodwill was as follows:
2010
Decrease
31 December Additions for during 31 December Name of investee 2009 the period the period 2010 Livzon Group Fuzhou Fuxing
Pharmaceutical Co., Ltd.
( ) 11,200,000.00 – – 11,200,000.00 Livzon Group Xinbeijiang
Pharmaceutical Manufacturing
Inc. (
) 7,271,307.03 – – 7,271,307.03 Zhuhai Livzon Meidaxin
Technological Development
Co., Ltd. (
) 287,756.12 – – 287,756.12 Total 18,759,063.15 – – 18,759,063.15 2011
Decrease
31 December Additions for during 31 December Name of investee 2010 the period the period 2011 Livzon Group Fuzhou Fuxing
Pharmaceutical Co., Ltd.
( ) 11,200,000.00 – – 11,200,000.00 Livzon Group Xinbeijiang
Pharmaceutical Manufacturing
Inc. (
) 7,271,307.03 – – 7,271,307.03 Zhuhai Livzon Meidaxin
Technological Development
Co., Ltd. (
) 287,756.12 – – 287,756.12 Total 18,759,063.15 – – 18,759,063.15 2012
Decrease
31 December Additions for during 31 December Name of investee 2011 the period the period 2012 Livzon Group Fuzhou Fuxing
Pharmaceutical Co., Ltd.
( ) 11,200,000.00 – – 11,200,000.00 Livzon Group Xinbeijiang
Pharmaceutical Manufacturing
Inc. (
) 7,271,307.03 – – 7,271,307.03 Zhuhai Livzon Meidaxin
Technological Development
Co., Ltd. (
) 287,756.12 – – 287,756.12 Total 18,759,063.15 – – 18,759,063.15
– I-96–
APPENDIX I ACCOUNTANTS’ REPORT None months ended 30 September 2013
Decrease
31 December Additions for during the 30 September Name of investee 2012 the period period 2013 Livzon Group Fuzhou Fuxing
Pharmaceutical Co., Ltd. (
) 11,200,000.00 – – 11,200,000.00 Livzon Group Xinbeijiang
Pharmaceutical Manufacturing
Inc. (
) 7,271,307.03 – – 7,271,307.03 Zhuhai Livzon Meidaxin
Technological Development Co.,
Ltd. (
) 287,756.12 – – 287,756.12 Total 18,759,063.15 – – 18,759,063.15 Method for impairment test of goodwill:
The goodwill of the Group arose from the business combinations involving enterprises not under common control in the prior years.
Atthebalancesheetdate,theGroupconductedimpairmenttestofgoodwillandtherecoverableamountofthe goodwill was estimated by the present value of expected future cash flows from the asset group related to the goodwill. The recoverable amount was determined by discounting the cash flows at a discount rate of12% for the yearsended31December2010,2011and2012andninemonthsended30September2013,withtheassumptionthat the investee units can continue their operations and are expected to generate cash flows. The expected future cash flowswereprojectedbasedonpastexperienceandfinancialbudgetapprovedbythemanagementoftheGroup.Thefinancialbudgetcoveredcashflowswithin5yearsandthecashflowsafter5yearsareextrapolatedusing2%growth rate.The management of the Group expects no provision for impairment loss is necessary to be made for goodwill during the reporting period.
17. Long-term deferred expense
2010
Remaining
31December Additionsfor Deductionfor Amortisation 31December Accumulated amortisation Item Initialamount 2009 theperiod theperiod fortheperiod 2010 amortisation period
Overhaulcostsof
fixedassets 5,808,053.32 2,841,824.29 1,296,753.26 – 1,270,821.30 2,867,756.25 2,940,297.07 4-73months Renovationcosts
ofoffices 2,452,231.41 92,159.04 2,091,613.41 – 315,659.73 1,868,112.72 584,118.69 2-57months Renovationcosts
ofplants 1,144,337.66 539,605.50 – – 241,214.15 298,391.35 845,946.31 9-37months Shareofcostsfor
publicutilities 436,008.31 151,073.50 7,400.00 – 29,930.55 128,542.95 307,465.36 11-58months Resin 4,188,551.71 1,092,417.01 942,803.23 – 805,827.97 1,229,392.27 2,959,159.44 3-34months Others 3,702,385.52 744,133.95 1,960,240.92 – 456,352.07 2,248,022.80 1,454,362.72 5-56months Total 17,731,567.93 5,461,213.29 6,298,810.82 – 3,119,805.77 8,640,218.34 9,091,349.59
The balance at 31 December 2010 increased by58.21% from the beginning of the year, which was mainly attributable to the increase in renovation costs of offices for the current period.
– I-97–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Remaining
31December Additionsfor Deductionfor Amortisation 31December Accumulated amortisation Item Initialamount 2010 theperiod theperiod fortheperiod 2011 amortisation period
Overhaulcostsof
fixedassets 7,818,816.08 2,867,756.25 2,010,762.76 – 830,550.90 4,047,968.11 3,770,847.97 7-61months Renovationcosts
ofoffices 2,452,231.41 1,868,112.72 – – 562,728.37 1,305,384.35 1,146,847.06 12-45months Renovationcosts
ofplants 7,269,841.54 298,391.35 6,125,503.88 – 1,201,036.77 5,222,858.46 2,046,983.08 1-53months Shareofcostsfor
publicutilities 591,788.14 128,542.95 155,779.83 – 75,152.15 209,170.63 382,617.51 38-46months Resin 5,128,561.29 1,229,392.27 940,009.58 – 1,064,582.03 1,104,819.82 4,023,741.47 1-35months Others 4,187,390.22 2,248,022.80 485,004.70 – 352,802.61 2,380,224.89 1,807,165.33 18-54months Total 27,448,628.68 8,640,218.34 9,717,060.75 – 4,086,852.83 14,270,426.26 13,178,202.42
The balance at 31 December 2011 increased by65.16% from the beginning of the year, which was mainly attributable to the increase in renovation costs of plants for the current period.
2012
Remaining
31December Additionsfor Deductionfor Amortisation 31December Accumulated amortisation Item Initialamount 2011 theperiod theperiod fortheperiod 2012 amortisation period
Overhaulcostsof
fixedassets 9,425,652.98 4,047,968.11 1,606,836.90 – 1,490,414.35 4,164,390.66 5,261,262.32 6-55months Renovationcosts
ofoffices 3,173,975.43 1,305,384.35 721,744.02 – 753,453.11 1,273,675.26 1,900,300.17 7-55months Renovationcosts
ofplants 7,323,158.54 5,222,858.46 53,317.00 – 2,109,727.36 3,166,448.10 4,156,710.44 5-21months Shareofcostsfor
publicutilities 591,788.14 209,170.63 – – 68,376.15 140,794.48 450,993.66 26-34months Resin 11,043,382.69 1,104,819.82 5,914,821.40 – 1,092,074.49 5,927,566.73 5,115,815.96 2-35months Others 7,370,582.69 2,380,224.89 3,183,192.47 – 2,450,422.14 3,112,995.22 4,257,587.47 6-95months Total 38,928,540.47 14,270,426.26 11,479,911.79 – 7,964,467.60 17,785,870.45 21,142,670.02
The balance at 31 December 2012 increased by24.63% from the beginning of the year, which was mainly attributable to the purchase of resin and increase in renovation costs of temporary construction for planting.
Nine months ended 30 September 2013
Remaining 31December Additionsfor Deductionfor Amortisation 30September Accumulated amortisation Item Initialamount 2012 theperiod theperiod fortheperiod 2013 amortisation period Overhauloffixed
assets 10,464,933.37 4,164,390.66 1,039,280.39 – 1,335,909.79 3,867,761.26 6,597,172.11 11-59months Renovationcosts
ofoffices 3,203,133.08 1,273,675.26 29,157.65 – 592,908.18 709,924.73 2,493,208.35 10-36months Renovationcosts
ofplants 7,323,158.54 3,166,448.10 – – 1,485,869.54 1,680,578.56 5,642,579.98 3-56months Shareofcostsfor
publicutilities 591,788.14 140,794.48 – – 57,095.16 83,699.32 508,088.82 12-49months Resin 13,715,167.96 5,927,566.73 2,671,785.27 – 2,260,132.34 6,339,219.66 7,375,948.30 1-35months Others 10,799,192.68 3,112,995.22 3,428,609.99 – 2,780,501.08 3,761,104.13 7,038,088.55 4-33months Total 46,097,373.77 17,785,870.45 7,168,833.30 – 8,512,416.09 16,442,287.66 29,655,086.11
– I-98–
APPENDIX I ACCOUNTANTS’ REPORT 18. Deferred tax assets
31December 31December 31December 30September Category 2010 2011 2012 2013 Deductibletemporarydifferencearisingfrom
provisionforimpairment 15,548,647.51 20,031,422.32 24,567,976.14 24,298,800.28 Deductibletemporarydifferencearisingfrom
Long-termequityinvestmentsnotinthescope
ofconsolidation 3,477,190.61 3,754,298.60 3,763,451.17 3,707,214.92 Deductibletemporarydifferencearisingfrom
amortisationofintangibleassets 383,207.81 322,098.26 60,230.11 16,205.92 Deductibletemporarydifferencearisingfrom
accruedexpenses 3,253,760.11 4,304,719.21 6,621,016.91 7,430,240.39 Deductibletemporarydifferencearisingfromtax
lossescarriedforward 81,643.00 7,145,831.32 7,517,170.15 7,519,887.52 Deductibletemporarydifferencearisingfrom
deferredincome 200,658.56 435,742.50 630,007.50 832,507.50 Total 22,945,107.60 35,994,112.21 43,159,851.98 43,804,856.53Thebalanceofdeferredtaxassetsat31December2011increasedby56.87%fromthebeginningofthatyear, which was mainly attributable to the increase in provision for impairment of fixed assets and the increase in deductible temporary difference arising from tax losses carried forward for the current period.
19. Provision for impairment
2010
Writtenbackfortheperiod
31December Additionsfor Reversalfor Write-offfor 31December Item 2009 theperiod theperiod theperiod 2010 Provisionforbaddebts 29,056,201.85 4,275,518.98 – 304,223.52 33,027,497.31 Provisionfordiminutionin
valueofinventories 11,626,866.63 5,760,515.61 – 14,359,274.79 3,028,107.45 Provisionforimpairment
oflong-termequity
investments 24,100,000.00 100,000.00 – 2,400,000.00 21,800,000.00 Provisionforimpairment
offixedassets 67,524,329.85 815,241.63 – 503,971.70 67,835,599.78 Provisionforimpairment
ofintangibleassets 2,361,826.83 – – – 2,361,826.83 Provisionforimpairment
ofgoodwill 18,759,063.15 – – – 18,759,063.15 Total 153,428,288.31 10,951,276.22 – 17,567,470.01 146,812,094.52 2011
Writtenbackfortheperiod
31December Additionsfor Reversalfor Write-offfor 31December Item 2010 theperiod theperiod theperiod 2011 Provisionforbaddebts 33,027,497.31 7,023,604.60 12,780.40 73,299.73 39,965,021.78 Provisionfordiminutionin
valueofinventories 3,028,107.45 11,149,440.36 – 4,011,685.04 10,165,862.77 Provisionforimpairment
oflong-termequity
investments 21,800,000.00 – – – 21,800,000.00 Provisionforimpairment
offixedassets 67,835,599.78 15,962,824.27 – 4,244,650.53 79,553,773.52 Provisionforimpairment
ofintangibleassets 2,361,826.83 – – – 2,361,826.83 Provisionforimpairment
ofgoodwill 18,759,063.15 – – – 18,759,063.15 Total 146,812,094.52 34,135,869.23 12,780.40 8,329,635.30 172,605,548.05
– I-99–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Writtenbackfortheperiod
31December Additionsfor Reversalfor Write-offfor 31December Item 2011 theperiod theperiod theperiod 2012 Provisionforbaddebts 39,965,021.78 12,495,664.40 – 435,749.37 52,024,936.81 Provisionfordiminutionin
valueofinventories 10,165,862.77 18,035,034.43 – 14,677,797.60 13,523,099.60 Provisionforimpairment
oflong-termequity
investments 21,800,000.00 – – – 21,800,000.00 Provisionforimpairment
offixedassets 79,553,773.52 14,963,017.35 – 4,433,811.34 90,082,979.53 Provisionforimpairment
ofintangibleassets 2,361,826.83 – – – 2,361,826.83 Provisionforimpairment
ofgoodwill 18,759,063.15 – – – 18,759,063.15 Total 172,605,548.05 45,493,716.18 – 19,547,358.31 198,551,905.92 Write-off provision for bad debts includes the bad debts written off. Provision for diminution in value of inventories, provision for impairment of fixed assets include scrap, disposal or write-off of assets.
Nine months ended 30 September 2013
Writtenbackfortheperiod
31December Additionsfor Reversalfor Write-offfor 30September Item 2012 theperiod theperiod theperiod 2013 Provisionforbaddebts 52,024,936.81 9,305,096.75 – 768,990.99 60,561,042.57 Provisionfordiminutionin
valueofinventories 13,523,099.60 12,368,287.25 2,285,260.33 17,459,739.86 6,146,386.66 Provisionforimpairment
oflong-termequity
investments 21,800,000.00 – – – 21,800,000.00 Provisionforimpairment
offixedassets 90,082,979.53 – – 148,460.60 89,934,518.93 Provisionforimpairment
ofintangibleassets 2,361,826.83 – – – 2,361,826.83 Provisionforimpairment
ofgoodwill 18,759,063.15 – – – 18,759,063.15 Total 198,551,905.92 21,673,384.00 2,285,260.33 18,377,191.45 199,562,838.14
– I-100–
APPENDIX I ACCOUNTANTS’ REPORT 20. Restricted assets
2010
Decrease
31 December Additions for during 31 December Item 2009 the period the period 2010 Assets pledged:
Bank deposits 18,980,000.00 19,450,000.00 18,980,000.00 19,450,000.00 Assets charged:
Plant& buildings 72,491,935.75 60,128,366.23 72,491,935.75 60,128,366.23 Land use rights 7,575,114.80 – 7,575,114.80 – Total 99,047,050.55 79,578,366.23 99,047,050.55 79,578,366.23 Details of assets with restrictions in their ownership:
(1) ZhuhaiFTZLivzonHechengPharmaceuticalManufacturingCo.,Ltd.(
), a subsidiary of the Company, pledged fixed deposits of RMB6,200,000.00 to Zhuhai Commercial Bank ( ) for a loan ofHK$6,200,000.00. The pledge was effective from 17 November 2010 to 16 February 2011.
(2) LidaPharmaceuticalCo.,Ltd.ofZhuhaiFreeTradeZone( ),asubsidiary oftheCompany,pledgedfixeddepositsofRMB13,250,000.00toPinganBank( )foraloanofHK$14,000,000.00. The pledge was effective from 9 December 2010 to 8 December 2011.
(3) Livzon Group Livzon Pharmaceutical Factory ( ), a subsidiary of the Company, pledged plant& buildings located at Guihua North Road, Gongbei, Zhuhai with cost of RMB109,440,852.41, accumulated depreciation of RMB69,473,533.76, impairment of fixed assets of RMB3,966,753.67 and net book value of RMB36,000,564.98 to Bank of China, Zhuhai Branch (
)foraloanofRMB45,596,116.23.Thepledgewaseffectivefrom15October2009to31 December 2015.
(4) The Company pledged plant& buildings located at Guihua North Road, Gongbei, Zhuhai with cost of RMB86,311,578.60, accumulated depreciation of RMB62,183,777.35, net book value of RMB24,127,801.25 to Bank of Communication, Zhuhui Branch ( ) for a loan of RMB500,000.00 granted to Livzon Group Livzon Pharmaceutical Factory ( ), a subsidiary of the Company. The pledge was effective from 23 December 2010 to 23 December 2016.
– I-101–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Decrease
31 December Additions for during 31 December Item 2010 the period the period 2011 Assets pledged:
Deposits under guarantees for letter
of credit – 2,317,760.92 – 2,317,760.92 Bank deposits 19,450,000.00 – 6,200,000.00 13,250,000.00 Assets charged:
Plant& buildings 60,128,366.23 – 39,350,014.70 20,778,351.53 Land use rights – – – – Total 79,578,366.23 2,317,760.92 45,550,014.70 36,346,112.45 Details of assets with restrictions in their ownership:
(1) The Company pledged fixed deposits of RMB13,250,000.00 to Pingan Bank ( ) for a loan ofHK$14,000,000.00grantedtoitssubsidiary,LidaPharmaceuticalCo.,Ltd.ofZhuhaiFreeTradeZone ( ).Thepledgewaseffectivefrom9December2011to9December2012. (2) The Company pledged plant& buildings located at Guihua North Road, Gongbei, Zhuhai with cost of RMB86,311,578.60, accumulated depreciation of RMB65,533,227.07 and net book value of RMB20,778,351.53 to Bank of Communication, Zhuhai Branch ( ) for a loan of RMB500,000.00 granted to Livzon Group Livzon Pharmaceutical Factory ( ), a subsidiary of the Company. The pledge was effective from 23 December 2010 to 23 December 2016. 2012
Decrease
31 December Addition for during 31 December Item 2011 the period the period 2012 Assets pledged:
Deposits under guarantees for letter
of credit 2,317,760.92 2,020,501.88 2,317,760.92 2,020,501.88 Deposits under bank acceptance bills – 11,676,000.00 – 11,676,000.00 Bank deposits 13,250,000.00 29,000,000.00 13,250,000.00 29,000,000.00 Assets charged:
Plant& buildings 20,778,351.53 – 20,778,351.53 – Land use rights – – – – Total 36,346,112.45 42,696,501.88 36,346,112.45 42,696,501.88 Details of assets with restrictions in their ownership:
TheCompanypledgedfixeddepositsofRMB29,000,000.00in2012toChinaEverbrightBank,ZhuhaiBranch ( ) for a loan ofHK$35,000,000.00. The pledge was effective from 24 December 2012 to 23 December 2013.
– I-102–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Decrease
31 December Additions for during the 30 September Item 2012 the period period 2013 Assets pledged:
Deposits under guarantees for letter
of credit 2,020,501.88 11,501,231.32 11,972,581.81 1,549,151.39 Deposits under bank acceptance bills 11,676,000.00 12,093,740.90 15,377,134.08 8,392,606.82 Bank deposits 29,000,000.00 4,000,000.00 – 33,000,000.00 Total 42,696,501.88 27,594,972.22 27,349,715.89 42,941,758.21 The details of assets with restriction in their ownerships were the same as disclosed in 2012 and there were RMB4,000,000.00 fixed deposits further pledged.
21. Short-term loans
(1) Short-term loans by categories
31 December 31 December 31 December 30 September Category 2010 2011 2012 2013 Loans on credit 147,533,920.00 183,225,943.01 495,627,002.91 524,150,065.20 Guarantee loans 42,682,648.80 56,749,000.00 12,162,750.00 130,030,680.00 Pledge loans 17,243,718.00 11,349,800.00 28,379,750.00 27,750,450.00 Total 207,460,286.80 251,324,743.01 536,169,502.91 681,931,195.20 (2)Thebalanceofshort-termloansat31December2012increasedby113.34%fromthebeginningofthat year,whichwasmainlyattributabletotheincreaseincapitalrequirementasaresultoftheincreasein investment for the construction of projects during that period.
(3) As at 30 September 2013, there was no past due short-term loans that were unpaid.
(4) Guarantee loans: During the nine months ended 30 September 2013, the Company provided guarantee toZhuhaiChinaResourcesBank( )foraloanofHK$54,000,000grantedtoLivzonGroup Livzon Pharmaceutical Factory ( ). In addition, the Company also provided counter-guaranteetoAgriculturalBankofChina,ZhuhaiBranch( ) foracorporateguaranteegrantedbyAgriculturalBankofChina,ZhuhaiBranch(
) for a loan ofHK$110,000,000 granted to Livzon Group Livzon Pharmaceutical Factory ( ) borrowed from Mega International Commercial Bank (
). During the year ended 31 December 2012, the Company provided guarantee to Zhuhai China Resources Bank ( ) for a loan ofHK$15,000,000 granted to Livzon Group Livzon Pharmaceutical Factory ( ), a subsidiary of the Company. In 2011, the Company provided guarantee to Wing Lung Bank, Macau Branch ( ) for a loan ofHK$55,000,000 and to Societe Generale, Guangzhou Branch ( ) for a loan ofHK$15,000,000 granted to Livzon Group Livzon Pharmaceutical Factory ( ). In 2010, the Company provided guarantee to Nanyang Commercial Bank, Shenzhen Branch (
)foraloanofHK$30,000,000andtoSocieteGenerale,GuangzhouBranch(
)foraloanofHK$20,160,000grantedtoLivzonGroupLivzonPharmaceuticalFactory(
).
(5) Please see note V. 20 for the particulars related to the pledges of the loans.
– I-103–
APPENDIX I ACCOUNTANTS’ REPORT 22. Bills payables
(1) Categories of bills payables
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Bank acceptance bills – – 283,581,118.89 372,798,618.20 (2)Thebalanceofbillspayablesat30September2013increasedfromthebeginningoftheyearby31.46%. Thebalanceofbillspayablesat31December2012increasedfromthebeginningoftheyear,whichwas mainlyattributabletotheflexibleapplicationoffundsandtheincreaseofsettlementwithsuppliersby bills.
(3) Asat30September2013,theacceptanceperiodofbillspayableswaswithinsixmonthsandduebefore 31 March 2014.
23. Accounts payables
(1) The ageing analysis of accounts payables (based on dates of recognition of accounts payables):
31 December 31 December 31 December 30 September Ageing 2010 2011 2012 2013 1 to 90 days 147,694,814.48 168,037,408.15 252,023,766.64 264,007,148.21 91 to 180 days 1,222,090.52 22,293,982.21 30,820,007.51 41,239,526.73 181 days to 1 year 5,437,649.94 3,122,944.28 4,735,905.84 48,895,934.40 1 to 2 years 4,247,704.87 6,478,885.15 13,987,566.61 18,451,069.79 Over 2 years 6,075,694.68 8,008,074.52 10,246,813.81 9,030,374.16 Total 164,677,954.49 207,941,294.31 311,814,060.41 381,624,053.29 (2)Thebalanceofaccountpayablesat31December2012increasedby49.95%fromthebeginningofthat year, which was mainly attributable to the increase in purchase of goods and investment for the construction of projects that increased the outstanding amount within the credit period.
(3) Asat30September2013,theamountsofaccountspayablesduetotopfivesupplierswereanalysedas follows:
Proportion Amount Nature or to total Name of entity outstanding description Time overdue amount ShanghaiTechwell 59,696,348.89 Purchases of Within 1 year: 15.64% Biopharmaceutical Co., Ltd. goods RMB47,427,220.69,
( ) 1-2 years:
RMB12,269,128.20
Jiaozuo Joincare 38,876,993.39 Purchases of Within 1 year 10.19% Pharmaceutical Group goods
Industry Co., Ltd. (
)
Siemens Medical Diagnostic 12,625,488.54 Purchases of Within 1 year 3.31% Products (Shanghai) Co., goods
Ltd. ( (
) )
Peking University International 10,731,423.05 Purchases of Within 1 year 2.81% Hospital Group Chongqing goods
Daxin Pharmaceutical Co.,
Ltd. (
)
Industrial Green Building 6,934,409.42 Project Within 1 year: 1.82% Technology Co., Ltd. of equipment RMB5,485,404.96,
Zhuhai ( costs 1-2 years:
) RMB1,449,004.46
Total 128,864,663.29 33.77%
– I-104–
APPENDIX I ACCOUNTANTS’ REPORT (4)Asat30September2013,therewasnoamountduetoashareholderholding5%(inclusive)ormoreof voting rights in the Company.
(5) Please see note VII for the details of amounts due to related parties.
24. Receipts in advance
(1) Ageing analysis
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Within 1 year 18,687,973.71 33,046,010.58 25,949,403.61 45,015,577.89 Over 1 year 2,439,254.99 5,982,692.43 12,000,636.81 10,171,481.98 Total 21,127,228.70 39,028,703.01 37,950,040.42 55,187,059.87 (2) The balance of receipts in advance at 30 September 2013 increased by45.42% from the beginning of that year. The balance of receipts in advance at 31 December 2011 increased by84.73% from the beginningofthatyear,whichwasmainlyattributabletotheincreaseinadvancesfromcustomersforthe current period.
(3) As at 30 September 2013, the top five amounts of receipts in advance were analysed as follows:
Proportion Amount Nature or to total Name of entity outstanding description Time overdue amount Yunnan Disease Prevention& 8,967,209.09 Sales of goods 1-2 years 16.25% Control Centre (
)
Wenshan Meiluo Junyuan 8,700,000.00 Sales of goods Within 1 year 15.76% Sanqi Plantation Base Co.,
Ltd. (
)
Family Planning Service 6,028,251.20 Sales of goods Within 1 year 10.92% Centre of Shenzhen
( )
Sinopharm Group Xinjiang 3,321,133.86 Sales of goods Within 1 year 6.02% Special Drugs Co., Ltd.
(
)
Health Department of Henan 1,912,584.60 Sales of goods Within 1 year 3.47% Province ( )
Total 28,929,178.75 52.42% (4)Asat30September2013,therewasnoreceiptsinadvancefromacustomerholding5%(inclusive)or more of voting rights in the Company.
– I-105–
APPENDIX I ACCOUNTANTS’ REPORT 25. Employee benefits payables
(1) Breakdown
2010
31 December Accruals for Payments for 31 December Item 2009 the period the period 2010 Salaries, bonuses, allowances
and subsidies 37,815,661.99 191,332,294.98 191,853,089.16 37,294,867.81 Employee welfare – 17,082,038.20 17,082,038.20 – Social insurances 229,959.99 22,271,000.89 22,277,637.11 223,323.77 Of which:Medical insurances 64,311.00 6,171,803.66 6,170,999.07 65,115.59 Basic pension
insurances 124,257.99 14,065,187.04 14,064,879.91 124,565.12 Unemployment
insurances 25,415.00 982,580.69 986,290.49 21,705.20 Work-related injury
insurances 10,213.00 625,980.74 631,852.70 4,341.04 Maternity insurances 5,763.00 425,448.76 423,614.94 7,596.82 Housing funds 537,553.32 8,293,215.08 8,286,741.08 544,027.32 Labour union fees and
employee education fees 290,622.44 1,113,715.11 1,402,870.10 1,467.45 Severance welfare – 1,434,184.70 1,434,184.70 – Share-based bonuses of
subsidiaries 6,663,700.42 7,797,838.63 1,570,920.54 12,890,618.51 Others 675,846.53 1,353,873.22 1,660,323.22 369,396.53 Total 46,213,344.69 250,678,160.81 245,567,804.11 51,323,701.39 2011
31 December Accruals for Payments for 31 December Item 2010 the period the period 2011 Salaries, bonuses, allowances
and subsidies 37,294,867.81 224,143,433.51 212,622,610.21 48,815,691.11 Employee welfare – 17,399,069.71 17,399,069.71 – Social insurances 223,323.77 33,449,436.16 33,391,014.08 281,745.85 Of which:Medical insurances 65,115.59 9,234,914.89 9,227,169.70 72,860.78 Basic pension
insurances 124,565.12 20,586,841.55 20,540,166.34 171,240.33 Unemployment
insurances 21,705.20 1,981,134.70 1,978,552.97 24,286.93 Work-related injury
insurances 4,341.04 1,012,081.24 1,011,564.89 4,857.39 Maternity insurances 7,596.82 634,463.78 633,560.18 8,500.42 Housing funds 544,027.32 10,760,767.38 10,730,112.38 574,682.32 Labour union fees and
employee education fees 1,467.45 1,582,480.28 1,412,222.20 171,725.53 Severance welfare – 2,474,352.00 2,474,352.00 – Performance-linked bonuses of
subsidiaries 12,890,618.51 436,143.73 11,182,748.38 2,144,013.86 Others 369,396.53 494,961.84 523,333.22 341,025.15 Total 51,323,701.39 290,740,644.61 289,735,462.18 52,328,883.82
– I-106–
APPENDIX I ACCOUNTANTS’ REPORT 2012
31 December Accruals for Payments for 31 December Item 2011 the period the period 2012 Salaries, bonuses, allowances
and subsidies 48,815,691.11 269,973,768.14 248,823,828.07 69,965,631.18 Employee welfare – 16,202,194.45 15,822,605.05 379,589.40 Social insurances 281,745.85 37,290,455.05 37,403,276.85 168,924.05 Of which:Medical insurances 72,860.78 10,707,632.24 10,729,218.41 51,274.61 Basic pension
insurances 171,240.33 22,566,994.92 22,648,819.07 89,416.18 Unemployment
insurances 24,286.93 2,125,758.22 2,129,793.45 20,251.70 Work-related injury
insurances 4,857.39 1,057,877.81 1,060,161.50 2,573.70 Maternity insurances 8,500.42 832,191.86 835,284.42 5,407.86 Housing funds 574,682.32 10,700,284.26 10,646,191.76 628,774.82 Labour union fees and
employee education fees 171,725.53 996,102.57 937,445.58 230,382.52 Severance welfare – 696,771.33 696,771.33 – Performance-linked bonuses of
subsidiaries 2,144,013.86 604,171.04 – 2,748,184.90 Others 341,025.15 14,400.00 14,400.00 341,025.15 Total 52,328,883.82 336,478,146.84 314,344,518.64 74,462,512.02 The balance of employee benefits payables at 31 December 2012 increased by42.30% from the beginningoftheyear,whichwasmainlyattributabletotheincreaseinlevelsofstaffsalariesuponthegrowth in operating results.
Nine months ended 30 September 2013
31 December Accruals for Payments for 30 September Item 2012 the period the period 2013 Salaries, bonuses, allowances
and subsidies 69,965,631.18 223,393,602.27 228,335,942.60 65,023,290.85 Employee welfare 379,589.40 11,713,844.58 11,966,914.31 126,519.67 Social insurance 168,924.05 35,392,779.95 35,337,356.03 224,347.97 Of which:Medical insurances 51,274.61 9,715,866.02 9,706,307.21 60,833.42 Basic pension
insurances 89,416.18 22,272,579.24 22,230,279.53 131,715.89 Unemployment
insurances 20,251.70 1,961,870.40 1,957,609.57 24,512.53 Work-related injury
insurances 2,573.70 782,974.69 783,291.16 2,257.23 Maternity insurances 5,407.86 659,489.60 659,868.56 5,028.90 Housing funds 628,774.82 9,237,745.90 9,232,348.44 634,172.28 Labour union fees and
employee education fees 230,382.52 882,602.25 912,853.36 200,131.41 Severance welfare 0.00 683,467.28 683,467.28 0.00 Performance-linked bonuses of
subsidiaries 2,748,184.90 – 1,928,904.71 819,280.19 Others 341,025.15 – – 341,025.15 Total 74,462,512.02 281,304,042.23 288,397,786.73 67,368,767.52 At the end of each of the reporting period, there is no overdue employee benefit that were unpaid.
– I-107–
APPENDIX I ACCOUNTANTS’ REPORT 26. Taxes payables
31 December 31 December 31 December 30 September Types of tax 2010 2011 2012 2013 VAT payable 17,655,992.44 26,548,565.90 27,045,774.62 -892,663.78 Business tax payable 4,033.83 4,559.53 4,406.31 – Urban maintenance and construction
tax payable 1,970,388.42 2,885,653.83 5,807,640.79 3,034,388.60 Enterprise income tax payable 58,799,226.42 50,742,436.32 54,609,738.48 61,869,532.00 Property tax payable 545,415.34 108,360.22 1,205,108.90 2,904,422.74 Land use tax payable 1,084,368.36 265,000.00 367,516.29 2,571,084.32 Individual income tax payable 2,246,210.65 6,182,013.00 2,020,320.48 9,474,781.13 Stamp duty payable 499,948.01 923,517.20 924,464.10 953,901.78 Education surcharges payable 890,011.63 2,195,414.50 4,215,701.89 2,344,154.23 Flood prevention fee payable 98,313.49 225,709.21 349,356.19 238,244.17 Others 43,902.93 120,470.63 108,282.31 56,431.37 Total 83,837,811.52 90,201,700.34 96,658,310.36 82,554,276.56 27. Interest payables
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Interest payables for short-term
financing bills – 13,658,301.36 8,146,146.10 – Interest payables for medium-term
financing bills – – – 6,793,945.22 Interest payables for short-term
loans 943,224.90 3,183,191.32 2,307,858.76 4,486,325.70 Total 943,224.90 16,841,492.68 10,454,004.86 11,280,270.92 The balance of interest payables at 31 December 2012 decreased by37.93% from the beginning of that year, which was mainly attributable to the decrease of interest rate for the short-term financing bills issued during that period.Thebalanceofinterestpayablesat31December2011increasedsubstantially,whichwasmainlyattributable to the issue of RMB400 million short-term financing bills for that period that increased the interests accrued.
28. Dividends payables
31 December 31 December 31 December 30 September Reason for Name of investor 2010 2011 2012 2013 outstanding Dividends on ordinary
shares 20,174.46 20,174.46 20,174.46 20,174.46 Not yet paid Qingyuan Xinbeijiang
(Group) Company
( ( )
) 1,200,710.00 1,200,710.00 1,200,710.00 1,200,710.00 Not yet paid Other legal persons and
individual shares of
subsidiaries 1,051,300.00 1,051,300.00 1,051,300.00 1,051,300.00 Not yet paid Staff shares of
subsidiaries 259,800.00 259,800.00 259,800.00 259,800.00 Not yet paid Total 2,531,984.46 2,531,984.46 2,531,984.46 2,531,984.46
– I-108–
APPENDIX I ACCOUNTANTS’ REPORT 29. Other payables
(1) Ageing analysis
31 December 31 December 31 December 30 September Item 2010 2011 2012 2013 Within 1 year 299,686,931.59 423,288,799.99 596,204,141.64 715,279,049.01 Over 1 year 23,224,967.52 37,158,755.38 25,960,061.48 32,901,557.92 Total 322,911,899.11 460,447,555.37 622,164,203.12 748,180,606.93 (2) During the reporting period, the breakdown of accruals included in other payables was as follows: 31December 31December 31December 30September Reasonfor
Item 2010 2011 2012 2013 outstanding
Utilitiesexpenses 2,012,794.27 1,974,340.58 2,985,641.37 5,919,893.84 Notyetpaid Researchexpenses 1,674,630.19 1,865,945.99 4,655,388.79 4,660,214.87 Notyetpaid Businesspromotion
expenses 166,459,275.68 213,634,812.50 348,654,690.71 381,208,827.26 Notyetpaid Leasingexpenses 128,642.13 185,652.13 14,530.00 – Notyetpaid Advertisingexpenses 2,788,738.30 1,681,539.29 230,588.19 3,152,009.34 Notyetpaid Businessmeeting
expenses 10,083,733.37 12,864,714.05 18,561,351.49 22,578,178.06 Notyetpaid Auditingandinformation
disclosureexpenses 1,424,168.67 1,503,067.22 1,290,812.30 961,499.30 Notyetpaid Drugresearchriskfunds 547,946.95 – – –
Segmentoperating
expenses 5,031,364.15 5,938,650.50 9,050,113.71 9,426,605.73 Notyetpaid Sewageexpenses 57,700.00 148,959.00 97,809.00 169,209.00 Notyetpaid Others 6,661,767.98 9,181,281.46 7,756,691.84 10,050,373.09 Notyetpaid Total 196,870,761.69 248,978,962.72 393,297,617.40 438,126,810.49
(3)Thebalanceofotherpayablesat31December2012increasedby35.12%fromthebeginningoftheyearandthebalanceofotherpayablesat31December2011increasedby42.59%fromthebeginningofthat year, which was mainly attributable to the increase in accrual of expenses.
(4)Asat30September2013,therewasnoamountduetoashareholderholding5%(inclusive)ormoreof voting rights in the Company.
(5) Please see note VII for the details of amounts due to related parties.
– I-109–
APPENDIX I ACCOUNTANTS’ REPORT 30. Non-current liabilities due within one year
31December 31December 31December 30September
Nameoflender 2010 2011 2012 2013 Interestrate Termoflending Conditions FujianOverseas 400,000.00 400,000.00 400,000.00 400,000.00 Interest-free Indefinite Credit
ChineseTrust&
InvestmentCorp.
(
)
AgriculturalBank 20,000,000.00 – – – 4.860% 24November Credit
ofChina,Zhuhai 2008to
Branch 24November
( 2011
)
AgriculturalBank 20,000,000.00 – – – 4.860% 24November Credit
ofChina,Zhuhai 2008to
Branch 24November
( 2011
)
Bankof 20,000,000.00 – – – 4.860% 22September Credit
Communications 2009to
Co.,Ltd., 22September
ZhuhaiBranch 2011
(
)
Bankof 10,000,000.00 – – – 4.860% 6November Credit
Communications 2009to
Co.,Ltd., 6November
ZhuhaiBranch 2011
(
)
Total 70,400,000.00 400,000.00 400,000.00 400,000.00
Thebalanceofnon-currentliabilitiesduewithinoneyearat31December2011decreasedby99.43%fromthe beginning of the year, which was attributable to the repayment of loans for that period.
31. Other current liabilities
31 December 31 December 31 December 30 September Category 2010 2011 2012 2013 Short-term financing bills – 400,000,000.00 400,000,000.00 – (1) The Company was approved to issue two tranches of short-term financing bills amounted to RMB400,000,000.00 in 2011 targeting at the institutional investors of the national inter-bank bond market (save as those purchasers as prohibited by the laws and regulations of China), which were matured and repaid in 2012.
(2) The Company issued the first tranche of 2012 short-term financing bills amounted to RMB400,000,000.00 on 6 July 2012 targeting at the institutional investors of the national inter-bank bondmarket(saveasthosepurchasersasprohibitedbythelawsandregulationsofChina),whichwere due for settlement on 9 July 2013.
– I-110–
APPENDIX I ACCOUNTANTS’ REPORT 32. Long-term loans
(1) Classification of long-term loans
31 December 31 December 31 December 30 September Category 2010 2011 2012 2013 Credit Loans 20,700,000.00 700,000.00 700,000.00 700,000.00 Pledge guarantee loans 46,096,116.23 500,000.00 – – Guarantee loans – – – 149,200,000.00 Total 66,796,116.23 1,200,000.00 700,000.00 149,900,000.00 (2) Thebalanceoflong-termloansat30September2013increasedfromthebeginningoftheyear,which wasmainlyattributabletotheadditionsoflong-termfinancingsoastofulfiltheneedsoffundsbythe Groupinconstructionofprojectsandtechnologyadvancementprojects.Thebalanceoflong-termloansat31December2012decreasedby41.67%fromthebeginningoftheyearandthebalanceoflong-termloansat31December2011decreasedby98.20%fromthebeginningofthatyear,whichwasattributable to the repayment of loans in these periods.
(3) As at 30 September 2013, the breakdown of loans in terms of lenders was as follows:
30September2013
Nameof Interests Annual Termof Conditions lender Principal payable Total interestrates lending oflending Loansfrom
financial
institutions:
Agricultural 149,200,000.00 – 149,200,000.00 6.15% 18January Guaranteed Bankof 2013to bythe
China, 31January Company Shaoguan 2016
Branch
Wujiang
Sub-branch
Loansfrom
non-banking
financial
institutions:
FuzhouBureau 700,000.00 – 700,000.00 Interest-free Indefinite Credit
ofFinance
(4) As at 30 September 2013, there is no overdue long-term loans that were unpaid.
33. Notes payable
Interest
Interest paidfor Interest
Interest accruedfor thenine payablefor
payableon thenine months thenine
31 monthsended ended30 monthsended
Nameof Dateof Termof December 30September September 30September 30September Bond NominalAmount Issue Bond IssueAmount 2012 2013 2013 2013 2013
RMB
13Livzon 400,000,000.00 29May 3years 400,000,000.00– 6,793,945.22– 6,793,945.22 400,000,000.00 MTN1 2013
On14December2012,the“ProposalfortheCompanytoApplyfortheIssueofMedium-termFinancingBills” wasconsideredandapprovedintheSecondExtraordinaryGeneralMeetingoftheCompanyin2012.TheCompany was approved to apply for registration of a quota not more than RMB800 million (inclusive) from the Inter-bank MarketDealersAssociationofChina.On29May2013,theCompanyissuedthe“2013FirstTrancheofMedium-term FinancingBillsforLivzonPharmaceuticalGroupInc.”atanamountofRMB400millionwithanominalinterestrate of5.03%.
– I-111–
APPENDIX I ACCOUNTANTS’ REPORT 34. Deferred income
2010
Totalamountof Additionsforthe Amortisationfor
Item subsidy 31December2009 period theperiod 31December2010 Ilaprazoleproject
( ) 10,900,000.00 10,900,000.00 – – 10,900,000.00 Non-PVCbagimprovementproject
( PVC ) 4,100,000.00 3,792,949.20 – 244,365.80 3,548,583.40 Demonstrationprojectsofhigh
concentrationorganicwastewater
treatmenttechnology
( ) 4,000,000.00 2,760,791.00 – 394,404.00 2,366,387.00 Shenchangdroppills(Fundsreceived
fromtenderorganisedbyProvincial
ScienceandTechnologyDepartment
( ( )) 4,300,000.00 2,058,077.34 – 2,058,077.34 – Triplepolleninjectionmedicine
( ) 1,800,000.00 1,600,000.00 – 366,010.03 1,233,989.97 Liposometechnologyinnovationproject
( ) 1,042,631.00 944,812.90 – – 944,812.90 IY81149Anti-pepticulcer
(IY81149 ) 1,900,000.00 861,499.00 – 861,499.00 – Fundingforexpansionfromorganic
growthandupgradeoffacilities
grantedbyprovincialfinance
departmentin2009
(2009 ) 700,000.00 700,000.00 – – 700,000.00 Researchoncommercialisationof
potassiumcitratesustained-release
tablets
( ) 1,120,000.00 540,337.86 200,000.00 226,232.50 514,105.36 5-aminosalicylicacidzinc(0001Project)
(5- (0001 )) 1,200,000.00 537,938.10 – – 537,938.10 Oralbifidobacteriaviablepreparations
( ) 600,000.00 480,646.34 – 14,441.19 466,205.15 Toxin-clearingandkidneysoothing
capsuleproject
( ) 2,040,000.00 420,000.00 1,200,000.00 741,346.18 878,653.82 RXdevelopmentofnewpreparationsfor
thetreatmentofthrombus
( RX ) 600,000.00 300,000.00 300,000.00 461,226.04 138,773.96R&Dandproductiontransformationof
gemifloxacintablets
( ) 300,000.00 274,902.13 – 46,637.00 228,265.13 Improvedsynthesisofvalaciclovir
hydrochloride
( ) 200,000.00 171,806.50 – – 171,806.50 Dan-phenolicacidB
( B) 300,000.00 140,757.40 – – 140,757.40 In-depthdevelopmentofgemifloxacin
mesylateseriesdosageforms(Tablets)
(
( )) 80,000.00 80,000.00 – – 80,000.00 Experimentalstudyofanti-viralgranules
foranti-avianinfluenza
( ) 600,000.00 73,147.58 – 73,147.58 – Sustained-releasefamciclovircapsule
0302project
( 0302 ) 4,100,000.00 58,684.35 3,000,000.00 40,503.30 3,018,181.05 Leuprolidemicrospheres
( ) 100,000.00 – 100,000.00 100,000.00 – Projectofrapidtestreagentfor
enrofloxacinandnitrofuran
(
) 300,000.00 – 300,000.00 300,000.00 – Environmentalprotectionspecialfunds
( ) 300,000.00 – 300,000.00 300,000.00 – ShenqiFuzhengInjection
( ) 1,200,000.00 – 1,200,000.00 200,000.00 1,000,000.00
– I-112–
APPENDIX I ACCOUNTANTS’ REPORT Totalamountof Additionsforthe Amortisationfor
Item subsidy 31December2009 period theperiod 31December2010 ProjectsfundsfromQingyuan
TechnologyInformationBureau
( ) 300,000.00 – 300,000.00 300,000.00 – Supplementaryfundsfortechnology
enhancementprojectsofprovincial
levelin2009
(2009
) 230,000.00 – 230,000.00 230,000.00 – Awardfromthemunicipalgovernment
forincreaseofexportsin2009
(2009 ) 299,547.00 – 299,547.00 299,547.00 – Specialfundingforbranddevelopment
ofGuangdongprovince
( ) 845,000.00 – 845,000.00 845,000.00 – Fundingfordevelopingownbranding
andsalesnetworkoverseas
( ,
) 800,000.00 – 800,000.00 800,000.00 – Cooperativeenterprisefundsfor
productionsciencefromprovincial
departmentsin2010
(2010 ) 400,000.00 – 400,000.00 – 400,000.00 Projectfundingfortechnologycentresof
municipal-levelenterprisesinZhuhai
in2010
(2010
) 300,000.00 – 300,000.00 – 300,000.00 Firstbatchofscienceandtechnology
R&Dfundingfromtradeandindustry
districtbranchin2010
( 2010
) 250,000.00 – 250,000.00 – 250,000.00 Demonstrationonresultsin
commercialisationofimmunoassay
technologiesinprohibitedanimal
growth
(
) 150,000.00 – 150,000.00 8,400.00 141,600.00 Fundingfortheprojectintheresearch
anddevelopmentoftechnologieson
yieldinghighoutputofcolistinsulfate
(
) 150,000.00 – 150,000.00 150,000.00 – PudongScienceandTechnology
DevelopmentFund
( ) 100,000.00 – 100,000.00 100,000.00 – L-phenylalanineProjectFund
(L- ) 100,000.00 – 100,000.00 100,000.00 – Others 1,924,354.00 961,750.00 952,604.00 1,318,230.25 596,123.75 Total 47,631,532.00 27,658,099.70 11,477,151.00 10,579,067.21 28,556,183.49
– I-113–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2010 theperiod fortheperiod 2011R&Dandcommercialisationof
innovativedrugofIlaprazole
series
(
) 49,900,000.00 10,900,000.00 39,000,000.00 24,166,832.10 25,733,167.90 MABforClassItreatmentof
necrosisfactorinhuman
tumourfromhumansource
(I
) 10,000,000.00 – 10,000,000.00 – 10,000,000.00 Demonstrationprojectonthe
applicationofsolar
photovoltaicarchitecture
(
) 7,010,000.00 – 7,010,000.00 – 7,010,000.00 Subsidyforthetenderof
technologyupgradeprojectfor
PVCsoftbagsupportedby
provincialfinancedepartments
(
PVC ) 4,100,000.00 3,548,583.40 – 244,365.80 3,304,217.60 Sustained-releasefamciclovir
capsule0302Project
( 0302 ) 4,100,000.00 3,018,181.05 – 23,318.02 2,994,863.03 Demonstrationprojectsofhigh
concentrationorganic
wastewatertreatment
technology
(
) 4,000,000.00 2,366,387.00 – 394,404.00 1,971,983.00 ShenqiFuzhengInjection
( ) 3,535,000.00 1,000,000.00 2,335,000.00 900,000.00 2,435,000.00 Leuprolidemicrospheresand
injections
( ) 2,300,000.00 – 2,300,000.00 1,300,000.00 1,000,000.00 Triplepolleninjectionmedicine
( ) 1,800,000.00 1,233,989.97 – 548,948.58 685,041.39 Research,developmentand
commercialisationof
fluvoxamine,anewtypeof
anti-depressant
(
) 1,500,000.00 – 1,500,000.00 – 1,500,000.00 Littlegianttrainingenterprise
( ) 1,400,000.00 – 1,400,000.00 – 1,400,000.00 Cooperativeenterprisefundsfor
productionsciencefrom
provincialdepartmentsin2010
(2010
) 1,370,000.00 400,000.00 970,000.00 1,370,000.00 – Firstbatchofscienceand
technologyR&Dfundingfrom
tradeandindustrydistrict
branchin2010
( 2010
) 1,250,000.00 250,000.00 1,000,000.00 – 1,250,000.00
– I-114–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2010 theperiod fortheperiod 2011 Toxin-clearingandkidney
soothingcapsule
( ) 2,040,000.00 878,653.82 – 69,798.18 808,855.64 5-aminosalicylicacidzinc(0001
Project)
(5- (0001 )) 1,200,000.00 537,938.10 – – 537,938.10 Researchoncommercialisation
ofpotassiumcitratesustained-
releasetablets
( ) 1,120,000.00 514,105.36 – 63,483.24 450,622.12 Liposometechnologyinnovation
project
( ) 1,042,631.00 944,812.90 – – 944,812.90 Japaneseencephalitisvaccine
project
( ) 1,000,000.00 – 1,000,000.00 – 1,000,000.00 Fundingforexpansionfrom
organicgrowthandupgradeof
facilitiesgrantedbyprovincial
financedepartmentin2009
(2009 ) 700,000.00 700,000.00 – – 700,000.00 Oralbifidobacteriaviable
preparations
( ) 600,000.00 466,205.15 – – 466,205.15 RXdevelopmentofnew
preparationsforthetreatment
ofthrombus
( RX ) 600,000.00 138,773.96 – 107,063.46 31,710.50 Firstbatchoffundingfor
integratingandguiding
projectsinproductionsciences
fromprovincialdepartmentsin
2011
(2011
) 500,000.00 – 500,000.00 – 500,000.00 Constructionofhi-techfacilities
forinnovationand
commercialisationofmodern
traditionalChinesemedicines
(
) 500,000.00 – 500,000.00 100,000.00 400,000.00 Specialprojectincentivefunding
fromtechnologycentresfor
municipallevelenterprisesin
Fuzhou
(
) 100,000.00 – 100,000.00 100,000.00 – Energysavingprojectonthe
“optimisationandupgrade
worksinenergyconsumption
ofthefermentationand
refiningproductionsystem”in
2010
(2010 “
” ) 300,000.00 – 300,000.00 300,000.00 – Power-savingoflightingpump
fanandair-conditioning
system
(
) 350,000.00 – 350,000.00 70,000.00 280,000.00
– I-115–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2010 theperiod fortheperiod 2011R&Dandproduction
transformationofgemifloxacin
tablets
(
) 300,000.00 228,265.13 – 15,737.58 212,527.55 Dan-phenolicacidB
( B) 300,000.00 140,757.40 – – 140,757.40 Projectfundingfortechnology
centresformunicipallevel
enterprisesinZhuhai
(
) 300,000.00 300,000.00 – – 300,000.00 Granttotheresearchand
developmentprojectforthe
commercialisationof
virginiamycininthePRC
(
) 300,000.00 – 300,000.00 300,000.00 – Granttotheprojectofthree
rapidtestingtechnologiesfor
melamineillegallyaddedin
food
(
) 200,000.00 – 200,000.00 11,400.00 188,600.00 Improvedsynthesisof
valaciclovirhydrochloride
( ) 200,000.00 171,806.50 – – 171,806.50 2011ZhuhaiStrategicEmerging
IndustriesSpecialFunds
(2011
) 200,000.00 – 200,000.00 200,000.00 – Granttotheprojectin
developmentofpreciseand
rapidtestingtechnologiesand
equipmentforthepresenceof
substantialtoxicsubstancesin
food
(
) 150,000.00 – 150,000.00 8,550.00 141,450.00 Demonstrationonresultsin
commercialisationof
immunoassaytechnologiesin
prohibitedanimalgrowth
(
) 150,000.00 141,600.00 – 141,600.00 – Experimentalstudyofanti-viral
granulesforanti-avian
influenza
(
) 110,000.00 – 110,000.00 51,170.86 58,829.14R&Dandcommercialisationof
UrofollitropinforInjection
(
) 100,000.00 – 100,000.00 100,000.00 – In-depthdevelopmentof
gemifloxacinmesylateseries
dosageforms
(
) 80,000.00 80,000.00 – 80,000.00 –
– I-116–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2010 theperiod fortheperiod 2011 2010developmentfundsfor
SMEsinternationalmarket
(2010
) 71,436.00 – 71,436.00 71,436.00 – Awardtoleadersinstrategicand
emergingindustries
( ) 50,000.00 – 50,000.00 50,000.00 – Incentivefundsforenterprises
withintellectualproperty
rightsadvantages
( ) 50,000.00 – 50,000.00 50,000.00 – Supplementaryfundsto
technology,industryandtrade
sectorsinrewardingscientific
andtechnologyachievements
bytheStateandGuangdong
Province
(2009
) 40,000.00 – 40,000.00 40,000.00 – Specialsubsidyfundsforpatent
applicationinZhuhai
(
) 37,950.00 – 37,950.00 37,950.00 – Specialfundsforexpandingto
otherareasbyenterprisesin
Zhuhai
( “ ” ) 37,700.00 – 37,700.00 37,700.00 – Specialfundingfromthebureau
ofindustryandcommerceto
smallandmediumenterprises
todevelopmarketinthePRC
in2011
( 2011
) 33,900.00 – 33,900.00 – 33,900.00 Researchandapplicationof
ultrafinegrindingtechnology
( ) 20,000.00 – 20,000.00 20,000.00 – Thirdclassawardforultrasound
inGuangdongProvince
( ) 20,000.00 – 20,000.00 20,000.00 – Incentivesforpersonalinjuries
fromsocialsecurityfund
managementcentreofZhuhai
(
) 10,000.00 – 10,000.00 10,000.00 – 2011specialsubsidyfundsfor
patentapplicationinZhuhai
(2011
) 1,000.00 – 1,000.00 – 1,000.00 Others 731,500.00 596,123.75 – 106,123.75 490,000.00 Total 105,811,117.00 28,556,183.49 69,696,986.00 31,109,881.57 67,143,287.92
– I-117–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2011 theperiod fortheperiod 2012R&Dandcommercialisationof
innovativedrugofIlaprazole
series
(
) 49,900,000.00 25,733,167.90 – 2,748,129.84 22,985,038.06 Teamforresearch,development
andcommercialisationof
proteindrugs(2012)underthe
scientificresearchteamfor
introductionofinnovation
technologiesinGuangdong
Province
(
(2012)
) 30,000,000.00 – 30,000,000.00 9,382,375.72 20,617,624.28 MABforClassItreatmentof
necrosisfactorinhuman
tumourfromhumansource(I
) 11,000,000.00 10,000,000.00 1,000,000.00 9,729,378.16 1,270,621.84 Demonstrationprojectonthe
applicationofsolar
photovoltaicarchitecture
(
) 7,010,000.00 7,010,000.00 – 116,833.34 6,893,166.66 Subsidyforthetenderof
technologyupgradeprojectfor
PVCsoftbagsupportedby
provincialfinancedepartments
(
PVC ) 4,100,000.00 3,304,217.60 – 194,365.80 3,109,851.80 Sustained-releasefamciclovir
capsule0302Project
( 0302 ) 4,100,000.00 2,994,863.03 – – 2,994,863.03 Demonstrationprojectsofhigh
concentrationorganic
wastewatertreatment
technology
(
) 4,000,000.00 1,971,983.00 – 394,404.00 1,577,579.00 ShenqiFuzhengInjection
( ) 3,535,000.00 2,435,000.00 – 214,407.90 2,220,592.10 Financialgrantforthequality
controltechnologiesofShenqi
( ) 3,500,000.00 – 3,500,000.00 183,333.34 3,316,666.66 Constructionofproduction
facilitatesfortheGAP
commercialisationof
astragalusatHunyuanin
Shanxi
( GAP
) 2,500,000.00 – 2,500,000.00 500,000.00 2,000,000.00 Leuprolidemicrospheresand
injections
( ) 2,300,000.00 1,000,000.00 – 880,000.00 120,000.00 Toxin-clearingandkidney
soothingcapsule
( ) 2,040,000.00 808,855.64 – 15,667.11 793,188.53
– I-118–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2011 theperiod fortheperiod 2012 Clinicalresearchinblonanserin,
anewtypeofmedicineforthe
treatmentofschizophrenia
(
) 2,000,000.00 – 2,000,000.00 2,000,000.00 – Triplepolleninjectionmedicine
( ) 1,800,000.00 685,041.39 – 640,064.88 44,976.51 Research,developmentand
commercialisationof
fluvoxamine,anewtypeof
anti-depressant
(
) 1,500,000.00 1,500,000.00 – 1,500,000.00 – Littlegianttrainingenterprise
( ) 1,400,000.00 1,400,000.00 – 1,400,000.00 – Firstbatchofscienceand
technologyR&Dfundingfrom
tradeandindustrydistrict
branchin2010
( 2010
) 1,250,000.00 1,250,000.00 – 250,000.00 1,000,000.00 Constructionofpublicservice
platformforforeigntradingin
GuangdongProvince
(
) 1,225,300.00 – 1,225,300.00 1,225,300.00 – 5-aminosalicylicacidzinc(0001
Project)
(5- (0001 )) 1,200,000.00 537,938.10 – 537,938.10 – Researchoncommercialisation
ofpotassiumcitratesustained-
releasetablets
( ) 1,120,000.00 450,622.12 – 450,622.12 – Liposometechnologyinnovation
project
( ) 1,042,631.00 944,812.90 – 944,812.90 – Grantforthequalitycontrolof
traditionalChinesemedicine
injections
( ) 1,000,000.00 – 1,000,000.00 – 1,000,000.00 Japaneseencephalitisvaccine
project
( ) 1,000,000.00 1,000,000.00 – 1,000,000.00 – Guidanceprojectforthe
developmentofHigh-tech
IndustrialDevelopmentZone
(YueCaiGongNo.319)
( 319
) 1,000,000.00 – 1,000,000.00 150,000.00 850,000.00 Projectsforstrategicand
emergingindustryin2012–
commercialisationand
researchoftigecyclinefor
injectiontohumanbody
(2012 -
) 800,000.00 – 800,000.00 754,268.12 45,731.88 Fundingforexpansionfrom
organicgrowthandupgradeof
facilitiesgrantedbyprovincial
financedepartmentin2009
(2009 ) 700,000.00 700,000.00 – 700,000.00 –
– I-119–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2011 theperiod fortheperiod 2012 RXdevelopmentofnew
preparationsforthetreatment
ofthrombus
( RX ) 600,000.00 31,710.50 – 31,710.50 – Specialfundsfortwonew
products
( ) 600,000.00 – 600,000.00 600,000.00 – Oralbifidobacteriaviable
preparations
( ) 600,000.00 466,205.15 – 466,205.15 – Firstbatchoffundingfor
integratingandguiding
projectsinproductionsciences
fromprovincialdepartmentsin
2011
(2011
) 500,000.00 500,000.00 – 100,000.00 400,000.00 2012ZhuhaiStrategicEmerging
IndustriesSpecialFunds
(2012
) 500,000.00 – 500,000.00 – 500,000.00 Constructionofhitechfacilities
forinnovationand
commercialisationofmodern
traditionalChinesemedicines
(
) 500,000.00 400,000.00 – 99,996.00 300,004.00 Power-savingoflightingpump
fanandair-conditioning
system
(
) 350,000.00 280,000.00 – 69,996.00 210,004.00R&Dandproduction
transformationofgemifloxacin
tablets
(
) 300,000.00 212,527.55 – – 212,527.55 Dan-phenolicacidB
( B) 300,000.00 140,757.40 – 140,757.40 – Projectfundingfortechnology
centresformunicipallevel
enterprisesinZhuhai
(
) 300,000.00 300,000.00 – – 300,000.00 SupplementaryfundingfromThe
ScientificandTechnology
DepartmentsoftheStateand
theProvincesin2012
(2012
) 250,000.00 – 250,000.00 – 250,000.00 Granttotheprojectofthree
rapidtestingtechnologiesfor
melamineillegallyaddedin
food
(
) 200,000.00 188,600.00 – – 188,600.00 Improvedsynthesisof
valaciclovirhydrochloride
( ) 200,000.00 171,806.50 – 171,806.50 –
– I-120–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 31December Item ofsubsidy 2011 theperiod fortheperiod 2012 Researchinthetechnologies
criticaltotheintelligent
monitoringsystemforbottled
infusionworkshop
(
) 150,000.00 – 150,000.00 – 150,000.00 Granttotheprojectin
developmentofpreciseand
rapidtestingtechnologiesand
equipmentforthepresenceof
substantialtoxicsubstancesin
food
(
) 150,000.00 141,450.00 – – 141,450.00 Researchanddevelopmentof
sugarandelectrolytemixed
injections
(
) 110,000.00 – 110,000.00 – 110,000.00 Experimentalstudyofanti-viral
granulesforanti-avian
influenza
(
) 110,000.00 58,829.14 – 58,829.14 – Researchoftechnologiesforthe
inspectionoftoxicsubstances
fromhigh-throughputaquatic
productsinGuangdong
Province
(
) 80,000.00 – 80,000.00 – 80,000.00 Specialfundingfromthebureau
ofindustryandcommerceto
smallandmediumenterprises
todevelopmarketinthePRC
in2011
( 2011
) 33,900.00 33,900.00 – 33,900.00 – 2011Specialsubsidyfundsfor
patentapplicationinZhuhai
(2011
) 1,000.00 1,000.00 – 1,000.00 – Others 731,500.00 490,000.00 – – 490,000.00 Total 147,589,331.00 67,143,287.92 44,715,300.00 37,686,102.02 74,172,485.90
– I-121–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Totalamount 31December Additionsfor Amortisation 30September Item ofsubsidy 2012 theperiod fortheperiod 2013R&Dandcommercialisationof
innovativedrugofIlaprazole
series(
) 50,000,000.00 22,985,038.06 100,000.00 2,161,097.38 20,923,940.68 Teamforresearch,development
andcommercialisationof
proteindrugs(2012)underthe
scientificresearchteamfor
introductionofinnovation
technologiesinGuangdong
Province(
(2012)
) 45,000,000.00 20,617,624.28 15,000,000.00 14,991,596.33 20,626,027.95 MABforClassItreatmentof
necrosisfactorinhuman
tumourfromhumansource(I
) 11,600,000.00 1,270,621.84 600,000.00 1,119,824.04 750,797.80 Demonstrationprojectonthe
applicationofsolar
photovoltaicarchitecture(
) 7,010,000.00 6,893,166.66 – 525,750.03 6,367,416.63 Subsidyforthetenderof
technologyupgradeprojectfor
PVCsoftbagsupportedby
provincialfinancedepartments
(
PVC ) 4,100,000.00 3,109,851.80 – 145,774.34 2,964,077.46 Sustained-releasefamciclovir
capsule0302project(
0302 ) 4,100,000.00 2,994,863.03 – 2,994,863.03 – Demonstrationprojectsofhigh
concentrationorganic
wastewatertreatment
technology(
) 4,000,000.00 1,577,579.00 – 295,803.00 1,281,776.00 ShenqiFuzhengInjection(
) 3,535,000.00 2,220,592.10 – 37,729.81 2,182,862.29 Financialgrantforthequality
controltechnologiesofShenqi
( ) 3,500,000.00 3,316,666.66 – 1,441,666.66 1,875,000.00 Constructionofproduction
facilitatesfortheGAP
commercialisationof
astragalusatHunyuanin
Shanxi( GAP
) 2,500,000.00 2,000,000.00 – – 2,000,000.00 Leuprolidemicrospheresand
injections(
) 2,300,000.00 120,000.00 – 120,000.00 – Toxin-clearingandkidney
soothingcapsule
( ) 2,040,000.00 793,188.53 – – 793,188.53 Triplepolleninjectionmedicine
( ) 1,800,000.00 44,976.51 – 44,976.51 – Firstbatchofscienceand
technologyR&Dfundingfrom
tradeandindustrysub-branch
inthedistrictbranchin2010
( 2010
) 1,250,000.00 1,000,000.00 – – 1,000,000.00
– I-122–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 30September Item ofsubsidy 2012 theperiod fortheperiod 2013 Grantforthequalitycontrolof
traditionalChinesemedicine
injections(
) 1,000,000.00 1,000,000.00 – 708,333.35 291,666.65 Guidanceprojectforthe
developmentofhigh-tech
IndustrialDevelopmentZone
(YueCaiGongNo.319)(
319
) 1,000,000.00 850,000.00 – – 850,000.00 Projectsforstrategicand
emergingindustryin2012-
commercialisationand
researchoftigecyclinefor
injectiontohumanbody(2012
–
) 800,000.00 45,731.88 – 45,731.88 – Firstbatchoffundingfor
integratingandguiding
projectsinproductionsciences
fromprovincialdepartmentsin
2011(2011
) 500,000.00 400,000.00 – – 400,000.00 2012ZhuhaiStrategicEmerging
Industriesspecialfunds(2012
) 500,000.00 500,000.00 – – 500,000.00 Constructionofhi-techfacilities
forinnovationand
commercialisationofmodern
traditionalChinesemedicines
(
) 500,000.00 300,004.00 – 74,997.00 225,007.00 Power-savingoflightingpump
fanandair-conditioning
system(
) 350,000.00 210,004.00 – 52,497.00 157,507.00R&Dandproduction
transformationofgemifloxacin
tablets(
) 300,000.00 212,527.55 – – 212,527.55 Projectfundingfortechnology
centresformunicipallevel
enterprisesinZhuhai(
) 300,000.00 300,000.00 – – 300,000.00 Supplementaryfundingfromthe
ScientificandTechnology
DepartmentsoftheStateand
theProvincesin2012(2012
) 250,000.00 250,000.00 – – 250,000.00 Granttotheprojectofthree
rapidtestingtechnologiesfor
melamineillegallyaddedin
food(
) 200,000.00 188,600.00 – – 188,600.00 Researchinthetechnologies
criticaltotheintelligent
monitoringsystemforbottled
infusionworkshop(
) 150,000.00 150,000.00 – 47,499.99 102,500.01
– I-123–
APPENDIX I ACCOUNTANTS’ REPORT Totalamount 31December Additionsfor Amortisation 30September Item ofsubsidy 2012 theperiod fortheperiod 2013 Granttotheprojectin
developmentofpreciseand
rapidtestingtechnologiesand
equipmentforthepresenceof
substantialtoxicsubstancesin
food(
) 150,000.00 141,450.00 – – 141,450.00 Researchanddevelopmentof
sugarandelectrolytemixed
injections(
) 110,000.00 110,000.00 – 24,444.44 85,555.56 Researchoftechnologiesforthe
inspectionoftoxicsubstances
fromhigh-throughputaquatic
productsinGuangdong
Province(
) 80,000.00 80,000.00 – – 80,000.00 Researchanddevelopmentfor
thepreparationofJindele
( ) 50,000.00 – 50,000.00 – 50,000.00 Specialfundsfortheresearchin
thetechnologystandardof
Chinesemedicinedrinking
tabletsinthePRC
(
) 200,000.00 – 200,000.00 78,180.00 121,820.00 Invitrodiagnosticstechnology
productsunderthebiological
andpharmaceuticaltechnology
sectorof863Plan(863
) 150,000.00 – 150,000.00 – 150,000.00 Secondbatchofscienceand
technologyR&Dfundingfrom
tradeandindustrysub-branch
inthedistrictbranch2012(
2012
) 1,000,000.00 – 1,000,000.00 – 1,000,000.00 Financialinterestsubsidyforthe
industrialisationoftraditional
Chinesemedicineinjections
technologicaltransformation
projects(
) 910,000.00 – 910,000.00 – 910,000.00 Specialnationalpatentgrants
( ) 113,600.00 – 113,600.00 113,600.00 – Littlegianttrainingenterprise
( ) 200,000.00 – 200,000.00 200,000.00 – 2013ZhuhaiBureauofFinance
StrategicEmergingIndustries
SpecialFunds(
2013 ) 200,000.00 – 200,000.00 – 200,000.00 Zhuhaispecialmatchingfunds
toexpandimports(
) 3,307.00 – 3,307.00 3,307.00 – Energysubsidiestobuyhome
appliances( ) 400.00 – 400.00 400.00 – Others 731,500.00 490,000.00 – – 490,000.00 Total 152,483,807.00 74,172,485.90 18,527,307.00 25,228,071.79 67,471,721.11
– I-124–
APPENDIX I ACCOUNTANTS’ REPORT 35. Deferred tax liabilities
31 December 31 December 31 December 30 September Category 2010 2011 2012 2013 Taxable temporary difference arising
from financial assets held for
trading – – 58,428.62 62,917.43 Taxable temporary difference arising
from available-for-sale financial
assets 1,212,428.40 1,012,313.47 1,218,424.33 1,208,643.31 Taxable temporary difference arising
from long-term equity investments
under in equity method 1,062,219.81 889,191.40 1,299,636.20 1,555,563.45 Total 2,274,648.21 1,901,504.87 2,576,489.15 2,827,124.19 The balance of deferred tax liabilities at 31 December 2012 increased by35.50% from the beginning of the year, which was mainly attributable to the improvement in the results of associates that resulted in an increase in taxable temporary difference under equity method.
– I-125–
APPENDIX I ACCOUNTANTS’ REPORT 36. Share capital
2010
Unit: Shares Movementfortheperiod
Numberof Reserve
31December placing Numberof fund 31December Item 2009 share bonusshare capitalised Others Sub-total 2010 I. Sharessubjecttoselling
restrictions
(i) Originalcorporate
shareholders’shares – – – – – – – Ofwhich:
State-ownedshares – – – – – – – Domesticlegalperson
shares – – – – – – – Overseaslegalperson
shares – – – – – – – Others – – – – – – – (ii)Legalpersonsharesfor
subscription – – – – – – – (iii)Staffshares – – – – – – – (iv)Preferencesharesor
others – – – – – – – (v) Sharesincirculation
subjecttoselling
restrictions 6,059,428 – – – – – 6,059,428 Sharesnotincirculationin
aggregate 6,059,428 – – – – – 6,059,428 -------- ------- ------- ------- ------ ------ -------- II. Sharesnotsubjecttoselling
restrictions
(i) Domesticallylisted
ordinaryshares
denominatedinRenminbi 177,669,070 – – – – – 177,669,070 Ofwhich:Sharesheldby
seniormanagement 535 – – – -535 -535 – (ii)Domesticallylisted
foreignshares 111,993,354 – – – – – 111,993,354 Sharesincirculationin
aggregate 289,662,424 – – – – – 289,662,424 -------- ------- ------- ------- ------ ------ -------- III.Totalnumberofshares 295,721,852 – – – – – 295,721,852
– I-126–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Unit: Shares Movementfortheperiod
Numberof Reserve
31December placing Numberof fund 31December Item 2010 share bonusshare capitalised Others Sub-total 2011 I. Sharessubjecttoselling
restrictions
(i) Originalcorporate
shareholders’shares – – – – – – – Ofwhich:
State-ownedshares – – – – – – – Domesticlegalperson
shares – – – – – – – Overseaslegalperson
shares – – – – – – – Others – – – – – – – (ii)Legalpersonsharesfor
subscription – – – – – – – (iii)Staffshares – – – – – – – (iv)Preferencesharesor
others – – – – – – – (v) Sharesincirculation
subjecttoselling
restrictions 6,059,428 – – – – – 6,059,428 Sharesnotincirculationin
aggregate 6,059,428 – – – – – 6,059,428 -------- ------- ------- ------- ------ ------ -------- II. Sharesnotsubjecttoselling
restrictions
(i) Domesticallylisted
ordinaryshares
denominatedinRenminbi 177,669,070 – – – – – 177,669,070 Ofwhich:Sharesheldby
seniormanagement – – – – – – – (ii)Domesticallylisted
foreignshares 111,993,354 – – – – – 111,993,354 Sharesincirculationin
aggregate 289,662,424 – – – – – 289,662,424 -------- ------- ------- ------- ------ ------ -------- III.Totalnumberofshares 295,721,852 – – – – – 295,721,852
– I-127–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Unit: Shares Movementfortheperiod
Numberof Reserve
31December placing Numberof fund 31December Item 2011 share bonusshare capitalised Others Sub-total 2012 I. Sharessubjecttoselling
restrictions
(i) Originalcorporate
shareholders’shares – – – – – – – Ofwhich:
State-ownedshares – – – – – – – Domesticlegalperson
shares – – – – – – – Overseaslegalperson
shares – – – – – – – Others – – – – – – – (ii)Legalpersonsharesfor
subscription – – – – – – – (iii)Staffshares – – – – – – – (iv)Preferencesharesor
others – – – – – – – (v) Sharesincirculation
subjecttoselling
restrictions 6,059,428 – – – – – 6,059,428 Sharesnotincirculationin
aggregate 6,059,428 – – – – – 6,059,428 -------- ------- ------- ------- ------ ------ -------- II. Sharesnotsubjecttoselling
restrictions
(i) Domesticallylisted
ordinaryshares
denominatedinRenminbi 177,669,070 – – – – – 177,669,070 Ofwhich:Sharesheldby
seniormanagement – – – – – – – (ii)Domesticallylisted
foreignshares 111,993,354 – – – – – 111,993,354 Sharesincirculationin
aggregate 289,662,424 – – – – – 289,662,424 -------- ------- ------- ------- ------ ------ -------- III.Totalnumberofshares 295,721,852 – – – – – 295,721,852
– I-128–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Unit: Shares Movementfortheperiod
Numberof Reserve 30 31December placing Numberof fund September Item 2012 share bonusshare capitalised Others Sub-total 2013 I. Sharessubjecttoselling
restrictions
(i) Originalcorporate
shareholders’share – – – – – – – Ofwhich:
State-ownedshares – – – – – – – Domesticlegalperson
shares – – – – – – – Overseaslegalperson
shares – – – – – – – Others – – – – – – – (ii)Legalpersonsharesfor
subscription – – – – – – – (iii)Staffshares – – – – – – – (iv)Preferencesharesor
others – – – – – – – (v) Sharesincirculation
subjecttoselling
restrictions 6,059,428 – – – – – 6,059,428 Sharesnotincirculationin
aggregate 6,059,428 – – – – – 6,059,428 -------- ------- ------- ------- ------ ------ -------- II. Sharesnotsubjecttoselling
restrictions
(i) Domesticallylisted
ordinaryshares
denominatedinRenminbi 177,669,070 – – – – – 177,669,070 Ofwhich:Sharesheldby
seniormanagement – – – – – – – (ii)Domesticallylisted
foreignshares 111,993,354 – – – – – 111,993,354 Sharesincirculationin
aggregate 289,662,424 – – – – – 289,662,424 -------- ------- ------- ------- ------ ------ -------- III.Totalnumberofshares 295,721,852 – – – – – 295,721,852 37. Capital reserve
2010
Increase Decrease
31 December during the during the 31 December Category 2009 period period 2010 Capital premiums 320,792,441.78 – – 320,792,441.78 Other capital reserve 30,153,733.86 161,815.00 2,671,811.30 27,643,737.56 Total 350,946,175.64 161,815.00 2,671,811.30 348,436,179.34
– I-129–
APPENDIX I ACCOUNTANTS’ REPORT The decrease of capital reserve in 2010 was attributable to the changes in fair value of available-for-sale financial assets.
2011
Increase Decrease
31 December during the during the 31 December Category 2010 period period 2011 Capital premiums 320,792,441.78 – – 320,792,441.78 Other capital reserve 27,643,737.56 790,941.73 1,133,984.66 27,300,694.63 Total 348,436,179.34 790,941.73 1,133,984.66 348,093,136.41 The decrease of capital reserve in 2011 was attributable to the changes in fair value of available-for-sale financial assets.
2012
Increase Decrease
31 December during the during the 31 December Category 2011 period period 2012 Capital premiums 320,792,441.78 – 101,682,236.10 219,110,205.68 Other capital reserve 27,300,694.63 1,167,961.50 28,468,656.13 – Total 348,093,136.41 1,167,961.50 130,150,892.23 219,110,205.68 The increase of capital reserve in 2012 was attributable to the changes in fair value of available-for-sale financial assets.
The decrease of capital reserve in 2012 was attributable to (i) the acquisition of11.91% non-controlling interests in Livzon Group Limin Pharmaceutical Manufacturing Factory ( ) by the Company at a consideration of RMB151,532,596.80. The difference of RMB129,067,823.34 between the transfer price and the correspondingcarryingamountofnon-controllinginterestsofRMB22,464,773.46wasadjustedincapitalreserveand (ii) pursuant to the equity interest transfer agreement entered into by the Company and Ding Gongcai ( ) on 24 July 2009, Ding Gongcai ( ) accepted the transfer of49% equity interests in Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd. ( ) at a consideration of RMB40,449,894.58. Until thisyear,theCompanyreceivedRMB19,884,600.00fromDingGongcai( )forthetransferofequityinterests and accounted for49% of the transfer price above, which was recognised as the transfer of24.01% equity interests(49%*49%)inShanghaiLivzonPharmaceuticalManufacturingCo.,Ltd.( ).Thedifferenceof RMB1,083,068.89betweenthetransferpriceandthecorrespondinginterestsofRMB20,967,668.89wasadjustedin capital reserve.
Nine months ended 30 September 2013
Increase Decrease
31 December during the during the 30 September Category 2012 period period 2013 Capital premiums 219,110,205.68 – – 219,110,205.68 Other capital reserve – – 55,425.84 -55,425.84 Total 219,110,205.68 – 55,425.84 219,054,779.84 Thedecreaseofcapitalreservefortheninemonthsended30September2013wasattributabletothemovement of fair value in available-for-sale financial assets.
– I-130–
APPENDIX I ACCOUNTANTS’ REPORT 38. Surplus reserve
2010
Increase Decrease
31 December during the during the 31 December Category 2009 period period 2010 Statutory surplus reserve 233,868,025.59 41,818,083.11 – 275,686,108.70 Discretionary surplus reserve 63,796,201.34 – – 63,796,201.34 Reserve funds 82,108,376.71 – – 82,108,376.71 Enterprise development funds 21,683,742.35 – – 21,683,742.35 Total 401,456,345.99 41,818,083.11 – 443,274,429.10 2011
Increase Decrease
31 December during the during the 31 December Category 2010 period period 2011 Statutory surplus reserve 275,686,108.70 35,936,988.09 – 311,623,096.79 Discretionary surplus reserve 63,796,201.34 – – 63,796,201.34 Reserve funds 82,108,376.71 – – 82,108,376.71 Enterprise development funds 21,683,742.35 – – 21,683,742.35 Total 443,274,429.10 35,936,988.09 – 479,211,417.19 2012
Increase Decrease
31 December during the during the 31 December Category 2011 period period 2012 Statutory surplus reserve 311,623,096.79 11,107,619.71 – 322,730,716.50 Discretionary surplus reserve 63,796,201.34 – – 63,796,201.34 Reserve funds 82,108,376.71 – – 82,108,376.71 Enterprise development funds 21,683,742.35 – – 21,683,742.35 Total 479,211,417.19 11,107,619.71 – 490,319,036.90 Nine months ended 30 September 2013
Increase Decrease
31 December during the during the 30 September Category 2012 period period 2013 Statutory surplus reserve 322,730,716.50 – – 322,730,716.50 Discretionary surplus reserve 63,796,201.34 – – 63,796,201.34 Reserve funds 82,108,376.71 – – 82,108,376.71 Enterprise development funds 21,683,742.35 – – 21,683,742.35 Total 490,319,036.90 – – 490,319,036.90
– I-131–
APPENDIX I ACCOUNTANTS’ REPORT 39. Retained earnings
31December 31December 31December 30September Item 2010 2011 2012 2013 Retainedearningsatthebeginningofthe
period 1,114,710,405.94 1,446,714,876.09 1,740,645,868.60 2,023,348,842.58 Add: Netprofitfortheperiod 418,180,831.06 359,369,880.94 441,671,519.69 378,519,464.72 Otheritems – – – – Less:Appropriationtostatutorysurplus
reserve 41,818,083.11 35,936,988.09 11,107,619.71 – Appropriationtostaffincentivesand
welfarefund – – – – Appropriationtoreservefunds – – – – Appropriationtoenterprise
developmentfunds – – – – Returnoninvestment – – – – Less:Dividendspayabletopreferenceshares – – – – Appropriationtodiscretionarysurplus
reserve – – – – Dividendspayabletoordinaryshares 44,358,277.80 29,501,900.34 147,860,926.00 147,860,926.00 Dividendsofordinaryshares
capitalised – – – – Retainedearningsattheendoftheperiod 1,446,714,876.09 1,740,645,868.60 2,023,348,842.58 2,254,007,381.30 Of which, the details for appropriation of dividends were as follows:
Unit:RMB’000 31 December 31 December 31 December 30 September 2010 2011 2012 2013 Dividends:
Final dividends in respect of the
year of 2009 paid during the year
(Note 1) 44,358.28 − − – Final dividends in respect of the
year of 2010 paid during the year
(Note 2) − 29,501.90 − – Final dividends in respect of the
year of 2011 paid during the year
(Note 3) − − 147,860.93 – Final dividends in respect of the
year of 2012 paid during the year
(Note 4) – – – 147,860.93 Dividends proposed after the
balance sheet date:
Final dividends proposed for the
year
2010 (Note 2) 29,501.90 − − – Final dividends proposed for the
year of 2011 (Note 3) − 147,860.93 − – Final dividends proposed for the
year of 2012 (Note 4) – − 147,860.93 –
– I-132–
APPENDIX I ACCOUNTANTS’ REPORT Note 1: On 25 February 2010, the Company held the Eighteen Meeting of the Sixth Board, which passed the resolution of 2009 annual profit distribution plan to declare a final dividend of RMB44,358,280 (RMB0.15 per share (tax inclusive)) to all shareholders with reference to the total number of 295,721,852sharesoftheCompanyattheendofthereportingperiod.Suchprofitdistributionplanwasapprovedintheshareholders’meetingon26March2010andthedividendswerepaidtoshareholders in May and June of 2010.
Note 2: On24February2011,theCompanyheldtheTwenty-SixthMeetingoftheSixthBoard,whichpassed the resolution of 2010 annual profit distribution plan to declare a final dividend of RMB29,572,180 (RMB0.1pershare(taxinclusive))toallshareholderswithreferencetothetotalnumberof295,721,852 shares of the Company at the end of the reporting period. Such profit distribution plan was approvedintheshareholders’meetingon25March2011andthedividendswerepaidtoshareholdersinMayand June of 2011.
Note 3: On 22 March 2012, the Company held the Sixth Meeting of the Seventh Board, which passed the resolution of 2011 annual profit distribution plan to declare a final dividend of RMB147,860,930 (RMB0.5pershare(taxinclusive))toallshareholderswithreferencetothetotalnumberof295,721,852 shares of the Company at the end of the reporting period. Such profit distribution plan was approvedintheshareholders’meetingon13April2012andthedividendswerepaidtoshareholdersinJuneof 2012.
Note 4: On 7 March 2013, the Company held the Fifteen Meeting of the Seventh Board, which passed the resolution of 2012 annual profit distribution plan to declare a final dividend of RMB147,860,930 (RMB0.5pershare(taxinclusive))toallshareholderswithreferencetothetotalnumberof295,721,852 shares of the Company at the end of the reporting period. Such profit distribution plan was approvedintheshareholders’meetingon21June2013andthedividendswerepaidtoshareholdersinJuly2013. 40. Non-controlling interests
2010
31December 31December 2009 Changein2010 2010 Shareholding Profitorloss
percentageof attributableto
Non-controlling Netprofitorloss non-controlling non-controlling Non-controlling Nameofcompany interests ofthesubsidiary shareholders shareholders Otherchanges interests ZhuhaiLivzonDiagnosticReagents
Inc.
( ) 36,929,472.74 43,445,827.48 49.00% 21,288,455.47 -4,900,000.00 53,317,928.21 LivzonGroupXinbeijiang
PharmaceuticalManufacturingInc.
(
) 9,256,656.34 23,784,539.14 7.86% 1,869,464.78 – 11,126,121.12 LivzonGroupLiminPharmaceutical
ManufacturingFactory
( ) 28,418,142.10 107,272,953.79 11.91% 12,776,208.80 -4,398,624.00 36,795,726.90 DatongLivzonQiyuanMedicineCo.,
Ltd.
( ) 263,314.34 -335,340.93 18.52% -25,150.57 – 238,163.77 LongxiLivzonShenyuanMedicine
Co.,Ltd.
( ) 394,653.53 -180,797.54 20.72% -18,079.75 – 376,573.78 ZhuhaiLivzonBaiamengBiological
MaterialsCo.,Ltd.
( -
) 1,111,467.95 – 18.00% – – 1,111,467.95 ZhuhaiLivzonMABBiological
TechnologyCo.,Ltd.
(
) – -1,948,988.53 49.00% -955,004.38 9,800,000.00 8,844,995.62 LivzonGroupVaccineEngineeringInc.
( ) – -3,880,395.93 16.15% -626,683.94 10,528,185.00 9,901,501.06 Total 76,373,707.00 168,157,797.48 34,309,210.41 11,029,561.00 121,712,478.41 The increase in other changes of non-controlling interests in 2010 represented the capital invested by non-controlling shareholders and the decrease represented the profit appropriated to non-controlling shareholders.
– I-133–
APPENDIX I ACCOUNTANTS’ REPORT 2011
31December 31December 2010 Changein2011 2011 Shareholding Profitorloss
percentageof attributableto
Non-controlling Netprofitorloss non-controlling non-controlling Non-controlling Nameofcompany interests ofthesubsidiary shareholders shareholders Otherchanges interests ZhuhaiLivzonDiagnosticReagents
Inc.
( ) 53,317,928.21 48,251,658.94 49.00% 23,643,312.88 – 76,961,241.09 LivzonGroupXinbeijiang
PharmaceuticalManufacturingInc.
(
) 11,126,121.12 30,000,306.00 7.86% 2,358,024.05 – 13,484,145.17 LivzonGroupLiminPharmaceutical
ManufacturingFactory
( ) 36,795,726.90 85,962,132.37 11.91% 10,251,408.48 -22,362,872.53 24,684,262.85 DatongLivzonQiyuanMedicineCo.,
Ltd.
( ) 238,163.77 -924,365.46 18.52% -69,327.41 – 168,836.36 LongxiLivzonShenyuanMedicine
Co.,Ltd.
( ) 376,573.78 -424,988.79 20.72% -42,498.88 – 334,074.90 ZhuhaiLivzonBaiamengBiological
MaterialsCo.,Ltd.
( -
) 1,111,467.95 – 18.00% – – 1,111,467.95 ZhuhaiLivzonMABBiological
TechnologyCo.,Ltd.
(
) 8,844,995.62 -12,495,793.96 49.00% -6,122,939.04 39,200,000.00 41,922,056.58 LivzonGroupVaccineEngineeringInc.
( ) 9,901,501.06 -8,730,602.20 16.15% -1,409,992.26 – 8,491,508.80 WenshanLivzonSanqiPlantationCo.,
Ltd.( ) – -366,261.13 49.00% -179,467.95 1,470,000.00 1,290,532.05 Total 121,712,478.41 141,272,085.77 28,428,519.87 18,307,127.47 168,448,125.75 The increase in other changes of non-controlling interests in 2011 represented the capital invested by non-controlling shareholders and the decrease represented the profit appropriated to non-controlling shareholders.
– I-134–
APPENDIX I ACCOUNTANTS’ REPORT 2012
31December 31December 2011 Changein2012 2012 Shareholding Profitorloss
percentageof attributableto
Non-controlling Netprofitorloss non-controlling non-controlling Non-controlling Nameofcompany interests ofthesubsidiary shareholders shareholders Otherchanges interests ZhuhaiLivzonDiagnosticReagents
Inc.( ) 76,961,241.09 59,829,700.42 49.00% 29,316,553.21 -22,051,429.23 84,226,365.07 CompanhiadeMacauCarason
Limitada( ) – 419,610.27 49.00% 205,609.03 – 205,609.03 LivzonGroupXinbeijiang
PharmaceuticalManufacturingInc.
(
) 13,484,145.17 31,566,282.27 7.86% 2,481,109.79 – 15,965,254.96 LivzonGroupLiminPharmaceutical
ManufacturingFactory
( ) 24,684,262.85 103,432,661.97 – 7,164,241.82 -31,848,504.67 – DatongLivzonQiyuanMedicineCo.,
Ltd.( ) 168,836.36 -115,015.86 7.50% -8,626.19 – 160,210.17 LongxiLivzonShenyuanMedicine
Co.,Ltd.
( ) 334,074.90 -695,273.13 10.00% -69,527.31 – 264,547.59 ZhuhaiLivzonBaiamengBiological
MaterialsCo.,Ltd.( -
) 1,111,467.95 – 18.00% – – 1,111,467.95 ZhuhaiLivzonMABBiological
TechnologyCo.,Ltd.(
) 41,922,056.58 -5,906,324.31 49.00% -2,894,098.91 – 39,027,957.67 LivzonGroupVaccineEngineeringInc.
( ) 8,491,508.80 -12,983,412.44 16.15% -2,096,821.11 – 6,394,687.69 ShanghaiLivzonPharmaceutical
ManufacturingCo.,Ltd.
( ) – 12,069,192.61 24.01% – 20,967,668.89 20,967,668.89 WenshanLivzonSanqiPlantationCo.,
Ltd.( ) 1,290,532.05 -1,116,042.98 49.00% -546,861.06 3,036,000.00 3,779,670.99 Total 168,448,125.75 186,501,378.82 33,551,579.27 -29,896,265.01 172,103,440.01 The increase in other changes of non-controlling interests in 2012 represented the capital invested by non-controllingshareholdersandthedecreaserepresentedthedisposalofinterestsinsubsidiariesbynon-controllingshareholders’to the Group and the profit appropriated to non-controlling shareholders.
– I-135–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
31December Changein 30September 2012 JanuarytoSeptember2013 2013 Shareholding Profitorloss
percentageof attributableto
Non-controlling Netprofitorloss non-controlling non-controlling Non-controlling Nameofcompany interest ofthesubsidiary shareholders shareholders Otherchanges interest ZhuhaiLivzonDiagnosticReagents
Inc.( ) 84,226,365.07 45,189,596.81 49.00% 22,096,656.49 -10,891.51 106,312,130.05 CompanhiadeMacauCarason
Limitada( ) 205,609.03 884,581.00 49.00% 433,444.69 – 639,053.72 LivzonGroupXinbeijiang
PharmaceuticalManufacturingInc.
(
) 15,965,254.96 13,944,673.49 7.86% 1,096,051.34 – 17,061,306.30 DatongLivzonQiyuanMedicineCo.,
Ltd.( ) 160,210.17 -468,814.65 7.50% -35,161.10 – 125,049.07 LongxiLivzonShenyuanMedicine
Co.,Ltd.(
) 264,547.59 -532,755.54 10.00% -53,275.55 – 211,272.04 ZhuhaiLivzonBaiamengBiological
MaterialsCo.,Ltd.( -
) 1,111,467.95 – 18.00% – – 1,111,467.95 ZhuhaiLivzonMABBiological
TechnologyCo.,Ltd.(
) 39,027,957.67 -5,482,629.13 49.00% -2,686,488.27 49,000,000.00 85,341,469.40 LivzonGroupVaccineEngineeringInc.
( ) 6,394,687.69 -10,709,250.95 16.15% -1,729,544.03 – 4,665,143.66 ShanghaiLivzonPharmaceutical
ManufacturingCo.,Ltd.(
) 20,967,668.89 13,268,170.23 24.01% – – 20,967,668.89 ShanghaiLivzonBiotechnologyCo.,
Ltd.( ) – – 43.01% – 2,500,000.00 2,500,000.00 WenshanLivzonSanqiPlantationCo.,
Ltd.( ) 3,779,670.99 1,808,103.54 49.00% 885,970.73 – 4,665,641.72 Total 172,103,440.01 57,901,674.80 20,007,654.30 51,489,108.49 243,600,202.80 41. Operating income and operating cost
(1) Category
2010 2011 2012
Operating Grossoperating Operating Grossoperating Operating Grossoperating Item income Operatingcost profit income Operatingcost profit income Operatingcost profit Principalactivities 2,690,195,857.93 1,267,927,290.69 1,422,268,567.24 3,136,340,136.09 1,377,394,362.64 1,758,945,773.45 3,923,496,825.00 1,549,903,898.38 2,373,592,926.62 Non-principal
activities 36,523,037.68 18,557,617.40 17,965,420.28 26,575,158.41 20,542,830.58 6,032,327.83 20,028,480.20 19,784,217.07 244,263.13 Total 2,726,718,895.61 1,286,484,908.09 1,440,233,987.52 3,162,915,294.50 1,397,937,193.22 1,764,978,101.28 3,943,525,305.20 1,569,688,115.45 2,373,837,189.75 Ninemonthsended30September2012(unaudited) Ninemonthsended30September2013
Operating Grossoperating Operating Grossoperating Item income Operatingcost profit income Operatingcost profit Principalactivities 2,894,713,211.26 1,130,067,015.28 1,764,646,195.98 3,218,124,992.37 1,150,211,348.91 2,067,913,643.46 Non-principalactivities 14,301,078.30 14,617,895.48 -316,817.18 15,234,521.09 14,373,213.80 861,307.29 Total 2,909,014,289.56 1,144,684,910.76 1,764,329,378.80 3,233,359,513.46 1,164,584,562.71 2,068,774,950.75
– I-136–
APPENDIX I ACCOUNTANTS’ REPORT (2) Principal activities presented in terms of product segments
2010 2011
Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit principal principal fromprincipal principal principal fromprincipal Item activities activities activities activities activities activities I. Drugpreparationproducts
1. Westerndrugpreparationproducts 994,402,080.26 300,637,839.96 693,764,240.30 1,152,423,374.53 339,329,488.11 813,093,886.42 Ofwhich: Gastrointestinaldrugs 239,707,983.30 34,328,600.32 205,379,382.98 261,081,284.10 37,895,488.62 223,185,795.48 Cardio-cerebral-vasculardrugs 97,526,875.57 27,653,397.37 69,873,478.20 119,122,158.35 31,589,017.60 87,533,140.75 Antibioticdrugs(including
importeddrugs) 325,947,761.38 121,365,416.69 204,582,344.69 307,001,375.61 109,441,979.28 197,559,396.33 Gonadotropichormones 224,716,826.21 74,277,068.98 150,439,757.23 330,015,436.27 112,727,520.84 217,287,915.43 Bloodandhemopoieticsystem
drugs 21,614,899.52 13,707,992.22 7,906,907.30 26,770,266.17 20,955,669.57 5,814,596.60 Others 84,887,734.28 29,305,364.38 55,582,369.90 108,432,854.03 26,719,812.20 81,713,041.83 2. Chinesedrugpreparationproducts 555,360,832.65 124,047,496.80 431,313,335.85 931,842,572.99 246,091,235.10 685,751,337.89 Sub-totalofdrugpreparationproducts: 1,549,762,912.91 424,685,336.76 1,125,077,576.15 2,084,265,947.52 585,420,723.21 1,498,845,224.31 II.Bulkmedicinesandintermediates 916,952,536.64 739,396,768.03 177,555,768.61 777,307,065.52 662,459,357.75 114,847,707.77 III.Diagnosticreagentsandequipment 223,480,408.38 103,845,185.90 119,635,222.48 274,767,123.05 129,514,281.68 145,252,841.37 Total 2,690,195,857.93 1,267,927,290.69 1,422,268,567.24 3,136,340,136.09 1,377,394,362.64 1,758,945,773.45 2012
Income from Cost of Gross profit principal principal from principal Item activities activities activities I.Drug preparation products
1. Western drug preparation
products 1,364,447,949.77 382,822,472.48 981,625,477.29 Of which: Gastrointestinal
drugs 300,654,654.88 39,974,429.38 260,680,225.50 Cardio-cerebral-
vascular drugs 142,778,622.93 33,197,437.21 109,581,185.72 Antibiotic drugs
(including
imported drugs) 276,292,475.33 88,143,775.99 188,148,699.34 Gonadotropic
hormones 458,128,077.44 158,953,042.70 299,175,034.74 Blood and
hemopoietic
system drugs 24,741,422.04 24,103,890.48 637,531.56 Others 161,852,697.15 38,449,896.72 123,402,800.43 2. Chinese drug preparation
products 1,383,249,300.22 296,754,005.65 1,086,495,294.57 Sub-total of drug preparation
products: 2,747,697,249.99 679,576,478.13 2,068,120,771.86 II. Bulk medicines and intermediates 834,638,276.57 711,885,932.47 122,752,344.10 III. Diagnostic reagents and equipment 341,161,298.44 158,441,487.78 182,719,810.66 Total 3,923,496,825.00 1,549,903,898.38 2,373,592,926.62
– I-137–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended30September2012(unaudited) Ninemonthsended30September2013
Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit principal principal fromprincipal principal principal fromprincipal Item activities activities activities activities activities activities I. Drugpreparationproducts
1. Westerndrug
preparationproducts 1,029,531,824.24 292,529,123.78 737,002,700.46 1,243,430,021.99 321,025,331.45 922,404,690.54 Ofwhich: Gastrointestinal
drugs 226,078,663.61 30,093,569.72 195,985,093.89 266,342,189.98 31,443,431.56 234,898,758.42 Cardio-
cerebrovascular
drugs 110,089,169.35 25,525,453.80 84,563,715.55 108,559,383.50 26,407,206.54 82,152,176.96 Antibiotic
drugs
(including
imported
drugs) 213,116,377.70 69,006,074.30 144,110,303.40 208,066,364.49 56,339,493.19 151,726,871.30 Gonadotropic
hormones 348,306,881.71 122,060,886.92 226,245,994.79 443,936,983.85 154,320,817.60 289,616,166.25 Bloodand
hemopoietic
system
drugs 18,076,074.76 17,061,410.19 1,014,664.57 22,873,899.80 23,797,881.86 -923,982.06 Others 113,864,657.11 28,781,728.85 85,082,928.26 193,651,200.37 28,716,500.70 164,934,699.67 2. Chinesedrug
preparationproducts 1,031,086,884.83 217,804,663.36 813,282,221.47 1,185,507,907.31 240,418,910.27 945,088,997.04 Sub-totalofdrug
preparationproducts: 2,060,618,709.07 510,333,787.14 1,550,284,921.93 2,428,937,929.30 561,444,241.72 1,867,493,687.58 II.Bulkmedicinesand
intermediates 606,338,701.93 516,366,703.43 89,971,998.50 530,491,688.85 473,575,951.66 56,915,737.19 III.Diagnosticreagentsand
equipment 227,755,800.26 103,366,524.71 124,389,275.55 258,695,374.22 115,191,155.53 143,504,218.69 Total 2,894,713,211.26 1,130,067,015.28 1,764,646,195.98 3,218,124,992.37 1,150,211,348.91 2,067,913,643.46 (3) Principal activities presented in terms of geographical regions
2010 2011 2012
Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit principal principal fromprincipal principal principal fromprincipal principal principal fromprincipal Item activities activities activities activities activities activities activities activities activities Domestic 2,441,321,008.94 1,098,481,351.22 1,342,839,657.72 2,842,806,447.24 1,169,973,215.05 1,672,833,232.19 3,576,612,422.97 1,296,208,890.00 2,280,403,532.97 Exports 248,874,848.99 169,445,939.47 79,428,909.52 293,533,688.85 207,421,147.59 86,112,541.26 346,884,402.03 253,695,008.38 93,189,393.65 Total 2,690,195,857.93 1,267,927,290.69 1,422,268,567.24 3,136,340,136.09 1,377,394,362.64 1,758,945,773.45 3,923,496,825.00 1,549,903,898.38 2,373,592,926.62 Ninemonthsended30September2012(unaudited) Ninemonthsended30September2013
Incomefrom Grossprofit Incomefrom Grossprofit principal Costofprincipal fromprincipal principal Costofprincipal fromprincipal Item activities activities activities activities activities activities Domestic 2,623,412,468.49 931,882,185.90 1,691,530,282.59 2,989,861,326.40 968,090,217.67 2,021,771,108.73 Exports 271,300,742.77 198,184,829.38 73,115,913.39 228,263,665.97 182,121,131.24 46,142,534.73 Total 2,894,713,211.26 1,130,067,015.28 1,764,646,195.98 3,218,124,992.37 1,150,211,348.91 2,067,913,643.46
– I-138–
APPENDIX I ACCOUNTANTS’ REPORT (4) Revenue from sales of goods to top five customers
2010 2011 2012
Percentageto Percentageto Percentageto totalsales totalsales totalsales Nameofcustomer Salesamount amount Salesamount amount Salesamount amount Totalsalesamounttotopfive
customers 243,981,912.40 8.95% 265,435,634.14 8.39% 313,052,709.82 7.94% Ninemonthsended Ninemonthsended
30September2012(unaudited) 30September2013
Percentageto Percentageto totalsales totalsales Nameofcustomer Salesamount amount Salesamount amount Totalsalesamounttotopfivecustomers 248,578,722.31 8.55% 268,606,933.77 8.31% (5) Other businesses presented in terms of business categories
2010 2011 2012
Revenuefrom Revenuefrom Revenuefrom
other Costofother other Costofother other Costofother Item businesses businesses businesses businesses businesses businesses Salesofrawmaterials 17,111,294.39 2,863,999.70 7,712,669.69 4,924,616.95 8,943,220.10 11,713,500.65 Processingfees 1,832,813.96 1,593,486.49 1,234,243.80 1,388,503.44 820,662.47 1,897,640.42 Rentalfee 1,995,553.64 35,594.98 3,271,502.35 103,489.50 3,206,924.21 194,129.00 Inspectionfees 811,826.17 814,972.43 165,330.23 438,389.58 3,846.16 – Powercosts 12,112,792.03 11,531,323.33 13,300,326.83 13,485,011.02 6,025,535.16 5,832,748.11 Others 2,658,757.49 1,718,240.47 891,085.51 202,820.09 1,028,292.10 146,198.89 Total 36,523,037.68 18,557,617.40 26,575,158.41 20,542,830.58 20,028,480.20 19,784,217.07 Ninemonthsended Ninemonthsended
30September2012(unaudited) 30September2013
Revenuefrom Revenuefrom
other Costofother other Costofother Item businesses businesses businesses businesses Salesofrawmaterials 6,067,084.46 8,427,658.42 4,388,296.31 5,234,295.41 Processingfees 22,919.23 829,925.10 145,796.03 145,796.03 Rentalfee 2,457,057.90 160,700.95 2,540,794.54 2,537,226.26 Inspectionfees 3,418.81 – 6,560.68 1,427.27 Powercosts 5,019,049.98 5,135,056.04 5,807,983.95 5,620,628.65 Others 731,547.92 64,554.97 2,345,089.58 833,840.18 Total 14,301,078.30 14,617,895.48 15,234,521.09 14,373,213.80 (6) TheGroupoperatesinasingleoperatingsegmentinthePRC,i.e.themanufactureofpharmaceuticals. Accordingly, no operating segment for geographical information are presented.
– I-139–
APPENDIX I ACCOUNTANTS’ REPORT 42. Business taxes and surcharges
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Urbanmaintenanceand
constructiontax 4,830,998.87 22,191,374.25 29,778,859.67 22,128,066.83 22,392,360.56 Educationsurcharges 2,539,476.25 16,344,393.69 22,633,341.30 16,776,759.05 17,270,522.25 Floodpreventionfee 1,283,247.52 1,733,702.63 1,882,826.26 1,362,787.69 1,430,166.19 Businesstaxes 44,120.96 73,338.38 55,247.25 31,350.86 67,260.70 Others 160,073.59 387,606.58 195,131.50 143,114.43 214,941.84 Total 8,857,917.19 40,730,415.53 54,545,405.98 40,442,078.86 41,375,251.54 (1) Business taxes and surcharges in 2012 increased by33.92% from 2011, which was mainly attributable to the growth of sales for the current period that resulted in an increase of surcharges payable from turnover. Business taxes and surcharges in 2011 increased by359.82% from 2010, which was mainly attributable to the additional charge of urban construction tax and education surcharges by the foreign-invested companies of the Group since December 2010 according to the Circular on Unifying theSystemofUrbanMaintenanceandConstructionTaxandEducationSurchargePaidbyDomesticand Foreign-invested Enterprises and Individuals (
)(GuoFa[2010]No.35),whereforeign-investedenterprises,foreignenterprisesand foreignindividualsbecamesubjecttotheInterimRegulationsonUrbanMaintenanceandConstruction Tax of thePeople’s Republic of China( ) promulgated by the State Council in 1985 and the Interim Provisions on Imposition of Education Surcharge (
) promulgated in 1986 since 1 December 2010.
(2) The basis of calculations for taxes are disclosed in note III.
43. Selling expenses
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Marketingand
promotionalexpenses 529,572,653.55 835,444,454.65 1,281,273,205.92 946,806,105.02 1,147,172,930.11 Ofwhich:Servicefees
paidtothird-party
salesrepresentatives 327,774,151.41 530,658,371.55 890,248,185.27 698,532,807.02 868,885,113.17 Advertisingand
promotionalexpenses 201,798,502.14 304,786,083.10 391,025,020.65 248,273,298.00 278,287,816.94 Staffsalaries 48,560,489.82 46,815,930.23 58,999,384.17 43,305,464.69 49,963,034.10 Transportationcosts 22,378,925.21 26,075,301.42 28,852,256.11 21,018,365.61 22,174,036.56 Travellingexpensesand
entertainment 13,886,805.84 16,457,599.18 22,041,317.17 15,044,800.08 16,684,257.38 Businessmeeting
expenses 12,796,513.18 16,985,175.58 20,069,730.37 12,699,614.83 15,863,165.46 Others 20,850,958.61 29,112,821.04 30,418,349.06 23,737,712.49 22,487,700.87 Total 648,046,346.21 970,891,282.10 1,441,654,242.80 1,062,612,062.72 1,274,345,124.48 Selling expenses in 2012 increased by48.49% from 2011 and selling expenses in 2011 increased by49.82% from 2010. These were mainly attributable to the increase in marketing expenses upon the expansion of sales channels.
– I-140–
APPENDIX I ACCOUNTANTS’ REPORT 44. Administrative expenses
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Researchanddevelopmentcosts 69,236,619.63 74,575,421.40 99,639,860.59 81,985,801.93 100,422,963.40 Staffsalaries 68,240,694.71 73,569,036.81 95,393,441.93 57,599,696.62 61,573,307.06 Depreciationandamortisation 37,484,176.86 38,837,219.03 40,132,844.45 24,331,079.49 25,853,678.55 Lossonsuspensionofoperations 19,725,996.83 26,556,744.98 19,348,322.15 15,430,759.59 21,781,570.73 Taxexpenses 11,047,258.28 12,495,856.66 12,880,587.30 8,930,270.35 11,021,074.39 Others 60,154,963.84 71,595,783.27 83,636,172.16 51,571,204.10 76,106,991.99 Total 265,889,710.15 297,630,062.15 351,031,228.58 239,848,812.08 296,759,586.12 45. Financial expenses
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Interestexpenses 10,982,467.64 22,109,433.56 17,182,224.10 9,191,377.35 8,499,832.74 Less:Interestincome 10,376,747.45 42,026,922.13 40,137,267.55 26,674,941.09 17,687,563.49 Exchange(gains)/losses -2,239,151.28 -4,742,463.70 188,818.88 1,268,399.21 -5,379,266.60 Bankcharges 1,208,577.18 3,936,353.75 5,644,113.81 4,354,339.46 3,619,640.97 Total -424,853.91 -20,723,598.52 -17,122,110.76 -11,860,825.07 -10,947,356.38 Financial expenses in 2011 decreased significantly from 2010, which was mainly attributable to the increase in receipts from sales which resulted in the increase in interest income from bank deposits.
46. Impairment losses
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Provisionforbaddebts 4,275,518.98 7,023,604.60 12,495,812.30 10,230,764.39 9,305,096.75 Provisionfordiminutionin
valueofinventories 5,760,515.61 11,149,440.36 18,035,034.43 7,800,372.54 10,083,026.92 Provisionforimpairmentof
long-term
equityinvestments 100,000.00 – – – – Provisionforimpairmentof
fixedassets 815,241.63 15,962,824.27 14,963,017.35 – – Total 10,951,276.22 34,135,869.23 45,493,864.08 18,031,136.93 19,388,123.67 Impairment losses in 2012 increased by33.27% from 2011, which was mainly attributable to the increase in provisionforbaddebtsandprovisionfordiminutioninvalueofinventoriesforthecurrentperiod.Impairmentlosses in 2011 increased by211.71% from 2010, which was mainly attributable to the increase in provision for bad debts, provision for diminution in value of inventories and provision for impairment of fixed assets.
– I-141–
APPENDIX I ACCOUNTANTS’ REPORT 47. Gains/(losses) from changes in fair value
Sourcesofgains/(losses) Ninemonthsended
fromchanges 30September
infairvalue 2010 2011 2012 2012 2013 (unaudited)
Financialassetsheldfor
trading([–]represents
losses) 10,780,224.20 -11,083,794.52 16,381,681.02 4,800,246.93 -3,528,802.12 Ofwhich:Shares 10,713,911.99 -10,927,116.94 16,365,634.08 4,814,063.40 -3,558,727.50 Funds 66,312.21 -156,677.58 16,046.94 -13,816.47 29,925.38 Duringthereportingperiod,thegains/(losses)fromchangesinfairvaluewasmainlyattributabletothechange in market prices of shares held.
48. Investment (Losses)/Income
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
1. (Losses)/incomefrominvestmentsduringtheperiod
([–]representslosses): -1,278,935.84 -1,485,522.49 3,580,346.68 1,109,909.30 2,962,766.31 (i) Appropriationofprofitsfromassociatesor
jointventures – – – – – (ii) Financialassetsheldfortrading 839,468.52 1,204,246.70 996,332.31 881,435.07 184,166.39 (iii)Available-for-salefinancialassets 318,461.14 27,603.44 151,818.90 151,818.90 364,365.36(iv)Netchangeintheshareholders’equityof
investeesasadjustedattheendoftheperiod -2,468,715.50 -2,717,372.63 2,432,195.47 76,655.33 2,070,484.56 Ofwhich: GuangdongBlueTreasure
PharmaceuticalCo.Ltd.
( ) 521,852.12 -1,483,100.65 3,518,098.34 1,932,597.55 2,193,662.12 TongyikangshimeiChain
(Shenzhen)Co.,Ltd.(
( ) ) -2,990,567.62 -1,234,271.98 -1,085,902.87 -1,855,942.22 -123,177.56 (v) Appropriationofprofitsfromotherequity
investments 31,850.00 – – – 343,750.00 Ofwhich: GuangdongDevelopmentBank
Co.,Ltd.
( ) – – – – 343,750.00 ShanghaiHaixin
PharmaceuticalCo.,Ltd.
( ) 31,850.00 – – – – (vi)Others – – – – – 2. Gainsondisposalofinvestments: – – 556,210.12 558,597.46 847,839.27 Ofwhich: Disposaloffinancialassetsheldfor
trading – – 556,210.12 558,597.46 847,839.27 Total -1,278,935.84 -1,485,522.49 4,136,556.80 1,668,506.76 3,810,605.58 Investment income during the nine months ended 30 September 2013 increased significantly by128.38% as compared with the same period last year, and increased significantly in 2012 as compared with 2011, which was mainly attributable to the improvement of the results of associates which resulted in the increase in investment income under equity method.
– I-142–
APPENDIX I ACCOUNTANTS’ REPORT 49. Non-operating income
(1) Breakdown of non-operating income
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Gainsondisposalof
non-currentassetsin
aggregate 6,578,220.62 623,272.72 1,012,443.94 176,286.90 335,405.10 Ofwhich:Gainson
disposaloffixed
assets 6,578,220.62 623,272.72 1,012,443.94 176,286.90 335,405.10 Penaltyincome 64,523.50 3,700.00 15,700.00 11,700.00 77,042.50 Incomefromscraps 362,225.74 470,385.64 540,441.33 274,551.50 388,358.95 Governmentgrants 13,208,647.02 32,046,594.98 42,064,456.38 15,100,394.11 28,994,120.35 Compensationincome 717,246.00 15,300.00 0.50 – 869,287.11 Waiverofpayables – 733,288.41 200,090.00 – 602,512.76 Others 236,452.12 2,289,771.34 434,721.91 382,490.52 387,516.44 Total 21,167,315.00 36,182,313.09 44,267,854.06 15,945,423.03 31,654,243.21 Non-operating income increased by98.52% during the nine months ended 30 September 2013 as compared with the same period last year, and increased by70.93% in 2011 from 2010, which was mainly attributable to the increase of government grants recognised in profit or loss for that period.
(2) Government grants
Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Fundingfortheteamfor – – 9,382,375.72 – 12,991,596.33 Science,Industry,TradeYueCaiJiao[2012]No. research,developmentand andInformation 319( [2012]319 ) commercialisationofprotein TechnologyBureauof
drugs(2012)underthe Zhuhai(
scientificresearchteamfor )
introductionofinnovation
technologiesinGuangdong
Province(
(2012)
)
Researchofcoretechnologiesfor – – 7,929,378.16 7,023,000.00 1,119,824.04 Science,Industry,TradeYueKeGuiHuaZi[2011] thestrategicandemerging andInformation No.167/ZhuKeGong
industriesinGuangdong TechnologyBureauof MaoXinJi[2012]No.19 Province(2011)fundingfor Zhuhai( ( [2011]167 / theresearchofnewmedicines )/Finance [2012]19 ) withMABforClassI BureauofZhuhai(
treatmentofnecrosisfactorin )
humantumourfromhuman
source(
(2011)I
a
)
Shenchangdroppills(Funds 2,058,077.34 – – – – ScienceandTechnology NoticefortheTenderof receivedfromtenderorganised DepartmentofGuangdong ProjectsfortheSignificant byProvincialScienceand Province( BreakthroughofCritical TechnologyDepartment)( ) Technologiesin
( )) GuangdongProvincein 2003( 2003
)
– I-143–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
NDRCIlaprazoleProject( – 24,166,832.10 2,748,129.84 2,061,097.38 2,061,097.38 FinanceBureauofZhuhaiYueFaGaiGao[2008] ) ( ) No.1282
FaGaiBanGaoJi[2008] No.2223
YueCaiGong[2010]No. 445
( [2008]1282 ) ( [2008]2223 ) ( [2010]445 )
2012ZhuhaiStrategicEmerging – – 2,000,000.00 – – FinanceBureauofZhuhai ZhuKeGongMaoXinJiIndustriesSpecialFunds– ( ) [2012]No.13(
Bio-medicine,Medical [2012]13 )
equipmentandR&Dquota
subsidies(2012
– ,
)
Fundingfortheclinicalresearch – – 1,800,000.00 – – FinanceBureauofZhuhaiZhuCaiGong[2012]No. inblonanserin,anewtypeof ( ) 049( [2012]049 ) medicineforthetreatmentof
schizophrenia(
)
Fundingfortheresearch, – – 1,500,000.00 – – FinanceBureauofZhuhaiZhuCai[2010]No.93 developmentand ( ) ([2010]93 )
commercialisationof
fluvoxamine,anewtypeof
anti-depressant(
)
Specialfundingformousenerve 1,500,000.00 – – – – GuangdongProvincial ZhuKeGongMaoXinJi projects( DevelopmentandReformZi[2010]No.15(
) Commission( [2010]15 )
)andGuangdong
ProvincialDepartmentof
Finance( )
Littlegianttrainingenterprise – – 1,400,000.00 1,400,000.00 200,000.00 ShanghaiScienceand HuKe[2010]No.047( ( ) TechnologyCommission [2010]407 )
( )
Specialfundsfortwonew – 1,370,000.00 – – – FinanceBureauofZhuhai−
productsin2010(2010 ( )
)
Fundingfortheconstructionof – – 1,225,300.00 1,225,300.00 – FinanceBureauofZhuhai YueCaiWaiNo.56(
publicserviceplatformfor ( ) 56 )
foreigntradinginGuangdong
Province(
)
Commercialisationprojectof – 1,170,000.00 – – – ShanghaiScienceand −
leuprolidemicrospheresfor TechnologyCommission
injections( ( )
)
Fundingfortheresearch, – – 1,000,000.00 1,000,000.00 – Science,Industry,Trade ZhuKeGongMaoXinJi developmentand andInformation [2011]No.16(
commercialisationofpurified TechnologyBureauof [2011]16 )
inactivatevaccineforthe Zhuhai(
adsorptionofJapanese )/FinanceBureau
encephalitis( ofZhuhai( )
)
Liposometechnologyinnovation – – 944,812.90 – – FinanceBureauofZhuhai−
project( ) ( )
Granttoenterprises – – 880,000.00 490,000.00 120,000.00 ShanghaiScienceand HuKe[2011]No.71( manufacturingbrightacrylic TechnologyCommission [2011]71 )
microspheresanditsinjection ( )
( )
Subsidiarytowagesfor 317,772.00 873,618.00 – – – ChengduBureauofLabourChengLaoSheFa[2009] employersinfinancial andSocialSecurity( No.178(
difficulties( ) ) [2009]178 )
IY81149Anti-peptic 861,499.00 – – – – FinanceBureauofZhuhai YueJingMaoChuangXin ulcer(Ilaprazole)(IY81149 ( ) [2008]No.778(
( )) [2008]778 )
– I-144–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Specialfundingforbrand 845,000.00 – – – – FinanceBureauofZhuhai NoticeontheImprovement developmentofGuangdong ( ) ofReportingWorkabout Province( SpecialFundingforthe ) DevelopmentofScience, TechnologyTradingand BrandsforExportsof
GuangdongProvincein 2008( 2008 )
Subsidyfordaptomycinproject – – 800,000.00 – – FinanceBureauinFuzhouMinCai(Jiao)Zhi[2012] ( ) ( ) No.73( ( )[2012] 73 )
The13thChinaPatentAwardand – – 800,000.00 – – ZhuhaiBranchofScience,−
ZhuhaiPatentAward( TradeandIndustryBureau
) ( )
InformationBureauof
ZhuhaiBranchTradeand
IndustryBureau(
)
Fundingfordevelopingown 800,000.00 – – – – FinanceBureauofZhuhai YueWaiJingMaoGuiCai brandingandsalesnetwork ( ) Zi[2009]No.42
overseas( , ( [2009]42 ) )
Projectsforstrategicand – – 754,268.12 – 45,731.88 FinanceBureauofZhuhai−
emergingindustryin2012– ( )
commercialisationandresearch
oftigecyclineforinjectionto
humanbody(2012
–
)
Fundingforexpansionfrom – – 700,000.00 – – FinanceBureauofZhuhai−
organicgrowthandupgradeof ( )
facilitiesgrantedbyprovincial
financedepartmentin2009
(2009 )
Triplepolleninjectionmedicine 166,010.03 248,948.58 640,064.88 – 44,976.51 ScienceandTechnology−
( ) BureauofZhuhai(
),FinanceBureau
ofZhuhai( )
Rebateontheincentivesfor – – 624,073.02 415,783.52 419,347.31 FinanceBureauofZhuhai−
enterprisestosecurethe ( )
employmentofdisabledpeople
(
)
Specialsubsidyfundsfortwo – – 600,000.00 – – FinanceBureauofZhuhai YueCaiWaiNo.134
newproducts( ( ) ( 134 )
)
Subsidyfromindustrialenergy – – – – 600,000.00 FinanceBureauofFuqingRongCaiQi(Zhi)[2013] savingandrecyclingeconomy ( ) (No.3 ()[2013]3 projectsofFuzhouintheyear )
of2012(2012
)
Fundsforqualitycontrol – – – – 708,333.35 FinanceBureauof –
programmeonChinese Shaoguan( )
injectionmedicinesfrom
FinanceBureauofShaoguan
(
)
5-aminosalicylicacidzinc(5- – – 537,938.10 – – FinanceBureauofZhuhai−
) ( )
Deferredincomecarriedforward – – 500,000.00 – – FinanceBureauofZhuhai GongXinXiaoFeiHan fromastragalusGAPprojects ( ) [2012]No.138
( GAP ) ( [2012]138 ) EnterpriseIncentiveFunds( – – – – 500,000.00 NingxiaPingluoIndustrialPingDangFa[2013]No. ) DevelopmentBureauand 24( [2013]24 ) theBureauofCommerce
(
)
– I-145–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Oralbifidobacteriaviable – – 466,205.15 – – FinanceBureauofZhuhaiYueFu[2009]No.62
preparations( ( ) ([2009]62 )
)
Researchoncommercialisationof – 63,483.24 450,622.12 – – FinanceBureauofZhuhaiYueKeGuiHuaZi[2009] potassiumcitratesustained- ( ) No.159
releasetablets( ZhuCai[2010]No.93 ) ( [2009]159 ,[2010]93 )
Toxin-clearingandkidney 420,000.00 – – – – ScienceandTechnologyYueKeJiZi[2007]
soothingcapsuleproject( DepartmentofGuangdong No.172
) Province( ( [2007]172 ) )
Demonstrationprojectsofhigh 394,404.00 394,404.00 394,404.00 295,803.00 295,803.00 EnvironmentalProtection−
concentrationorganic BureauofZhuhai(
wastewatertreatment )
technology(
)
Specialfundstoexportcredit 361,967.00 – – – – QingyuanMunicipal −
insurancepromotioninthe FinanceBureau(
secondhalfof2009,thefirst )
halfof2010(2009 ,
2010
)
Specialfundingforpollutants 350,000.00 – – – – ShaoguanMunicipal −
emissionandenergysaving( FinanceBureau(
) )
Rewardforenterprisesexpanding 340,000.00 – – – – Science,Industry,TradeZhuFu[2010]No.11
salesinthePRC( andInformation ([2010]11 )
) TechnologyBureauof
Zhuhai(
)
Specialfundingforthe – 300,000.00 – – – QingyuanMunicipal QingCaiJiao2011
incubationofinnovative FinanceBureau( No.(88)
enterprises( ) ( [2011](88) )
)
Fundingfortheenergysaving – 300,000.00 – – – FinanceBureauinFuzhouRongCaiGong[2006]No. projectontheoptimisationand ( ) 9
upgradeworksinenergy ( [2006]9 )
consumptionofthe
fermentationandrefining
productionsystem(
)
Granttotheresearchand – 300,000.00 – – – FuzhouMunicipalBureauRongKe[2011]No.85 developmentprojectforthe ofScienceandTechnology ([2011]85 )
commercialisationof ( )
virginiamycininthePRC(
)
EnvironmentalProtectionSpecial 300,000.00 – – – – QingyuanMunicipal QingCaiQi[2009]
Funds( ) FinanceBureau( No.130
) ( [2009]130 )
2009QingyuanMunicipal 299,547.00 – – – – QingyuanMunicipal −
governmentEnterprises FinanceBureau(
ExportsExpansionAward )
(2009
)
Subsidyfortechnologyresearch – – – – 300,000.00 FinanceBureauofFuqingRongCaiQi(Zhi)[2013] anddevelopment( ( ) No.20(
) ()[2013]20 )
Specialfundonrenewable – – – – 300,000.00 ZhuhaiHousingandUrbanZhuGuiJianZhi[2013] energy2012(2012 PlanningandConstruction No.4( [2013]4 ) ) Bureau(
)/Finance
BureauofZhuhai(
)
Pudongnewareavocational – – 299,362.22 – –PudongCareer&Staff QingCaiJiao[2011]
trainingfinancialsubsidy( TrainingCentre( No.9
) ) ( [2011]9 )
– I-146–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Specialfundsfortheresearchof 283,200.00 – – – – TechnologyBureauin −
productionscience–South Zhuhai( )
ChinaAgriculturalUniversity
( -
)
Exportcreditinsurancesubsidies 269,137.00 – – – – FujianProvincial RongWaiJingMaoMao in2009,2010(2009 ,2010 DepartmentofFinance(Yi[2009]No.83
) ) ( [2009]
83 )
Fundingforscientificresearch – – 250,000.00 – – ZhuhaiBranchofScience, ZhuXiangKeGongMao andfundingin2010(2010 TradeandIndustryBureauXinZi[2010]
) ( ) No.98
( [2010]98 )
Subsidytotheresearchinthe – – 240,000.00 – – QingyuanScienceand −
methodfortheselectionof TechnologyBureau(
fermentationtechniquesand )
qualitycontrolofproducts
regardingetanercept(
)
Researchoncommercialisationof 226,232.50 – – – – FinanceBureauofZhuhai NoticeontheFundingfor potassiumcitratesustained- ( ) ExpansionfromOrganic releasetablets( GrowthandUpgradeof ) FacilitiesGrantedby
ProvincialFinance
DepartmentofGuangdong ProvincetoKeyIndustries in2007
( 2007
)
Interestdiscountfundsfor – – – – 235,210.00 FinanceBureauofZhuhai–
promotingimportsinthe ( )
secondhalfof2012(2012
)
2011exportcreditinsurance – – 215,697.44 215,697.44 – FinanceBureauofZhuhaiQingCaiWai[2012]
specialfunds(2011 ( ) No.24
) ( [2012]24 )
PatentTechnologySupportFunds – – 200,000.00 – – FinanceBureauofZhuhaiZhuZhi[2012]No.32 ( ) ( ) ([2012]32 )
Researchforenhancingthe – – – – 200,000.00 PengzhouIndustryand –
qualitystandardsofanti-viral InformationTechnology
granules( BureauofScienceand
) Technology(
)
2011ZhuhaiStrategicEmerging 0.00 200,000.00 – – – FinanceBureauofZhuhai−
IndustriesSpecialFunds(2011 ( )
)
ShenqiFuzhengInjection( 200,000.00 – – – – FinanceBureauofZhuhaiYueCaiJiao[2010]
) ( ) No.7
( [2010]7 )
PatentSupportFunds( 200,000.00 – – – – ShaoguanFinanceBureau−
) ( )( )
Non-PVCbagimprovement 194,365.80 194,365.80 194,365.80 194,365.80 145,774.34 NDRC( YueKeJiZi[2007]
project( PVC ) ) No.172
( [2007]172 ) Creditinsurancesubsidiesinthe – 193,234.00 – – – QingyuanMunicipal −
secondhalfof2010(2010 FinanceBureau(
) )
Firstbatchofenergysavingand – – – – 190,000.00 FinanceBureauofGutianGuCaiQi[2012]No.46 recyclingeconomyfinancial County( ) ( [2012]46 )
incentiveprojectsofFujian
Province(
)
– I-147–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
AmountgrantedfromScience – 160,000.00 183,333.34 120,575.89 1,441,666.66 ShaoguanFinanceBureauShaoGuanCaiJiao[2011] andTechnologyBureauof ( )/Shaoguan No.79
Shaoguanforqualitycontrol ScienceandTechnology ( [2011]79 )
researchofShenqiFuzheng Bureau(
Injection( )
)
Improvedsynthesisof – – 171,806.50 – – FinanceBureauofZhuhai−
valaciclovirhydrochloride( ( )
)
Researchandapplicationof – – 170,000.00 – – ShaoguanTechnology −
UHPLCfingerprintfor Agency( )
injectionstotreatthrombus(
UHPLC
)
Specialfundingforenergy 160,000.00 – – – – ShaoguanFinanceBureau−
savingprojectsin2009(energy ( )
savingandupgradeoffan
systemandairconditioner)
(2009 (
))
Fundingfortheprojectinthe 150,000.00 – – – – FuzhouBureauofFinanceRongCaiShi(Zhi)[2010] researchanddevelopmentof ( ) No.132
technologiesonyieldinghigh ( ()[2010]132 ) outputofcolistinsulfate(
)
Specialfundsfortwonew 150,000.00 – – – – QingyuanMunicipal −
productsin2009(2009 FinanceBureau(
) )
Supplementaryfundsfor 150,000.00 – – – – QingyuanMunicipal −
technologyenhancement FinanceBureau(
projectsofprovinciallevelin )
2009(Qingdao)(2009
(
))
Fundingfortheresearchinthe – 141,600.00 – – – MinistryofScienceand−
rapidimmunoassay Technology( )
technologiesandproduct
developmentofmajor
prohibitedveterinarydrugs(
)
Dan-phenolicacid( ) – – 140,757.40 – – FinanceBureauofZhuhai−
( )
Subsidyforthedemonstration – – 133,662.99 – 525,750.03 FinanceBureauofZhuhai−
projectontheapplicationof ( )
solarphotovoltaicarchitecture
(
)
RXdevelopmentofnew 461,226.04 107,063.46 – – – ScienceandTechnologyYueKeGuiHuaZi[2009] xueshuantongpreparations( BureauofZhuhai( No.159
RX ) ),FinanceBureau ( [2009]159 ) ofZhuhai( )
Patentapplicationsubsidies( 132,400.00 – – – – FinanceBureauofZhuhaiZhuZi[2009]No.159 ) ( ) ([2009]6 )
Exporttaxrebateforgeneral 109,734.00 – – – – QingyuanMunicipal YueCaiWai[2009]
tradingenterprisesinthe FinanceBureau( No.145
fourthquarterof2009(2009 ) ( [2009]145 )
)
ElectricityIncentiveFunds( – – 104,070.00 – 187,720.00 FuzhouBureauofFinance MinJingMaoYunXing ) ( ) [2012]No.323
( [2012]323 ) Bonusfundsfortoptenprivate – – 100,000.00 – – FinanceBureauofZhuhai ZhuKeGongMaoXinJi enterprisesinthemunicipality ( ) [2012]No.22
fortheyearof2010-2011 ( [2012]
(2010-2011 22 )
)
– I-148–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Incentivefundsforfamousbrand – – 100,000.00 – – FinanceBureauofZhuhai KeGongMao2012
namesandtrademarksof ( ) ( 2012)
Zhuhaiintheyearof2012
(2012
)
ShanghaiJinqiaoExport – – 100,000.00 100,000.00 – ShanghaiJinqiaoExportHuJinGuan[2011]No.57 ProcessingZoneManagement ProcessingZone ( [2011]57 )
Committeereviewincentives ManagementCommittee
forhigh-techrelated (
enterprises( )
)
FuzhouBureauofFinanceHigh- – – 100,000.00 100,000.00 – FuzhouBureauofFinanceRongKe[2012]No.35( techEnterprisefundAward( ( ) [2012]35 )
)
Subsidiesforoverseaspatent – – 100,000.00 – – ShaoguanTechnology −
applicationforxueshuantong Agency( )
( )
Specialfundsforprotectionof – – 100,000.00 100,000.00 – FinanceBureauofZhuhai YueCaiJiaoNo.522
intellectualpropertyrights ( ) ( 522 )
(GuangdongProvincePatent
Award)(
( ))
ScienceandTechnologyBureau – 100,000.00 – – – QingyuanMunicipal −
High-techEnterprise ScienceandTechnology
TechnologyAward( Bureau( )
)
R&Dandcommercialisationof – 100,000.00 – – – FinanceBureauofZhuhai−
UrofollitropinforInjection( ( )
)
Specialprojectincentivefunding – 100,000.00 – – – FuzhouBureauofFinanceRongCaiGong[2006] fromtechnologycentresfor ( ) No.6
municipallevelenterprisesin ( [2006]6 )
Fuzhou(
)
ShaoguanFinanceBureauFunds – 100,000.00 – – – ShaoguanFinanceBureauShaoCaiGong[2011]
( ) ( ) No.86
( [2011]86 )
Constructionofhitechfacilities – 100,000.00 99,996.00 83,330.00 74,997.00 ShaoguanFinanceBureauShaoCaiGong[2010]
forinnovationand ( ) No.170
commercialisationofmodern ( [2010]170 )
traditionalChinesemedicines
(
)
2008-2009Top10Private 100,000.00 – – – – FinanceBureauofZhuhai−
EnterprisesAward(2008-2009 ( )
)
L-phenylalanineProjectFund(L- 100,000.00 – – – – FujianProvincial MinCai(Jiao)Zhi[2010] ) DepartmentofFinance( No.19
) ( ( )[2010]19 ) GuangdongProvinceFamous 100,000.00 – – – – FinanceBureauofZhuhaiYueCaiWai[2009]
BrandIncentivefunds( ( ) No.163
) ( [2009]163 )
GuangdongProvinceenterprises 100,000.00 – – – – FinanceBureauofZhuhai ZhuKeGongMaoXinZi withintellectualproperty ( ) [2010]No.640
rightsadvantages( ( [2010]
) 640 )
LeuprolideMicrospheresProject 100,000.00 – – – – PudongScienceand −
Funds( ) TechnologyFund(
)
– I-149–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Protectionfundsforintellectual 100,000.00 – – – – FinanceBureauofZhuhai Noticeofthe4thBatchof propertyrights( ( ) NationalIntellectual
) PropertyModelEnterprises ListinGuangdong
Provinceissuedby
GuangdongProvince
IntellectualProperty
Department
(
) ZhuhaiPatentAward( 100,000.00 – – – – FinanceBureauofZhuhai NoticeoftheProposed ) ( ) WinningEntriesforthe FirstPatentAwardof
ZhuhaiissuedbyBureau ofZhuhaiofScienceand TechnologyofZhuhai
(
)
ShanghaiJinqiaoExport – – 91,000.00 – – ShanghaiJinqiaoExportHuJinGuan[2011]No.57 ProcessingZoneManagement ProcessingZone ( [2011]57 )
CommitteeFinancialSupport ManagementCommittee
Funds(taxrebates)( (
)
( ))
Creditinsurancecapitalsubsidies – 86,320.71 – – – FujianProvincial −
ofthefirstquarterof2011 DepartmentofFinance(
(2011 )
)
Exportcreditinsurancesubsidies – 120,858.00 83,457.00 83,457.00 290,042.00 FujianBranchofChina−
( ) ImportandExportCredit
Insurance
(
)
In-depthdevelopmentof – 80,000.00 – – – FinanceBureauofZhuhai−
gemifloxacinmesylateseries ( )
dosageforms(
)
Demonstrationonresultsin – 74,623.75 – – – ScienceandTechnology−
commercialisationof BureauofZhuhai
immunoassaytechnologiesin ( )
prohibitedanimalgrowth(
)
Power-savingoflightingpump – 70,000.00 69,996.00 58,330.00 52,497.00 ShaoguanFinanceBureauShaoCaiGong[2010]
fanandair-conditioningsystem ( ) No.179
( ) ( [2010]179 )
Powerconsumptionrewards( – – 68,910.00 – 264,250.00 GutianFinanceBureau GuZhengWen[2012]
) ( ) No.276
( [2012]276 )
Energyconsumptionsubsidies – – 63,976.00 8,976.00 – ZhuhaiFreeTradeZoneZhuBao[2012]No.16 ( ) ManagementCommittee ([2012]16 )
( )
Energyconsumptionsubsidies – – – – 8,700.00 PengzhouIndustryand –
( ) ScienceTechnology
InformationBureau(
)
DevelopmentfundsforSMEs – 71,436.00 59,183.00 – – FinanceBureauofZhuhai−
internationalmarket( ( )
)
Experimentalstudyofanti-viral – 51,170.86 58,829.14 – – FinanceBureauofZhuhai−
granulesforanti-avian ( )
influenza(
)
Exportcreditinsurancespecial – 54,104.40 – – – FinanceBureauofZhuhai−
funds( ) ( )
– I-150–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
MedicinesandHealthProducts – – 170,342.00 – – MedicinesandHealth −
ImporterandExporter ProductsImporterand
AssociationofChinaSubsidies ExporterAssociationof
( ) China(
2011QingyuanPatentIncentive – – 50,000.00 50,000.00 – QingyuanMunicipal QingCaiJiao[2012]
Funds(2011 FinanceBureau( No.14
) ),QingyuanScience ( [2012]14 )
andTechnologyBureau
( )
Qingyuanspecialfundsfor – 50,000.00 – – – QingyuanMunicipal QingCaiJiao[2010]
protectionofintellectual FinanceBureau No.90
propertyrights( ( ) ( [2010]90 )
)
Incentivefundsforenterprises – 50,000.00 – – – FinanceBureauofZhuhaiZhuZhiJi[2011]No.1 withintellectualproperty ( ) ( [2011]1 )
rightsadvantages(
)
Awardtoleadersinstrategicand – 50,000.00 – – – FinanceBureauofZhuhai ZhuJinKeGongMaoXin emergingindustries( ( ) [2011]No.7
) ( [2011]7 ) In-depthresearchandapplication – 50,000.00 – – – ScienceandTechnology−
ofShenqiFuzhengInjection BureauofShaoguan
( ( )
)
DevelopmentfundsforSMEs – – 47,530.00 – – FinanceBureauofZhuhaiYueCaiWai[2010]
internationalmarket( ( ) No.194
) ( [2010]194 )
Medicinesandhealthproducts – 40,974.00 – – – MedicinesandHealth −
importerandexporter ProductsImporterand
associationsubsidies( ExporterAssociationof
) China(
)
Supplementaryfundsin – – 40,000.00 – – FinanceBureauofZhuhai−
rewardingscientificand ( )
technologyachievementsby
theStateandGuangdong
Provincein2010(2010
)
Supplementaryfundsto – 40,000.00 – – – ScienceandTechnology−
technology,industryandtrade BureauofZhuhai
sectorsinrewardingscientific ( )
andtechnologyachievements
bytheStateandGuangdong
Provincein2009(2009
)
Specialsubsidyfundsforpatent – 37,950.00 – – – FinanceBureauofZhuhaiZhuZhi[2011]No.11
applicationinZhuhai( ( ) ([2011]11 )
)
Specialfundsforexpanding – 37,700.00 – – – FinanceBureauofZhuhai ZhuKeGongMaoXin overseasbyenterprisesin ( ) [2011]No.354
Zhuhai( “ ” ( [2011]354 ) )
Specialfundsformarketing – – 33,900.00 – – ZhuhaiBranchofScience,−
projectsfromtheScienceand TradeandIndustryBureau
TradeBureauofZhuhai( ( )
)
Specialfundsformarketing – 31,500.00 – – –ZhuhaiScience&Trade−
projectsfromtheScienceand Bureau
TradeBureauofZhuhai( ( )
)
2011QingyuanScienceand – – 30,000.00 30,000.00 – QingyuanScienceand QingFu[2012]No.16
TechnologyProgressAward TechnologyBureau( ([2012]16 )
(2011 ) )
Incentivefundingforproprietary – 30,000.00 – – – QingyuanScienceand −
innovationproductsfromthe TechnologyBureau(
scienceandtechnologyBureau )
( )
– I-151–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
Sustained-releasefamciclovir – 23,318.02 – – 2,994,863.03 FinanceBureauofZhuhai−
capsule0302project( ( )
0302 )
ForeignPatentApplications – – 20,000.00 20,000.00 – FinanceBureauofZhuhai−
SubsidyFunds( ( )
)
MycophenolateMofetil – 20,000.00 – – – QingyuanScienceand −
IndependentInnovation TechnologyBureau(
ProductTechnologyAward( )
)
Researchandapplicationof – 20,000.00 – – – FinanceBureauofZhuhai−
ultrafinegrindingtechnology ( )
( )
ForeignTradeandExport – 19,562.00 – – – FuzhouForeignTradeand AppropriationofExport SupportFundinthefourth EconomicCooperation SupportFund
quarterof2010(2010 Bureau( ( )
) )
Graduatestudenttrainee – 18,360.00 – – – ShaoguanTalentExchange−
subsidiesofnationaltreasury Centre
paymentcentreofthe ( )
ShaoguanFinanceBureau(
)
MedicinesandHealthProducts – 15,896.00 – – – FinanceBureauofZhuhai−
ImporterandExporter ( )
AssociationofChinaFundsfor
China’sEnterprisesin2010
CPHIFranceExpo(
2010
CPHI )
MedicinesandHealthProducts – 15,753.00 – – – MedicinesandHealth NoticeforthePayment ImporterandExporter ProductsImporterand FundingonExpansion
AssociationofChinaFundsfor ExporterAssociationof RegardingInternationalChina’sEnterprisesin2010 China( RawMaterialsExhibition CPHIFranceExpo( ) inFrancein2010
2010 CPHI ( 2010
) )R&Dandproduction – 15,737.58 – – – FinanceBureauofZhuhai−
transformationofgemifloxacin ( )
tablets(
)
Toxin-clearingandkidney 81,346.18 69,798.18 15,667.11 – – ScienceandTechnology YueKeChanXueYanZi soothingcapsule( BureauofZhuhai( [2009]No.197
) ),FinanceBureau ( [2009]
ofZhuhai( ) 197 ),
ZhuKeGongMaoXinJiZi[2010]No.5
( [2010]5 )
CityFinanceBureauFundsfor – 15,588.00 – – – FinanceBureauofZhuhai−
2010RawMaterialsExhibition ( )
inMumbai,India(
2010 CPHI
)
ZhuhaiScienceandTechnology – 15,000.00 – – – FinanceBureauofZhuhai−
Industry2011BrandIncentive ( )
Funds( 2011
)
Projectfundsfor“Development 30,000.00 – – – – FuzhouScienceand RongKe(2010)No.81 andintroductionofnew TechnologyAgency( ( (2010)81 )
technologyoffermentationin )
vancomycinhydrochloride
production”(“
”
)
ShenqiFuzhengInjection( – – 14,407.90 – 37,729.81 FinanceBureauofZhuhai−
) ( )
FuzhouBureauofQualityand – 13,800.00 – – – FuzhouBureauofQuality−
TechnicalSupervisionEnergy andTechnicalSupervision
MeasurementDataCollection ( )
Fund(
)
– I-152–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September Departmentgivingthe
Type 2010 2011 2012 2012 2013 grant Approvaldocuments
(unaudited)
MedicinesandHealthProducts – 13,275.00 – – 21,500.00 MedicinesandHealth NoticeforthePayment ImporterandExporter ProductsImporterand FundingonExpansion
AssociationofChinaFundsfor ExporterAssociationof RegardingInternational SMEsin2010CPHISouth China( RawMaterialsExhibition AmericaExpo( ) inSouthAmericain2010 2010 CPHI ( 2010
) ) Socialsecuritysubsidiesandpost – – 13,229.53 – – PengzhouEmployment ChengWeiFa[2009]
allowance( ServicesAuthority No.26
) ( ) ( [2009]26 )
Environmentalprotectionon-line – – 13,000.00 – – QingyuanMunicipal −
monitoringcompensation( EnvironmentalProtection
) Bureau
( )
2012importdiscountcapitalfor – – 12,755.00 12,755.00 – FinanceBureauofZhuhaiYueCaiWai[2012]No. Guangdongenterprises ( ) 100
promotion(2012 ( [2012]100 )
)
MedicinesandHealthProducts – 11,946.00 – – 30,200.00 MedicinesandHealth NoticeforthePayment ImporterandExporter ProductsImporterand FundingonExpansion
AssociationofChina ExporterAssociationof RegardingInternational DevelopmentFundsforSMEs China( RawMaterialsExhibition InternationalMarketin2010 ) inIndiain2010
InternationalPharmaceutical ( 2010
RawMaterialsExhibitionin ) India( 2010
)
Socialsecuritysubsidiesin2010 31,730.90 11,379.30 – – – FujianEmployment RongLaoSheBao[2010] (2010 ) ManagementCentre( No.80
) ( [2010]80 )
Socialsecuritysubsidiesduring 10,541.00 – – – – FuzhouEmployment RongLaoSheBao[2009] October-December,2010(2010 ManagementCentre( No.88
10-12 ) ) ( [2009]88 )
IncentivesforPersonalInjuries – 10,000.00 – – – SocialInsuranceFund −
fromSocialSecurityFund ManagementCentrein
ManagementCentreofZhuhai Zhuhai(
( )
)
2012centralfundingofspecial – – – – 732,000.00 ZhuhaiMunicipal –
fundstoforeignpatent Government( )
applications(2012
)
R&Dandcommercialisationof – – – – 100,000.00 ZhuhaiMunicipal –
innovativedrugofIlaprazole Government( )
series(
)
IncentivesoftheBondedZone – – – – 114,800.00 ZhuhaiMunicipal –
( ) Government( )
Datoindustrialtechnology – – – – 500,000.00 FuqingScienceand RongKe[2012]No.54 developmentprojectfunding TechnologyBureau( ([2012]54 )
( ) )
GutianCountyEconomicand – – – – 556,259.00 GutianCountyEconomicGuZhengWen[2013]No. TradeBureauDoubleTaxLevy andTradeBureau( 104( [2013]104 ) IncentiveAward( )
)
Specialnationalpatentgrants( – – – – 113,600.00 FinanceBureauof YueCaiJiao[2012]No. ) Shaoguan( ) 500( [2012]500 ) 2012Zhuhaispecialmatching – – – – 100,000.00 ZhuhaiMunicipal –
fundstoexpandimports(2012 Government( )
)
Others 654,457.23 26,995.00 27,650.00 11,923.08 369,851.68
Total 13,208,647.02 32,046,594.98 42,064,456.38 15,100,394.11 28,994,120.35
– I-153–
APPENDIX I ACCOUNTANTS’ REPORT 50. Non-operating expenses
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Lossesondisposalofnon-current
assets 834,836.01 161,267.88 1,081,686.28 1,047,694.38 4,620.05 Ofwhich:Lossesondisposalof
fixedassets 834,836.01 161,267.88 1,081,686.28 1,047,694.38 4,620.05 Write-offoffixedassets 215,260.42 558,533.79 1,361,457.76 664,755.27 373,888.38 Lossonfixedassetstaking – 3,777.78 – – – Penaltyexpenses 856,131.11 29,710.38 58,779.38 51,127.26 42,330.48 Liquidateddamagesexpenses 13,150.00 1,600,000.00 – – – Charitydonationexpenses 1,287,958.53 260,313.95 186,564.83 130,000.00 1,317,862.56 Extraordinarylosses 6,072.05 28,659.94 – – – Others 701,491.64 133,572.62 19,423.56 19,423.56 6,634.26 Total 3,914,899.76 2,775,836.34 2,707,911.81 1,913,000.47 1,745,335.73
– I-154–
APPENDIX I ACCOUNTANTS’ REPORT 51. Income tax expenses
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Currentincometaxfor
theyear/period 73,485,818.95 88,574,862.74 91,786,506.53 73,729,354.39 79,902,401.73 Deferredtax 7,691,434.84 -13,222,033.02 -6,696,866.35 -3,012,782.95 -384,588.49 Total 81,177,253.79 75,352,829.72 85,089,640.18 70,716,571.44 79,517,813.24 52. Other comprehensive income
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
1. Gains/(losses)onavailable-
for-salefinancialassets -3,143,299.74 -1,334,099.59 1,374,072.36 387,483.34 -65,206.86 Less:Effectofincometax
arisingfrom
available-for-sale
financialassets -471,488.44 -200,114.93 206,110.86 58,122.51 -9,781.02 Netamountrecognisedin
othercomprehensive
incomeinpriorperiod
transferredtoprofitorloss
forthecurrentperiod – – – – – Sub-total -2,671,811.30 -1,133,984.66 1,167,961.50 329,360.83 -55,425.84 2. Shareofother
comprehensiveincomein
investeesbyequitymethod – – – – – Less:Effectofincometax
arisingfromshareof
othercomprehensive
incomeininvestees
byequitymethod – – – – – Netamountrecognisedin
othercomprehensive
incomeinpriorperiod
transferredtoprofitorloss
forthecurrentperiod – – – – – Sub-total – – – – –
– I-155–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
3. Gains/(losses)oncashflow
hedgesfinancialinstrument – – – – – Less:Effectofincometax
arisingfromcash
flowhedges
financialinstrument – – – – – Netamountrecognisedin
othercomprehensive
incomeinpriorperiod
transferredtoprofitorloss
forthecurrentperiod – – – – – Amountasadjustedupon
initialrecognitionofitems
beinghedged – – – – – Sub-total – – – – – 4. Differencesfromtranslation
offinancialstatements
denominatedinforeign
currencies -2,959,282.75 -3,793,341.71 17,010.24 -1,088,040.35 -1,704,002.85 Less:Netamounttransferred
toprofitorloss
upondisposalof
overseasoperations
forthecurrent
period – – – – – Sub-total -2,959,282.75 -3,793,341.71 17,010.24 -1,088,040.35 -1,704,002.85 5. Others – – -1,083,068.89 – – Less:Effectofincometax
arisingfromothers
itemsrecognisedin
othercomprehensive
income – – – – – Netamountrecognisedin
othercomprehensive
incomeinpriorperiod
transferredtoprofitorloss
forthecurrentperiod – – – – – Sub-total – – -1,083,068.89 – – Total -5,631,094.05 -4,927,326.37 101,902.85 -758,679.52 -1,759,428.69 Others represented the differences between consideration received for the disposal of equity interest in a subsidiary and the correspondingshareholders’interests. Please refer to note V. 37 for details.
– I-156–
APPENDIX I ACCOUNTANTS’ REPORT 53. Cash received relating to other operating activities
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Securitydeposits 23,360,277.59 13,987,805.15 39,225,973.77 30,781,816.45 28,150,821.12 Movementsofcapital 16,970,596.38 12,355,280.54 19,069,777.51 112,749,124.34 12,987,775.85 Governmentgrants 14,385,781.80 70,751,424.41 51,783,654.36 7,742,181.54 24,293,355.56 Interestincome 10,376,747.45 42,026,922.13 40,137,267.55 26,674,941.09 17,687,563.49 Penaltyincome 64,523.50 3,700.00 15,700.00 11,700.00 77,042.50 Deposit 498,515.72 366,250.00 1,340,142.13 204,720.00 474,926.79 Staffadvances 5,148,696.37 5,209,512.99 10,438,892.42 3,507,935.92 5,526,073.15 Incomefromscraps 362,225.74 470,385.64 540,441.33 274,551.50 388,358.95 Compensationincome 717,246.00 15,300.00 – – 869,287.11 Depositsunderguaranteesforletter
ofcredit – – 2,317,760.92 2,317,760.92 23,489,715.89 Others 5,222,489.82 2,001,562.48 5,309,140.64 8,773,970.19 10,017,839.36 Total 77,107,100.37 147,188,143.34 170,178,750.63 193,038,701.95 123,962,759.77 54. Cash paid relating to other operating activities
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Officeexpenses 14,793,028.08 15,940,276.70 18,019,865.34 16,658,058.39 16,145,232.11 Travellingexpenses 17,055,643.01 23,620,411.41 25,376,164.37 21,604,363.09 20,854,260.38 Entertainmentexpenses 12,121,882.10 23,414,257.75 20,374,701.38 15,447,622.15 19,552,431.53 Utilitiesexpenses 3,263,126.79 2,617,330.91 9,022,726.60 6,393,099.02 1,946,314.02 Transportationfees 25,186,063.59 24,489,683.92 41,304,690.87 30,450,704.40 31,205,365.04 Advertisingexpenses 10,540,777.78 4,479,544.00 11,751,073.80 8,981,349.00 7,862,706.11 Businessmeetingexpenses 18,874,260.44 24,779,224.42 27,601,590.38 23,927,618.09 34,671,416.97 Rentalexpenses 5,834,693.79 6,031,379.44 12,290,418.07 6,098,149.58 6,034,169.68 Maintenanceexpenses 8,075,217.24 10,661,505.19 4,169,729.47 3,091,708.13 1,433,832.79 Environmentalprotectionfees 28,760.00 490,173.00 931,254.03 626,948.82 1,577,039.69 Auditingandinformation
disclosurefees 2,050,195.96 2,856,552.04 2,874,219.19 2,171,236.83 3,253,904.60 Insurancepremiums 2,137,812.56 1,663,997.05 1,282,214.61 645,558.71 964,257.92 Boardmeetingexpenses 206,781.54 206,781.54 797,816.14 12,649.00 86,627.10 Consultancyfees 1,913,162.88 2,419,393.15 2,295,852.53 1,961,572.31 15,062,048.40 Researchanddevelopmentcosts 25,777,342.71 50,505,049.58 43,506,598.49 30,732,863.24 40,377,160.06 Litigationcosts 1,039,307.79 464,313.55 278,751.00 255,941.57 510,153.81 Tenderfees 2,265,440.46 1,048,975.89 1,738,696.35 1,322,081.61 777,265.78 Testinspectionfees 542,284.05 487,320.23 1,398,357.95 1,143,674.98 785,106.28 Bankcharges 1,208,577.18 3,936,353.75 5,644,113.81 4,354,339.46 3,619,640.97 Penaltyexpenses 856,131.11 29,710.38 58,779.38 51,127.26 42,330.48 Reserves 4,297,173.58 16,799,794.93 40,159,446.52 12,739,736.09 12,888,885.59 Securitydeposits 14,939,638.00 3,354,065.56 31,471,615.38 17,362,699.82 15,260,000.04 Movementsofcapital 19,039,682.52 19,413,568.39 23,063,626.24 144,250,287.92 16,113,408.28 Businesspromotionfees 436,873,824.47 697,336,904.63 1,095,658,880.09 879,659,746.97 1,146,984,275.55 Depositsunderguaranteesforletter
ofcreditandbankacceptance
bills – 2,317,760.92 13,696,501.88 1,065,474.05 18,194,972.22 Technicalcompensationfees 4,361,949.07 1,726,717.36 2,568,340.02 2,568,340.02 2,100,000.00 Others 25,694,608.86 21,921,839.86 18,703,888.40 17,814,825.32 7,622,124.49 Total 658,977,365.56 963,012,885.55 1,456,039,912.29 1,251,391,775.83 1,425,924,929.89
– I-157–
APPENDIX I ACCOUNTANTS’ REPORT 55. Cash received relating to other investing activities
Item 2010 2011 2012 Ninemonthsended30September 2012 2013 (unaudited)
Guaranteeforletterofcredit – – – – 3,860,000.00 Total – – – – 3,860,000.00 56. Cash paid relating to other investing activities
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Guaranteeforletterofcredit – – – – 5,400,000.00 Total – – – – 5,400,000.00 57. Cash received relating to other financing activities
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Releaseofpledgeddeposits – 6,200,000.00 13,250,000.00 13,250,000.00 – Dividendwithheldforpersonal
incometax 1,186,821.82 – – – – Total 1,186,821.82 6,200,000.00 13,250,000.00 13,250,000.00 – 58. Cash paid relating to other financing activities
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Financingbillsissuancecosts 125,000.00 1,600,000.00 1,850,000.00 1,600,000.00 – Pledgeddeposits 470,000.00 – 29,000,000.00 – 4,000,000.00 Total 595,000.00 1,600,000.00 30,850,000.00 1,600,000.00 4,000,000.00
– I-158–
APPENDIX I ACCOUNTANTS’ REPORT 59. Supplemental information to consolidated cash flow statement
(1) Supplemental information to cash flow statement
Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
1. Reconciliationofnet
profittocashflowfrom
operatingactivities:
Netprofitfortheyear 452,490,041.47 387,798,400.81 475,223,098.96 365,040,718.09 398,527,119.02 Add:Provisionfor
impairmentof
assets 10,951,276.22 34,135,869.23 45,493,864.08 18,031,136.93 19,388,123.67 Depreciationoffixed
assets,
amortisationofoil
andgasassets,
depreciationof
productive
biologicalassets 107,546,086.97 124,764,764.47 131,640,099.15 98,138,967.72 107,101,738.41 Amortisationof
intangibleassets 13,307,365.69 16,222,386.69 20,347,091.49 15,223,597.27 14,408,612.18 Amortisationof
long-termdeferred
expenseandlong-
termassets 3,119,805.77 4,086,852.83 7,964,467.60 6,115,716.33 8,512,416.09 (Gains)/losseson
disposaloffixed
assets,intangible
assetsandother
long-termassets
([–]represents
gains/income) -5,743,384.61 -458,227.06 69,242.34 871,407.48 -330,785.05 LossesonWrite-off
offixedassets 215,260.42 558,533.79 1,361,457.76 664,755.27 373,888.38 (Gains)/lossesfrom
changesin
fairvalue
([–]represents
gains/income) -10,780,224.20 11,083,794.52 -16,381,681.02 -4,800,246.93 3,528,802.12 Financialexpenses 8,743,316.36 17,366,969.86 16,401,356.41 7,953,605.70 3,473,074.74 Investments
losses/(income)
([–]represents
gains/income) 1,278,935.84 1,485,522.49 -4,136,556.80 -1,668,506.76 -3,810,605.58 Decrease/(increase)
indeferred
taxassets
([–]represents
increase) 8,298,110.14 -13,049,004.61 -7,165,739.77 -3,296,586.00 -645,004.55 (Decrease)/increase
indeferredtax
liabilities
([–]represents
decrease) -606,675.30 -173,028.41 468,873.42 283,803.05 260,416.06 (Increase)/decrease
ininventories
([–]represents
increase) -116,651,897.30 14,642,159.71 -140,110,192.61 -101,508,050.51 -110,785,743.75 Decrease/(increase)
intrade
receivables
([–]represents
increase) 73,154,428.59 -82,425,460.57 -288,247,037.53 -164,638,034.39 -693,456,794.16
– I-159–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
Increaseintrade
payables 87,973,861.85 192,161,802.83 351,036,320.82 292,806,993.26 612,869,599.22 Others – – – – – Netcashinflows
fromoperating
activities 633,296,307.91 708,201,336.58 593,964,664.30 529,219,276.51 359,414,856.80 2. Significantinvestingand
financingactivitiesnot
involvingcashreceipts
andpayment:
Liabilitiesconvertedinto
capital – – – – – Convertiblebondsdue
withinoneyear – – – – – Fixedassetsacquired
underfinanceleases – – – – – 3. Netmovementincashand
cashequivalents:
Cashattheendofthe
period 844,481,857.59 1,432,175,794.78 1,178,636,300.52 1,314,853,591.86 1,014,144,522.49 Less:Cashatthe
beginningofthe
period 558,262,596.74 844,481,857.59 1,432,175,794.78 1,432,175,794.78 1,178,636,300.52 Add:Cashequivalentsat
theendofthe
period – – – – – Less:Cashequivalentsat
thebeginningof
theperiod – – – – – Netincrease/(decrease)in
cashandcash
equivalents
([–]representsdecrease) 286,219,260.85 587,693,937.19 -253,539,494.26 -117,322,202.92 -164,491,778.03 (2) Cash and cash equivalents
31December 31December 31December Ninemonthsended30September Item 2010 2011 2012 2012 2013 (unaudited)
I. Cash 844,481,857.59 1,432,175,794.78 1,178,636,300.52 1,314,853,591.86 1,014,144,522.49 Ofwhich:Cashonhand 150,354.63 232,609.61 134,187.07 110,253.56 113,549.31 Bankdepositsthat
arereadily
availablefor
payment 843,549,246.37 1,429,491,276.37 1,175,722,004.87 1,311,741,887.99 1,012,660,158.99 Othercashatbank
andonhandthat
arereadily
availablefor
payment 782,256.59 2,451,908.80 2,780,108.58 3,001,450.31 1,370,814.19 II. Cashequivalents – – – – – Ofwhich:Bondinvestments
duewithinthree
months – – – – – III. Cashandcashequivalentsat
theendoftheperiod 844,481,857.59 1,432,175,794.78 1,178,636,300.52 1,314,853,591.86 1,014,144,522.49
– I-160–
APPENDIX I ACCOUNTANTS’ REPORT 60.Directors’andsupervisors’remuneration
During the reporting period,directors’andsupervisors’remuneration were disclosed as follows:
2010 Unit: RMB ten thousands Salaries, Social
allowances insurance,
and benefits pensions and
Fees in kind others Total in 2010 Directors
Zhu Baoguo ( ) 9.00 – – 9.00 Liu Guangxia ( ) 7.20 – – 7.20 An Ning ( ) 7.20 61.40 9.17 77.77 Tao Desheng ( ) 7.20 51.88 8.17 67.25 Qiu Qingfeng ( ) 7.20 – – 7.20 Zhong Shan ( ) 7.20 – – 7.20 Independent directors
Wang Junyan ( ) 9.60 – – 9.60 Luo Xiaosong ( ) 9.60 – – 9.60 Yang Bin ( ) 9.60 – – 9.60 Supervisors
Cao Pingwei ( ) 4.20 – – 4.20 Wang Maolin ( ) 3.60 22.49 5.11 31.20 Pang Datong ( ) 3.60 – – 3.60 Total 85.20 135.77 22.45 243.42 2011 Unit: RMB ten thousands Salaries, Social
allowances insurance,
and benefits pensions and
Fees in kind others Total in 2011 Directors
Zhu Baoguo ( ) 9.00 – – 9.00 Liu Guangxia ( ) 7.20 – – 7.20 An Ning ( ) 7.20 60.54 9.69 77.43 Tao Desheng ( ) 7.20 51.04 8.69 66.93 Qiu Qingfeng ( ) 7.20 – – 7.20 Zhong Shan ( ) 7.20 – – 7.20 Independent directors
Wang Junyan ( ) 9.60 – – 9.60 Luo Xiaosong ( ) 9.60 – – 9.60 Yang Bin ( ) 9.60 – – 9.60 Supervisors
Cao Pingwei ( ) 4.20 – – 4.20 Wang Maolin ( ) 3.60 22.07 5.63 31.30 Pang Datong ( ) 3.60 – – 3.60 Total 85.20 133.65 24.01 242.86
– I-161–
APPENDIX I ACCOUNTANTS’ REPORT 2012 Unit: RMB ten thousands Salaries, Social
allowances insurance,
and benefits pensions and
Fees in kind others Total in 2012 Directors
Zhu Baoguo ( ) 9.00 – – 9.00 Liu Guangxia ( ) 7.20 – – 7.20 An Ning ( ) 7.20 109.91 10.10 127.21 Tao Desheng ( ) 7.20 88.94 9.10 105.24 Qiu Qingfeng ( ) 7.20 – – 7.20 Zhong Shan ( ) 7.20 – – 7.20 Independent directors
Wang Junyan ( ) 9.60 – – 9.60 Luo Xiaosong ( ) 9.60 – – 9.60 Yang Bin ( ) 9.60 – – 9.60 Supervisors
Cao Pingwei ( ) 4.20 – – 4.20 Wang Maolin ( ) 3.60 25.65 6.06 35.31 Pang Datong ( ) 3.60 – – 3.60 Total 85.20 224.50 25.26 334.96 Nine months ended 30 September 2012 (unaudited) Unit: RMB ten thousands Total for the Salaries, Social nine months allowances and insurance, ended 30 benefits in pensions and September Fees kind others 2012 Directors
Zhu Baoguo ( ) 6.75 – – 6.75 Liu Guangxia ( ) 5.40 – – 5.40 An Ning ( ) 5.40 41.53 7.52 54.45 Tao Desheng ( ) 5.40 34.99 6.76 47.15 Qiu Qingfeng ( ) 5.40 – – 5.40 Zhong Shan ( ) 5.40 – – 5.40 Independent directors
Wang Junyan ( ) 7.20 – – 7.20 Luo Xiaosong ( ) 7.20 – – 7.20 Yang Bin ( ) 7.20 – – 7.20 Supervisors
Cao Pingwei ( ) 3.15 – – 3.15 Wang Maolin ( ) 2.70 15.11 4.49 22.30 Pang Datong ( ) 2.70 – – 2.70 Total 63.90 91.63 18.77 174.30
– I-162–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013 Unit: RMB ten thousands Total for the Salaries, Social nine months allowances and insurance, ended 30 benefits in pensions and September Fees kind others 2013 Directors
Zhu Baoguo ( ) 6.75 – – 6.75 Liu Guangxia ( ) 5.40 – – 5.40 An Ning ( ) 5.40 41.43 7.90 54.73 Tao Desheng ( ) 5.40 34.88 7.14 47.42 Qiu Qingfeng ( ) 5.40 – – 5.40 Zhong Shan ( ) 5.40 – – 5.40 Independent directors
Wang Junyan ( ) 4.00 – – 4.00 Luo Xiaosong ( ) 7.20 – – 7.20 Yang Bin ( ) 7.20 – – 7.20 Guo Guoqing ( ) 3.20 – – 3.20 Wang Xiaojun ( ) – – – – Yu Xiong ( ) – – – – Supervisors
Cao Pingwei ( ) 1.75 – – 1.75 Wang Maolin ( ) 2.70 15.01 4.87 22.58 Pang Datong ( ) 1.50 – – 1.50 Yuan Huasheng ( ) 1.40 – – 1.40 Huang Huamin( ) 1.20 – – 1.20 Total 63.90 91.32 19.91 175.13 During the reporting period, no remuneration was paid by the Group to any director and supervisor as an inducementtojoinoruponjoiningtheGrouporascompensationforlossofoffice.Therewasnoarrangementunder which any director and supervisor waived any remuneration.
61. Individuals with highest emoluments
The emoluments of two, two, two, two and two of the five highest paid individuals were directors of the Company for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013, respectively. Their remuneration were already disclosed in note V.60. The aggregate emoluments of the remaining three, three, three, three and three of the five highest paid individuals for the years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2012 and 2013, respectively were disclosed as follows: Unit: RMB ten thousand Nine months ended
Total in Total in Total in 30 September
2010 2011 2012 2012 2013 (unaudited)
Salariesandallowances 161.73 159.15 263.66 109.23 109.03 Socialinsurance,pensionsandothers 21.01 23.31 24.19 18.03 18.79 Total 182.74 182.46 287.85 127.26 127.82 Ofwhich:Numberofindividuals
whoseemolumentsfell
withinRMB1,000,000 3 3 2 3 3 Numberofindividuals
whoseemolumentsfell
withinRMB1,000,000to
RMB2,000,000 – – 1 – – Duringthereportingperiod,noremunerationwaspaidbytheGrouptotheindividualsaboveasaninducement to join or upon joining the Group or as compensation for loss of office.
– I-163–
APPENDIX I ACCOUNTANTS’ REPORT VI. NOTES TO THE FINANCIALSTATEMENTS OFTHE COMPANY
1. Accounts receivables
(1) Categories of accounts receivable
31December2010 31December2011 31December2012 30September2013
Provisionfor Netbook Provisionfor Netbook Provisionfor Netbook Provisionfor Netbook Item Amount Percentage baddebts value Amount Percentage baddebts value Amount Percentage baddebts value Amount Percentage baddebts value Individually
significantand
impairment
providedonan
individualbasis – – – – – – – – – – – – – – – – Assessedfor
impairment
collectively 189,414,119.09100.00% 10,667,538.65178,746,580.44270,476,668.72100.00% 14,994,542.64255,482,126.08377,303,477.50100.00% 20,359,295.33356,944,182.17496,097,149.44100.00% 26,711,629.90469,385,519.54 Receivablesthat
areindividually
insignificantbut
impairment
providedonan
individualbasis – – – – – – – – – – – – – – – – Total 189,414,119.09100.00% 10,667,538.65178,746,580.44270,476,668.72100.00% 14,994,542.64255,482,126.08377,303,477.50100.00% 20,359,295.33356,944,182.17496,097,149.44100.00% 26,711,629.90469,385,519.54 (2) The balance of accounts receivable at 30 September 2013 increased by31.50% from the beginning of that year. The balance of accounts receivable at 31 December 2012 increased by39.71% from the beginning of that year, which was mainly attributable to the sluggish performance of domestic bulk medicinesmarketwithslowrecoveryofreceivablesfromthedownstreamoperations,whichresultedin longer receivable turnover of the Group. The balance of accounts receivable at 31 December 2011 increased by42.93% from the beginning of that year, which was mainly attributable to the growth in sales for the that period that resulted in a corresponding increase in accounts receivables.
(3) Ageing analysis of amounts receivables that are assessed for impairment collectively:
31December2010 31December2011 31December2012 30September2013
Provisionfor Provisionfor Provisionfor Provisionfor
Ageing Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Within1year 183,212,547.09 96.73% 9,160,627.43 174,051,919.66 266,388,981.02 98.49% 13,319,449.05 253,069,531.97 370,544,400.26 98.21% 18,527,220.02 352,017,180.24 486,085,849.32 97.98% 24,304,292.47 461,781,556.85 1to2years 4,185,798.30 2.21% 251,147.90 3,934,650.40 1,569,775.19 0.58% 94,186.51 1,475,588.68 4,525,851.18 1.20% 271,551.08 4,254,300.10 6,509,809.14 1.31% 390,588.55 6,119,220.59 2to3years 746,333.39 0.39% 149,266.68 597,066.71 959,063.29 0.35% 191,812.66 767,250.63 536,357.54 0.14% 107,271.51 429,086.03 1,570,795.81 0.32% 314,159.16 1,256,636.65 Over3years 1,269,440.31 0.67% 1,106,496.64 162,943.67 1,558,849.22 0.58% 1,389,094.42 169,754.80 1,696,868.52 0.45% 1,453,252.72 243,615.80 1,930,695.17 0.39% 1,702,589.72 228,105.45 Total 189,414,119.09100.00% 10,667,538.65 178,746,580.44 270,476,668.72100.00% 14,994,542.64 255,482,126.08 377,303,477.50100.00% 20,359,295.33 356,944,182.17 496,097,149.44100.00% 26,711,629.90 469,385,519.54 (4) As at 30 September 2013, the top five amounts of account receivables were analysed as follows:
Relationship
with the Nature or Proportion to Name of debtor Company Amount due description Time overdue total amount Shanghai Siful Non-related 15,471,588.00 Sales of Within 1 year 3.12% Medicine Co., party goods
Ltd. (
)
Liao Ning Non-related 14,335,805.33 Sales of Within 1 year 2.89% Hengsong party goods
Pharmaceutical
Co., Ltd. (
)
– I-164–
APPENDIX I ACCOUNTANTS’ REPORT Relationship
with the Nature or Proportion to Name of debtor Company Amount due description Time overdue total amount Chongqing Non-related 12,011,425.34 Sales of Within 1 year 2.42% Medical Special party goods
Drugs Products
Co., Ltd. (
)
Harbin Non-related 11,844,388.80 Sales of Within 1 year 2.39% Pharmaceutical party goods
Group Sanjing
New Drug LLC
(
)
Sinopharm Holding Non-related 11,255,994.56 Sales of Within 1 year 2.27% Henan Co., Ltd. party goods
(
)
Total 64,919,202.03 13.09% (5)Asat30September2013,therewasnoamountduefromashareholderholding5%(inclusive)ormore of voting rights in the Company.
2. Other receivables
(1) Categories of other receivables
31December2010 31December2011 31December2012 30September2013
Provisionfor Provisionfor Provisionfor Provisionfor
Item Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Amount Percentage baddebts Netbookvalue Individuallysignificantand
impairmentprovidedonan
individualbasis 318,058,928.7981.18% – 318,058,928.79 262,215,870.1694.69% – 262,215,870.16 660,749,892.2497.93% – 660,749,892.241,196,542,673.3898.56% –1,196,542,673.38 Assessedforimpairment
collectively 73,746,800.7318.82% 2,032,572.98 71,714,227.75 14,704,138.61 5.31% 1,028,972.90 13,675,165.71 13,993,483.90 2.07% 1,868,360.55 12,125,123.35 20,490,123.11 1.44% 2,384,684.57 18,105,438.54 Receivablesthatare
individuallyinsignificantbut
impairmentprovidedonan
individualbasis – – – – – – – – – – – – – – – – Total 391,805,729.52100.00% 2,032,572.98 389,773,156.54 276,920,008.77100.00% 1,028,972.90 275,891,035.87 674,743,376.14100.00% 1,868,360.55 672,875,015.591,217,032,796.49100.00% 2,384,684.571,214,648,111.92 (2)Thebalanceofotherreceivablesat30September2013increasedby80.52%fromthebeginningoftheperiod.Thebalanceofotherreceivablesat31December2012increasedby143.89%fromthebeginning of that year, which was mainly attributable to the increase in advances to subsidiaries.
– I-165–
APPENDIX I ACCOUNTANTS’ REPORT (3) Other receivables that are individually significant
31December2010 31December2011 31December2012 30September2013
Percentageof Percentageof Percentageof Percentageof
Nameofdebtor Amountdue provision Amountdue provision Amountdue provision Amountdue provision Reason
LivzonGroupNingxiaXinbeijiang – – – – 215,254,031.98 – 316,245,489.93 – Thedebtorisasubsidiaryof PharmaceuticalManufacturingCo.,Ltd. theCompanyandthereis ( ) noriskinthecollection. LivzonGroupLivzonPharmaceutical – – – – – – 232,761,932.30 – Thedebtorisasubsidiaryof Factory( ) theCompanyandthereis noriskinthecollection. LivzonGroupNingxiaFuxing – – – – 165,296,451.85 – 277,235,888.58 – Thedebtorisasubsidiaryof PharmaceuticalManufacturingCo.,Ltd. theCompanyandthereis ( ) noriskinthecollection. AndoDevelopmentLimited 123,757,335.92 – 123,757,335.92 – 123,757,335.92 – 123,857,335.92 – Thedebtorisasubsidiaryof ( ) theCompanyandthereis noriskinthecollection. LivzonGroupXinbeijiangPharmaceutical 55,566,938.08 – 51,321,159.80 – 56,714,411.00 – 30,590,702.15 – Thedebtorisasubsidiaryof ManufacturingInc.( theCompanyandthereis ) noriskinthecollection. ZhuhaiFTZLivzonHechengPharmaceutical 60,281,386.62 – 22,603,551.97 – 48,076,469.16 – 151,451,638.82 – Thedebtorisasubsidiaryof ManufacturingCo.,Ltd.( theCompanyandthereis ) noriskinthecollection. WenshanLivzonSanqiPlantationCo.,Ltd. – – 14,100,000.00 – 25,450,000.00 – 23,000,000.00 – Thedebtorisasubsidiaryof ( ) theCompanyandthereis noriskinthecollection. Lizhu(HongKong)Co.,Limited – – 25,215,457.02 – 21,155,328.14 – 3,747,157.60 – Thedebtorisasubsidiaryof ( ( ) ) theCompanyandthereis noriskinthecollection. LivzonGroupFuzhouFuxing 78,453,268.17 – 24,228,037.95 – 5,045,864.19 – 36,310,948.38 – Thedebtorisasubsidiaryof PharmaceuticalCo.,Ltd. theCompanyandthereis ( ) noriskinthecollection. JiaozuoLivzonHechengPharmaceutical – – – – – – 1,341,579.70 – Thedebtorisasubsidiaryof ManufacturingCo.,Ltd.( theCompanyandthereis ) noriskinthecollection. GutianFuxingPharmaceuticalCo.,Ltd.( – – 990,327.50 – – – – – Thedebtorisasubsidiaryof ) theCompanyandthereis noriskinthecollection. Total 318,058,928.79 262,215,870.16 660,749,892.24 1,196,542,673.38
(4) Ageing analysis of other receivables that are assessed for impairment collectively:
31December2010 31December2011 31December2012 30September2013
Provision Provision Provision Provision
forbad Netbook forbad Netbook forbad Netbook forbad Netbook Ageing Amount Percentage debts value Amount Percentage debts value Amount Percentage debts value Amount Percentage debts value Within1year 70,371,742.3095.42% 653,541.87 69,718,200.43 8,540,247.1758.08% 413,432.33 8,126,814.84 6,220,199.0144.45% 311,009.95 5,909,189.06 12,275,876.9059.91% 613,793.85 11,662,083.05 1to2years 1,350,488.32 1.83% 81,029.29 1,269,459.03 5,436,373.3736.97% 326,182.40 5,110,190.97 1,657,323.9111.84% 99,439.43 1,557,884.48 1,726,316.87 8.42% 103,579.01 1,622,737.86 2to3years 286,769.27 0.39% 57,353.85 229,415.42 481,003.78 3.27% 96,200.76 384,803.02 5,691,933.9440.68% 1,138,386.79 4,553,547.15 5,835,073.6628.48% 1,167,014.73 4,668,058.93 Over3years 1,737,800.84 2.36% 1,240,647.97 497,152.87 246,514.29 1.68% 193,157.41 53,356.88 424,027.04 3.03% 319,524.38 104,502.66 652,855.68 3.19% 500,296.98 152,558.70 Total 73,746,800.73100.00% 2,032,572.98 71,714,227.75 14,704,138.61100.00% 1,028,972.90 13,675,165.71 13,993,483.90100.00% 1,868,360.55 12,125,123.35 20,490,123.11100.00% 2,384,684.57 18,105,438.54
– I-166–
APPENDIX I ACCOUNTANTS’ REPORT (5) As at 30 September 2013, the top five amounts of other receivables were analysed as follows:
Relationship Proportion withthe Natureor Time tototal Nameofdebtor Company Amountdue description overdue amount LivzonGroupNingxia Subsidiary 316,245,489.93 Currentaccount Within1year 25.98% Xinbeijiang
Pharmaceutical
ManufacturingCo.,Ltd.
(
)
LivzonGroupNingxia Subsidiary 277,235,888.58 Currentaccount Within1year 22.78% FuxingPharmaceutical
ManufacturingCo.,Ltd.
(
)
LivzonGroupLivzon Subsidiary 232,761,932.30 Currentaccount Within1year 19.13% PharmaceuticalFactory
( )
ZhuhaiFTZLivzon Subsidiary 151,451,638.82 Currentaccount Within1year 12.44% HechengPharmaceutical
ManufacturingCo.,Ltd.
(
)
AndoDevelopmentLimited Subsidiary 123,857,335.92 Currentaccount Within1year 10.18% ( )
Total 1,101,552,285.55 90.51% (6)Asat30September2013,therewasnoamountduefromashareholderholding5%(inclusive)ormore of voting rights in the Company.
3. Long-term equity investments
(1) Long-term equity investments and provision for impairment
31December2010 31December2011 31December2012 30September2013
Gross Provisionfor Carrying Gross Provisionfor Carrying Gross Provisionfor Carrying Gross Provisionfor Carrying Item amount impairment amount amount impairment amount amount impairment amount amount impairment amount Investmentsundercost
method 1,162,175,587.15 39,071,307.031,123,104,280.121,553,147,547.15 39,071,307.031,514,076,240.121,686,876,475.06 39,071,307.031,647,805,168.031,737,876,475.06 39,071,307.031,698,805,168.03 Investmentunder
equitymethod 15,358,984.36 1,200,000.00 14,158,984.36 13,795,134.46 1,200,000.00 12,595,134.46 13,491,031.22 1,200,000.00 12,291,031.22 13,855,334.13 1,200,000.00 12,655,334.13 Total 1,177,534,571.51 40,271,307.031,137,263,264.481,566,942,681.61 40,271,307.031,526,671,374.581,700,367,506.28 40,271,307.031,660,096,199.251,751,731,809.19 40,271,307.031,711,460,502.16
– I-167–
APPENDIX I ACCOUNTANTS’ REPORT (2) Long-term equity investments under cost method
2010
Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2009 theperiod period 2010 GuangdongDevelopment
Bank,ZhuhaiBranch
( ) 177,348.84 105,000.00 72,348.84 – 177,348.84 BeijingMedicalSupplies
JointOperating
Corporation(
) 100,000.00 100,000.00 – – 100,000.00 DoumenSanzhouIndustrial
CityCo.,Ltd.(
) 500,000.00 500,000.00 – – 500,000.00 ZhuhaiCommercialBank
Co.,Ltd.(
) 20,000,000.00 20,000,000.00 – – 20,000,000.00 RuihengMedicalTechnology
InvestmentCo.,Ltd.(
) 6,250,000.00 6,250,000.00 – – 6,250,000.00 ZhuhaiLivzonBaiameng
BiologicalMaterialsCo.,
Ltd.( -
) 3,934,721.95 3,934,721.95 – – 3,934,721.95 ZhuhaiLivzonMeidaxin
Technological
DevelopmentCo.,Ltd.(
) 800,000.00 800,000.00 – – 800,000.00 LivzonGroupLivzon
PharmaceuticalFactory
( ) 353,169,752.98 353,169,752.98 – – 353,169,752.98 SichuanGuangda
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 116,872,457.35 116,872,457.35 – – 116,872,457.35 ShanghaiLivzon
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 74,229,565.00 74,229,565.00 – – 74,229,565.00 ZhuhaiModernChinese
MedicineHighTechnology
Co.,Ltd.(
) 4,539,975.00 4,539,975.00 – – 4,539,975.00 LivzonGroupLivzon
MedicalResearchCentre
( )
6,004,000.00 6,004,000.00 – – 6,004,000.00 Lizhu(HongKong)Co.,
Limited( ( )
) 64,770,100.00 64,770,100.01 – – 64,770,100.01 AndoDevelopmentLimited
( ) 534,050.00 534,050.00 – – 534,050.00 LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 116,446,982.80 116,446,982.80 – – 116,446,982.80 ZhuhaiLivzonDiagnostic
ReagentsInc.(
) 2,021,378.68 2,896,800.00 – – 2,896,800.00
– I-168–
APPENDIX I ACCOUNTANTS’ REPORT Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2009 theperiod period 2010 LivzonGroupLivzon
PharmaceuticalMarketing
Co.,Ltd.(
) 12,008,000.00 12,008,000.00 – – 12,008,000.00 LivzonGroupLimin
Pharmaceutical
ManufacturingFactory(
) 32,768,622.72 32,768,622.72 – – 32,768,622.72 ZhuhaiLivzon
PharmaceuticalTrading
Co.,Ltd.(
) 40,020,000.00 40,020,000.00 – – 40,020,000.00 LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.(
) 150,759,738.00 241,453,210.50 – – 241,453,210.50 ZhuhaiLivzonMAB
BiologicalTechnology
Co.,Ltd.(
) 10,200,000.00 – 10,200,000.00 – 10,200,000.00 LivzonGroupVaccine
EngineeringInc.(
) 54,500,000.00 – 54,500,000.00 – 54,500,000.00 Total 1,070,606,693.32 1,097,403,238.31 64,772,348.84 – 1,162,175,587.15 2011
Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2010 theperiod period 2011 GuangdongDevelopment
BankCo.,Ltd.(
) 177,348.84 177,348.84 – – 177,348.84 BeijingMedicalSupplies
JointOperating
Corporation(
) 100,000.00 100,000.00 – – 100,000.00 DoumenSanzhouIndustrial
CityCo.,Ltd.(
) 500,000.00 500,000.00 – – 500,000.00 ZhuhaiChinaResources
BankCo.,Ltd.(
) 95,325,760.00 20,000,000.00 75,325,760.00 – 95,325,760.00 RuihengMedicalTechnology
InvestmentCo.,Ltd.(
) 6,250,000.00 6,250,000.00 – – 6,250,000.00 ZhuhaiLivzonBaiameng
BiologicalMaterialsCo.,
Ltd.( -
) 3,934,721.95 3,934,721.95 – – 3,934,721.95 ZhuhaiLivzonMeidaxin
Technological
DevelopmentCo.,Ltd.(
) 800,000.00 800,000.00 – – 800,000.00 LivzonGroupLivzon
PharmaceuticalFactory
( ) 353,169,752.98 353,169,752.98 – – 353,169,752.98 SichuanGuangda
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 170,872,457.35 116,872,457.35 54,000,000.00 – 170,872,457.35
– I-169–
APPENDIX I ACCOUNTANTS’ REPORT Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2010 theperiod period 2011 ShanghaiLivzon
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 74,229,565.00 74,229,565.00 – – 74,229,565.00 ZhuhaiModernChinese
MedicineHighTechnology
Co.,Ltd.(
) 4,539,975.00 4,539,975.00 – – 4,539,975.00 LivzonGroupLivzon
MedicalResearchCentre
( )
6,004,000.00 6,004,000.00 – – 6,004,000.00 Lizhu(HongKong)Co.,
Limited( ( )
) 64,770,100.00 64,770,100.01 – – 64,770,100.01 AndoDevelopmentLimited
( ) 534,050.00 534,050.00 – – 534,050.00 LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 116,446,982.80 116,446,982.80 – – 116,446,982.80 ZhuhaiLivzonDiagnostic
ReagentsInc.(
) 2,021,378.68 2,896,800.00 – – 2,896,800.00 LivzonGroupLivzon
PharmaceuticalMarketing
Co.,Ltd.(
) 12,008,000.00 12,008,000.00 – – 12,008,000.00 LivzonGroupLimin
Pharmaceutical
ManufacturingFactory(
) 32,768,622.72 32,768,622.72 – – 32,768,622.72 ZhuhaiLivzon
PharmaceuticalTrading
Co.,Ltd.(
) 40,020,000.00 40,020,000.00 – – 40,020,000.00 LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.(
) 190,075,938.00 241,453,210.50 39,316,200.00 – 280,769,410.50 ZhuhaiLivzonMAB
BiologicalTechnology
Co.,Ltd.(
) 51,000,000.00 10,200,000.00 40,800,000.00 – 51,000,000.00 LivzonGroupVaccine
EngineeringInc.(
) 54,500,000.00 54,500,000.00 – – 54,500,000.00 LivzonGroupNingxia
FuxingPharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 – 90,000,000.00 – 90,000,000.00 LivzonGroupNingxia
Xinbeijiang
Pharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 – 90,000,000.00 – 90,000,000.00 WenshanLivzonSanqi
PlantationCo.Ltd.(
) 1,530,000.00 – 1,530,000.00 – 1,530,000.00 Total 1,461,578,653.32 1,162,175,587.15 390,971,960.00 – 1,553,147,547.15
– I-170–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2011 theperiod period 2012 GuangdongDevelopment
BankCo.,Ltd.(
) 177,348.84 177,348.84 – – 177,348.84 BeijingMedicalSupplies
JointOperating
Corporation(
) 100,000.00 100,000.00 – – 100,000.00 DoumenSanzhouIndustrial
CityCo.,Ltd.(
) 500,000.00 500,000.00 – – 500,000.00 ZhuhaiChinaResources
BankCo.,Ltd.(
)* 95,325,760.00 95,325,760.00 – – 95,325,760.00 RuihengMedicalTechnology
InvestmentCo.,Ltd.
(
) 6,250,000.00 6,250,000.00 – – 6,250,000.00 ZhuhaiLivzonBaiameng
BiologicalMaterialsCo.,
Ltd.( -
) 3,934,721.95 3,934,721.95 – – 3,934,721.95 ZhuhaiLivzonMeidaxin
Technological
DevelopmentCo.,Ltd.(
) 800,000.00 800,000.00 – – 800,000.00 LivzonGroupLivzon
PharmaceuticalFactory
( ) 353,169,752.98 353,169,752.98 – – 353,169,752.98 SichuanGuangda
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 170,872,457.35 170,872,457.35 – – 170,872,457.35 ShanghaiLivzon
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 53,261,896.11 74,229,565.00 – 20,967,668.89 53,261,896.11 ZhuhaiModernChinese
MedicineHighTechnology
Co.,Ltd.(
) 4,539,975.00 4,539,975.00 – – 4,539,975.00 LivzonGroupLivzon
MedicalResearchCentre
( )
6,004,000.00 6,004,000.00 – – 6,004,000.00 Lizhu(HongKong)Co.,
Limited( ( )
) 64,770,100.00 64,770,100.01 – – 64,770,100.01 AndoDevelopmentLimited
( ) 534,050.00 534,050.00 – – 534,050.00 LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 116,446,982.80 116,446,982.80 – – 116,446,982.80 ZhuhaiLivzonDiagnostic
ReagentsInc.(
) 2,021,378.68 2,896,800.00 – – 2,896,800.00 LivzonGroupLivzon
PharmaceuticalMarketing
Co.,Ltd.(
) 12,008,000.00 12,008,000.00 – – 12,008,000.00
– I-171–
APPENDIX I ACCOUNTANTS’ REPORT Disposal
31December Additionsfor duringthe 31December Nameofinvestee Initialcost 2011 theperiod period 2012 LivzonGroupLimin
Pharmaceutical
ManufacturingFactory(
) 184,301,219.52 32,768,622.72 151,532,596.80 – 184,301,219.52 ZhuhaiLivzon
PharmaceuticalTrading
Co.,Ltd.(
) 40,020,000.00 40,020,000.00 – – 40,020,000.00 LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.(
) 190,075,938.00 280,769,410.50 – – 280,769,410.50 ZhuhaiLivzonMAB
BiologicalTechnology
Co.,Ltd.(
) 51,000,000.00 51,000,000.00 – – 51,000,000.00 LivzonGroupVaccine
EngineeringInc.(
) 54,500,000.00 54,500,000.00 – – 54,500,000.00 LivzonGroupNingxia
FuxingPharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 90,000,000.00 – – 90,000,000.00 LivzonGroupNingxia
Xinbeijiang
Pharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 90,000,000.00 – – 90,000,000.00 WenshanLivzonSanqi
PlantationCo.Ltd.(
) 4,694,000.00 1,530,000.00 3,164,000.00 – 4,694,000.00 Total 1,595,307,581.23 1,553,147,547.15 154,696,596.80 20,967,668.89 1,686,876,475.06 Nine months ended 30 September 2013
Disposal
31December Additionsfor duringthe 30September Nameofinvestee Initialcost 2012 theperiod period 2013 GuangdongDevelopment
BankCo.,Ltd.(
) 177,348.84 177,348.84 – – 177,348.84 BeijingMedicalSupplies
JointOperating
Corporation(
) 100,000.00 100,000.00 – – 100,000.00 DoumenSanzhouIndustrial
CityCo.,Ltd.(
) 500,000.00 500,000.00 – – 500,000.00 ZhuhaiChinaResources
BankCo.,Ltd.(
) 95,325,760.00 95,325,760.00 – – 95,325,760.00 RuihengMedicalTechnology
InvestmentCo.,Ltd.(
) 6,250,000.00 6,250,000.00 – – 6,250,000.00 ZhuhaiLivzonBaiameng
BiologicalMaterialsCo.,
Ltd.( -
) 3,934,721.95 3,934,721.95 – – 3,934,721.95
– I-172–
APPENDIX I ACCOUNTANTS’ REPORT Disposal
31December Additionsfor duringthe 30September Nameofinvestee Initialcost 2012 theperiod period 2013 ZhuhaiLivzonMeidaxin
Technological
DevelopmentCo.,Ltd.(
) 800,000.00 800,000.00 – – 800,000.00 LivzonGroupLivzon
PharmaceuticalFactory
( ) 353,169,752.98 353,169,752.98 – – 353,169,752.98 SichuanGuangda
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 170,872,457.35 170,872,457.35 – – 170,872,457.35 ShanghaiLivzon
Pharmaceutical
ManufacturingCo.,Ltd.
( ) 53,261,896.11 53,261,896.11 – – 53,261,896.11 ZhuhaiModernChinese
MedicineHighTechnology
Co.,Ltd.(
) 4,539,975.00 4,539,975.00 – – 4,539,975.00 LivzonGroupLivzon
MedicalResearchCentre
( ) 6,004,000.00 6,004,000.00 – – 6,004,000.00 Lizhu(HongKong)Co.,
Limited( ( )
) 64,770,100.00 64,770,100.01 – – 64,770,100.01 AndoDevelopmentLimited
(HongKong)(
) 534,050.00 534,050.00 – – 534,050.00 LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 116,446,982.80 116,446,982.80 – – 116,446,982.80 ZhuhaiLivzonDiagnostic
ReagentsInc.(
) 2,021,378.68 2,896,800.00 – – 2,896,800.00 LivzonGroupLivzon
PharmaceuticalMarketing
Co.,Ltd.(
) 12,008,000.00 12,008,000.00 – – 12,008,000.00 LivzonGroupLimin
Pharmaceutical
ManufacturingFactory(
) 184,301,219.52 184,301,219.52 – – 184,301,219.52 ZhuhaiLivzon
PharmaceuticalTrading
Co.,Ltd.(
) 40,020,000.00 40,020,000.00 – – 40,020,000.00 LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.(
) 190,075,938.00 280,769,410.50 – – 280,769,410.50 ZhuhaiLivzonMAB
BiologicalTechnology
Co.,Ltd.(
) 102,000,000.00 51,000,000.00 51,000,000.00 – 102,000,000.00 LivzonGroupVaccine
EngineeringInc.(
) 54,500,000.00 54,500,000.00 – – 54,500,000.00 LivzonGroupNingxia
FuxingPharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 90,000,000.00 – – 90,000,000.00
– I-173–
APPENDIX I ACCOUNTANTS’ REPORT Disposal
31December Additionsfor duringthe 30September Nameofinvestee Initialcost 2012 theperiod period 2013 LivzonGroupNingxia
Xinbeijiang
Pharmaceutical
ManufacturingCo.,Ltd.
(
) 90,000,000.00 90,000,000.00 – – 90,000,000.00 WenshanLivzonSanqi
PlantationCo.Ltd.(
) 4,694,000.00 4,694,000.00 – – 4,694,000.00 Total 1,646,307,581.23 1,686,876,475.06 51,000,000.00 – 1,737,876,475.06 (3) Long-term equity investments under equity method
2010
Increase Decrease
Investment 31December duringthe duringthe 31December Cash Nameofinvestee cost 2009 period period 2010 dividend LivzonMedical
Electronic
Equipment(Plant)
Co.,Ltd.(
( )
) 1,200,000.00 1,200,000.00 – – 1,200,000.00 – GuangdongBlue
Treasure
PharmaceuticalCo.
Ltd.(
) 2,462,407.50 6,979,543.51 115,967.16 – 7,095,510.67 – Tongyikangshimei
Chain(Shenzhen)
Co.,Ltd.(
( )
) 35,000,000.00 10,054,041.31 – 2,990,567.62 7,063,473.69 – Total 38,662,407.50 18,233,584.82 115,967.16 2,990,567.62 15,358,984.36 – 2011
Increase Decrease
Investment 31December duringthe duringthe 31December Cash Nameofinvestee cost 2010 period period 2011 dividend LivzonMedical
Electronic
Equipment(Plant)
Co.,Ltd.(
( )
) 1,200,000.00 1,200,000.00 – – 1,200,000.00 – GuangdongBlue
Treasure
PharmaceuticalCo.
Ltd.(
) 2,462,407.50 7,095,510.67 – 329,577.92 6,765,932.75 – Tongyikangshimei
Chain(Shenzhen)
Co.,Ltd.(
( )
) 35,000,000.00 7,063,473.69 – 1,234,271.98 5,829,201.71 – Total 38,662,407.50 15,358,984.36 – 1,563,849.90 13,795,134.46 –
– I-174–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Increase Decrease
Investment 31December duringthe duringthe 31December Cash Nameofinvestee cost 2011 period period 2012 dividend LivzonMedical
Electronic
Equipment(Plant)
Co.,Ltd.(
( )
) 1,200,000.00 1,200,000.00 – – 1,200,000.00 – GuangdongBlue
Treasure
PharmaceuticalCo.
Ltd.(
) 2,462,407.50 6,765,932.75 781,799.63 – 7,547,732.38 – Tongyikangshimei
Chain(Shenzhen)
Co.,Ltd.(
( )
) 35,000,000.00 5,829,201.71 – 1,085,902.87 4,743,298.84 – Total 38,662,407.50 13,795,134.46 781,799.63 1,085,902.87 13,491,031.22 – Nine months ended 30 September 2013
Increase Decrease
Investment 31December duringthe duringthe 30September Cash Nameofinvestee cost 2012 period period 2013 dividend LivzonMedical
Electronic
Equipment(Plant)
Co.,Ltd.(
( )
) 1,200,000.00 1,200,000.00 – – 1,200,000.00 – GuangdongBlue
Treasure
PharmaceuticalCo.
Ltd.(
) 2,462,407.50 7,547,732.38 487,480.47 – 8,035,212.85 – Tongyikangshimei
Chain(Shenzhen)
Co.,Ltd.(
( )
) 35,000,000.00 4,743,298.84 – 123,177.56 4,620,121.28 – Total 38,662,407.50 13,491,031.22 487,480.47 123,177.56 13,855,334.13 –
– I-175–
APPENDIX I ACCOUNTANTS’ REPORT (4) Provision for impairment of long-term equity investments
2010
31December Provisionmade Write-offfor 31December Reasonof
Nameofinvestee 2009 fortheperiod theperiod 2010 provisionmade DoumenSanzhouIndustrial
CityCo.,Ltd.( Netassetless ) 500,000.00 – – 500,000.00 thanzero
ZhuhaiCityCommercial
BankCo.,Ltd.(
) 20,000,000.00 – – 20,000,000.00 Loss-making
LivzonMedicalElectronic
Equipment(Plant)Co.,
Ltd.( Netassetless ( ) ) 1,200,000.00 – – 1,200,000.00 thanzero
LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.( Already
) 11,200,000.00 – – 11,200,000.00 impaired
BeijingMedicalSupplies
JointOperating Business
Corporation( registration
) – 100,000.00 – 100,000.00 revoked
LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 7,271,307.03 – – 7,271,307.03 Operatingloss Total 40,171,307.03 100,000.00 – 40,271,307.03
2011
31December Provisionmade Write-offfor 31December Reasonof
Nameofinvestee 2010 fortheperiod theperiod 2011 provisionmade DoumenSanzhouIndustrial
CityCo.,Ltd.( Netassetless ) 500,000.00 – – 500,000.00 thanzero
ZhuhaiChinaResources
BankCo.,Ltd.(
) 20,000,000.00 – – 20,000,000.00 Loss-making
LivzonMedicalElectronic
Equipment(Plant)Co.,
Ltd.( Netassetless ( ) ) 1,200,000.00 – – 1,200,000.00 thanzero
LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.( Already
) 11,200,000.00 – – 11,200,000.00 impaired
BeijingMedicalSupplies
JointOperating Business
Corporation( registration
) 100,000.00 – – 100,000.00 revoked
LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 7,271,307.03 – – 7,271,307.03 Operatingloss Total 40,271,307.03 – – 40,271,307.03
– I-176–
APPENDIX I ACCOUNTANTS’ REPORT 2012
31December Provisionmade Write-offfor 31December Reasonof
Nameofinvestee 2011 fortheperiod theperiod 2012 provisionmade DoumenSanzhouIndustrial
CityCo.,Ltd.( Netassetless ) 500,000.00 – – 500,000.00 thanzero
ZhuhaiChinaResources
BankCo.,Ltd.(
) 20,000,000.00 – – 20,000,000.00 Loss-making
LivzonMedicalElectronic
Equipment(Plant)Co.,
Ltd.( Netassetless ( ) ) 1,200,000.00 – – 1,200,000.00 thanzero
LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.( Already
) 11,200,000.00 – – 11,200,000.00 impaired
BeijingMedicalSupplies
JointOperating Business
Corporation( registration
) 100,000.00 – – 100,000.00 revoked
LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 7,271,307.03 – – 7,271,307.03 Operatingloss Total 40,271,307.03 – – 40,271,307.03
Nine months ended 30 September 2013
31December Provisionmade Write-offfor 30September Reasonof
Nameofinvestee 2012 fortheperiod theperiod 2013 provisionmade DoumenSanzhouIndustrial
CityCo.,Ltd.( Netassetless ) 500,000.00 – – 500,000.00 thanzero
ZhuhaiChinaResources
BankCo.,Ltd.(
) 20,000,000.00 – – 20,000,000.00 Loss-making
LivzonMedicalElectronic
Equipment(Plant)Co.,
Ltd.( Netassetless ( ) ) 1,200,000.00 – – 1,200,000.00 thanzero
LivzonGroupFuzhou
FuxingPharmaceutical
Co.,Ltd.( Already
) 11,200,000.00 – – 11,200,000.00 impaired
BeijingMedicalSupplies
JointOperating Business
Corporation( registration
) 100,000.00 – – 100,000.00 revoked
LivzonGroupXinbeijiang
Pharmaceutical
ManufacturingInc.(
) 7,271,307.03 – – 7,271,307.03 Operatingloss Total 40,271,307.03 – – 40,271,307.03
– I-177–
APPENDIX I ACCOUNTANTS’ REPORT 4. Operating income and operating cost
(1) Category
2010 2011 2012 Ninemonthsended30September2013
Gross Gross Gross Gross Operating operating Operating operating Operating operating Operating operating Item income Operatingcost profit income Operatingcost profit income Operatingcost profit income Operatingcost profit Principalactivities 1,008,547,133.12 485,505,501.31 523,041,631.811,345,327,902.39 751,583,219.82 593,744,682.571,791,955,150.41 815,305,789.48 976,649,360.931,571,487,748.57 621,424,078.42 950,063,670.15 Non-principalactivities 2,710,738.49 1,056,423.37 1,654,315.12 2,318,500.35 91,549.26 2,226,951.09 2,330,871.71 124,955.98 2,205,915.73 1,778,253.46 88,769.51 1,689,483.95 Total 1,011,257,871.61 486,561,924.68 524,695,946.931,347,646,402.74 751,674,769.08 595,971,633.661,794,286,022.12 815,430,745.46 978,855,276.661,573,266,002.03 621,512,847.93 951,753,154.10Operatingincomein2012increasedby33.14%from2011andoperatingincomein2011increasedby33.26% from2010.Theseweremainlyattributabletotheincreaseinpricesofgoodssold.Operatingcostin2011increasedby54.49%from2010,whichwasmainlyattributabletotheincreaseinpriceforintragrouppurchasesforthatperiod. (2) Principal activities presented in terms of product categories
2010 2011 2012 Ninemonthsended30September2013
Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit principal principal fromprincipal principal principal fromprincipal principal principal fromprincipal principal principal fromprincipal Item activities activities activities activities activities activities activities activities activities activities activities activities Westerndrug
preparation 628,101,949.01 275,154,503.56 352,947,445.45 661,341,018.40 486,610,163.47 174,730,854.93 708,389,113.34 475,414,889.20 232,974,224.14 623,070,192.62 325,440,693.27 297,629,499.35 Ofwhich:
Gastrointestinaldrugs 233,307,704.55 86,234,967.03 147,072,737.52 244,456,208.28 210,387,406.09 34,068,802.19 267,156,911.63 190,459,204.98 76,697,706.65 220,678,890.36 121,896,239.62 98,782,650.74 Cardio-cerebral-vascular
drugs 37,289,353.47 14,746,654.07 22,542,699.40 54,528,129.34 42,477,880.69 12,050,248.65 75,658,430.10 53,288,981.00 22,369,449.10 57,932,156.49 29,564,940.48 28,367,216.01 Antibioticdrugs
(includingimported
drugs) 285,279,809.33 147,293,852.83 137,985,956.50 269,367,558.53 183,833,593.18 85,533,965.35 229,004,202.15 166,078,467.75 62,925,734.40 177,970,339.63 119,296,205.43 58,674,134.20 Gonadotropichormones 4,050,538.34 1,174,017.11 2,876,521.23 862,415.50 650,391.63 212,023.87 2,151,871.91 1,616,457.09 535,414.82 2,827,986.40 2,211,718.72 616,267.68 Others 68,174,543.32 25,705,012.52 42,469,530.80 92,126,706.75 49,260,891.88 42,865,814.87 134,417,697.55 63,971,778.38 70,445,919.17 163,660,819.74 52,471,589.02 111,189,230.72 Chinesedrug
preparation 380,445,184.11 210,350,997.75 170,094,186.36 683,986,883.99 264,973,056.35 419,013,827.641,083,566,037.07 339,890,900.28 743,675,136.79 948,417,555.95 295,983,385.15 652,434,170.80 Total 1,008,547,133.12 485,505,501.31 523,041,631.811,345,327,902.39 751,583,219.82 593,744,682.571,791,955,150.41 815,305,789.48 976,649,360.931,571,487,748.57 621,424,078.42 950,063,670.15 (3) Principal activities presented by geographical regions
2010 2011 2012 Ninemonthsended30September2013
Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit Incomefrom Costof Grossprofit principal principal fromprincipal principal principal fromprincipal principal principal fromprincipal principal principal fromprincipal Item activities activities activities activities activities activities activities activities activities activities activities activities Domestic 1,008,189,367.12 485,352,690.99 522,836,676.131,343,875,755.63 750,544,916.01 593,330,839.621,788,293,808.67 813,089,692.65 975,204,116.021,566,200,059.56 618,158,071.13 948,041,988.43 Exports 357,766.00 152,810.32 204,955.68 1,452,146.76 1,038,303.81 413,842.95 3,661,341.74 2,216,096.83 1,445,244.91 5,287,689.01 3,266,007.29 2,021,681.72 Total 1,008,547,133.12 485,505,501.31 523,041,631.811,345,327,902.39 751,583,219.82 593,744,682.571,791,955,150.41 815,305,789.48 976,649,360.931,571,487,748.57 621,424,078.42 950,063,670.15 (4) Revenue from sales of goods to top five customers
Ninemonthsended30
2010 2011 2012 September2013
Percentageto Percentageto Percentageto Percentageto totalsales totalsales totalsales totalsales Nameofcustomer Salesamount amount Salesamount amount Salesamount amount Salesamount amount Totalsalesamountto
topfivecustomers 65,435,880.15 6.47% 128,527,733.19 9.54% 224,883,570.66 12.53% 199,940,094.52 12.71% 5. Business taxes and surcharges
Nine months ended 30 September Item Tax rate 2010 2011 2012 2013 Business taxes 5% – 18,627.52 – – Urban construction and
maintenance taxes 7% 449,164.21 6,403,470.29 11,671,835.40 10,645,724.96 Education surcharges 5% 192,498.94 4,570,784.59 8,337,025.28 7,604,089.24 Flood prevention fee 0.07% 180,000.14 330,384.72 536,995.60 470,843.82 Total 821,663.29 11,323,267.12 20,545,856.28 18,720,658.02
– I-178–
APPENDIX I ACCOUNTANTS’ REPORT Business taxes and surcharges in 2012 increased by81.45% from 2011 and business taxes and surcharges in 2011 increased by1,278.09% from 2010. The major reasons were set out in note V. 42.
6. Investment Income
Ninemonths ended30 Item 2010 2011 2012 September2013 1. Incomefrominvestmentsduringtheholdingperiod: 19,654,504.23 98,340,761.54 64,713,312.46 1,072,418.27 (i) Profitsappropriatedfromassociatesorjointventures – – – – Ofwhich: ChangzhouKonyPharmaceuticalCo.,Ltd.
( ) – – – – (ii) Financialassetsheldfortrading – – – 364,365.36 (iii)Dividendsonavailable-for-salefinancialassets 318,461.14 27,603.44 151,818.90 – (iv)Profitappropriatedfromotherequityinvestments – – – 343,750.00 Ofwhich: RuihengMedicalTechnology
InvestmentCo.,Ltd.
( ) – – – 343,750.00 (v)Netchangeintheshareholders’equityofinvesteesas
adjustedattheendoftheperiod -2,874,600.46 -1,563,849.90 -304,103.24 364,302.91 Ofwhich: GuangdongBlueTreasurePharmaceutical
Co.Ltd.( ) 115,967.16 -329,577.92 781,799.63 487,480.47 TongyikangshimeiChain(Shenzhen)Co.,
Ltd.( ( )
) -2,990,567.62 -1,234,271.98 -1,085,902.87 -123,177.56 (vi)Investmentincomefromsubsidiaries 24,747,936.00 99,877,008.00 64,865,596.80 – Ofwhich: LivzonGroupLivzonPharmaceutical
Factory( ) – – – – SichuanGuangdaPharmaceutical
ManufacturingCo.,Ltd.(
) – – – – LivzonGroupLivzonPharmaceutical
MarketingCo.,Ltd.(
) – – – – LivzonGroupLiminPharmaceutical
ManufacturingFactory(
) 19,647,936.00 99,877,008.00 41,915,596.80 – ZhuhaiLivzonAdvertisingCo.,Ltd.(
) – – – – ZhuhaiLivzonPharmaceuticalTrading
Co.,Ltd.( ) – – – – ZhuhaiLivzonDiagnosticReagentsInc.
( ) 5,100,000.00 – 22,950,000.00 – (vii)Others -2,537,292.45 – – – 2. Gainsondisposal: – – -1,083,068.89 – Ofwhich: Disposaloffinancialassetsheldfortrading – – – – Disposalofavailable-for-salefinancialassets – – – – Disposalofshares – – -1,083,068.89 – Total 19,654,504.23 98,340,761.54 63,630,243.57 1,072,418.27 During the reporting period, the movement in investment income was mainly attributable to the change in distribution from the subsidiaries.
– I-179–
APPENDIX I ACCOUNTANTS’ REPORT 7. Supplemental information to the cash flow statement of the Company
Ninemonths ended30 Item 2010 2011 2012 September2013 1. Reconciliationofnetprofittocashflowfrom
operatingactivities:
Netprofitfortheyear 99,024,878.79 135,356,735.02 111,076,197.05 108,957,621.79 Add: Provisionforimpairmentofassets 3,702,437.86 5,810,982.80 17,758,281.32 4,583,398.26 Depreciationoffixedassets,
amortisationofoilandgasassetsand
depreciationofproductivebiological
assets 11,853,997.73 11,406,662.46 12,708,131.14 11,327,528.30 Amortisationofintangibleassets 7,842,465.68 7,234,918.45 10,100,630.79 6,430,331.13 Amortisationoflong-termdeferred
expenseandlong-termassets – – – – Gainsondisposaloffixedassets,
intangibleassetsandotherlong-term
assets -6,559,230.75 -138,714.53 -101,517.10 -281,669.95 Lossesonwrite-offoffixedassets – 4,541.75 21,806.66 935.00 (Gains)/lossesfromchangesin
fairvalue – – – – Financialexpenses 1,453,482.45 13,869,336.27 10,858,078.96 27,943,513.48 InvestmentsIncome -19,654,504.23 -98,340,761.54 -63,630,243.57 -1,072,418.27 Decrease/(increase)indeferred
taxassets 6,330,437.22 -818,714.08 -1,530,211.57 -254,785.23 (Decrease)/increaseindeferred
taxliabilities([–]representsincrease) – – – – (Increase)/decreaseininventories
([–]representsincrease) -14,459,065.40 -41,429,420.56 24,150,987.33 -3,851,735.07 Increaseintradereceivables -100,583,335.83 -58,173,079.45 -263,863,212.47 -200,125,363.97 Increase/(decrease)intradepayables 153,726,579.47 -12,574,744.78 219,387,741.85 80,157,301.73Others([–]representsdecrease) – – – – Netcashinflows/(outflows)from
operatingactivities([–]represents
netoutflows) 142,678,142.99 -37,792,258.19 76,936,670.39 33,814,657.20 2. Significantinvestingandfinancingactivities
notinvolvingcashreceiptsandpayment:
Liabilitiesconvertedintocapital – – – – Convertiblebondsduewithinoneyear – – – – Fixedassetsacquiredunderfinanceleases – – – – 3. Netmovementincashandcashequivalents: – Cashattheendoftheperiod 652,428,797.62 1,306,877,982.24 1,099,218,893.89 899,956,100.22 Less:Cashatthebeginningoftheperiod 408,389,049.61 652,428,797.62 1,306,877,982.24 1,099,218,893.89 Add:Cashequivalentsattheendoftheperiod – – – – Less:Cashequivalentsatthebeginningofthe
period – – – – Netincrease/(decrease)incashandcash
equivalents([–]representsdecrease) 244,039,748.01 654,449,184.62 -207,659,088.35 -199,262,793.67
– I-180–
APPENDIX I ACCOUNTANTS’ REPORT VII. RELATED PARTY RELATIONSHIPAND TRANSACTIONS
1. Determination of related party
Aparty is considered to be related to the Group if the party is subject to control, joint control or significant influencebytheGroup,orthepartyhascontrol,jointcontrolorsignificantinfluenceovertheGroup,orbothentities are controlled, jointly controlled or significant influence by the same third-party.
2. Relationship with related parties
(1) Related parties with controlling relationships
Relationship
Nameof Registered Principal Organisation withthe Economic Legal
company address business code Company type representatives Joincare Shenzhen Productionof 61887436-7 Holding Jointstock ZhuBaoguo Pharmaceutical oralliquid, Company companies ( )
Group drugsand with
Industry healthcare limited
Co.,Ltd. food liabilities
( (listed)
)
Please refer to note IV for details of theCompany’s subsidiaries.
The ultimate controlling party of the Company is Zhu Baoguo ( ), a natural person.
(2) Registered capital of related parties with controlling relationships and their movement
31December Additionsfor Decreaseduring 30September Nameofcompany 2012 theperiod theperiod 2013 JoincarePharmaceuticalGroup
IndustryCo.,Ltd.(
) 1,545,835,892 – – 1,545,835,892 Please refer to note IV for details of registered capital of theCompany’s subsidiaries and their movement.
(3) Shareholding by related parties with controlling relationships
Shareholding Additions Decrease Shareholding 31December percentage forthe duringthe 30September percentage Nameofcompany 2012 (%) period period 2013 (%) Joincare
Pharmaceutical
GroupIndustryCo.,
Ltd.(
)
anditssubsidiaries 140,122,590 47.3832% – – 140,122,590 47.3832% AmongtheabovesharesoftheCompanyheldbyJoincarePharmaceuticalGroupIndustryCo.,Ltd.( ), of which 6,059,428 legal person shares were held in the name of Guangzhou Begol Trading Corporation ( ) and the transfer procedures for these shares were not completed. The transfer procedures for other shares were completed.
– I-181–
APPENDIX I ACCOUNTANTS’ REPORT (4) Related parties with no controlling relationships
Nameofcompany Organisationcode RelationshipwiththeCompany
GuangdongBlueTreasurePharmaceuticalCo. 61806410-2 Associate
Ltd.( )
TongyikangshimeiChain(Shenzhen)Co.,Ltd. 76046936-2 Associate
( ( ) )
ShenzhenHaibinPharmaceuticalCo.,Ltd. 61885517-4 AcompanycontrolledbytheHolding
( ) CompanyoftheCompany
JiaozuoJoincarePharmaceuticalGroup 77512952-0 AcompanycontrolledbytheHolding
IndustryCo.,Ltd. CompanyoftheCompany
( )
ZhuhaiJoincarePharmaceuticalCo.,Ltd. 75788087-1 AcompanycontrolledbytheHolding
( ) CompanyoftheCompany
HealthPharmaceutical(China)Co.,Ltd. 61749891-0 AcompanycontrolledbytheHolding
( ( ) ) CompanyoftheCompany
ShenzhenTaitaiPharmaceuticalCo.,Ltd. 74121715-1 AcompanycontrolledbytheHolding
( ) CompanyoftheCompany
ShenzhenTaitaiGeneEngineeringCo.,Ltd. 73308333-3 AcompanycontrolledbytheHolding
( ) CompanyoftheCompany
3. Transactions and balances with related parties
(1) ThebasisfordeterminingthepricingfortransactionsbetweentheGroupandrelatedparties:themarket price of same type of products.
(2) Transactions with related parties
(i) Sales of goods
Ninemonthsended
2010 2011 2012 30September2013
Percentage Percentage Percentage Percentage Nameofrelated ofsimilar ofsimilar ofsimilar ofsimilar party Amount transactions Amount transactions Amount transactions Amount transactions ZhuhaiJoincare
Pharmaceutical
Co.,Ltd.
(
) 4,222.26 – 26,369.33 – 284,443.66 0.01% 9,932.66 0.01% GuangdongBlue
Treasure
Pharmaceutical
Co.Ltd.
(
) – – – – 25,914,485.75 0.66% 18,077,105.90 0.56% JiaozuoJoincare
Pharmaceutical
GroupIndustry
Co.,Ltd.
(
) – – – – 3,076.92 – 435,046.15 0.01% ShenzhenTaitai
Pharmaceutical
Co.,Ltd.
(
) 49,094.02 – – – – – – – Total 53,316.28 – 26,369.33 – 26,202,006.33 0.67% 18,522,084.71 0.58%
– I-182–
APPENDIX I ACCOUNTANTS’ REPORT (ii) Provision of services (water, electricity and power)
Ninemonthsended
2010 2011 2012 30September2013
Percentage Percentage Percentage Percentage Nameofrelated ofsimilar ofsimilar ofsimilar ofsimilar party Amount transactions Amount transactions Amount transactions Amount transactions GuangdongBlue
Treasure
Pharmaceutical
Co.Ltd.
(
) 6,223,283.97 51.38% 9,147,755.19 68.78% 5,492,412.56 91.15% 4,051,771.49 69.76% ZhuhaiJoincare
Pharmaceutical
Co.,Ltd.(
) – – – – – – 100,992.69 1.74% Total 6,223,283.97 51.38% 9,147,755.19 68.78% 5,492,412.56 91.15% 4,152,764.18 71.50% (iii) Purchase of goods
Ninemonthsended
2010 2011 2012 30September2013
Percentage Percentage Percentage Percentage ofsimilar ofsimilar ofsimilar ofsimilar Nameofrelatedparty Amounttransactions Amounttransactions Amounttransactions Amounttransactions GuangdongBlueTreasure
PharmaceuticalCo.Ltd.
( )
3,413.33 – 4,625,430.48 0.46% 5,695,958.79 0.28% 1,224,951.08 0.11% ShenzhenHaibin
PharmaceuticalCo.,Ltd.
(
) 8,456,873.99 0.70% 11,695,434.19 1.17% 4,845,110.15 0.24% 8,174,772.65 0.71% ShenzhenTaitai
PharmaceuticalCo.,Ltd.
( )
153,384.00 0.01% – – – – – – ShenzhenTaitaiGene
EngineeringCo.,Ltd.
(
) 14,444.44 – – – 159,418.82 0.01% 76,923.08 0.01% JoincarePharmaceutical
GroupIndustryCo.,Ltd
(
) 75,188.03 0.01% 98,358.97 0.01% 160,957.27 0.01% – – JiaozuoJoincare
PharmaceuticalGroup
IndustryCo.,Ltd.
(
) 226,825,534.23 18.88% 74,679,679.48 7.48% 79,468,360.65 3.96% 80,856,047.19 7.03% Total 235,528,838.02 19.60% 91,098,903.12 9.12% 90,329,805.68 4.50% 90,332,694.00 7.86%
– I-183–
APPENDIX I ACCOUNTANTS’ REPORT (iv) Leasing of assets
Ninemonthsended
2010 2011 2012 30September2013
Percentage Percentage Percentage Percentage ofsimilar ofsimilar ofsimilar ofsimilar Nameofrelatedparty Amounttransactions Amounttransactions Amounttransactions Amounttransactions ZhuhaiJoincare
PharmaceuticalCo.,Ltd.
(
) 106,095.14 5.32% 106,533.25 3.26% 251,263.13 7.84% 305,152.60 12.01% HealthPharmaceutical
(China)Co.,Ltd.
( ( )
) 99,997.00 5.01% 108,277.00 3.31% 99,948.00 3.12% 83,290.00 3.28% Total 206,092.14 10.33% 214,810.25 6.57% 351,211.13 10.96% 388,442.60 15.29% (v) Leased assets
Ninemonthsended
2010 2011 2012 30September2013
Percentage Percentage Percentage Percentage ofsimilar ofsimilar ofsimilar ofsimilar Nameofrelatedparty Amounttransactions Amounttransactions Amounttransactions Amounttransactions JoincarePharmaceutical
GroupIndustryCo.,Ltd.
(
) – – 329,472.00 100% 658,944.00 100% 494,208.00 100% (vi) On 8 June 2010, the Company jointly established Zhuhai Livzon MAB Biological Technology Co.,Ltd.( )withJoincarePharmaceuticalGroupIndustryCo., Ltd. ( ) by way of cash contribution. Its registered capital was RMB100 million, for which the Company contributed RMB51,000,000, representing51% and Joincare Pharmaceutical Group Industry Co., Ltd. ( ) contributed RMB49,000,000, representing49%. On 3 June 2013, it was resolved in the First Extraordinary General Meeting in 2013 of Zhuhai Livzon MAB Biological Technology Co., Ltd. (
) that its registered capital would be increased to RMB300 million, for which the first instalment of contribution amounting to RMB100 million should be paid before 30 June 2013 and the remaining balance shall be paid up within 36 months after 30 June 2013. As at 9 June 2013, the Company and Joincare Pharmaceutical Group Industry Co., Ltd. (
)hadcontributedRMB51millionandRMB49millionrespectivelywitha total of RMB100 million subscribed. The proportion of contribution remained the same.
– I-184–
APPENDIX I ACCOUNTANTS’ REPORT (3) Balances of amounts due from/to related parties
31December2010 31December2011 31December2012 30September2013
Nameofcompany Amount Percentage Amount Percentage Amount Percentage Amount Percentage Accounts
receivables:
GuangdongBlue
Treasure
Pharmaceutical
Co.Ltd.
(
) – – – – 8,724,846.80 1.06% 730,161.10 0.08% ZhuhaiJoincare
Pharmaceutical
Co.,Ltd.
(
) – – – – 19,928.25 – 82,861.98 0.01% JiaozuoJoincare
Pharmaceutical
GroupIndustry
Co.,Ltd.
(
) – – – – – – 508,604.00 0.05% Total – – – – 8,744,775.05 1.06% 1,321,627.08 0.14% Prepayments:
ShenzhenHaibin
Pharmaceutical
Co.,Ltd.
(
) – – 150,000.00 0.07% – – – – Total – – 150,000.00 0.07% – – – – Otherreceivables:
ZhuhaiJoincare
Pharmaceutical
Co.,Ltd.
(
) – – – – 26,386.99 0.04% 27,776.99 0.04% Otherreceivables:
Health
Pharmaceutical
(China)Co.,
Ltd.
( (
) ) – – – – – – 8,329.00 0.01% JiaozuoJoincare
Pharmaceutical
GroupIndustry
Co.,Ltd.
(
) – – – – – – 234,390.22 0.34% GuangdongBlue
Treasure
Pharmaceutical
Co.Ltd.
(
) 4,157,957.24 8.40% 2,865,078.12 5.84% 942,888.96 1.59% 1,265,868.81 1.86% Total 4,157,957.24 8.40% 2,865,078.12 5.84% 969,275.95 1.63% 1,536,365.02 2.25%
– I-185–
APPENDIX I ACCOUNTANTS’ REPORT 31December2010 31December2011 31December2012 30September2013
Nameofcompany Amount Percentage Amount Percentage Amount Percentage Amount Percentage Accounts
payables:
GuangdongBlue
Treasure
Pharmaceutical
Co.Ltd.
(
) – – 300,195.00 0.14% 275.00 – 4,227.72 0.00% ShenzhenHaibin
Pharmaceutical
Co.,Ltd.
(
) – – – – 4,065,860.00 1.30% 4,761,984.00 1.25% JiaozuoJoincare
Pharmaceutical
GroupIndustry
Co.,Ltd.
(
) 37,523,400.46 22.79% 22,301,104.02 10.72% 25,289,950.00 8.11% 38,876,993.39 10.19% Total 37,523,400.46 22.79% 22,601,299.02 10.86% 29,356,085.00 9.41% 43,643,205.11 11.44% Otherpayables:
JiaozuoJoincare
Pharmaceutical
GroupIndustry
Co.,Ltd.
(
) 44,741.25 0.01% – – 7,261.05 – 11,924.30 0.00% Joincare
Pharmaceutical
GroupIndustry
Co.,Ltd
(
) – – – – 878,592.00 0.14% 1,372,800.00 0.18% Total 44,741.25 0.01% – – 885,853.05 0.14% 1,384,724.30 0.18%
– I-186–
APPENDIX I ACCOUNTANTS’ REPORT VIII. CONTINGENCIES
As at 30 September 2013, there was no significant contingencies that required to be disclosed by the Group. IX. COMMITMENTS
1. Capital commitments
As at the balance sheet date, the Group had capital commitments contracted but not yet incurred as follows: Unit: RMB ten thousands 31 December 31 December 31 December 30 September 2010 2011 2012 2013 Property, plant and equipment 9,903.52 34,591.57 36,245.07 22,960.92 2. Operating lease commitments– the Group as the lessee
The Group had commitments on future minimum lease payments under non-cancellable operating leases payable as follows:
Unit: RMB ten thousands 31 December 31 December 31 December 30 September 2010 2011 2012 2013 Land and buildings
Within 1 year 323.93 364.88 486.09 153.62 1 to 2 years − 2.62 2.46 10.09 2 to 3 years – – – 10.09 Over 3 years – – – 2.52 Total 323.93 367.50 488.55 176.32 3. Other commitments
(1) TheCompanyenteredintoapatentlicencingagreementwithIl-YangPharmaceuticalCo.Ltd.ofKorea. ItwasagreedthattheCompanywouldbesolelyentitledtotheirrevocableuseofpatentinPPI(proton pump inhibitor) compounds, as well as the production, processing and sales in China (including Hong KongandMacau)onanexclusivebasisregardingthepatentofIl-Yang.Itwasagreedthatanentryfee ofUS$2,500,000 was payable.As at 31 December 2008, such amount was fully settled.The Company agreed to pay a commission of10% on the sales of goods to Il-Yang since the sales of products begin for three years and a commission of8% on the sales of goods for five years after the first three years,andtopayacommissionof6%onthesalesfromthereafterto22July2014,i.e.theexpirydateofthe agreement. Commission were paid according to the agreement since sales commenced in 2009.
(2) In2005,theCompanyenteredintoalicensingandsupplyagreementwithLGLifeScienceLtdofKorea (hereinafterreferredtoas“LGLifeScience”)regardingtherelevantlicenceontheintellectualproperty rights of gemifloxacin mesylate, payment for the licences of injection and tablets for mesylate gemifloxacin ( ) atUS$1,000,000 each. As at 31 December 2006, such amounts were settled in full. It was provided in the agreement that:
Withinthefirstfivebusinessyearsupontheagreementbecameeffective,ifthenetsalesvolumeofthe above tablet products of the Company reached 1,500,000 packets (3 tablets in each packet), LG Life Science shall pay a rebate to the Company ofUS$500,000 (net of tax) within two months after the CompanysubmitteditsnetsalescertificatetoLGLifeScience.Atthesametime,withinthevalidperiodoftheagreement(asoftheendof2015),theCompanyshallpaylicencefeetoLGLifeScienceof1.5% onthenetsalesamount(netoftax)within30daysaftertheendofeachquarter.Licencefeewaspaid according to the provisions of the agreement since the sales began in 2008.
Withinthefirstfivebusinessyearsupontheagreementbecameeffective,theCompanyshallpaylicencefeeoftheaboveinjectionproductstoLGLifeScienceof10%onthenetsalesamount(netoftax)within 30daysaftertheendofeachquarter.Fromthesixthbusinessyearuntiltheexpiryoftheagreement(asoftheendof2019),theCompanyshallpaylicencefeetoLGLifeScienceof6%onthenetsalesamount (net of tax) within 30 days after the end of each quarter.
– I-187–
APPENDIX I ACCOUNTANTS’ REPORT X. NON-ADJUSTING POST BALANCE SHEET EVENTS
Asatthedateofthisreport,thereisnoothernon-adjustingpostbalancesheeteventthatshouldbedisclosed by the Group.
XI. OTHER SIGNIFICANT MATTERS
1. Asat30September2013,thedetailsonthebankloansofsubsidiariesguaranteedbytheCompany were set out as follow:
Balanceat
Actualdate theend Actual
Nameofguaranteed ofevent ofthe guaranteed Guaranteed Typeof
party (Signing period amount amount guarantee Periodofguarantee dateofthe (RMBten (RMBten (RMBten
Agreement) thousand) thousand) thousand)
ZhuhaiLivzonDiagnostic 2013.3.20 – – 4,000.00 Joint 2013.3.20-2015.3.20 ReagentsInc.( liability BankofChina,
) ZhuhaiBranch
( )
ZhuhaiLivzonDiagnostic 2012.3.22 – – 1,229.60 Joint 2012.3.22-2015.3.21 ReagentsInc.( (USD200.00) liability StandardChartered ) Bank,ZhuhaiBranch ( ) ZhuhaiLivzon 2012.7.2 – – 1,000.00 Joint 2012.7.2-2015.7.2
PharmaceuticalTrade liability Bankof
Co.,Ltd.( Communication,
) ZhuhaiBranch
( )
LivzonGroupLimin 2012.4.17 14,920.00 15,000.00 15,000.00 Joint 2012.4.17-2015.4.16 Pharmaceutical liability ChinaAgricultural ManufacturingFactory Bank,Shaoguan
( ) WujianSub-branch )
ZhuhaiFTZLivzon 2012.6.7 – – 3,000.00 Joint 2012.6.7-2015.6.7
HechengPharmaceutical liability ZhuhaiChina
ManufacturingCo.,Ltd. ResourcesBank
( ( )
)
LivzonGroupLivzon 2012.5.17 – – 16,000.00 Joint 2012.5.17-2015.5.16 PharmaceuticalFactory liability XiamenInternational ( ) Bank,ZhuhaiBranch (
)
LivzonGroupLivzon 2010.12.23 – – 32,000.00 Joint 2010.12.14-2018.12.14 PharmaceuticalFactory liability Bankof
( ) Communication,
ZhuhaiBranch
( )
LivzonGroupLivzon 2009.10.15 – – 12,000.00 Joint 2010.6.12-2018.6.3
PharmaceuticalFactory liability BankofChina,
( ) ZhuhaiBranch
( )
– I-188–
APPENDIX I ACCOUNTANTS’ REPORT Balanceat
Actualdate theend Actual
Nameofguaranteed ofevent ofthe guaranteed Guaranteed Typeof
party (Signing period amount amount guarantee Periodofguarantee dateofthe (RMBten (RMBten (RMBten
Agreement) thousand) thousand) thousand)
LivzonGroupLivzon 2012.6.15 – – 10,000.00 Joint 2012.6.15-2015.6.15 PharmaceuticalFactory liability BankofChina,
( ) ZhuhaiBranch
( )
LivzonGroupLivzon 2010.5.13 – – 7,928.70 Joint 2010.7.20-2013.7.20 PharmaceuticalFactory (HKD10,000.00) liability Nanyang
( ) CommercialBank, ShenzhenBranch
(
)
LivzonGroupLivzon 2012.7.31 – – 3,996.20 Joint 2012.7-31-2015.7.31 PharmaceuticalFactory (USD650.00) liability SocieteGenerale,
( ) GuangzhouBranch (
)
LivzonGroupLivzon 2012.6.7 4,281.50 4,281.50 9,000.00 Joint 2012.6.7-2015.6.7
PharmaceuticalFactory (HKD5,400.00) liability ZhuhaiChina
( ) ResourcesBank
( )
LivzonGroupLivzon 2011.8.4 – – 4,360.79 Joint 2011.8.4-2014.8.4
PharmaceuticalFactory (HKD5,500.00) liability WingLungBank, ( ) MacauBranch
( ) Totalactualamountguaranteedforloansofsubsidiaries 19,281.50
duringthereportingperiod
Balanceoftotalamountguaranteedforloansof 19,201.50
subsidiariesduringthereportingperiod
2. On30July2010,the“ProposalfortheCompanytoApplyfortheIssueofShort-TermFinancingBills” was considered and approved in the Second Extraordinary General Meeting of the Company in 2010. The Company was approved to apply for registration of a quota not more than RMB800 million short-term financing bills from the Inter-bank Market Dealers Association of China. The registration shall be valid for two years. The short-term financing bills would issued in three tranches and Agricultural Bank of China Limited was engaged as the lead underwriter.
On 28 January 2011, pursuant to the notice on registration acceptance Zhong Shi XieJue[2011]CP15 issued by the Inter-bank Market Dealers Association of China, the Company was approved to issue short-termfinancingbillswitharegisteredamountofRMB800million.Thequotashallbevalidwithin two years from the date the notice on registration acceptance was issued.Agricultural Bank of China Limited was engaged as the lead underwriter. The Company may issue short-term financing bills in differenttranchesduringthevalidperiodoftheregistration.Ofwhich,theCompanyissuedtwotranches of short-term financing bills in 2011 with a quota of RMB400 million, which were already settled in 2012.On6July2012,theCompanyissuedthethirdtrancheofshort-termfinancingbillswithaquota of RMB400 million and were repaid when they were due in 2013.
– I-189–
APPENDIX I ACCOUNTANTS’ REPORT 3. On 14 December 2012, the “Proposal for the Company to Apply for the Issue of Medium-Term Financing Bills” was considered and approved in the Second Extraordinary General Meeting of the Company in 2012. The Company was approved to apply for registration of a quota not more than RMB800million(inclusive)fromtheInter-bankMarketDealersAssociationofChina.On29May2013, the Company issued the 2013 first tranche of medium-term financing bills at an amount of RMB400 million.
4. Assets and liabilities measured at fair value
2010
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value for the 31 December Item 2009 period in equity period 2010 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 48,888.58 10,780.22 – – 57,865.79 2. Derivative
financial assets – – – – – 3. Available-for-
sale financial
assets 12,906.09 – -3,143.30 – 10,572.89 Sub-total for
financial assets 61,794.67 10,780.22 -3,143.30 – 68,438.68 Investment
properties – – – – – Productive
biological assets – – – – – Others – – – – – Total 61,794.67 10,780.22 -3,143.30 – 68,438.68 Financial liabilities – – – – –
– I-190–
APPENDIX I ACCOUNTANTS’ REPORT 2011
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value for the 31 December Item 2010 period in equity period 2011 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 57,865.79 -11,083.79 – – 44,343.01 2. Derivative
financial assets – – – – – 3. Available-for-
sale financial
assets 10,572.89 – -1,334.10 – 9,238.79 Sub-total for
financial assets 68,438.68 -11,083.79 -1,334.10 – 53,581.80 Investment
properties – – – – – Productive
biological assets – – – – – Others – – – – – Total 68,438.68 -11,083.79 -1,334.10 – 53,581.80 Financial liabilities – – – – – 2012
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value made for 31 December Item 2011 period in equity the period 2012 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 44,343.01 16,381.68 – – 59,319.62 2. Derivative
financial assets – – – – – 3. Available-for-
sale financial
assets 9,238.79 – 1,374.07 – 10,612.86 Sub-total for
financial assets 53,581.80 16,381.68 1,374.07 – 69,932.48 Investment
properties – – – – – Productive
biological assets – – – – – Others – – – – – Total 53,581.80 16,381.68 1,374.07 – 69,932.48 Financial liabilities – – – – –
– I-191–
APPENDIX I ACCOUNTANTS’ REPORT Nine months ended 30 September 2013
Unit:RMB’000 Change in Accumulated Provision of
31 fair value change in impairment 30 December for the fair value for the September Item 2012 period in equity period 2013 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 59,319.62 -3,528.80 – – 9,164.16 2. Derivative
financial assets – – – – – 3. Available-for-
sale financial
assets 10,612.86 – -65.21 – 10,547.65 Sub-total for
financial assets 69,932.48 -3,528.80 -65.21 – 19,711.81 Investment
properties – – – – – Productive
biological assets
– – – – – Others – – – – – Total 69,932.48 -3,528.80 -65.21 – 19,711.81 Financial liabilities – – – – –
– I-192–
APPENDIX I ACCOUNTANTS’ REPORT 5. Financial assets and liabilities in foreign currencies
2010
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value for the 31 December Item 2009 period in equity period 2010 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 48,274.74 10,713.91 – – 57,185.64 2. Derivative
financial assets – – – – – 3. Loans and
receivables 28,499.25 – – 491.03 36,764.94 4. Available-for-
sale financial
assets – – – – – 5. Investments
held to maturity – – – – – Sub-total for
financial assets 76,773.99 10,713.91 – 491.03 93,950.58 Financial liabilities 159,676.60 – – – 184,368.60 2011
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value for the 31 December Item 2010 period in equity period 2011 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 57,185.64 -10,927.12 – – 43,819.54 2. Derivative
financial assets – – – – – 3. Loans and
receivables 36,764.94 – – 668.36 61,544.97 4. Available-for-
sale financial
assets – – – – – 5. Investments
held to maturity – – – – – Sub-total for
financial assets 93,950.58 -10,927.12 – 668.36 105,364.51 Financial liabilities 184,368.60 – – – 251,449.80
– I-193–
APPENDIX I ACCOUNTANTS’ REPORT 2012
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment
31 December for the fair value for the 31 December Item 2011 period in equity period 2012 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 43,819.54 16,365.63 – – 58,780.09 2. Derivative
financial assets – – – – – 3. Loans and
receivables 61,544.97 – – 269.99 64,130.63 4. Available-for-
sale financial
assets – – – – – 5. Investments
held for
maturity – – – – – Sub-total for
financial assets 105,364.51 16,365.63 – 269.99 122,910.72 Financial liabilities 251,449.80 – – – 248,730.85 Nine months ended 30 September 2013
Unit:RMB’000 Change in Accumulated Provision of
fair value change in impairment 30 31 December for the fair value for the September Item 2012 period in equity period 2013 Financial assets
1. Financial assets
at fair value
through profit
or loss
(excluding
derivative
financial assets) 58,780.09 -3,558.73 – – 8,594.71 2. Derivative
financial assets – – – – – 3. Loans and
receivables 64,130.63 – – 175.40 76,578.12 4. Available-for-
sale financial
assets – – – – – 5. Investments
held for
maturity – – – – – Sub-total for
financial assets 122,910.72 -3,558.73 – 175.40 85,172.83 Financial liabilities 248,730.85 – – – 249,242.18
– I-194–
APPENDIX I ACCOUNTANTS’ REPORT 6. Financial Risk Management
(1) Foreign currency risk
The Group conducts its operation primarily in China. Substantially all of the transactions were denominated and settled in Renminbi. However, the Group still have certain imports and exports businesses regarding bulk medicines and diagnostic reagents and equipment, for which they are settled in U.S. dollar and JapaneseYen. TheGroup’s businesses in Hong Kong are settled in Hong Kong dollars. In addition, the Group had loans denominated in Hong Kong dollars. As at 30 September 2013, the balance of loans in Hong Kong dollars amounted toHK$305,133,500. In respect of the above, the Group is still exposed to certain foreign currency risks. Taking into account the foreign currency risks acceptable by the Group, the Group do not use derivatives to hedge foreign currency risks. However, as to the foreign exchange risk in loans, the Group shall closely monitor the trend on the exchange rate of Renminbi, and timely adjust the extent of borrowings, so as to reduce its risks to the minimum. (2) Interest rate risk
TheGroup’s exposures in interest rate risk are mainly arising from bank borrowings.The bank lending rates are affected by the macro monetary policies of China, so that the Group is facing the risks arising from fluctuation ofinterestratesinfuture.TheGroupalsousedshort-termfinancingbillsasadirectchannelinfinancingsince2011. Theinterestrateriskinrespectoftheissueofshort-termfinancingbillswasarisingfromtightmoneysupplyinthe market upon the issue of such bills.
(3) Credit risk
Creditriskisprimarilyattributabletocashandcashequivalents,restrictedcashatbank,accountsreceivables andotherreceivables.Inrespectofcashatbanks,theywereplacedatseveralbankswithgoodreputations,forwhich the credit risk was limited. In respect of accounts receivables, the Group shall assess the credit limit granted to customersforcreditpurpose.Moreover,asthecustomerbaseislarge,thecreditriskonaccountsreceivablesisnot concentrated. In respect of the settlement of bills receivables, a lot of bills receivables are used to settle external payments, which significantly limit the balance of bills receivables. Moreover, the balance of bills receivables are quality bills having maturity within three months. Therefore there should not be any significant credit risk. In addition, the provision made on accounts receivables and other receivables are adequate to manage the credit risk. (4) Liquidity risk
The Group adopts a prudent liquidity risk management, so as to ensure the sufficiency of the sources of monetary funds and liquidity by maintaining adequate monetary funds and reserve of banking facilities so that we cansecurecreditloansfrombanks.Apartfromindirectfinancingfrombanks,anumberoffinancingchannelswere opened, such as direct financing by inter-bank market including short-term financing bills and medium-term financingbills,corporatebondsetc.Theseinstrumentscanappropriatelyreducetheeffectsarisingfromthescaleof financingbyinter-bankmarketandandthemacromonetarypoliciesofChina,whichshallsecureadequatefundsin a flexible manner.
– I-195–
APPENDIX I ACCOUNTANTS’ REPORT XII. SUPPLEMENTARY INFORMATION
1. Extraordinary gains or losses
Accordingtothe“NoticeonExplanationofInformationDisclosureofCompaniesPubliclyIssuingSecurities No. 1– Extraordinary gains or losses (2008)” (CSRC Notice[2008] No. 43) published on 31 October 2008, the extraordinary gains or losses of the Group are calculated as follows:
Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Gainsorlossesfromthe
disposalofnon-current
assets,includingthose
alreadywrittenoffinthe
provisionforimpairmentas
provided 5,743,384.61 462,004.84 -69,242.34 -871,407.48 330,785.05 Ultraviresorwithoutofficial
approvaldocuments,or
incidentaltaxrebateor
relief – – – – – Governmentgrantsincludedin
theprofitorlossforthe
period,saveasthose
governmentgrantsclosely
associatedtothenormal
operationoftheGroup,
complyingwiththepolicies
andregulationsofChina,
beingentitledatacertain
standardamountorcertain
level 13,208,647.02 32,046,594.98 42,064,456.38 15,100,394.11 28,994,120.35 Fundsutilisationfeescollected
fromnon-financial
enterprisesincludedinthe
profitorlossforthecurrent
period – – – – – Thegainfromtheexcessof
thefairvalueof
indentifiablenetassets
attributabletotheinvestee
atacquisitionoverthe
investmentcostsofthe
Groupforitssubsidiaries,
associatesandjointventures – – – – – Gainsorlossesfromthe
exchangeofnon-monetary
assets – – – – – Gainsorlossesfrom
investmentsontrustorasset
management – – – – – Provisionforimpairmentasa
resultofforcemajeure
factors,suchasnatural
disasters – – – – – Gainsorlossesfromdebt
restructuring – – – – – Corporatereorganisation
expenses,suchas
expendituresforstaff
dormitory,andbusiness
combinationexpenses – – – – –
– I-196–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Gainsorlossesfrom
transactionwithtransaction
pricenotatfairvalueover
thepartatfairvalue – – – – – Netgainsorlossesof
subsidiariesarisingfrom
businesscombinationunder
commoncontrolfromthe
beginningoftheperiodto
thedateofcombination – – – – – Gainsorlossesarisingfrom
contingentmattersnot
relatedtothenormal
operationoftheGroup – – – – – Investmentincomederived
fromtheholdingof
financialassetsheldfor
trading,gainsorlosses
arisingfromchangesinfair
valueoffinancialliabilities
heldfortradinganddisposal
offinancialassetsheldfor
trading,financialliabilities
heldfortradingand
available-for-salefinancial
assets(excludingthe
hedgingactivitiesofthe
normaloperationofthe
Group) 11,938,153.86 -9,851,944.38 18,086,042.35 6,392,098.36 -1,788,681.10 Reversalofimpairmentof
receivablesonindividual
basis – – 636,406.43 – – Gainsorlossesfromexternal
entrustedloans – – – – – Gainsorlossesfromchanges
infairvalueoninvestment
propertiesunderthefair
valuemodel – – – – – Oneoffadjustmentinprofitor
lossfortheperiodaccording
tothelawsandregulations
regardingtaxationand
accounting – – – – – Entrustfeeincomefrom
entrustedoperation – – – – – Othernon-operatingincome
andexpendituresapartfrom
theabove -1,699,616.39 897,876.93 -435,271.79 -196,564.07 584,002.08 Itemsofgainsorlossesas
definedmeetingthe
definitionofextraordinary
gainsorlosses – – – – – Sub-total 29,190,569.10 23,554,532.37 60,282,391.03 20,424,520.92 28,120,226.38
– I-197–
APPENDIX I ACCOUNTANTS’ REPORT Ninemonthsended
30September
Item 2010 2011 2012 2012 2013 (unaudited)
Less:Effectofincometax 2,600,085.44 5,156,062.49 8,151,476.68 2,902,883.15 5,723,102.52 Effectofnon-controlling
interests 595,875.86 638,752.79 6,649,649.17 2,742,509.36 5,228,062.73 Total 25,994,607.80 17,759,717.09 45,481,265.18 14,779,128.41 17,169,061.13 2. Rate of return on net assets and earnings per share
2010
Weighted average Earnings per share (RMB/share) rate of return Basic earnings Diluted earnings Profit for the reporting period on net assets per share per share Net profit attributable to shareholders of ordinary
shares 17.94% 1.41 1.41 Net profit attributable to shareholders of ordinary
shares before extraordinary gains or losses 16.82% 1.33 1.33 2011
Weighted average Earnings per share (RMB/share) rate of return Basic earnings Diluted earnings Profit for the reporting period on net assets per share per share Net profit attributable to shareholders of ordinary
shares 13.41% 1.22 1.22 Net profit attributable to shareholders of ordinary
shares before extraordinary gains or losses 12.75% 1.16 1.16 2012
Weighted average Earnings per share (RMB/share) rate of return Basic earnings Diluted earnings Profit for the reporting period on net assets per share per share Net profit attributable to shareholders of ordinary
shares 15.17% 1.49 1.49 Net profit attributable to shareholders of ordinary
shares before extraordinary gains or losses 13.61% 1.34 1.34 Nine months ended 30 September 2012 (unaudited)
Weighted average Earnings per share (RMB/share) rate of return Basic earnings Diluted earnings Profit for the reporting period on net assets per share per share Net profit attributable to shareholders of ordinary
shares 11.83% 1.16 1.16 Net profit attributable to shareholders of ordinary
shares before extraordinary gains or losses 11.32% 1.11 1.11 Nine months ended 30 September 2013
Weighted average Earnings per share (RMB/share) rate of return Basic earnings Diluted earnings Profit for the reporting period on net assets per share per share Net profit attributable to shareholders of ordinary
shares 12.02% 1.28 1.28 Net profit attributable to shareholders of ordinary
shares before extraordinary gains or losses 11.48% 1.22 1.22
– I-198–
APPENDIX I ACCOUNTANTS’ REPORT Calculation:
(1) Weighted average rate of return on net assets
Ninemonthsended30September Item Serialnumber 2010 2011 2012 2012 2013 (unaudited)
Netprofitattributableto
shareholdersof
ordinaryshares A 418,180,831.06 359,369,880.94 441,671,519.69 343,630,861.86 378,519,464.72 Extraordinarygainsor
losses B 25,994,607.80 17,759,717.09 45,481,265.18 14,779,128.41 17,169,061.13 Netprofitattributableto
shareholdersof
ordinarysharesbefore
extraordinarygainsor
losses C=A-B 392,186,223.26 341,610,163.85 396,190,254.51 328,851,733.45 361,350,403.59 Netassetsatthe
beginningofthe
periodattributableto
shareholdersof
ordinaryshares D 2,149,084,836.03 2,517,438,110.24 2,843,169,706.20 2,843,169,706.20 3,008,015,808.63 Increaseinnetassets
fromissueofnew
sharesorconversion
ofdebtsintoshares
duringthereporting
periodattributableto
shareholdersof
ordinaryshares E – – – – – Accumulatednumberof
monthswithincrease
innetassetsfromthe
nextmonthofthe
increasetotheendof
thereportingperiod F – – – – – Decreaseinnetassets
duetorepurchaseor
cashdividendsduring
thereportingperiod
attributableto
shareholdersof
ordinaryshares G 44,358,277.80 29,501,900.34 147,860,926.00 147,860,926.00 147,860,926.00 Accumulatednumberof
monthswithdecrease
innetassetsfromthe
nextmonthofthe
decreasetotheendof
thereportingperiod H 7 7 8 5 3 Changeinnetassets
arisingfromother
transactionsor
matters I -2,509,996.30 -343,042.93 -128,982,930.73 -120,298,004.18. -55,425.84 Accumulatednumberof
monthswithincrease
ordecreaseinnet
assetsfromthenext
monthoftheother
transactionsor
matterstotheendof
thereportingperiod J 6 6 5,6 2 4 Numberofmonths
duringthereporting
period K 12 12 12 9 9 Weightedaveragenet L=D+A/2+E*F/K-
assets G*H/K±I*J/K 2,331,044,591.36 2,679,742,087.37 2,911,695,701.96 2,904,323,120.13 3,147,960,852.74 Weightedaveragerate
ofreturnonnetassets M=A/L 17.94% 13.41% 15.17% 11.83% 12.02% Weightedaveragerate
ofreturnonnetassets
beforeextraordinary
gainsorlosses N=C/L 16.82% 12.75% 13.61% 11.32% 11.48%
– I-199–
APPENDIX I ACCOUNTANTS’ REPORT (2) Basic earnings per share
Ninemonthsended30September Item Serialnumber 2010 2011 2012 2012 2013 (unaudited)
Netprofitattributableto
shareholdersofordinary
shares A 418,180,831.06 359,369,880.94 441,671,519.69 343,630,861.86 378,519,464.72 Extraordinarygainsorlosses B 25,994,607.80 17,759,717.09 45,481,265.18 14,779,128.41 17,169,061.13 Netprofitattributableto
shareholdersofordinary
sharesbeforeextraordinary
gainsorlosses C=A-B 392,186,223.26 341,610,163.85 396,190,254.51 328,851,733.45 361,350,403.59 Totalnumberofsharesatthe
beginningoftheyear D 295,721,852 295,721,852 295,721,852 295,721,852 295,721,852 Increasesofsharesdueto
transferredfromcapital
reserveorsharedividend
duringthereportingperiod E – – – – – Increasesofsharesdueto
issueofnewsharesor
conversionofdebtsinto
sharesduringthereporting
period F – – – – – Accumulatednumberof
monthswithincreasein
numberofsharesfromthe
nextmonthoftheincrease
totheendofthereporting
period G – – – – – Decreasesofsharesdueto
sharesrepurchaseduringthe
reportingperiod H – – – – – Accumulatednumberof
monthswithdecreasein
numberofsharesfromthe
nextmonthofthedecrease
totheendofthereporting
period I – – – – – Decreasesofsharesdueto
sharesconsolidationduring
thereportingperiod J – – – – – Amountofmonthsinthe
reportingperiod K 12 12 12 9 9 Weightedaveragenumberof
ordinarysharesissuedand L=D+E+F*G/K-H*
outstanding I/K-J 295,721,852 295,721,852 295,721,852 295,721,852 295,721,852 Basicearningspershare M=A/L 1.41 1.22 1.49 1.16 1.28 Basicearningspersharebefore
extraordinarygainsorlosses N=C/L 1.33 1.16 1.34 1.11 1.22 (3) Diluted earnings per share
The calculation of diluted earnings per share is the same as the calculation of basic earnings per share.
Yours faithfully,
Ruihua Certified Public Accountants (LLP) Li Encheng
Chinese Certified Public Accountants Beijing, thePeople’s Republic of China, Wang Shuyan
14 January 2014 Chinese Certified Public Accountants
– I-200–
APPENDIX II PROFIT ESTIMATE The estimate of the consolidated profit attributable to the shareholders of the Company for the year ended 31 December 2013 is set out in the section headed “Financial Information– Profit Estimate For the Year Ended 31 December 2013” in this listing document.
A. BASES
We have prepared the estimate of the consolidated profit attributable to the shareholders of the Company for the year ended 31 December 2013 based on audited consolidated financial statements for the nine months ended 30 September 2013 and the unaudited consolidated financial statements of the Group for the three months ended 31 December 2013. The estimate for the year ended 31 December 2013 has been prepared on the basis of accounting policies consistent with those adopted for the purpose of theAccountants’ Report set out in Appendix I to this listing document.
– II-1–
APPENDIX II PROFIT ESTIMATE B. LETTER FROM THE REPORTING ACCOUNTANTS
The following is the text of the letter received by the Directors from our reporting accountants, Ruihua, Certified Public Accountants (LLP) (formerly known as Crowe Horwath China Certified Public Accountants (LLP)), prepared for the purpose of incorporation in this listing document in connection with the profit estimate for the year ended 31 December 2013. (cid:17994)(cid:16863)(cid:3424)(cid:3440)(cid:726) (cid:2375)(cid:1244)(cid:5170)(cid:9127)(cid:9200)(cid:2410)(cid:16303)(cid:3339)(cid:10719)(cid:1117)(cid:17439)16(cid:2599)(cid:19602)2(cid:2599)(cid:8108)4(cid:4722)
Postal Address(cid:726)4th Floor of Tower 2,No.16 Xisihuanzhong Road,Haidian District, Beijing
(cid:18142)(cid:7023)(cid:13638)(cid:11825)(cid:708)Post Code(cid:709)(cid:726)100039
(cid:11109)(cid:16909)(cid:708)Tel(cid:709)(cid:726)+86(10)88219191
(cid:1360)(cid:11599)(cid:708)Fax(cid:709)(cid:726)+86(10)88210558
14 January 2014 The Directors
Livzon Pharmaceutical Group Inc.
Guosen Securities (HK) Capital Company Limited
Dear Sirs,
We have reviewed, in accordance with theAuditing Guideline 3.341“Accountants’report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants, the accounting policies adopted and calculations made in arriving at the estimate of the consolidated profit attributable to shareholders of Livzon Pharmaceutical Group Inc. (“the Company”) for the year ended 31 December 2013 (“the Profit Estimate”), for which the directors of the Company are solely responsible, as set forth in the section headed “Financial Information” in the listing document of the Company dated 14 January 2014 (“the Listing Document”).
The Profit Estimate has been prepared by the directors of the Company based on the audited consolidated results of the Company and its subsidiaries (collectively referred to as “the Group”) for the nine months ended 30 September 2013 and the unaudited consolidated results based on management accounts of the Group for the three months ended 31 December 2013.
In our opinion, so far as the accounting policies and calculations are concerned, the Profit Estimate has been properly compiled by the directors of the Company on the bases set out in SectionAofAppendix II of the Listing Document and is presented on a basis consistent in all material respects with the accounting policies normally adopted by the Group as set out in ouraccountants’ report dated 14 January 2014, the text of which is set out in Appendix I of the Listing Document.
Yours faithfully,
Ruihua Certified Public Accountants (LLP)
Wang Shuyan
Chinese Certified Public Accountants
– II-2–
APPENDIX II PROFIT ESTIMATE C. LETTER FROM THE SPONSOR
The following is the text of a letter, prepared for inclusion in this listing document by the Sole Sponsor in connection with the profit estimate for the year ended 31 December 2013. Unit Nos. 1604-06, 16th Floor Infinitus Plaza
199 Des Voeux Road Central Hong Kong
14 January 2014 The Directors
Livzon Pharmaceutical Group Inc.
Dear Sirs,
We refer to the estimate of the consolidated profit attributable to shareholders of Livzon Pharmaceutical Group Inc. (the “Company” and its subsidiaries together the “Group”) for the year ended 31 December 2013 (the “Profit Estimate”) as set out in the listing document issued by the Company dated 14 January 2014 (the “Listing Document”).
The Profit Estimate, for which the directors of the Company (the “Directors”) are solely responsible,hasbeenpreparedbyyoubasedontheauditedconsolidatedfinancialresultsofthe Group for the nine months ended 30 September 2013 and the unaudited consolidated financial results of the Group for the three months ended 31 December 2013.
We have discussed with you the bases and assumptions, as set forth inAppendix II to the ListingDocument,uponwhichtheProfitEstimatehasbeenmade.Wehavealsoconsideredand relied upon the letter dated 14 January 2014 addressed to you and us from Ruihua Certified Public Accountants (LLP) regarding the accounting policies and calculations upon which the Profit Estimate has been made.
On the basis of the information comprising the Profit Estimate and on the basis of the accounting policies and calculations adopted by you and reviewed by Ruihua Certified Public Accountants (LLP), we are of the opinion that the Profit Estimate, for which you as the Directors are solely responsible, has been made after due and careful enquiry.
Yours faithfully,
For and on behalf of
Guosen Securities (HK) Capital Company Limited
Yip Kwok Kwan
Managing Director
– II-3–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS ThisAppendixsetsoutsummariesofcertainaspectsofthePRClegalandjudicialsystem, its arbitration system and its company and securities regulations. It also contains a summary ofcertainHongKonglegalandregulatoryprovisions,includingsummariesofcertainmaterial differences between the Company Law and the Companies Ordinance, certain requirements of the Hong Kong Listing Rules and the Mandatory Provisions.
PRC LEGAL SYSTEM
The PRC legal system is based on the PRC Constitution ( ) and is made up of written laws, administrative regulations, local regulations, separate regulations, autonomy regulations, rules and regulations of State Council departments, rules and regulations of local governments, international treaties of which the PRC Government is a signatory, and other regulatory documents. Court case verdicts do not constitute binding precedents. However, they are used for the purposes of judicial reference and guidance.
The NationalPeople’s Congress (the “NPC”) and the Standing Committee of the NPC are empowered to exercise the legislative power of the State. The NPC has the power to formulate andamendbasiclawsgoverningStateorgans,civilandcriminalmattersandothermatters.The Standing Committee of the NPC is empowered to formulate and amend laws other than those required to be enacted by the NPC and to supplement and amend any parts of laws enacted by the NPC during the adjournment of the NPC, provided such supplements and amendments are not in conflict with the basic principles of such laws. The Standing Committee of the NPC is empowered to interpret, enact and amend other laws not required to be enacted by the NPC. The State Council is the highest organ of the PRC administration and has the power to formulate administrative regulations based on the constitution and laws.
Thepeople’s congresses of provinces, autonomous regions and municipalities and their respective standing committees may formulate local regulations based on the specific circumstances and actual requirements of their own respective administrative areas, subject to the constitution, laws and administrative regulations. Thepeople’s congresses of larger cities and their respective standing committees may formulate local regulations based on the specific circumstances and actual requirements of such cities, which will become enforceable after being reported to and approved by the standing committees of the relevant provinces or autonomous regions but such local regulations shall conform with the constitution, laws, administrative regulations, and the relevant local regulations of the relevant provinces orautonomousregions.People’scongressesofnationalautonomousareashavethepowertoenact autonomy regulations and separate regulations in the light of the political, economic and cultural characteristics of the nationality (nationalities) in the areas concerned.
The ministries, commissions,People’s Bank of China, NationalAudit Office of the State Council and institutions with administrative functions directly under the State Council may formulate department rules within the jurisdiction of their respective departments based on the laws and the administrative regulations, decisions and rulings of the State Council. Thepeople’s governments of provinces, autonomous regions, municipalities and larger cities may formulate rules based on the laws, administrative regulations and local regulations of such provinces and autonomous regions and municipalities.
– III-1–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS According to the PRC Constitution, the power to interpret laws is vested in the Standing Committee of the NPC. According to the Decision of the Standing Committee of the NPC Regarding the Strengthening of Interpretation of Laws (
) passed on 10 June 1981, the SupremePeople’s Court has the powertogivegeneralinterpretationonquestionsinvolvingthespecificapplicationoflawsand decrees in court trials. The State Council and its ministries and commissions are also vested with the power to give interpretation of the administrative regulations and department rules which they have promulgated. At the regional level, the power to give interpretations of the local laws and regulations as well as administrative rules is vested in the regional legislative and administrative organs which promulgate such laws, regulations and rules.
PRC JUDICIAL SYSTEM
Under the PRC Constitution and the Law of Organisation of thePeople’s Courts of the PRC ( ), the PRC judicial system is made up of the SupremePeople’s Court, the localpeople’s courts, military courts and other specialpeople’s courts. The localpeople’s courts are comprised of the basicpeople’s courts, the intermediatepeople’s courts and the higherpeople’s courts. The basicpeople’s courts are organised into civil, criminal, administrative, supervision and enforcement divisions. The intermediatepeople’s courts are organised into divisions similar to those of the basicpeople’s courts, and have the power to organise other divisions as needed such as the intellectual property division. The higher levelpeople’s courts supervise the basic and intermediatepeople’s courts. Thepeople’s procuratorates also have the right to exercise legal supervision over the civil proceedings ofpeople’s courts of the same level and lower levels.The SupremePeople’s Court is the highest judicial body in the PRC. It supervises the administration of justice by all of thepeople’s courts.
Thepeople’s courts apply a two-tier appellate system. A party may appeal against ajudgmentororderofalocalpeople’scourttothepeople’scourtatthenexthigherlevel.Second judgments or orders given at the next higher level are final. First judgments or orders of the SupremePeople’s Court are also final. If, however, the SupremePeople’s Court or apeople’s court at a higher level finds an error in a judgment which has been given in anypeople’s court at a lower level, or the presiding judge of apeople’s court finds an error in a judgment which has been given in the court over which he presides, the case may then be retried according to the judicial supervision procedures.
The PRC Civil Procedure Law ( ), which was adopted in 1991 and amended in 2007 and 2012, sets forth the criteria for instituting a civil action, the jurisdiction of thepeople’s courts, the procedures to be followed for conducting a civil action and the procedures for enforcement of a civil judgment or order. All parties to a civil action conducted within the PRC must comply with the PRC Civil Procedure Law. Generally, a civil case is initially heard by a local court of the municipality or province in which the defendant resides. The parties to a contract may, by express agreement, select a jurisdiction where civil actions may be brought, provided that the jurisdiction is either theplaintiff’s or thedefendant’s place of residence, the place of execution or implementation of the contract or the place of the object of the action, provided that the provisions of this law regarding the level of jurisdiction and exclusive jurisdiction shall not be violated.
– III-2–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Aforeign national or enterprise generally has the same litigation rights and obligations as a citizen or legal person of the PRC. If a foreigncountry’s judicial system limits the litigation rights of PRC citizens and enterprises, the PRC courts may apply the same limitations to the citizens and enterprises of that foreign country within the PRC. If any party to a civil action refuses to comply with a judgment or order made by apeople’s court or an award granted by an arbitration panel in the PRC, the other party may apply to thepeople’s court to request enforcement of the judgment, order or award. There are time limits of two years imposed on the right to apply for such enforcement. If a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.
A party seeking to enforce a judgment or order of apeople’s court against a party who isnotlocatedwithinthePRCanddoesnotownanypropertyinthePRC,mayapplytoaforeign court with proper jurisdiction for recognition and enforcement of the judgment or order. A foreign judgment or ruling may also be recognised and enforced by thepeople’s court according to PRC enforcement procedures if the PRC has entered into, or acceded to, an international treaty with the relevant foreign country, which provides for such recognition and enforcement, or if the judgment or ruling satisfies thecourt’s examination according to the principle of reciprocity, unless thepeople’s court finds that the recognition or enforcement of such judgment or ruling will result in a violation of the basic legal principles of the PRC, its sovereignty or security, or non-compliance with social and public interest.
THE COMPANY LAW, SPECIAL REGULATIONS AND MANDATORY PROVISIONS Ajoint stock limited company which is incorporated in the PRC and seeking a listing on the Hong Kong Stock Exchange is mainly subject to the following three laws and regulations in China:
• The Company Law, which was promulgated by the Standing Committee of the NPC on29December1993,tookeffecton1July1994andwasrevisedasof25December 1999, 28 August 2004 and 27 December 2005 respectively. The latest revised Company Law came into effect on 1 January, 2006;
• The Special Regulations, which were promulgated by the State Council on August 4, 1994 pursuant to Articles 85 and 155 of the Company Law; and
• The Mandatory Provisions, which were jointly promulgated by the Securities CommitteeandtheStateRestructuringCommissionon27August1994,andmustbe incorporatedintothearticlesofassociationofajointstocklimitedcompanyseeking an overseas listing.
Set out below is a summary of the provisions of the Company Law, the Special Regulations and the Mandatory Provisions applicable to our Company.
– III-3–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS General
A “company” is a corporate legal person incorporated under the Company Law with independent legal person properties and entitlements to such legal person properties. The liability of the company is limited to the full amount of its assets and the liability of its shareholders is limited to the extent of the shares held by them. Companies can be divided into two different categories: limited liability companies and joint stock limited companies.
Incorporation
Ajointstocklimitedcompanymaybeincorporatedbyaminimumoftwopromoterswhile its maximum thereof is 200, and at least half of the promoters must have residences within the PRC. A company incorporated under the Company Law as a joint stock limited company has the status of a legal person and that its registered capital is divided into shares of equal par value. The liability of its shareholders is limited to the amount of shares held by them and the company is liable to its creditors for an amount equal to the total value of its assets.
Under the Company Law, a joint stock limited company may invest in other enterprises, provided that it may not be a contributor that undertakes joint and several liabilities for the debts of the enterprises it invests in, unless otherwise provided for by law.
The promoters must convene an inaugural meeting within 30 days after the issued shares have been fully paid up, and must give notice to all subscribers or make an announcement of the date of the inaugural meeting 15 days before the meeting. The inaugural meeting may be convened only with the presence of promoters or subscribers representing at least half of the shares in the company. At the inaugural meeting, matters including the adoption of articles of association and the election of members of the board of directors and members of the board of supervisors of the company will be dealt with. All resolutions of the meeting require the approval of subscribers with more than half of the voting rights present at the meeting.
Within 30 days after the conclusion of the inaugural meeting, the board of directors must applytotheregistrationauthorityforregistrationoftheestablishmentofthejointstocklimited company. A company is formally established, and has the status of a legal person, after the business licence has been issued by the relevant registration authority. Joint stock limited companies established by the subscription method must file the approval on the offering of shares issued by the securities administration department of the State Council with the company registration authority for record.
A joint stock limitedcompany’s promoters must be liable for: (i) the payment of all expenses and liabilities incurred in the incorporation process jointly and severally if the company cannot be incorporated; (ii) the repayment of subscription monies to the subscribers, together with interest, at bank rates for a deposit of the same term jointly and severally if the company cannot be incorporated; and (iii) damages suffered by the company as a result of the default of the promoters in the course of incorporation of the company. According to the
– III-4–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Provisional Regulations Concerning the Issuance and Trading of Shares (
) promulgated by the State Council on 22 April 1993 (which is only applicable to issuance and trading of shares in the PRC and their related activities), if a company is established by means of public subscription, the promoters of such company are required to sign on the prospectus to ensure that the prospectus does not contain any misrepresentation, serious misleading statements or material omissions, and assume joint and several responsibility for it.
Allotment and Issue of Shares
All issue of shares of a joint stock limited company should be based on the principles of equality and fairness. The same class of shares must carry equal rights. Shares issued at the same time and within the same class must be issued on the same conditions and at the same price. It may issue shares at par value or at a premium, but it may not issue shares below the par value.
A company must obtain the approval of the CSRC to offer its shares to the overseas public. Under the Special Regulations, shares issued to foreign investors by joint stock limited companies and listed overseas are known as “overseas listed and foreign invested shares”. Shares issued to investors within the PRC by joint stock limited companies, which also issue overseas listed and foreign shares, are known as “domestic shares”. Upon approval of the securities regulatory authority of the State Council, a company issuing overseas listed and foreign invested shares in total shares determined by the issuance programme may agree with underwriters in the underwriting agreement to retain not more than15% of the aggregate number of overseas listed and foreign invested shares outside the underwritten amount. The issuance of the retained shares is deemed to be a part of this issuance.
Registered Shares
Under the Company Law, the promoters may make capital contributions in cash, in kind or by way of injection of assets, intellectual property rights, land use rights or other transferable non-cash property based on their appraised value.The amount of investment made in cash by all shareholders may not be less than30% of the registered capital of the company. Pursuant to the Special Regulations, overseas listed and foreign invested shares issued must be in registered form, denominated in Renminbi and subscribed for in a foreign currency. Domestic shares issued must be in registered form.
– III-5–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Under the Company Law, when the company issues shares in registered form, it shall maintain a register of shareholders, stating the following matters:
• the name and domicile of each shareholder;
• the number of shares held by each shareholder;
• the serial numbers of shares held by each shareholder; and
• the date on which each shareholder acquired the shares.
Increase of Share Capital
According to the Company Law, when the joint stock limited company issues new shares, resolutions shall be passed by ashareholders’general meeting, approving the class and number of the new shares, the issue price of the new shares, the commencement and end of the new share issuance and the class and amount of new shares to be issued to existing shareholders. Whenthecompanylaunchesapublicissuanceofnewshareswiththeapprovalofthesecurities regulatory authorities under the State Council, it must publish a prospectus and financial accounts, and prepare the share subscription form.After the new share issuance has been paid up, the change must be registered with the company registration authorities and an announcement must be made.
Reduction of Share Capital
Acompany may reduce its registered capital in accordance with the following procedures prescribed by the Company Law:
• it shall prepare a balance sheet and a property list;
• the reduction of registered capital must be approved byshareholders’ general meeting;
• it shall inform our creditors of the reduction in capital within ten days and publish an announcement of the reduction in the newspaper within 30 days after the resolution approving the reduction has been passed;
• creditors may within 30 days after receiving the notice, or within 45 days of the public announcement if no notice has been received, require the company to pay its debts or provide guarantees covering the debts;
• it must apply to the relevant registration authority the registration of the reduction in registered capital; and
• thereducedregisteredcapitalcannotbelowerthanthestatutoryminimumregistered capital requirements.
– III-6–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Repurchase of Shares
According to the Company Law, a joint stock limited company may not purchase its shares other than for one of the following purposes: (i) to reduce registered capital; (ii) to merge with another company that holds its shares; (iii) to grant its shares to its employees as incentives; and (iv) to purchase its shares from shareholders who are against the resolution regarding the merger or division with other companies in ashareholders’ general meeting. The purchase of shares on the grounds set out in (i) to (iii) above shall require approval by way of a resolution passed by theshareholders’general meeting. Following the purchase of shares in accordance with the foregoing, such shares shall be cancelled within ten days from the date of purchase in the case of (i) above and transferred or cancelled within six months in the case of (ii) or (iv) above. Shares purchased in accordance with (iii) above shall not exceed5% of the total number of thecompany’s issued shares. Such purchase shall be financed by funds appropriated from thecompany’s profit after tax, and the shares so purchased shall be transferred to thecompany’s employees within one year.
Transfer of Shares
The shares held by shareholders may be transferred in accordance with the relevant laws and regulations. Pursuant to the Company Law, transfer of shares by shareholders must be carried out at a lawfully established securities exchange or in other manners stipulated by the StateCouncil.Nomodificationsofregistrationintheshareregistercausedbytransferofshares shall be carried out within 20 days prior to the convening ofshareholder’s general meeting or five days prior to the base date for determination of dividend distributions. However, where there are separate provisions by law on alternation of registration in the share register of listed companies, those provisions shall prevail. Pursuant to the Mandatory Provisions, no modifications of registration in the share register caused by transfer of shares shall be carried out within 30 days prior to convening ofshareholder’s general meeting or five days prior to any base date for determination of dividend distributions.
Under the Company Law, shares issued prior to the public issuance of shares shall not betransferredwithinoneyearfromthedateofthejointstocklimitedcompany’slistingonastock exchange. Directors, supervisors and the senior management shall declare to the company that their shareholdings in the company and any alternation of such shareholdings. They shall not transfer more than25% of all the shares they hold in the company annually during their tenure. They shall not transfer the shares they hold within one year from the date of thecompany’s listing on a stock exchange, or six months after their resignation from their positions with the company.
– III-7–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Shareholders
Under the Company Law and the Mandatory Provisions, the rights of holders of ordinary shares of a joint stock limited company include:
• the right to attend or appoint a proxy to attendshareholders’ general meetings and to vote thereat;
• the right to transfer shares in accordance with laws, administrative regulations and provisions of the articles of association;
• the right to inspect thecompany’s articles of association, share register, counterfoil of debentures, minutes ofshareholder’s general meetings, resolutions of board of directors, resolutions of board of supervisors and financial statements and to make proposals or enquiries of thecompany’s operations;
• the right to bring an action in thepeople’s court to rescind resolutions passed byshareholder’s general meetings and board of directors where the articles of associations violated by the above resolutions;
• the right to dividends and other types of interest distributed in proportion to the number of shares held;
• in the event of the termination or liquidation of the company, the right to participate in the distribution of remaining assets of the company in accordance with the number of shares held; and
• other rights granted by laws, administrative regulations, other regulatory documents and thecompany’s articles of association.
The obligations of a shareholder include the obligation to abide by thecompany’s articles of association, to pay the subscription moneys in respect of the shares subscribed for, to be liable for thecompany’s debts and liabilities to the extent of the amount of his or her subscribed shares and any othershareholders’obligation specified in thecompany’s articles of association.
– III-8–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONSShareholders’ General Meetings
Theshareholders’ general meeting is the organ of authority of the company, which exercises its powers in accordance with the Company Law.
Under the Company Law, theshareholders’ general meeting exercises the following principal powers:
• to decide on thecompany’s operational policies and investment plans;
• to elect or remove the directors and supervisors (other than the supervisor representative of the employees of the company) and to decide on matters relating to the remuneration of directors and supervisors;
• to examine and approve reports of the board of directors;
• to examine and approve reports of the board of supervisors;
• to examine and approve thecompany’s proposed annual financial budget and final accounts;
• to examine and approve thecompany’s proposals for profit distribution plans and losses recovery plans;
• to decide on any increase or reduction of thecompany’s registered capital;
• to decide on the issue of bonds by the company;
• to decide on issues such as merger, division, dissolution and liquidation of the company and other matters;
• to amend thecompany’s articles of association; and
• other powers as provided for in the articles of association.
Shareholders’annual general meetings are required to be held once every year. Under the Company Law, we are required to hold an extraordinaryshareholders’general meeting within two months after the occurrence of any of the following:
• the number of directors is less than the number stipulated by the law or less than two-thirds of the number specified in the articles of association;
• the aggregate losses of the company which are not recovered reach one-third of thecompany’s total paid-in share capital;
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS• when shareholders alone or in aggregate holding10% or more of thecompany’s shares request the convening of an extraordinary general meeting;
• whenever the board of directors deems necessary;
• when the board of supervisors so requests; or
• other circumstances as provided for in the articles of associations.
Under the Company Law,shareholders’general meetings shall be convened by the board of directors, and presided over by the chairman of the board of directors. In the event that the chairman is incapable of performing or does not perform his duties, the meeting shall be presided over by the vice chairman. In the event that the vice chairman is incapable of performing or not performing his duties, a director nominated by more than half of directors shall preside over the meeting.
Where the board of directors is incapable of performing or not performing its duties of convening theshareholders’ general meeting, the board of supervisors shall convene and preside over such meeting in a timely manner. In case the board of supervisors fails to convene and preside over such meeting, shareholders alone or in aggregate holding more than10% ofthecompany’ssharesfor90daysconsecutivelymayunilaterallyconveneandpresideoversuch meeting.
Under the Company Law, notice ofshareholders’general meeting shall state the time and venue of and matters to be considered at the meeting and shall be given to all shareholders 20 days before the meeting. Notice of our extraordinaryshareholder’s general meetings shall be given to all shareholders 15 days prior to the meeting. Under the Special Regulations and the Mandatory Provisions, written notice shall be delivered to all the registered shareholders 45 days before the meeting, and the matters to be considered at and time and venue of the meeting shall be specified. The confirmation letters of our shareholders planning to attend the meeting shall be delivered to us 20 days in advance of the meeting.
ThereisnospecificprovisionintheCompanyLawregardingthenumberofshareholders’ constituting a quorum in ashareholders’meeting. Pursuant to the Special Regulations and the Mandatory Provisions,shareholder’s general meeting may be convened where the number of voting shares held by the shareholders present at the meeting reaches one-half or more of thecompany’s total voting shares. If this is not attained, the company shall within five days notify the shareholders again of the matters to be considered at and time and venue of the meeting to our Shareholders in the form of public announcement. The company may convene theshareholders’ general meeting after such public announcement. Pursuant to Special Regulations, modification or abrogation of rights conferred to any class of shareholders must be passed both by special resolution ofshareholders’ general meeting and by class meeting convened respectively by shareholders of the affected class.
Pursuant to Special Regulations, where the company convenes annualshareholder’s general meeting, shareholders holding more than5% of voting shares have a right to submit to the company new proposals, in which the matters falling within the scope ofshareholder’s general meeting shall be placed in the agenda of the meeting.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Under the Company Law, shareholders present atshareholders’general meeting have one vote for each share they hold, save that shares held by the company are not entitled to any voting rights.
Pursuant to the provisions of the articles of association or a resolution of theshareholders’general meeting, the accumulative voting system may be adopted for the election of directors and supervisors at theshareholders’ general meeting. Under the accumulative voting system, each share shall be entitled to votes equivalent to the number of director or supervisor to be elected at theshareholders’general meeting and shareholders may consolidate their voting rights when casting a vote.
Pursuant to the Company Law and the Mandatory Provisions, resolutions of theshareholders’general meeting must be adopted by more than half of the voting rights held by the shareholders present at the meeting. However, resolutions of theshareholders’ general meeting regarding the following matters must be adopted by more than two-third of the voting rights held by the shareholders present at the meeting: (i) amendments to the articles of association; (ii) the increase or decrease of registered capital; (iii) the issue of any types of shares, warrants or other similar securities; (iv) the issue of debentures; (v) the merger, separation, dissolution, liquidation or change in the form of the company; (vi) other matters considered by theshareholders’general meeting, by way of an ordinary resolution, to be of a nature which may have a material impact on the company and should be adopted by a special resolution.
Under the Company Law, meeting minutes shall be prepared in respect of decisions on matters discussed at theshareholders’ general meeting. The chairman of the meeting and directors attending the meeting shall sign on the minutes. The minutes shall be kept together with theshareholders’ attendance register and the proxy forms.
Board
Under the Company Law, a joint stock limited company shall have a board of directors, which shall consist of five to nineteen members. Members of the board of directors may include representatives of the employees of the company, who shall be democratically elected by thecompany’s staff at the staff representative assembly, general staff meeting or otherwise. The term of a director shall be stipulated in the articles of association, provided that no term of office shall last for more than three years. Directors may serve consecutive terms if re-elected. Directors shall continue to perform his duties in accordance with the laws, administrative regulations and articles of association until a re-elected director takes office, if re-election is not conducted in a timely manner upon the expiry of his term of office or if the resignation of directors results in the number of directors being less than the statutory requirement.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Under the Company Law, the board of directors mainly exercises the following powers:• to convene theshareholders’ general meetings and report on its work to theshareholders’ general meetings;
• to implement the resolutions passed inshareholders’ general meetings;
• to decide on thecompany’s business plans and investment proposals;
• to formulate thecompany’s proposed annual financial budget and final accounts;• to formulate thecompany’s profit distribution proposals and loss recovery proposals;
• to formulate proposals for the increase or reduction of thecompany’s registered capital and the issuance of corporate bonds;
• to prepare plans for the merger, division, dissolution and change in the form of the company;
• to formulate thecompany’s basic management system; and
• to exercise any other power under the articles of association.
Board Meetings
Under the Company Law, meetings of the board of directors shall be convened at least twice a year. Notice of meeting shall be given to all directors and supervisors ten days before the meeting. Interim Board meetings may be proposed to be convened by shareholders representing more than10% of voting rights, more than one-third of the directors or the supervisors. The chairman shall convene and preside over such meeting within ten days after receiving such proposal. Meetings of the board of directors shall be held only if half or more of the directors are present. Resolutions of the board of directors must be passed by more than half of all directors. Each director shall have one vote for resolutions to be approved by the board of directors. Directors shall attend board meetings in person. If a director is unable to attend a board meeting, he may appoint another director by a written power of attorney specifying the scope of the authorisation to attend the meeting on his behalf.
If a resolution of the board of directors violates the law, administrative regulations or the articles of association, and as a result of which the company sustains serious losses, the directors participating in the resolution are liable to compensate the company. However, if it canbeprovedthatadirectorexpresslyobjectedtotheresolutionwhentheresolutionwasvoted on, and that such objection was recorded in the minutes of the meeting, such director may be relieved from that liability.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Chairman of the Board
UndertheCompanyLaw,theboardofdirectorsshallappointachairmanandmayappoint a vice chairman. The chairman and the vice chairman are elected with approval of more than half of all the directors. The chairman shall convene and preside over board meetings and examine the implementation of board resolutions. The vice chairman shall assist in the work of the chairman. In the event that the chairman is incapable of performing or not performing his duties, the duties shall be performed by the vice chairman. In the event that the vice chairmanisincapableofperformingornotperforminghisduties,adirectornominatedbymore than half of the directors shall perform his duties.
Qualification of Directors
The Company Law provides that the following persons may not serve as a director:
• person who is unable or has limited ability to undertake any civil liabilities;
• a person who has been convicted of an offence of bribery, corruption, misappropriation of property, or the destruction of socialist market economy order; orwhohasbeendeprivedofhispoliticalrightsduetohiscrimes,ineachcasewhere less than five years have elapsed since the date of completion of the sentence;
• a person who has been a former director, factory manager or manager of a company or enterprise that has entered into insolvent liquidation and who was personally liable for the insolvency of such company or enterprise, where less than three years have elapsed since the date of the completion of the liquidation of the company or enterprise;
• a person who has been a legal representative of an enterprise that has had its business licence revoked because of unlawful operations and has been ordered to close down by law and the person was personally responsible for such revocation or shutdown, where less than three years have elapsed since the date of such revocation; or
• apersonwhoisliableforarelativelylargeamountofdebtwhichhasnotbeenrepaid when due.
Other circumstances under which a person is disqualified from acting as a director are set out in the Mandatory Provisions.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Board of Supervisors
Ajointstocklimitedcompanyshallhaveaboardofsupervisorscomposedofnotlessthan three members. The board of supervisors is made up of representatives of the shareholders and an appropriate proportion of representatives of the employees of the company. The actual proportion shall be stipulated in the articles of association, provided that the proportion of representatives of the employees shall not be less than one-third of the supervisors. Representatives of the employees of the company in the board of supervisors shall be democratically elected by the employees at theemployees’ representative assembly,employees’ general meeting or otherwise.
The directors and senior management officers may not act concurrently as supervisors. The board of supervisors shall appoint a chairman and may appoint a vice chairman. The chairman and the vice chairman of the board of supervisors are elected with approval of more than half of all the supervisors. The chairman of the board of supervisors shall convene and preside over the board of supervisors meetings. In the event that the chairman of the board of supervisors is incapable of performing or not performing his duties, the vice chairman of the board of supervisors shall convene and preside over the board of supervisors meetings. In the event that the vice chairman of the board of supervisors is incapable of performing or not performing his duties, a supervisor nominated by more than half of the supervisors shall convene and preside over the board of supervisors meetings.
Each term of office of a supervisor is three years and he or she may serve consecutive terms if re-elected. A supervisor shall continue to perform his duties in accordance with the laws, administrative regulations and articles of association until a duly re-elected supervisor takes office, if re-election is not conducted in a timely manner upon the expiry of his term of office or if the resignation of supervisors results in the number of supervisors being less than the statutory requirement.
The board of supervisors exercises the following powers:
• to review thecompany’s financials;
• to supervise the directors and senior management officers in their performance of their duties and to propose the removal of directors and officers who have violated laws, regulations, the articles of association orshareholders’ resolution;
• when the acts of directors and senior management officers are harmful to thecompany’s interests, to require correction of those acts;
• to propose the convening of extraordinaryshareholders’ general meetings and to convene and preside overshareholders’ general meetings when the board of directors fails to perform the duty of convening and presiding overshareholders’ general meeting under this law;
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS• make proposals for resolutions toshareholders’ general meeting;
• to initiate proceedings against directors and senior management officers; and
• other powers specified in the articles of association.
Supervisors may attend board meetings and make enquiries or proposals in respect of board resolutions. The board of supervisors may initiate investigations into any irregularities identified in the operation of the company and, where necessary, may engage an accountant to assist in their work at thecompany’s expense.
Manager and Senior Management Officers
Under the Company Law, a company shall have a manager who shall be appointed or removed by the board of directors. The manager shall report to the board of directors and may exercise the following powers:
• supervising the business and administration of the company and arranging for the implementation of resolutions of the board of directors;
• arranging for the implementation of thecompany’s annual business plans and investment proposals;
• formulating the basic administration system of the company;
• formulating thecompany’s detailed rules;
• recommending the appointment and dismissal of deputy managers and person-in- charge of finance;
• appointing or dismissing other administration officers (other than those required to be appointed or dismissed by the board of directors); and
• other powers conferred by the board of directors or the articles of association.
Other provisions of the articles of association concerning themanager’s powers shall also be complied with. The manager shall be in attendance at board meetings.
According to the Company Law, senior management officers shall mean the manager, deputy manager(s), person-in-charge of finance, board secretary (in case of a listed company) of a company and other personnel as stipulated in the articles of association.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Duties of Directors, Supervisors and Senior Management Officers
Directors, supervisors and senior management officers of the company are required under the Company Law to comply with the relevant laws, regulations and the articles of association, and have the fiduciary and diligent duties to the company. Directors, supervisors and senior management officers are prohibited from abusing their powers to accept bribes or other unlawful income and from embezzlement of thecompany’s properties. Directors and senior management officers are prohibited from:
• misappropriation of company capital;
• depositing company capital into accounts under his own name or the name of other individuals;
• loaning company funds to others or providing guarantees in favour of others supported by thecompany’s properties in violation of the articles of association or without prior approval of theshareholders’ general meeting or board of directors;• entering into contracts or deals with the company in violation of the articles of association or without prior approval of theshareholders’ general meeting;
• using their position and powers to procure business opportunities for themselves or others that should have otherwise been available to the company or operating for their own benefits or managing on behalf of others businesses similar to that of the company without prior approval of theshareholders’ general meeting;
• accepting and possessing the commissions paid by others for transactions conducted with the company;
• unauthorised disclosure of confidential business information of the company; or• other acts in violation of their duty of loyalty to the company.
Adirector, supervisor or senior management officer who contravenes any law, regulation or thecompany’s articles of association in the performance of his duties resulting in any loss to the company shall be personally liable to the company.
Finance and Accounting
Under the Company Law, a company shall establish financial and accounting systems according to laws, administrative regulations and the regulations of the financial department of the State Council and shall at the end of each financial year prepare a financial report which shall be audited by an accounting firm as required by law. Thecompany’s financial and accounting report shall be prepared in accordance with provisions of the laws, administrative regulations and the regulations of the financial department of the State Council.
– III-16–
APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Pursuant to Company Law, the company shall deliver its financial statements to all the shareholderswithinthetimelimitstipulatedinthearticlesofassociationandmakeitsfinancial statements available at the company for inspection by the shareholders at least 20 days before the convening of an annual general meeting of shareholders. It must also publish its financial statements.
When distributing eachyear’s after-tax profits, it shall set aside10% of its after-tax profits into a statutory reserve fund (except where the fund has reached50% of its registered capital).
Ifitsstatutoryreservefundisnotsufficienttomakeuplossesofthepreviousyear,profits of the current year shall be applied to make up losses before allocation is made to the statutory reserve fund pursuant to the above provisions.
After allocation of the statutory reserve fund from after-tax profits, it may, upon a resolution passed by theshareholders’ general meeting, allocate discretionary reserve fund from after-tax profits.
Theremainingafter-taxprofitsaftermakinguplossesandallocationofreservefundmust be distributed in proportion to the number of shares held by the shareholders, unless otherwise stipulated in the articles of association.
Shares held by the company shall not be entitled to any distribution of profit.
The premium received through issuance of shares at prices above par value and other incomes required by the finance authority of the State Council to be allocated to the capital reserve fund shall be allocated to thecompany’s capital reserve fund.
Our reserve fund shall be applied to make up losses of the company, expand its business operations or be converted to increase the registered capital of the company. However, the capital reserve fund cannot be applied to make good thecompany’s losses. Upon the conversion of statutory reserve fund into capital, the balance of the statutory reserve fund shall not be less than25% of the registered capital of the company before such conversion.
Thecompanyshallhavenootheraccountingbooksexceptthestatutoryaccountingbooks. Its assets shall not be deposited in any accounts opened in the name of an individual.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Appointment and Retirement of Accounting Firms
Pursuant to the Company Law, the appointment or dismissal of accounting firms responsible for the audit business of the company shall be determined byshareholders’general meeting or board of directors in accordance with provisions of articles of association. The accounting firm should be allowed to make representations when theshareholders’ general meeting or board of directors conducts a vote on the dismissal of the accounting firm. The company should provide true and complete accounting evidences, books, financial and accounting reports and other accounting data to the accounting firm that we employ without any refusal, withholding and misrepresentation.
The Special Regulations require us to employ an independent accounting firm complying with the relevant regulations to audit our annual report and review and check our other financial reports. The accountingfirm’s term of office shall commence from their appointment at ashareholders’ annual general meeting to the end of the nextshareholders’ annual general meeting.
Distribution of Profits
According to the Company Law, a company shall not distribute profits before losses are covered and the statutory common reserve is drawn. Under the Mandatory Provisions, a company shall appoint receiving agents on behalf of holders of the overseas listed and foreign invested shares to receive on behalf of such shareholders dividends and other distributions payable in respect of their overseas listed and foreign invested shares.
Amendments to Articles of Association
PursuanttotheCompanyLaw,theresolutionofashareholders’generalmeetingregarding any amendment to acompany’s articles of association requires affirmative votes by at least two-thirds of the votes held by shareholders attending the meeting. Pursuant to Mandatory Provisions, the company may amend its articles of association according to the laws, administrative regulations and our Articles of Association. The amendment of articles of association involving content of Mandatory Provisions will only be effective upon approval of the department in charge of company examination and approval and the securities regulatory department authorised by the State Council. It must process the registration of changes involving matters of company registration in accordance with laws.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Dissolution and Liquidation
AccordingtotheCompanyLaw,acompanyshallbedissolvedbyreasonofthefollowing: (i) the term of its operations set down in the articles of association has expired or other events of dissolution specified in the articles of association have occurred; (ii) theshareholders’ general meeting have resolved to dissolve the company; (iii) the company is dissolved by reason of a merger or division; (iv) the business licence is revoked or the company is orderedtoclosedownorbedissolved;or(v)thecompanyisdissolvedbythepeople’scourtinresponse to the request of shareholders holding our shares that represent more than10% of the voting rights of all its shareholders, on the grounds that the company suffers significant hardships in its operation and management that cannot be resolved through other means, and that the ongoing existence of the company would bring significant losses for shareholders.
In the event of (i) above, it may carry on its existence by amending its articles of association.Theamendmentofourarticlesofassociationinaccordancewithprovisionssetout above shall require approval of more than two-thirds of voting rights of shareholders attending ashareholders’ general meeting.
Where the company is dissolved in the circumstances described in subparagraphs (i), (ii), (iv), or (v) above, a liquidation group shall be established and the liquidation process shall commence within 15 days after the occurrence of an event of dissolution.
The members of thecompany’s liquidation group shall be composed of its directors or the personnel appointed by theshareholders’ general meeting. If a liquidation group is not established within the stipulated period, creditors can apply to thepeople’s court, requestingthecourttoappointrelevantpersonneltoformtheliquidationgroup.Thepeople’scourtshould accept such application and form a liquidation group to conduct a liquidation in a timely manner.
The liquidation group shall exercise the following powers during the liquidation period:• to handle thecompany’s assets and to prepare a balance sheet and an inventory of the assets;
• to notify creditors through notice or public announcement;
• to deal with thecompany’s outstanding businesses related to liquidation;
• to pay any tax overdue as well as tax amounts arising from the process of liquidation;
• to claim credits and pay off debts;
• to handle thecompany’s remaining assets after its debts have been paid off; and• to represent the company in civil lawsuits.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS The liquidation group shall notify thecompany’s creditors within ten days after its establishment,andissuepublicnoticesinthenewspaperswithin60days.Acreditorshalllodge his claim with the liquidation group within 30 days after receiving notification, or within 45 days of the public notice if he did not receive any notification.Acreditor shall state all matters relevant to his creditor rights in making his claim and furnish evidence. The liquidation group shall register such creditor rights. The liquidation group shall not make any debt settlement to creditors during the period of claim.
Upon liquidation of our properties and the preparation of the balance sheet and inventory of assets, the liquidation group shall draw up a liquidation plan to be submitted to theshareholders’ general meeting orpeople’s court for confirmation.
Thecompany’s remaining assets after payment of liquidation expenses, wages, social insurance expenses and statutory compensation, outstanding taxes and our debt shall be distributed to shareholders according to their shareholding proportion. It shall continue to exist during the liquidation period, although it can only engage in any operating activities that are related to the liquidation.Thecompany’s properties shall not be distributed to the shareholders before repayments are made in accordance to the foregoing provisions.
Uponliquidationofthecompany’spropertiesandthepreparationofthebalancesheetand inventoryofassets,iftheliquidationgroupbecomesawarethatwedonothavesufficientassets to meet its liabilities, it must apply to thepeople’s court for a declaration for bankruptcy.
Following such declaration, the liquidation group shall hand over all affairs of the liquidation to thepeople’s court.
Uponcompletionoftheliquidation,theliquidationgroupshallsubmitaliquidationreporttotheshareholders’generalmeetingorthepeople’scourtforverification.Thereafter,thereport shall be submitted to our registration authority in order to cancel thecompany’s registration, and a public notice of its termination shall be issued. Members of the liquidation group are required to discharge their duties honestly and in compliance with the relevant laws. Members oftheliquidationgroupshallbeprohibitedfromabuseoftheirpowerstoacceptbribesorother unlawful income and from misappropriating thecompany’s properties.
A member of the liquidation group is liable to indemnify the company and its creditors in respect of any loss arising from his wilful or material default.
Overseas Listing
According to the Special Regulations, a company must obtain the approval of the CSRCtolistitssharesoverseas.Acompany’splantoissueoverseaslistedandforeigninvestedshares and domestic shares which has been approved by the CSRC may be implemented by the board of directors of the company by way of separate issues within 15 months after approval is obtained from the CSRC.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Loss of Share Certificates
If a share certificate in registered form is either lost, stolen or destroyed, the respective shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to apeople’s court for a declaration that such certificate will no longer be valid. Thepeople’s court declares the invalidity of such certificate, and the shareholder may apply to the company for a replacement certificate.Aseparate procedure regarding the loss of overseas listed and foreign invested share certificates is provided for in the Mandatory Provisions.
Merger and Demerger
When companies merge, the creditor rights and debts of the merging parties shall be assumed by the surviving company or the new company. When a company demerges, its assets must be divided accordingly and a balance sheet and inventory of assets must be drawn up. Unless otherwise agreed with a creditor, obligations in respects of the liabilities before the demerger of the company shall be jointly and severally borne by the demerged companies. Changes in registrable particulars of the companies caused by merger or demerger must be registered withcompany’s registration authorities. Cancellation of a company should be registered in accordance with the law when a company is dissolved. Incorporation of a company shall be registered when a new company is incorporated.
SECURITIES LAW AND REGULATIONS AND REGULATORY REGIMES
The PRC has promulgated a number of regulations that relate to the issue and trading of our shares and disclosure of information by us. In October 1992, the State Council established the Securities Committee and the CSRC. The Securities Committee is responsible for coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities-related institutions in the PRC and administering the CSRC. The CSRC is the regulatory arm of the Securities Committee and is responsible for the drafting of regulatory provisions of securities markets, supervising securities companies, regulating public offers of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities-related statistics and undertaking relevant research and analysis. In April 1998, the State Council consolidated the two departments and reformed the CSRC.
The Provisional Regulations Concerning the Issuance andTrading of Shares deal with the application and approval procedures for public offerings of equity securities, trading in equity securities, the acquisition of listed companies, deposit, clearing and transfer of listed equity securities, the disclosure of information with respect to a listed company, investigation, penalties and dispute settlement.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS On 25 December 1995, the State Council promulgated the Regulations of the State Council Concerning Domestic Listed Foreign Shares of Joint Stock Limited Companies (
). These regulations deal mainly with the issue, subscription, trading and declaration of dividends and other distributions of domestic listed and foreign invested shares and disclosure of information of joint stock limited companies having domestic listed and foreign invested shares.
The PRC Securities Law took effect on 1 July 1999 and was revised as of 28August 2004 and 27 October 2005, respectively. This is the first national securities law in the PRC, and it is divided into 12 chapters and 240 articles regulating, among other things, the issue and trading of securities, takeovers by listed companies, securities exchanges, securities companies and the duties and responsibilities of the StateCouncil’s securities regulatory authorities. The PRC Securities Law comprehensively regulates activities in the PRC securities market.Article 238 of the PRC Securities Law provides that domestic enterprises must obtain prior approval from the StateCouncil’s regulatory authorities to list its shares outside the PRC. Currently, the issue and trading of foreign issued shares (including shares) are mainly governed by the rules and regulations promulgated by the State Council and the CSRC.
ARBITRATION AND ENFORCEMENT OF ARBITRALAWARDS
TheArbitration Law of thePeople’s Republic of China ( ) (the “ArbitrationLaw”)waspassedbytheStandingCommitteeoftheNPCon31August1994and became effective on 1 September 1995. Under the Arbitration Law, an arbitration committee may, before the promulgation by the PRC Arbitration Association of arbitration regulations, formulate interim arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have by agreement provided arbitration as the method for dispute resolution, thepeople’s court will refuse to handle the case except when the arbitration agreement is declared invalid.
The Listing Rules and the Mandatory Provisions require an arbitration clause to be included in the articles of association of an issuer and, in the case of the Listing Rules, also in contracts between the issuer and each of its directors and supervisors, to the effect that whenever any disputes or claims arise (i) between holders of shares and the issuer; and (ii) between holders of shares and theissuer’s directors, supervisors, manager or other senior management officers. Matters in arbitration include any disputes or claims in relation to theissuer’saffairsorasaresultofanyrightsorobligationsarisingunderitsarticlesofassociation, the Company Law or other relevant laws and administrative regulations.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, must comply with the arbitration. Disputes in respect of the definition of shareholder and disputes in relation to theissuer’s register of shareholders need not be resolved by arbitration.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission (the “CIETAC”) in accordance with its rules or the Hong Kong International Arbitration Centre (the “HKIAC”) in accordance with its SecuritiesArbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If the claimant elects for arbitration to be carried out at the Hong Kong InternationalArbitration Centre, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Centre.
Under the Arbitration Law and PRC Civil Procedure Law, an arbitral award is final and binding on the parties. If a party fails to comply with an award, the other party to the award may apply to thepeople’s court for enforcement. Apeople’s court may refuse to enforce an arbitral award made by an arbitration commission if there is any procedural or membership irregularity specified by law or the award exceeds the scope of the arbitration agreement or is outside the jurisdiction of the arbitration commission.
Aparty seeking to enforce an arbitral award of PRC arbitration panel against a party who, or whose property, is not within the PRC, may apply to a foreign court with jurisdiction over the case for enforcement. Similarly, an arbitral award made by a foreign arbitration body may be recognised and enforced by the PRC courts in accordance with the principles of reciprocity or any international treaty concluded or acceded to by the PRC. The PRC acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) adopted on 10 June 1958 pursuant to a resolution of the Standing Committee of the NPC passed on 2 December 1986. The New York Convention provides that all arbitral awards made in a state which is a party to the New York Convention must be recognised and enforced by other parties to the New York Convention, subject to their right to refuse enforcement under certain circumstances, including where the enforcement of the arbitral awardisagainstthepublicpolicyofthestatetowhichtheapplicationforenforcementismade. It was declared by the Standing Committee of the NPC simultaneously with the accession of the PRC that (i) the PRC will only recognise and enforce foreign arbitral awards on the principle of reciprocity; and (ii) the PRC will only apply the NewYork Convention in disputes considered under PRC laws to arise from contractual and non-contractual mercantile legal relations. On 18 June 1999, an arrangement was made between Hong Kong and the SupremePeople’s Court of the PRC for the mutual enforcement of arbitral awards. Under the arrangement, awards made by PRC arbitral authorities recognised under the Arbitration Ordinance of Hong Kong can be enforced in Hong Kong, Hong Kong arbitration awards are also enforceable in China.
FOREIGN EXCHANGE CONTROL
Theforeignexchangecontrollegalsystemmainlyincludein thePRC(i)thePRCForeign Exchange Control Regulations ( ), which were promulgated by the State Council on 29 January 1996, became effective on 1 April 1996 and were subsequently amended on 14 January 1997 and August 5, 2008; and (ii) the Regulations on Foreign Exchange Settlement, Sale and Payments ( ), which were promulgated by the PBOC on 20 June 1996 and became effective on 1 July 1996.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Foreign exchange revenue under the current account may be retained or sold to financial institutions operating a foreign exchange sale or settlement business. Before retaining foreign exchange revenue under the capital account or selling it to any financial institution operating a foreign exchange sale or settlement business, the approval of the competent foreign exchange administrative authorities must be obtained, unless otherwise provided by the State.
HONG KONG LAWS AND REGULATIONS
Summary of material differences between Companies Ordinance and Company Law
The Hong Kong law applicable to a company incorporated in Hong Kong is based on the Companies Ordinance and supplemented by common law and rules of equity that apply to Hong Kong. Our Company, which is a joint stock limited company established in the PRC, is governed by the Company Law and all other rules and regulations promulgated pursuant to the Company Law.
Set out below is a summary of certain material differences between the Companies Ordinance applicable to a company incorporated in Hong Kong and the Company Law applicable to a joint stock limited company incorporated and existing under the Company Law. This summary is, however, not intended to be an exhaustive comparison.
Ongoing concern
Under the Companies Ordinance, a company with share capital is incorporated and will subsist as an independent body corporate after the Registrar of Companies in Hong Kong has issued a certificate of incorporation. A company may be incorporated as a public company or a private company. Pursuant to the Companies Ordinance, the articles of association of a private company incorporated in Hong Kong shall contain certain pre-emptive provisions. A publiccompany’s articles of association does not contain such pre-emptive provisions.
Under the Company Law, a joint stock limited company may be incorporated by promotion or public subscription. A joint stock limited company must have a minimum registered capital of RMB5 million, or a higher amount as may otherwise be required by laws and regulations. Under the Company Law, the monetary contributions by all the shareholders must not be less than30% of the registered capital.
Hong Kong law does not prescribe any minimum capital requirement for a Hong Kong company. There is no minimum monetary contribution restriction on a Hong Kong company under Hong Kong law.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Share capital
Under Hong Kong law, the authorised share capital of a Hong Kong company is the amount of share capital which the company is authorised to issue and a company is not bound to issue the entire amount of its authorised share capital. The authorised share capital may be larger than its issued share capital. Hence, the directors of a Hong Kong company may, with thepriorapprovaloftheshareholders(ifrequired),causethecompanytoissuenewshares.The Company Law does not provide for authorised share capital other than registered capital. The registered capital of a joint stock limited company is the amount of the issued share capital. Any increase in registered capital must be approved by the shareholders in a general meeting and, where applicable, by the relevant PRC Governmental and regulatory authorities.
Under the Securities Law, a company which is authorised by the relevant securities administration authority to list its shares on a stock exchange must have a registered capital of not less than RMB30 million. Hong Kong law does not prescribe any minimum capital requirements for companies incorporated in Hong Kong.
Under the Company Law, shares may be subscribed for in the form of money or non-monetary assets that may be valued in currency and lawfully transferable. For non- monetary assets to be used as capital contributions, appraisals and verification must be carried outtoensurenoovervaluationorunder-valuationoftheassets.Contributionsinmonetaryform shall not be less than30% of a joint stock limitedcompany’s registered capital. There is no such restriction on a Hong Kong company under Hong Kong law.
Restrictions on shareholding and transfer of shares
Under PRC law, the domestic shares in the share capital of a joint stock limited company which are denominated and subscribed for in Renminbi may only be subscribed or traded by domestic investors of the PRC qualified foreign institutional investors or eligible foreign strategic investors. The overseas listed foreign shares issued by a joint stock limited company which are denominated in Renminbi but subscribed for in a currency other than Renminbi, may only be subscribed for, and traded by, investors from Hong Kong, Macau and Taiwan or any country and territory outside the PRC, as well as other qualified institutions.
Under the Company Law, shares in a joint stock limited company held by its promoters cannot be transferred within one year after the date of establishment of the company. Shares in issue prior to thecompany’s public offering cannot be transferred within one year from the listing date of the shares on the Hong Kong Stock Exchange. Shares in a joint stock limited company held by its directors, supervisors and managers and transferred each year during their term of office shall not exceed25% of the total shares they held in the company, and shares held by them in the company cannot be transferred within one year from the listing date of the shares, and also cannot be transferred within half a year after the said personnel has left office. The articles of association may set other restrictive requirements on the transfer of thecompany’s shares held by its directors, supervisors and officers. There are no such restrictions on shareholdings and transfers of shares under Hong Kong law.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Financial assistance for acquisition of shares
Although the Company Law does not contain any provision prohibiting or restricting a joint stock limited company or its subsidiaries from providing financial assistance for the purpose of an acquisition of its own or its holdingcompany’s shares, the Mandatory Provisions contain certain restrictions on a company and its subsidiaries providing such financial assistance similar to those under the Companies Ordinance.
Variation of class rights
The Company Law makes no specific provision relating to variation of class rights. However, the Company Law states that the State Council can promulgate regulations relating to other kinds of shares. The Mandatory Provisions contain elaborate provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedures required to be followed regarding variations of class rights. These provisions have been incorporated in the Articles of Association, which are summarised in Appendix IV to this listing document.
Under the Companies Ordinance, no rights attached to any class of shares can be varied except (a) with the approval of a special resolution of the holders of the relevant class at a separate meeting; (b) with the consent in writing of the holders of three-fourths in nominal value of the issued shares of the class in question; (c) by agreement of all the members of a Hong Kong company; or (d) if there are provisions in the articles of association relating to the variation of those rights, then in accordance with those provisions.
Our Company (as required by the Hong Kong Listing Rules and the Mandatory Provisions) has adopted in the Articles of Association provisions protecting class rights in a similar manner to those under Hong Kong law. Holders of overseas listed foreign shares and domestic shares are defined in theArticles ofAssociation as different classes of shareholders, provided however that the special procedures for approval by separate class shareholders shall notapplytothefollowingcircumstances:(a)theseparateorsimultaneousissuanceofdomestic shares and overseas listed foreign shares by the Company, once every 12-month period, pursuant to aShareholders’ special resolution, of not more than20% of each of the issued domestic shares and issued overseas listed foreign shares as of the date of theShareholders’ special resolution; (b) the plan for the issue of domestic shares and overseas listed foreign shares upon its establishment is implemented within 15 months following the date of approval by the CSRC; and (c) upon approval by the CSRC, the transfer of shares to overseas investors by holders of domestic shares to be listed and traded in foreign markets.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Directors
The Company Law, unlike the Companies Ordinance, does not contain any requirements relating to the declaration made by directors of the interests in material contracts, restrictions ondirectors’ authority in making major dispositions, restrictions on companies providing certain benefits, and prohibitions against compensation for loss of office withoutshareholders’ approval. The Company Law provides restrictions on interested directors voting on the resolution at a meeting of the board of directors when such resolution relates to an enterprise which the director is interested or connected. The Mandatory Provisions, however, contain requirements and restrictions on major dispositions and specify the circumstances under which a director may receive compensation for loss of office.
Supervisory committee
Under the Company Law, the board of directors and managers of a joint stock limited company is subject to the supervision and inspection of a supervisory committee but there is no mandatory requirement for the establishment of a supervisory committee for a company incorporated in Hong Kong. The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of his powers, to act in good faith and honestly in what he considers to be in the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise under comparable circumstances.
Derivative action by minority shareholders
Hong Kong law permits minority shareholders to start a derivative action on behalf of a company against directors who have committed a breach of their fiduciary duties to the company, if such directors control a majority of votes at ashareholders’ general meeting, thereby effectively preventing a company from suing the directors in breach of their duties in its own name.The Company Law gives shareholders of a joint stock limited company the right to initiate proceedings in thepeople’s court to restrain the implementation of any resolution passed by the shareholders in a general meeting, or by the board of directors, that violates any law or infringes the lawful rights and interests of the shareholders. The Company Law also provides that the shareholder can initiate proceedings if the director or senior management of the company violates laws, administrative regulations or articles of association of the company and thus infringes theshareholder’s interest. The Mandatory Provisions further provide remedies to the company against directors, supervisors and senior management in breach of their duties to the company. In addition, every director and supervisor of a joint stock limited company applying for a listing of its foreign shares on the Hong Kong Stock Exchange is required to give an undertaking in favour of the company to comply with thecompany’s articles of association. This allows minority shareholders to act against the directors and supervisors in default.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Protection of minorities
Under Hong Kong law, a shareholder who complains that the affairs of a company incorporated in Hong Kong are conducted in a manner unfairly prejudicial to his interests may petition to court to either wind up the company or make an appropriate order regulating the affairs of the company. In addition, on the application of a specified number of members, the Financial Secretary of the Hong Kong Government may appoint inspectors who are given extensive statutory powers to investigate the affairs of a company incorporated in Hong Kong. The Company Law provides that where any company encounters any serious difficulty in its operationsormanagementsuchthatthesubsistenceofthecompanywillresultinseriouslosses for the shareholders and such difficulty cannot be resolved by any other means, the shareholders holding10% or more of the voting rights of all the issued shares of the company may plead thepeople’s court to dissolve the company. The Mandatory Provisions, however, contain provisions to the effect that a controlling shareholder may not exercise its voting rights torelieveadirectororsupervisorofhisdutytoacthonestlyinthebestinterestsofthecompany or to approve the expropriation by a director or supervisor of thecompany’s assets or the individual rights of other shareholders which is prejudicial to the interests of thecompany’s shareholders generally or certain shareholders in particular.
Notice ofshareholders’ meetings
UndertheCompanyLaw,noticeofashareholders’generalmeetingmustbegivennotless than twenty (20) days before the meeting, or, in the case of a company having bearer shares, a public announcement of ashareholders’ general meeting must be made at least thirty (30) days prior to it being held. Under the Special Regulations and the Mandatory Provisions, forty-five (45)days’ written notice must be given to all shareholders and shareholders who wish to attend the meeting must reply in writing twenty (20) days before the date of the meeting. For a company incorporated in Hong Kong, the minimum notice periods of a general meeting convened for passing an ordinary resolution and a special resolution are fourteen (14) days and twenty-one (21) days, respectively. The notice period for an annual general meeting is twenty-one (21) days.
Quorum forshareholders’ meetings
Under Hong Kong law, the quorum for a general meeting is two members unless otherwise provided for by the articles of association of the company. For one member companies, one member will be a quorum.
The Company Law does not specify any quorum requirement for ashareholders’general meeting, but the Special Regulations and the Mandatory Provisions provide that acompany’s general meeting can be convened when replies to the notice of that meeting have been received from shareholders whose shares represent50% of the voting rights in the company at least twenty (20) days before the proposed date of the meeting. If such50% level is not achieved, the company shall within five days notify its shareholders by public announcement and theshareholders’ general meeting may be held thereafter.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Voting
Under Hong Kong law, an ordinary resolution is passed by a simple majority of votes cast by members present in person or by proxy at ashareholders’ general meeting and a special resolution is passed by a majority of not less than three-fourths of votes cast by members present in person or by proxy at ashareholders’general meeting. Under the Company Law, the passing of any resolution requires more than one half of the votes cast by shareholders present in person or by proxy at ashareholders’ general meeting except in cases of proposed amendment to the articles of association, increase or reduction of share capital, and merger, demerger or dissolution of a joint stock limited company or changes to the company status, which require two-thirds or more of votes cast by shareholders present at ashareholders’ general meeting.
Financial disclosure
A company is required under the Company Law to make available at its office for inspection by shareholders its annual balance sheet, profit and loss account, statements of changes in financial position and other relevant annexes twenty (20) days before the annual general meeting of shareholders. In addition, a company established by way of public subscription under the Company Law must publish its financial position. The annual balance sheet has to be verified by registered accountants. The Companies Ordinance requires a company to send to every shareholder a copy of its balance sheet,auditors’ report anddirectors’report,whicharetobelaidbeforethecompanyinitsannualgeneralmeeting,notless than twenty-one (21) days before such meeting. A company is required under the PRC law to prepare its financial statements in accordance with the PRC accounting standards. The Mandatory Provisions require that the company must, in addition to preparing accounts according to the PRC standards, have its accounts prepared and audited in accordance with International Accounting Standards or Hong Kong accounting standards and its financial statements must also contain a statement of the financial effect of the material differences (if any) from the financial statements prepared in accordance with the PRC accounting standards. The Special Regulations require that there should not be any inconsistency between the information disclosed within and outside the PRC and that, to the extent that there are differences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such differences should also be disclosed simultaneously.
Information on directors and shareholders
The Company Law gives the shareholders of a company the right to inspect its articles of association, minutes of theshareholders’ general meetings and financial and accounting reports. Under the Articles of Association, Shareholders have the right to inspect and, after payments of reasonable charges, make copies of certain information on the Shareholders and on the Directors similar to that available to shareholders of Hong Kong companies under Hong Kong law.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Receiving agent
Under both the PRC and Hong Kong law, dividends once declared become debts payable to shareholders. The limitation period for debt recovery action under Hong Kong law is six years, while that under the PRC law is two years. The Mandatory Provisions require that the company should appoint a trust company registered under the Hong Kong Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) as a receiving agent to receive on behalf of holders offoreignsharesdividenddeclaredandallothermoniesowedbyajointstocklimitedcompany in respect of such foreign shares.
Corporate reorganisation
Corporate reorganisations involving company incorporated in Hong Kong may be effected in a number of ways, such as a transfer of the whole or part of the business or property of the company to another company in the course of being wound up voluntarily pursuant to section 237 of the Companies Ordinance or a compromise or arrangement between the company and its creditors or between the company and its members pursuant to section 166 of the Companies Ordinance which requires the sanction of the court. Under the Company Law, the merger, demerger, dissolution, liquidation or change to the forms of a company has to be approved by shareholders at the general meeting.
Arbitration of disputes
In Hong Kong, disputes between shareholders and a company incorporated in Hong Kong or its directors may be resolved through the courts. The Mandatory Provisions provide that such disputes should be submitted to arbitration at either the HKIAC or the CIETAC at theclaimant’s choice.
Mandatory deductions
Under the Company Law, a company shall allocate10% of the profits to its statutory commonreservebeforedeclaringanydividendsaftertaxationuntiltheaggregateamountofthe statutory common reserve reaches a level equivalent to50% of thecompany’s registered capital. After the company has made allocations to the statutory common reserve from the after-tax profits, it may, upon a resolution made by the shareholders, make further allocations from after-tax profit to the discretionary common reserve. There are no such requirements under Hong Kong law.
Remedies of a company
Under the Company Law, if a director, supervisor or manager in carrying out his duties infringes any law, administrative regulation or the articles of association of a company, which results in damage to the company, that director, supervisor or manager should be responsible to the company for such damages. In addition, such remedies of the company are similar to those available under the Hong Kong law (including rescission of the relevant contract and recovery of profits made by a director, supervisor or officer) and in compliance with the Hong Kong Listing Rules.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Dividends
Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws, the relevant limitation period is twoyears.Acompanyshallnotexerciseitspowerstoforfeitanyunclaimeddividendinrespect of its overseas listed foreign shares until after the expiry of the applicable limitation period. Fiduciary duties
In Hong Kong, there is the common law concept of the fiduciary duty of directors. Under the Company Law and the Special Regulations, directors, supervisors, senior management owe a fiduciary duty towards a company and are not permitted to engage in any activities which compete with or are prejudicial to the interests of the company.
Closure of register of shareholders
The Companies Ordinance requires that the register of shareholders of a company must not generally be closed for the registration of transfers of shares for more than thirty (30) days (extendable to sixty (60) days in certain circumstances) in a year, whereas the articles of association of a company provide, as required by the Company Law, that share transfers may not be registered within thirty (30) days before the date of ashareholders’ meeting or within five days before the record date set for the purpose of distribution of dividends.
Hong Kong Listing Rules
The Hong Kong Listing Rules provide additional requirements which apply to an issuer incorporated in the PRC as a joint stock limited company and seeking a primary listing or whose primary listing is on the Hong Kong Stock Exchange. Set out below is a summary of such principal additional requirements which apply to our Company.
Compliance adviser
A company seeking listing on the Hong Kong Stock Exchange is required to appoint a complianceadviseracceptabletotheHongKongStockExchangefortheperiodfromitslisting date up to the date of the publication of its first fullyear’s financial results, to provide the company with professional advice on continuous compliance with the Hong Kong Listing Rules and all other applicable laws, regulations, rules, codes and guidelines, and to act at all times, in addition to thecompany’s two authorised representatives, as the principal channel of communication with the Hong Kong Stock Exchange. The appointment of the compliance adviser may not be terminated until a replacement acceptable to the Hong Kong Stock Exchange has been appointed.
If the Hong Kong Stock Exchange is not satisfied that the compliance adviser is fulfiling its responsibilities adequately, it may require the company to terminate the complianceadviser’s appointment and appoint a replacement.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS The compliance adviser must keep the company informed on a timely basis of changes in the Hong Kong Listing Rules and any new or amended laws, regulations or codes in Hong Kong applicable to the company.
It must act as thecompany’s principal channel of communication with the Hong Kong Stock Exchange if the authorised representatives of the company are expected to be frequently outside Hong Kong.
Accountants’ report
Anaccountants’ report for a PRC issuer will not normally be regarded as acceptable by the Hong Kong Stock Exchange unless the relevant accounts have been audited to a standard comparable to that required in Hong Kong or under International Standards on Auditing or ChinaAuditing Standards. Such report will normally be required to conform to Hong Kong or international accounting standards or CASBE.
Process agent
Our Company is required to appoint and maintain a person authorised to accept service of process and notices on its behalf in Hong Kong throughout the period during which its securities are listed on the Hong Kong Stock Exchange and must notify the Hong Kong Stock Exchange of his appointment, the termination of his appointment and his contact particulars. Public shareholdings
IfatanytimethereareexistingissuedsecuritiesofaPRCissuerotherthanforeignshares which are listed on the Hong Kong Stock Exchange, the Hong Kong Listing Rules require that the aggregate amount of such foreign shares held by the public must constitute not less than25% of the issued share capital and that such foreign shares for which listing is sought must not be less than15% of the total issued share capital if the company has an expected market capitalisation at the time of listing of not less thanHK$50,000,000.00. The Hong Kong Stock Exchange may, at its discretion, accept a lower percentage of between15% and25% if the Company has an expected market capitalisation at the time of listing of overHK$10,000,000,000.00.
Independent non-executive directors and supervisors
The independent non-executive directors of a PRC issuer are required to demonstrate an acceptable standard of competence and adequate commercial or professional expertise to ensure that the interests of the general body of shareholders will be adequately represented. The supervisors of a PRC issuer must have the character, expertise and integrity and be able to demonstrate a standard of competence commensurate with their position as supervisors.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Restrictions on purchase and subscription of its own securities
Subject to governmental approvals and the provisions of the Articles of Association, our Company may repurchase its own H Shares on the Hong Kong Stock Exchange in accordance with the provisions of the Hong Kong Listing Rules.Approval by way of special resolution of theholdersofdomesticsharesandtheholdersofHSharesatseparateclassmeetingsconducted in accordance with the Articles of Association is required for share repurchases. In seeking approvals, our Company is required to provide information on any proposed or actual purchasesofalloranyofitsequitysecurities,whetherornotlistedortradedontheHongKong Stock Exchange. The Directors must also state the consequences of any purchases which will arise under either or both of the Code on Takeovers and Mergers and any similar PRC law of which the directors are aware, if any.
Any general mandate given to the directors to repurchase the foreign shares must not exceed10% of the total amount of existing issued foreign shares of the Company.
Mandatory provisions
With a view to increasing the level of protection afforded to investors, the Hong Kong Stock Exchange requires the incorporation, in the articles of association of a PRC company whose primary listing is on the Hong Kong Stock Exchange, of the Mandatory Provisions and provisions relating to the change, removal and resignation of auditors, class meetings and the conduct of the supervisory committee of the company. Such provisions have been incorporated into the Articles of Association, a summary of which is set out in Appendix IV to this listing document.
Redeemable shares
The Company must not issue any redeemable shares unless the Hong Kong Stock Exchange is satisfied that the relative rights of the holders of the foreign shares are adequately protected.
Pre-emptive rights
Except in the circumstances mentioned below, the directors of a company are required to obtain the approval by a special resolution of shareholders in general meeting, and the approvals by special resolutions of the holders of domestic shares and foreign shares (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with thecompany’s articles of association, prior to (a) authorising, allotting, issuing or granting shares or securities convertible into shares, or options, warrants or similar rights to subscribe for any shares or such convertible securities; or (b) any major subsidiary of the company making any such authorisation, allotment, issue or grant so as materially to dilute the percentage equity interest of the company and its shareholders in such subsidiary.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS No such approval will be required, but only to the extent that, the existing shareholders of the company have by special resolution in general meeting given a mandate to the directors, either unconditionally or subject to such terms and conditions as may be specified in the resolution, to authorise, allot or issue, either separately or concurrently once every 12 months, not more than20% of the existing domestic shares and foreign shares as of the date of the passing of the relevant special resolution or of such shares that are part of thecompany’s plan at the time of its establishment to issue domestic shares and foreign shares and which plan is implementedwithin15monthsfromthedateofapprovalbytheCSRC;orwhereuponapproval by securities supervision or administration authorities of State Council, the shareholders of domestic shares of the company transfer its shares to overseas investors and such shares are listed and traded in foreign markets.
Supervisors
Our Company is required to adopt rules governing dealings by its Supervisors in securities of the Company in terms no less exacting than those of the model code (set out in Appendix 10 to the Hong Kong Listing Rules) issued by the Hong Kong Stock Exchange. Our Company is required to obtain the approval of its Shareholders at a general meeting (at which the relevant Supervisor and his associates shall not vote on the matter) prior to the Company or any of its subsidiaries entering into a service contract of the following nature with a Supervisor or proposed Supervisor of the Company or its subsidiary: (i) having a term that may exceed three years; or (ii) expressly requiring the Company to give notice of one year or above or to pay compensation or make other payments equivalent to the remuneration for one year or above.
The remuneration and appraisal committee of our Company or an independent board committee must form a view in respect of service contracts that requireShareholders’approval and advise Shareholders (other than Shareholders with a material interest in the service contracts and their associates) as to whether the terms are fair and reasonable, advise whether such contracts are in the interests of our Company and its Shareholders as a whole and advise Shareholders on how to vote.
Amendment to the Articles of Association
Our Company is required not to permit or cause any amendment to be made to itsArticles of Association which would cause the same to cease to comply with the mandatory provision of the Hong Kong Listing Rules and the Mandatory Provisions or the Company Law.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Documents for inspection
Our Company is required to make available at a place in Hong Kong for inspection by the public and its Shareholders free of charge, and for copying by Shareholders at reasonable charges the following:
− a complete duplicate register of shareholders;
− a report showing the state of the issued share capital of the Company;
− theCompany’s latest audited financial statements and the reports of the Directors, auditors and Supervisors (if any) thereon;
− special resolutions of the Company;
− reports showing the number and nominal value of securities repurchased by the Company since the end of the last certificates year, the aggregate amount paid for such securities and the maximum and minimum prices paid in respect of each class of securities repurchased (with a breakdown between domestic shares and H Shares);
− a copy of the latest annual return led with the Zhuhai Administration for Industry and Commerce; and
− for Shareholders only, copies of minutes of meetings of Shareholders.
Receiving agents
Our Company is required to appoint one or more receiving agents in Hong Kong and pay to such agent(s) dividends declared and other monies owing in respect of the H Shares to be held, pending payment, in trust for the holders of such H Shares.
Statements in H share certificates
Our Company is required to ensure that all of its listing documents and H Share certificates include the statements stipulated below and to instruct and cause each of its share registrars not to register the subscription, purchase or transfer of any of its Shares in the name of any particular holder unless and until such holder delivers to such share registrar a signed form in respect of such Shares bearing statements to the following effect that the acquirer of shares:
− agrees with our Company and each Shareholder of the Company, and the Company agrees with each Shareholder of our Company, to observe and comply with the Company Law, the Special Regulations, the Articles of Association and other relevant laws and administrative regulations;
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS− agrees with the Company, each Shareholder, Director, Supervisor, manager and officer of our Company, and our Company acting for itself and for each Director, Supervisor, manager and officer of the Company agrees with each Shareholder, to refer all differences and claims arising from theArticles ofAssociation or any rights or obligations conferred or imposed by the Company Law or other relevant laws and administrative regulations concerning the affairs of our Company to arbitration in accordance with theArticles ofAssociation, and any reference to arbitration shall be deemed to authorise the arbitration tribunal to conduct hearings in open session and to publish its award. Such arbitration shall be final and conclusive;
− agrees with our Company and each Shareholder of our Company that the H Shares are freely transferable by the holder thereof; and
− authorises our Company to enter into a contract on his behalf with each Director, Supervisor, manager and officer of our Company whereby each such Director and officer undertakes to observe and comply with his obligations to the Shareholders as stipulated in the Articles of Association.
Compliance with the Company Law, the Special Regulations and the Articles of Association Our Company is required to observe and comply with the Company Law, the Special Regulations and the Articles of Association.
Contract between our Company and its Directors, officers and Supervisors
Our Company is required to enter into a contract in writing with every Director and officer containing at least the following provisions:
− an undertaking by the Director or officer to our Company to observe and comply with the Company Law, the Special Regulations, the Articles of Association, the Codes on Takeovers and Mergers and Share Repurchases and an agreement that our Company shall have the remedies provided in the Articles of Association and that neither the contract nor his office is capable of assignment;
− an undertaking by each Director or officer to our Company acting as agent for each Shareholder to observe and comply with his obligations to the Shareholders as stipulated in the Articles of Association;
− an arbitration clause which provides that whenever any differences or claims arise from that contract, theArticles ofAssociation or any rights or obligations conferred or imposed by the Company Law or other relevant laws and administrative regulations concerning the affairs of our Company between our Company and our Directors or officers and between a holder of H Shares and a Director or officer of our Company, such differences or claims will be referred to arbitration at either the
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS CIETAC in accordance with its rules or the HKIAC in accordance with its Securities Arbitration Rules, at the election of the claimant and that once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. Such arbitration will be final and conclusive;
− if the party seeking arbitration elects to arbitrate the dispute or claim at HKIAC, then either party may apply to have such arbitration conducted in Shenzhen according to the Securities Arbitration Rules of HKIAC;
− PRC laws shall govern the arbitration of disputes or claims referred to above, unless otherwise provided by laws or administrative regulations;
− the award of the arbitral body is final and shall be binding on the parties thereto;− the agreement to arbitrate is made by the Director or officer with our Company on our own behalf and on behalf of each shareholder; and
− any reference to arbitration shall be deemed to authorise the arbitral tribunal to conduct hearings in open session and to publish its award.
Our Company is also required to enter into a contract in writing with every Supervisor containing statements in substantially the same terms.
Subsequent listing
Our Company must not apply for the listing of any of its foreign shares on a PRC stock exchange unless the Hong Kong Stock Exchange is satisfied that the relative rights of the holders of foreign shares are adequately protected.
English translation
All notices or other documents required under the Hong Kong Listing Rules to be sent by our Company to the Hong Kong Stock Exchange or to holders of H Shares are required to be in the English language, or accompanied by a certified English translation.
General
IfanychangeinthePRClawormarketpractisesmateriallyaltersthevalidityoraccuracy of any of the basis upon which the additional requirements have been prepared, then the Hong Kong Stock Exchange may impose additional requirements or make listing of the equity securities of a PRC issuer, including our Company, subject to special conditions as the Hong Kong Stock Exchange considers appropriate. Whether or not any such changes in the PRC law or market practises occur, the Hong Kong Stock Exchange retains its general power under the Hong Kong Listing Rules to impose additional requirements and make special conditions in respect of ourCompany’s listing.
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APPENDIX III SUMMARY OF PRC AND HONG KONG PRINCIPAL LEGAL AND REGULATORY PROVISIONS Other Legal and Regulatory Provisions
Upon ourCompany’s listing, the provisions of the SFO, the Hong Kong Takeovers Code and such other relevant ordinances and regulations as may be applicable to companies listed on the Hong Kong Stock Exchange will apply to our Company.
Securities Arbitration Rules
The Articles of Association provide that certain claims arising from the Articles of Association or the Company Law shall be arbitrated at either the CIETAC or the HKIAC in accordance with their respective rules. The SecuritiesArbitration Rules of the HKIAC contain provisions allowing an arbitral tribunal to conduct a hearing in Shenzhen for cases involving the affairs of companies incorporated in the PRC and listed on the Hong Kong Stock Exchange so that PRC parties and witnesses may attend.
Where any party applies for a hearing to take place in Shenzhen, the tribunal shall, where satisfied that such application is based on bona fide grounds, order the hearing to take place in Shenzhen conditional upon all parties including witnesses and the arbitrators being permitted to enter Shenzhen for the purpose of the hearing. Where a party (other than a PRC party) or any of its witnesses or any arbitrator is not permitted to enter Shenzhen, then the tribunal shall order that the hearing be conducted in any practicable manner, including the use of electronic media. For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRC other than the territories of Hong Kong, Macau and Taiwan.
PRC Legal Matter
King& Wood Mallesons, our PRC legal advisers, have furnished to us a legal opinion dated14January2014confirmingthatithasreviewedthesummariesofrelevantPRClawsand regulations as contained in this Appendix and is of the view that such summaries are correct summaries relevant to PRC laws and regulations. This letter is available for inspection as describedinAppendixVIItothislistingdocument.Anypersonwishingtohavedetailedadvice onPRClawandthelawsofanyjurisdictionsisrecommendedtoseekindependentlegaladvice.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION This Appendix contains a summary of the principal provisions of the Articles ofAssociation,whichwasadoptedbyourShareholdersintheShareholders’generalmeetingheld on 20 February 2013 and will become effective on the date on which our H Shares are listed on the Hong Kong Stock Exchange. The principal objective of this Appendix is to provide an overview of the Articles of Association and a copy of the full Chinese and English text of the Articles of Association is available for inspection as mentioned in the Appendix VII to this listing document.
1. DIRECTORS AND BOARD OF DIRECTORS
(a) Power to allocate and issue shares
There is no provision in the Articles of Association empowering the Directors to allot and issue shares.
To increase the capital of our Company, the Board of Directors is responsible for formulating proposals for approval at ashareholders’general meeting by way of special resolution. The plan of listing foreign shares in overseas and domestic shares which is approved by the CSRC can be arranged by the Board of Directors to be listed separately. Any such increase must be conducted in accordance with the procedures stipulated by the relevant laws and administrative regulations.
(b) Power to dispose assets of our Company or our subsidiaries
The Board of Directors shall not, without the prior approval of theshareholders’ general meeting, dispose of or agree to dispose of any fixed assets of our Company where the sum of the estimated value of the consideration for the proposed disposition and the aggregate amount of the consideration for all dispositions of fixed assets of our Company completed within four (4) months immediately preceding the proposed disposition exceeds33% of value of our fixed assets as shown on the latest balance sheet placed before ashareholders’ general meeting. In the event that the above provision is not consistentwithanyruleofthestockexchangewherethesharesoftheCompanyarelisted, the rules of the stock exchange where the shares of the Company are listed shall prevail. IntheeventthatthesharesoftheCompanyarelistedontwoormorestockexchangesand the rules of such stock exchanges regarding the above matter are not consistent, the stricter listing rules of the stock exchanges shall prevail.
The above disposal refers to the transfer of rights and interests in certain properties, but does not include the provision of guarantees with fixed assets.
The validity of the transactions with respect to the disposal of fixed assets of our Company shall not be affected by the violation of the above restrictions contained in the Articles of Association.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (c) Remuneration, compensation or payments for loss of office
Our Company shall, with the approval of shareholders at ashareholders’ general meeting, enter into a contract in writing with each Director, Supervisor wherein his emoluments are stipulated. The aforesaid emoluments shall include:
(i) emoluments in respect of his service as Director, Supervisor or senior executive officers of our Company;
(ii) emoluments in respect of his services as Director, Supervisor or senior executive officers of any of ourCompany’s subsidiary;
(iii) emoluments in respect of the provision of other services in connection with the management of affairs of our Company or any of its subsidiary;
(iv) compensation for loss of office, or as consideration for or in connection with his retirement from office.
Except under a contract entered into in accordance with the foregoing, no proceedings may be brought by a Director or Supervisor against our Company for any benefit due to him in respect of the above matters.
Contracts entered into by the Company with a Director or Supervisor of our Company in connection with emoluments, shall provide that such Director or Supervisor, in the event of a takeover of our Company and subject to the approval of shareholders in a general meeting, has the right to receive compensation or other payments for loss of officeorretirementfromoffice.AtakeoveroftheCompanymeanseitherofthefollowing circumstances:
(i) an offer is made to all shareholders of the Company;
(ii) an offer is made such that the offeror will become the controlling shareholder of our Company (as defined in the Articles of Association).
If the relevant Director or Supervisor fails to comply with the above requirements, any payment received shall belong to the person who sells the shares for accepting the aforesaid offer. The Director or Supervisor shall bear all expenses arising from the distribution of such payments to the person in a proportional manner and all related expenses shall not be deducted from the payments distributed.
(d) Loans to Directors, Supervisors or other management personnel
Our Company shall neither provides the Directors, Supervisors, President or other senior executive officers of our company or our parent company with loans or loan guarantees either directly or indirectly nor provides persons related to the above personnel with loans or loan guarantees.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION In the event that our Company provides loans in violation of this restriction, the person who receives the loan(s) must pay off the loan(s) immediately, regardless of the terms and conditions. Any loan provided by our Company in violation of the above requirements shall not be mandatorily enforced against us, unless under the following circumstances:
(i) The loan provider unknowingly provides loans to personnel related to the Directors, Supervisors, President or other senior executive officers of our Company or controlled company; or
(ii) The collateral provided by our Company is sold by the lender to the buyer in good faith.
The following transactions are exempted from the above clauses:
(i) Our Company provides our subsidiaries with loans or loan guarantees;
(ii) Our Company provides any of the Directors, Supervisors, President or senior executive officers with loans, loan guarantees or any other fund pursuant to the employment contract/s approved at theShareholders’ meeting to pay all expenses incurred for the purpose of our Company or performing our duties; and
(iii) In case that the normal scope of business of our Company covers the provision of loans or guarantees, our Company may provide any of the Directors, Supervisors, President or senior executive officers or other related personnel with loans or guarantees for loans provided by other personnel to the above personnel, provided that the terms and conditions governing the above loans or loan guarantees shall be normal commercial terms and conditions.
For the purpose of the above provisions, “guarantee” includes the acts of the guarantor bearing the liabilities or providing properties to ensure that the obligor performs the obligations.
(e) Provide financial aid for acquiring the Shares or shares of any of our
subsidiaries
Pursuant to the Articles of Association:
(i) Subject to the exceptions in the Articles of Association, our Company or our subsidiaries shall not provide any financial assistance at any time or in any manner to personnel that acquires or plans to acquire the Shares. Such personnel include anyone who undertakes liabilities, directly or indirectly, from acquiring the Shares, and
(ii) Our Company or any of our subsidiaries shall not provide personnel mentioned in the preceding paragraph with financial aid at any time or in any manner to mitigate or exempt the liabilities of the above personnel.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION The following transactions are not prohibited:
(i) Related financial aid provided by our Company which is indeed in our interest and the main purpose of the aid is not to acquire the Shares or is part of a master plan of our Company;
(ii) Distribution of our assets by way of dividend lawfully declared;
(iii) Distribution of dividends in the form of bonus shares;
(iv) Reducing the registered capital, redeeming the Shares or adjusting the equity structure pursuant to the Articles of Association;
(v) Our Company grants loans within our normal scope of business, provided that such loans shall not result in reduction in the net assets of our Company or even if the net assets are reduced, this financial aid is paid from the profit available for distribution; and
(vi) Our Company provides the employee stock ownership plan with loans, provided that such loans shall not result in reduction in the net assets of our Company or, even if the net assets are reduced, this financial aid is paid from the profit available for distribution.
For the purpose of the above provisions:
(i) “Financial aid” includes without limitation to:
(aa) Gifts;
(bb) Guarantees (including acts of the guarantor assuming liabilities or providing property to ensure that the obligor performs the obligations), compensation (excluding compensation arising from mistakes of our Company), cancellation or waiver of rights;
(cc) Provision of loans or signing of contracts whereby our Company performs some obligations before others, change of the parties to the loans/contracts as well as the assignment of the rights in the loans/contracts; or
(dd) Financial aid provided by our Company in any other manner when it is insolvent, has no net assets, or will suffer significant decreases in net assets.
(ii) “Assuming liabilities” includes undertaking liabilities by signing agreements or making arrangements (no matter whether the agreements or arrangements are enforceable on demand or bearing the liabilities for itself or any other person) or changing its financial status in any other manner.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (f) Disclose matters relating to the contract rights of our Company and voting on the contracts.
When any of the Directors, Supervisors, President and other senior executive officers own material rights and interest in the contracts, transactions or arrangements that our Company has entered into or plans to enter into in any manner directly or indirectly (except for employment contracts), the above personnel shall disclose the natureanddegreeoftheirrightsandintereststotheBoardofDirectorsassoonaspossible no matter whether the above contracts, transactions, arrangements or suggestions are subject to the approval of the Board of Directors in normal circumstances.
When a resolution adopted by the Board of Directors creates an interest for a Directororarelatedperson,theDirectorshallwithdrawandnotparticipateinvoting;and the Director shall not be included when determining whether the number of directors attending the meeting reaches a quorum.
Unless the Directors, Supervisors, President and other senior executive officers who have interests have made disclosure to the Board of Directors in accordance with the above requirements and the Board of Directors approves the matters at the meeting in which they are not included in the quorum nor participate in voting, our Company shall have the right to cancel the contracts, transactions or arrangements, except where the opposite party is a party in good faith without knowledge of the acts of related Directors, Supervisors, President and other senior executive officers violating their obligations or laws, regulations, or relevant regulatory rules provide otherwise.
Where related persons of the Directors, Supervisors, President and other senior executive officers have interests in certain contracts, transactions and arrangements, the related Directors, Supervisors, President and other senior executive officers shall be deemed to have interests.
(g) Resignation, Appointment and Dismissal
None of the following persons shall serve as our Director, Supervisor, President and other senior executive officers:
(i) Anyone who has no civil capacity or has only limited civil capacity;
(ii) Anyonewhohasbeenconvictedofcorruption,bribery,embezzlement,larceny, or disrupting the social economic order and is within five years of the expiry date of punishment or has been deprived of political rights because of this conviction and is within five years of the expiry date of the sentence;
(iii) Anyone who has served as the director, factory manager or manager of a company or enterprise that is bankrupt and liquidated as a result of poor management, was personally liable for the bankruptcy of the company or enterprise, and is within three years of the date of completion of bankruptcy and liquidation of the company or enterprise;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (iv) Anyone who has served as the legal representative of a company or enterprise whosebusinesslicencewasrevokedduetoviolationofthelaw,waspersonally liable,andiswithinthreeyearsofthedateonwhichthebusinesslicenceofthe company or enterprise was revoked;
(v) Anyone who has a large sum of debt, which was not paid at maturity;
(vi) Anyone who is investigated by the judicial agencies for violation of criminal law and whose case is pending;
(vii) Anyonewhomaynotserveasaheadofthecompanypursuanttotheprovisions of the law and administrative regulations;
(viii) Anyone who is not a natural person;
(ix) Anyone judged by the competent agencies to have violated the provisions of relevantPRCSecuritiesLaws,hasbeeninvolvedindeceptiveordishonestacts and is within five years of the date on which the judgment was made;
(x) Anyone penalised by the CSRC by being denied access to the securities market and the penalty remains in effect;
(xi) a person identified by stock exchange as inappropriate candidates, where less than two years has elapsed since the date of such identification; or
(xii) other persons stipulated by laws, administrative regulations or department regulations.
The Board of Directors consists of nine Directors and these are elected at theShareholders’ general meeting. The Directors need not hold any of the Shares.
The Directors may also serve as senior management provided that the total number of Directors serving as senior management is not more than one half of the total number of the Directors.
ThechairmanoftheBoardshallbeelectedanddismissedbyavoteofmorethanone half of the Directors. Subject to compliance with related laws and administrative regulations, theShareholders’general meeting may dismiss any Director whose term has not expired by an ordinary resolution without affecting any claim for compensation that may be made pursuant to any contract.
The Directors serve three-year terms. Upon expiration of the term, the Director may be re-elected.
Written notice concerning nomination of a director candidate and indication of thecandidate’s intention to accept the nomination shall be sent to our Company seven days before theShareholders’ general meeting is convened.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (h) Power to Obtain Loans
Subject to compliance with the laws and administrative regulations of the State, our Company has the right to raise funds and obtain loans, including (but not limited to) issuing bonds, mortgaging or pledging all or part of the properties of our Company, as well as exercising other rights approved by the laws and administrative regulations of the State, provided that such action shall not undermine or revoke the rights of any Shareholder.
The Articles of Association do not include any special provision regarding the manner in which the Directors may exercise the right to obtain loans or the manner in whichsucharightiscreatedexcept(a)theprovisionregardingthepoweroftheDirectors to develop schemes for our Company to issue bonds, and (b) the provision that the bond issue must be approved by the Shareholders through a special resolution at theShareholders’ general meeting.
(i) Responsibilities
The Directors, Supervisors, President and other senior executive officers shall bear the responsibility of good faith and diligence towards our Company. In the event of violation of obligations owed to our Company by the Directors, Supervisors, President and other senior executive officers, we shall have the right to take the following measures in addition to various rights and remedial measures stipulated in legal and administrative regulations:
(i) Require related Directors, Supervisors, President or other senior executive officers to compensate our Company for losses sustained as a result of their neglect of duty;
(ii) Cancel any contract or transaction entered into between the Company and related Directors, Supervisors, President or other senior executive officers as well as any contract or transaction entered into between our Company and any third person when the third person knew or should have known that the Directors, Supervisors, President or other senior executive officers acting on behalf of our Company violated their obligations owed to our Company;
(iii) RequiretherelevantDirectors,Supervisors,Presidentorotherseniorexecutive officers to turn over the proceeds obtained from the violation of their obligations;
(iv) Recover funds collected by the relevant Directors, Supervisors, President or other senior executive officers that should have been collected for our Company, including but not limited to commissions;
(v) RequiretherelevantDirectors,Supervisors,Presidentorotherseniorexecutive officers to return the interest earned or that may be earned from funds that should have been paid to our Company.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION When performing their responsibilities, the Directors, Supervisors and senior management must comply with the principle of integrity and shall not put themselves in situations where their own interests may conflict with the obligations they have undertaken. This principle includes, but is not limited to, performing the following obligations:
(i) Sincerely taking the best interests of our Company as the starting point of any action;
(ii) Exercisingone’s rights within but not exceeding the scope of authority;
(iii) Exercising conferred discretionary powers personally without being manipulated by others; not transferring discretionary powers to other persons without lawful permission or the approval with their full knowledge of the Shareholders at the generalShareholders’ general meeting;
(iv) Treating Shareholders of the same type equally and Shareholders of different types fairly;
(v) Enteringintoanycontract,transactionorarrangementwithourCompanyisnot allowed, unless in line with the Articles of Association or otherwise by the consent of theShareholders’ general meeting with its full knowledge;
(vi) Seeking private gain using the assets of our Company is not allowed, unless approved by theShareholders’ general meeting with its full knowledge;
(vii) Usingone’s position to take bribes or other illegal gains is not allowed, nor is any form of embezzlement of our property, including, but not limited to, opportunities beneficial to our Company;
(viii) Accepting commissions associated with transactions of our Company is not allowed unless approved by theShareholders’ general meeting with our full knowledge;
(ix) Compliance with the Articles of Association, discharging duties in a faithful manner, safeguarding the interests of our Company rather than seeking private gain by taking advantage ofone’s position and authority in our Company;
(x) Competing with our Company in any manner is not allowed, unless approved by the Shareholders at the general meeting with our full knowledge;
(xi) Misappropriation of our funds or lending these funds to others is not allowed, nor is depositing the assets of our Company in an account opened inone’s own name or that of others, nor is using the assets of our Company to provide guarantees for the debts of the Shareholders or other individuals;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (xii) Disclosure of any confidential information relating to our Company obtained during employment without the approval of theShareholders’general meeting withourfullknowledge,orusingthisinformation,isnotallowed,unlessinthe interest of our Company; however, under the following circumstances the information may be disclosed to a court or other competent government agenciesasrequiredby(1)theprovisionsofthelaw;(2)thepublicinterest;(3) the interest of the Directors, Supervisors, or senior management.
The Directors, Supervisors, President and other senior executive officers may not direct the following personnel or institutions (“related personnel”) to do acts that the Directors, Supervisors, President and other senior executive officers may not do:
(i) Spouses or minor children of the Directors, Supervisors, President and other senior executive officers;
(ii) Trustors of the Directors, Supervisors, President and other senior executive officers or the persons mentioned in (i);
(iii) Partners of the Directors, Supervisors, President and other senior executive officers or persons mentioned in (i) and (ii);
(iv) The company under de facto control by the Directors, Supervisors, President and other senior executive officers individually or jointly with the persons or other directors, supervisors, President and other senior executive officers of companies mentioned in (i), (ii) and (iii);
(v) Directors, Supervisors, President or other senior executive officers of the companies mentioned in (iv).
The good faith obligation owed by the Directors, Supervisors, President and other senior executive officers may not necessarily terminate with the expiration of their terms; their obligation to keep the trade secrets of our Company in confidence shall survive the expiration of their terms. The duration of other obligations shall be determined in accordance with the principle of fairness, depending on the length of time from the occurrence of the events to the time of resignation, as well as the circumstances and conditions under which the relationship with our Company is terminated.
In the event that the Directors, Supervisors, or senior management violate the responsibilities of a certain duty, their relationships with our Company may be dissolved at theShareholders’ general meeting with theShareholders’ full knowledge, unless otherwise indicated in the Articles of Association.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Apart from the responsibilities set forth in related laws, administrative regulations or the listing rules of the securities exchange where the Shares are listed, the Directors, Supervisors, President or other senior executive officers shall assume the following responsibilities for the Shareholders when exercising their rights and performing their responsibilities:
(i) They may not cause our Company to operate beyond the scope of business indicated on our business licence;
(ii) TheyshallsincerelytakethebestinterestsofourCompanyasthestartingpoint of any action;
(iii) They may not deprive our Company of our assets in any manner, including, but not limited to, opportunities beneficial to our Company; and
(iv) They may not deprive the Shareholders of personal rights and interests, including, but not limited to, the right to receive dividends and to vote, except for restructuring of our Company approved at theShareholders’ general meeting pursuant to the provisions of the Articles of Association.
The Directors, Supervisors, President and other senior executive officers have the responsibility when exercising their rights or carrying out their obligations to act with the care, diligence and skill due from a reasonably prudent person under similar circumstances.
In the event of any loss caused to our Company as a result of violation of any laws, administrative rules and regulations, orArticles ofAssociation by the Directors or senior executive officers when performing their duties in our Company, Shareholders who have held1% or more of the Shares separately or jointly for 180 consecutive days or longer have the right to request the Supervisory Committee in writing to initiate court litigation. In the event of any loss caused to our Company as a result of violation of any laws, administrative rules and regulations, or Articles of Association by the Supervisory Committee when performing its duties in our Company, the Shareholders may request the Board of Directors in writing to initiate court litigation. In the event that the Supervisory Committee or Board of Directors refuses to initiate litigation after receiving a written request of the Shareholders as specified in the preceding paragraph, fails to institute litigation within 30 days of the receipt of the request, or if failure to institute litigation immediately may cause irreparable damage to the interest of our Company under urgent circumstances, the Shareholders as mentioned in the preceding paragraph shall have the right to initiate court litigation directly in their own name and in the interest of our Company.
In the event of infringement of ourCompany’s legal rights and interests by a third-party resulting in losses to our Company, the Shareholders in the first paragraph of theseArticlesofAssociationmayinitiatecourtlitigationinaccordancewiththepreceding two paragraphs.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION In the event that the Directors or senior executive officers violate laws, administrative rules and regulations or theArticles ofAssociation to the detriment of the interests of the Shareholders, the Shareholders may initiate court litigation.
2. MODIFICATION OF THE ARTICLES OF ASSOCIATION
We may amend the Articles of Association based on the provisions of the relevant laws, administrative rules and regulations and the Articles of Association.
Any amendment to the Articles of Association that involves mandatory clauses shall be approved by the competent agencies before taking effect.Where the amendment of theArticles of Association involves our registration, it shall be necessary to carry out the lawfully prescribed procedures for registration change.
3. SPECIAL VOTING PROCEDURES OF CLASSIFIED SHAREHOLDERS
Any Shareholder who holds different types of Shares is a classified Shareholder.
Any plan of our Company to change or abolish the rights of a classified Shareholder is subject to the approval of theShareholders’general meeting in the form of a special resolution and the approval of the affected classified Shareholders at a separately convenedShareholders’ meeting in accordance with the Articles of Association before it can be implemented. The rights of classified Shareholders shall be viewed as changed or abolished under any of the following circumstances:
(a) Increase/reduce the number of the classified Shares, or increase/reduce the number of classified Shares with equal or more voting rights, distribution rights and other privileges than this type of classified Shares;
(b) Convert all or part of the classified Shares into other types or convert another type of Shares, partly or wholly, into this type of classified Shares or grant such conversion right;
(c) Cancel/reduce the right of the classified Shares to obtain dividends generated or cumulative dividends;
(d) Reduce/cancel the right of the classified Shares to receive dividends on a priority basis or the priority right to receive property distribution in the liquidation of our Company;
(e) Increase/cancel or reduce the right of the classified Shares to convert Share rights, options rights, voting rights, transfer rights, and prior purchase rights, or the right to obtain the securities of our Company;
(f) Cancel/reduce the right of the classified Shares to receive funds payable of our Company in specified currencies;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (g) Create new classified Shares entitled to equal or more voting rights, distribution rights, or privileges than the classified Shares;
(h) Impose restrictions on the transfer or ownership of the classified Shares or increase such restrictions;
(i) Issue subscription or conversion rights for this or other classified Shares;
(j) Increase the rights and privileges of other types of Shares;
(k) The restructuring plan of our Company may constitute different types of Shareholders to assume responsibilities disproportionately;
(l) Amend or abolish clauses of the Articles of Association.
Whether or not the affected classified Shareholders have voting rights at the general Shareholders meeting, in the event of matters described above from (b) through (h), (k) and (l), they have voting rights at the classifiedShareholders’meeting, but the Shareholders that have interests at stake (see our Articles of Association for definition) shall have no voting rights at the classifiedShareholders’ meeting.
The resolution of the classifiedShareholders’meeting shall be voted on by more than two thirds of Shareholders with voting rights attending the classifiedShareholders’ meeting.
When convening a classifiedShareholders’ meeting, 45 days (including the date of the meeting) before the meeting is convened, our Company shall send a written notice to inform all registered holders of the classified Shares on matters to be deliberated at the meeting, as well as the date and venue of the meeting. Shareholders planning to attend the meeting shall send our Company a written reply to that effect 20 days before the meeting.
In the event that the number of shares with voting power represented by Shareholders planning to attend the meeting accounts for more than one half of the total number of said classified Shares with voting power at the meeting, our Company may convene a classifiedShareholders’ meeting. If this number is not reached, our Company shall again inform the Shareholders of the matters to be deliberated as well as the date and venue of the meeting within five days in the form of an announcement or in other manners as stipulated in the Articles of Association, if applicable, and our Company may convene a classifiedShareholders’ meeting once the announcement or the notice in other manners as stipulated in the Articles of Association, if applicable, is delivered.
The notice of the classifiedShareholders’ meeting needs only to be sent to the Shareholders who have the right to vote at the meeting.
Insofar as possible, any classifiedShareholders’meeting shall be held in accordance with the same procedures as those of theShareholders’general meeting contained in theArticles of Association, and any clause that relates to the convening of anyShareholders’ meeting in the Articles of Association shall apply to any classifiedShareholders’ meeting.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Both the holders of other classified Shares and the holders of domestic Shares and overseas listed foreign Shares are considered as different classified Shareholders.
The special procedures for voting by the classified Shareholders shall not apply under the following circumstances:
(a) where our Company issues, upon the approval by a special resolution ofShareholders’meeting, either separately or concurrently once every 12 months, not more than20% of each of its existing issued domestic Shares and overseas-listed foreign Shares;
(b) where the plan to issue domestic Shares and overseas listed foreign Shares upon the establishment of our Company is completed within 15 months of the date of approval by the CSRC;
(c) wheretheholdersofdomesticSharestransferstheSharesitholds,upontheapproval by CSRC, to overseas investors, and the transferred Shares are listed and traded on the overseas stock exchange.
4. SPECIAL RESOLUTIONS NEEDED TO BE ADOPTED BY MAJORITY VOTE
The resolutions of theShareholders’meeting are categorised as ordinary resolutions and special resolutions.
An ordinary resolution can be adopted by a simple majority of the votes held by the Shareholders (including proxies) attending the meeting.
A special resolution can be adopted by a two-thirds majority of the votes held by the Shareholders (including proxies) attending the meeting.
5. VOTING RIGHTS (GENERALLY ON A POLLAND RIGHT TO DEMAND A
POLL)
The ordinary Shareholders have the right to attend or appoint a proxy to attend and vote at theshareholders’ general meeting. When voting at theShareholders’ general meeting, the Shareholder (or proxy) may exercise his or her voting rights in accordance with the number of Shares with voting power held with each Share representing one vote.
At any general meeting of shareholders a resolution shall be decided on a show of hands unless a poll is required according to the listing rules of the stock exchange where the shares of our Company are listed or (before or after any vote by show of hands) demanded:
(a) by the chairman of the meeting;
(b) by at least two shareholders entitled to vote present in person or by proxy; or
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (c) by one or more shareholders (including proxies) and representing10% or more of all shares carrying the right to vote at the meeting.
Unless a poll be as demanded, the chairman of the meeting shall declare whether a proposal has been adopted according to the results of voting by show of hands, and record the same in the minutes of the meeting as the conclusive evidence of the fact without proof of the numberorproportionofthevotesrecordedinfavouroforagainstsuchresolution.Thedemand for a poll may be withdrawn by the person who makes such demand.
A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such times as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be preceded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded.
Whenthenumberofdissentingvotesequalsthenumberofsupportingvotes,thechairman of the meeting is entitled to one additional vote.
TheShareholders’ general meeting must vote on all proposals individually; in the event of different proposals for the same matter, theShareholders’meeting shall vote on them in the order in which they were submitted. Unless theShareholders’general meeting is adjourned or fails to adopt any resolution as a result of force majeure or for other special reasons, the Shareholders shall not put aside or refuse to vote on the proposal/s at theShareholders’general meeting.
The same vote can be cast in any of the following manners: on site, on line, or other voting methods. In case that the same vote is cast more than once, the result of the first vote cast shall prevail.
6. SHAREHOLDERS’ GENERAL MEETINGS
TheShareholders’ general meetings are divided into annual general meetings and extraordinary general meetings.Shareholders’ general meetings are called by the Board of Directors.The annualShareholders’general meeting shall be convened once a year and be held within six months of the end of the previous fiscal year.
7. ACCOUNTING AND AUDITS
(a) Financial and accounting policies
Our Company shall develop its financial and accounting policies and internal auditing policies pursuant to PRC laws, administrative rules and regulations, as well as accounting standards developed by the competent department in charge of finance under the State Council.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION The Board of Directors shall submit the financial reports of our Company prepared in accordance with the laws, administrative rules and regulations or orders of local governments and regulatory agencies having jurisdiction over Shareholders at theShareholders’ meetings.
Apart from the Chinese accounting standards and regulations, the financial reports of our Company shall also conform to international accounting standards and the accounting standards and regulations of overseas areas where the Shares are listed. In the event of any major discrepancy between the financial reports prepared in accordance with the above accounting standards, explanations and notes must be provided in the financial reports. As to the distribution of after-tax profits of our Company in a fiscal year, the after-tax profits indicated on the financial reports, whichever is lower shall prevail.
Our Company shall make its financial reports available for inspection by the Shareholders 20 days before theShareholders’ general meeting is convened. Each Shareholder is entitled to obtain one copy of the financial report.
OurCompanyshallsendthefinancialreportstotheregisteredaddressoftheholders of overseas listed foreign Shares by postage-paid mail or by other manners as stipulated in the Articles of Association, if applicable, at least 21 days before theShareholders’ general meeting is convened.
OurCompany’s interim results or financial information published or disclosed by our Company shall at the same time be prepared in accordance with PRC accounting standards, rules and regulations, international accounting standards as well as the accounting standards, rules and regulations of the overseas area in which the Shares are listed.
Our Company must publish the financial reports twice in each fiscal year. Interim financial reports shall be published within 60 days of the end of the first six months of a fiscal year, while the annual financial report shall be published within 120 days of the completion of each fiscal year. Our Company shall submit its quarterly financial/accounting reports to the local branch of the CSRC and the domestic/overseas stock exchanges within one month of the ending date of the first three months and first nine months of each fiscal year.
OurCompanyshallnotkeepanyaccountingbooksotherthanthosespecifiedbylaw. (b) Appointment and Dismissal of Accountants
Our Company shall appoint an accounting firm with independent qualifications that meets appropriate requirements of the State to be responsible for auditing its annual report and reviewing its other financial reports.
The term of the accounting firm appointed by our Company shall start at the close of theShareholders’ general meeting and continue until the close of the nextShareholders’ meeting.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Without prejudice to the right of the accounting firm to claim for compensation (if any) for being dismissed and replaced, the Shareholders may replace the accounting firmthroughanordinaryresolutionattheShareholders’generalmeetingpriortotheexpiration of the term of any accounting firm notwithstanding the terms and conditions of the contract entered into between our Company and the accounting firm.
Appointment, dismissal/replacement of the accounting firm by our Company is subject to the resolution of the Shareholders at theShareholders’ general meeting and shall be filed with the competent agency in charge of securities under the State Council. Before dismissing, replacing or terminating the contract with the accounting firm, our Company shall send a notice to the accounting firm in advance notifying it of the matters relating to the dismissal or replacement, and the accounting firm shall be entitled to attend theShareholders’ general meeting and make a statement.
In the event that the accounting firm requests to resign, it shall declare to theShareholders’ general meeting whether our Company is affected by any improprieties. The accounting firm shall resign by sending a written resignation notice to ourCompany’s legal address. The notice shall take effect on the date of delivery to that address or on the date specified in the notice, whichever is later.
The notice shall include the following statements:
(i) Its resignation does not include any statement that should be disclosed to the Shareholders or creditors of our Company; or
(ii) Any statement that should be disclosed.
Within 14 days of receipt of the notice mentioned above, our Company shall send the copy of the notice to related competent agencies. If the notice includes statements mentioned in (ii) of the preceding paragraph, our Company shall retain a copy thereof for perusal by the Shareholders. Our Company shall also send a copy of the above-mentioned statements to each holder of the overseas-listed foreign Shares in accordance with the addresses registered on the register of Shareholders by postage-prepaid mail or by other manners as stipulated in the Articles of Association, if applicable.
Intheeventthattheresignationnoticeoftheaccountingfirmincludesanystatement that should be disclosed, the accounting firm may request the Board of Directors to convene an extraordinary general meeting to hear its explanations regarding the resignation.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION 8. NOTIFICATION AND AGENDA OFSHAREHOLDERS’ GENERAL MEETINGS TheShareholders’ general meeting is the authorised organ of our Company that can perform duties and exercise powers in accordance with the law.
Apart from special circumstances such as where our Company is in crisis, without the approval of a special resolution of theShareholders’ general meeting, our Company shall not enter into a contract with any person other than the Directors, President and other senior executive officers that would make a person responsible for the management of all or part of our important business.
Under any of the following circumstances, the Board of Directors shall convene an extraordinary general meeting within two months:
(a) The number of Directors is less than the number specified in the Company Law or less than two thirds of the number required in the Articles of Association;
(b) The uncovered losses of our Company reach one-third of its total share capital;
(c) The Shareholders with10% or more voting power separately or jointly request to convene an extraordinary general meeting in writing;
(d) The Board of Directors considers it necessary;
(e) The Supervisory Committee proposes convening an extraordinary general meeting; or
(f) Other circumstances specified in laws, administrative rules and regulations and the Articles of Association.
When convening aShareholders’ general meeting, our Company shall send a written notice to inform all registered Shareholders of the matters to be deliberated at the meeting as well as the date and venue of the meeting 45 days (including the date of the meeting) before it is convened. Shareholders planning to attend shall send our Company a written reply to that effect 20 days before it is held.
AtourCompany’sgeneralmeetingofShareholders,theShareholdersholding3%ormore Shares with voting power are entitled to submit written proposals to our Company.
Our Company shall calculate the number of Shares with voting power represented by the Shareholders planning to attend theShareholders’ general meeting in accordance with the written replies received 20 days before the meeting is convened. In the event that the number of Shares with voting power represented by the Shareholders planning to attend reaches more than one half of our total number of Shares with voting power, our Company may convene theShareholders’general meeting. If this number is not reached, our Company shall again inform the Shareholders of the matters to be deliberated and the date and venue within five days in the form of an announcement or in other manners as stipulated in the Articles of Association, if applicable, before theShareholders’ general meeting may be convened.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATIONThenoticeoftheShareholders’generalmeetingshallbeinwritingandmeetthefollowing requirements:
(a) Specified venue, date and time of the meeting;
(b) Specified matters to be deliberated at the meeting;
(c) Provision to the Shareholders of materials and explanations necessary for the Shareholders to make sound decisions about the matters to be deliberated. This principle includes, but is not limited to, the provision of the detailed terms and contract(s), if any, of the proposed transaction(s) and proper explanations about related causes and effects when our Company proposes mergers, redemption of shares, restructuring of stock capital or other restructuring;
(d) In the event that any of the Directors, Supervisors, President or other senior executive officers has material interests at stake in matters to be deliberated, the nature and extent of the interests at stake shall be disclosed. If the matters to be deliberated affect any Director, Supervisor, President or other senior executive officers as a Shareholder in a manner different from how they affect other Shareholders of the same type, the difference shall be explained;
(e) Inclusion of the full text of any special resolution to be proposed for adoption at the meeting;
(f) A clear explanation that the Shareholder is entitled to attend and vote at theShareholders’ general meeting, or to appoint one or more entrusted representatives to attend and vote at the meeting on his or her behalf and that such may not necessarily be Shareholders;
(g) Specified delivery time and place of the power of attorney for proxy voting of the meeting;
(h) Specified date of equity registration of Shareholders entitled to attend and vote at ourShareholders’ general meeting; and
(i) Specified name and phone number of the permanent contact person for the meeting. The notice of theShareholders’ general meeting shall be sent in the form of an announcement, in person or by postage-paid mail, to the holders of overseas listed foreignSharesregardlesswhethersuchShareholdershavetherighttovoteattheShareholders’generalmeeting,andeachrecipient’saddressshallbeaccordingtotheaddressindicatedontheregister of Shareholders. For holders of domestic Shares, the notice of ourShareholders’ general meeting may be given in the form of an announcement.
Once the notice of theShareholders’general meeting is issued, theShareholders’general meeting shall not be postponed or cancelled without proper reasons and proposals listed in the notice of theShareholders’ general meeting shall not be cancelled. Once postponement or cancellation becomes apparent, the convener shall publish an announcement and specify the reasons at least two working days prior to the scheduled meeting date.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Shareholders who hold more than10% of the Shares separately or jointly have the right to request the Board of Directors to convene an extraordinary general meeting and the request shall be made in writing. The Board of Directors shall within ten days of receipt of the notice provide a written opinion, pursuant to legal and administrative rules and regulations and these Articles ofAssociation, agreeing or not agreeing to convene the extraordinary general meeting. In the event that the Board of Directors agrees to convene an extraordinary general meeting, it shall send a notice on convening the meeting within five days after the Board of Directors adopts the resolution, and any change to the original request shall be subject to the approval of the relevant Shareholders.
In the event that the Board of Directors does not agree to convene an extraordinary general meeting or fails to make a reply within ten days of receipt of the request, Shareholders holding more than10% of the Shares separately or jointly have the right to request the Supervisory Committee to convene an extraordinary general meeting and the request shall be made in writing.
In the event that the Supervisory Committee agrees to convene an extraordinary general meeting, it shall send a notice on convening the meeting within five days of receipt of the notice, and any change to the original proposal in the notice shall be subject to the approval of the relevant Shareholders. In the event that the Supervisory Committee fails to send the notice of ourShareholders’ general meeting within the specified time, the Supervisory Committee shall be deemed as not convening and presiding over theShareholders’ general meeting, and Shareholders having held more than10% of the Shares separately or jointly for more than 90 days consecutively may convene and preside over theShareholders’ general meeting pursuant to the regulations of these Articles of Association.
In the event that the Supervisory Committee or Shareholders decides to convene theShareholders’general meeting, the Board of Directors must be notified in writing and file the notice with the local branch of the CSRC and the related stock exchange in the place where our Company is located.
Before the resolution concerning theShareholders’ general meeting is announced, the proportion of the Shares held for more than 90 days consecutively by the Shareholders who convene the meeting separately or shall not be less than10%.
When sending the notice of theShareholders’ general meeting and announcing its resolutions, the Shareholders who convene the meeting shall submit the relevant certifying documents to the local branch of the CSRC and the related stock exchange in the place where our Company is located.
The following matters shall be approved by theShareholders’ general meeting through ordinary resolutions:
(a) work report of the Board of Directors and Supervisory Committee;
(b) plans of profit distribution and loss make-up schemes drafted by the Board of Directors;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (c) appointment or dismissal of the members of the Board of Directors and Supervisory Committee, their remuneration and payment methods;
(d) annual budget/final account report, balance sheet, income and other financial statements of our Company;
(e) annual report of our Company;
(f) other matters in addition to those approved by special resolution stipulated in the laws, administrative rules and regulations or listing rules of stock exchange where our Company is located or the Articles of Association.
ThefollowingmattersshallbeapprovedbyspecialresolutionattheShareholders’general meeting:
(a) ourCompany’s capital stock increases/decreases;
(b) ourCompany’s redemption of shares or issues of any type of shares, warrants, bond and other similar securities;
(c) division, merger, dissolution and liquidation of our Company;
(d) amendment of the Articles of Association;
(e) the total amount of purchase/sale of material assets or external guarantees within one year exceed30% of the latestperiod’s audited total assets;
(f) stock incentive plan; and
(g) other matters approved by ordinary resolution of theShareholders’general meeting pursuant to the laws, administrative rules and regulations or the Articles of Association which are believed could materially affect our Company and need to be approved by special resolution.
The following external guarantees of our Company must be deliberated and approved by theShareholders’ general meeting:
(a) anyguaranteeprovidedbyourCompanyorourcontrolledsubsidiariesafterthetotal amount of external guarantees reaches or exceeds50% of the latestperiod’s audited net assets;
(b) any guarantee provided by our Company after the total amount of external guarantees reaches or exceeds30% of the latestperiod’s audited total assets;
(c) guarantees provided to any guaranteed party whose asset-liability ratio exceeds70%;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (d) guarantees of which a single-amount guarantee amount exceeds10% of the latestperiod’s audited net assets; or
(e) guarantees provided to the Shareholders, actual controlling person and other related parties.
9. SHARE TRANSFERS
The Shares held by the promoters may not be transferred within one year of our incorporation. Shares issued by our Company prior to a listing may not be transferred within one year of the date on which the shares are listed and traded on the stock exchange.
The Directors, Supervisors, President and other senior executive officers shall report to our Company the number of Shares held by them as well as the subsequent changes in their Shareholdings.
The number of Shares which a Director, Supervisor, President or other senior executive officers may transfer each year during his term of office may not exceed25% of the total number of the Shares owned by them, and the Shares may not be transferred within one year of the date on which the Shares are listed and traded on the stock exchange. The above personnel may not transfer the Shares held by them within six months after resignation.
In the event that the Directors, Supervisors, President, other senior executive officers or shareholders holding5% or more of the Shares sell their Shares within six months after purchasing them, or buy them back within six months after selling them, all proceeds obtained therefrom shall be vested in by our Company and the Board of Directors shall forfeit such proceedsfromtheabove-mentionedpersonnel.IntheeventthattheBoardofDirectorsdoesnot obey the stipulations of this paragraph, the responsible Directors shall be legally liable severally or jointly.
In the event that the Board of Directors fails to comply with the provisions of the preceding paragraph, the Shareholders have the right to request the Board of Directors to implement the related provisions within 30 days. If the Board of Directors fails to implement the requirements within the specified time, the Shareholders may initiate court litigation directly in their own names and in the interest of our Company.
All the fully paid-up H Shares can be freely transferred in accordance with the Articles ofAssociation.ForHShareslistedontheHongKongStockExchange,unlesstherequirements stipulated in the Articles of Association are met, the Board of Directors may refuse to accept any transfer documents without giving any explanation for such refusal.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION 10. RIGHTS OF OUR COMPANY TO BUY BACK OUR OUTSTANDING ISSUED SHARES
Under any of the following circumstances, our Company may buy back our outstanding issued Shares pursuant to the procedures as provided in theArticles ofAssociation and subject to the approval by the competent agencies of the State:
(a) cancellation of the Shares to reduce ourCompany’s share capital;
(b) merger with another company which holds these Shares;
(c) granting Shares to the staff of our Company as incentives;
(d) buying back the Shares from Shareholders who vote against any resolutions adopted at theShareholders’ general meeting concerning the merger and division of our Company on their demand; or
(e) other circumstances approved by the laws and administrative rules and regulations and permitted by the security regulatory authority where the Shares of our Company are listed.
In the event our Company buys back the Shares for reasons stated in (a) through (c) of the preceding paragraph, related resolutions must be adopted at theShareholders’ general meeting. If our Company buys back the Shares according to the provision of the preceding paragraph under the circumstances set forth in (a), the shares bought back must be cancelled within ten days of the date on which they are bought back. In the event of the circumstances set forth in (b) and (d), the Shares bought back must be transferred or cancelled within six months.
In the event that our Company buys back the Shares pursuant to the provision of (c) in the preceding paragraph, the Shares bought back may not exceed15% of the total Shares issued. The fund used for such buy-back must be allocated from the after-tax net profit of our Company and the Shares bought back must be transferred to the staff within one year.
Our Company may buy back Shares in any of the following ways after the competent agencies of the State has approved the buyback:
(a) making a comprehensive buyback offer on a pro-rata basis to all Shareholders;
(b) buying back Shares through public trading on the stock exchange;
(c) buying back Shares by an agreement outside a stock exchange;
(d) in other ways approved by the laws and regulations or the relevant securities regulatory authority where the Shares are listed.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Where our Company buys back the Shares by an agreement outside a stock exchange, it shall obtain prior approval at theShareholders’ general meeting pursuant to the Articles of Association. Likewise, subject to the prior approval of theShareholders’general meeting, our Company may dissolve or change the contract signed in the aforesaid manner or waive any of its rights in the contract. The contract that buys back the Shares includes, but is not limited to, an agreement that consents to undertake the obligation to buy back the Shares and obtain the rights to buy them back.
As for the redeemable Shares that our Company is entitled to buy back, if they are not bought back in the market or by bidding, the price may not exceed a certain maximum limit. If the Shares are bought back by bidding, a proposal to bid must be made to all Shareholders on equal terms. Our Company shall not transfer any contract that buys back the Shares or any rights conferred under the contract.
Unless our Company has entered into the liquidation process, we must observe the following provisions for the buyback of issued Shares:
(a) where our Company buys back Shares at book value, the funds shall be deducted from the book balance of our distributable profit and the proceeds obtained from the issue of new Shares to buy back the old Shares;
(b) where our Company buys back the Shares at a premium to the book value, the portion of funds equivalent to book value shall be deducted from the book balance of our distributable profit and the proceeds obtained from the issue of new Shares made for the purpose of buying back of Shares, while the portion of funds higher than book value shall be dealt with in the following manner:
(i) where the Shares bought back were issued at book value, the funds shall be deducted from the book balance of our distributable profits;
(ii) where the Shares bought back were issued at a premium to the book value, the funds shall be deducted from the book balance of our distributable profits and the proceeds obtained from the issue of new Shares made for the purpose of buying back of Shares. However, the amount deducted from the proceeds obtained from the issue of new Shares shall not exceed the total premium amount obtained when the Shares bought back were issued or the amount (including the premium amount of the issue of new shares) in our premium account (or capital reserve account) when the Shares are bought back.
(c) the funds paid by our Company for the following purposes shall be allocated from our distributable profits:
(i) to obtain the right to buy back the Shares;
(ii) to modify any contract to buy back the Shares;
(iii) toreleaseanyresponsibilityofourCompanyunderthesharebuybackcontract.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (d) after the total book value of the cancelled Shares is deducted from our registered capital pursuant to the relevant provisions, the amount deducted from the distributable profits for paying up the book value portion of the Shares bought back shall be credited to our premium account (or capital reserve account).
11. RIGHT OF SUBSIDIARIES TO OWN PARENT COMPANY SHARES
The Articles of Association have no provision prohibiting our subsidiaries from holding shares of our parent company.
12. DIVIDEND AND DISTRIBUTION METHODS
Our Company may distribute dividends by way of cash or shares.
Our Company shall appoint, on behalf of holders of overseas listed foreign Shares, receiving agents to receive dividends and other payable funds that are distributed with respect to our overseas listed foreign Shares.
The receiving agents appointed by our Company shall comply with related provisions of the laws or the securities exchange where the Shares are listed.
After ourShareholders’ general meeting adopts a resolution on the profit distribution plan, the Board of Directors must finish the distribution of dividends (or shares) within two months after ourShareholders’ general meeting is held.
13. SHAREHOLDER PROXIES
Any shareholder who is entitled to attend and vote at ourShareholders’general meeting has the right to appoint one or more persons (who may not necessarily be Shareholders) as his or her shareholder proxy to attend and vote at the meeting in his or her place. Pursuant to the authorisation of the Shareholder, the proxy may exercise the following rights:
(a) speak for the Shareholder at theShareholders’ general meeting;
(b) demand a poll individually or with others;
(c) exercise the right to vote by a show of hands or a poll, but the shareholder proxy mayonlyexercisetherighttovotebyapollwhenmorethanoneproxyisappointed.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION The shareholder proxy appointment shall be in writing and shall be signed by the appointor or a person duly authorised in writing. Where the appointor is a legal person, the stamp of the legal person shall be affixed, or signed by the Director or a duly authorised agent. The power of attorney must be kept at the registered office or other location designated in the notice convening the meeting no later than 24 hours before the meeting at which the power of attorney is put to vote is convened or 24 hours before the designated time at which the resolution is adopted. If the power of attorney is signed by another person authorised by the appointor by means of power of attorney or other instrument of authorisation, the power of attorney or other instrument must be verified by a notary. The power of attorney or other instrument verified by the notary must be kept together with the power of attorney appointing the entrusted representative at our registered office or other location designated at the notice convening the meeting.
Where the appointor is a legal person, a power of attorney may be signed by its duly authorised person to authorise its legal representative or any person authorised by resolutions of its board of directors or other governing body to attend ourShareholders’ general meeting as a representative.
Any form sent by the Directors to the Shareholder for appointing a shareholder proxy shall allow the Shareholder, according to his or her free will, to instruct the proxy to vote and provide instructions separately for matters to be put to vote on each item on the meeting agenda. The power of attorney shall specify that the shareholder proxy may vote at his or her own discretion if the Shareholder does not provide instructions.
The votes of the shareholder proxy given pursuant to the terms of an instrument of proxy shall remain valid notwithstanding the previous death, loss of capacity of the appointor or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the Shares in respect of which the proxy is given, provided that our Company does not receive written notice concerning such matters before the related meeting is convened.
14. CAPITAL CALLS AND CONFISCATION OF SHARES
The Articles of Association does not include clauses concerning capital calls or confiscation of Shares.
15. REGISTER OF SHAREHOLDERS AND OTHER RIGHTS OF SHAREHOLDERS Pursuant to the understanding reached and agreement entered into between the competent agencyinchargeofsecuritiesundertheStateandtheoverseassecuritiesregulatoryagency,our Company may keep in overseas a register of the holders of the overseas listed foreign Shares and entrust an overseas entity to manage it. The original register of the holders of the overseas listed foreign Shares listed in Hong Kong shall be kept in Hong Kong.
OurCompanyshallkeepacopyoftheregisteroftheholdersoftheoverseaslistedforeign Shares at our residential address. The overseas entrusted entity shall at all times maintain consistency between the original and copy of the register of the holders of the overseas listed foreign Shares.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION In case of inconsistency between the original and copy of the register of the holders of the overseas listed foreign Shares, the original shall prevail.
Our Company must keep a complete register of Shareholders.
The register of Shareholders shall include the following:
(a) register of Shareholders kept at our residential address other than those specified in (b) and (c);
(b) register of the holders of our overseas listed foreign Shares kept at the location of the stock exchange where such Shares are listed;
(c) register of Shareholders kept in other locations according to the decision of the Board of Directors as required for the listing of the Shares.
Different parts of theShareholders’ register shall not overlap. The transfer of Shares registered in a certain part of the register of Shareholders shall not be registered elsewhere in the register of Shareholders as long as the Shares remain registered.
Any alteration or rectification to any part of the register of Shareholders shall be made in accordance with the laws in the place where such part of the register of Shareholders is maintained.
NochangeoftheregisterofShareholdersasaresultofsharetransfershallbemadewithin 30 days before theShareholders’general meeting is convened or within five days prior to the record date on which our Company decides to pay dividends.
When our Company convenes theShareholders’ general meeting, pays dividends, goes into liquidation or is involved in other actions that require the confirmation of equities, the convener of the Board of Directors orShareholders’ general meeting shall fix a date as the equity registration date, upon expiration of which the Shareholders whose names appear on the register of Shareholders shall be the Shareholders.
Any person who objects to the register of Shareholders and requests to register his or her name(title)intheregisterofShareholdersortoremovehisorhername(title)fromtheregister of Shareholders may apply to the court with jurisdiction to amend the register of Shareholders. The Shareholders are entitled to obtain the following information, including but not limited to:
(a) the Articles of Association after paying the cost;
(b) the right to inspect and copy the following after paying a reasonable fee:
(i) all parts of the register of Shareholders;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (ii) personal data of the Directors, Supervisors, President and other senior executive officers;
(iii) status of the share capital of our Company;
(iv) ourCompany’s latest audited financial statements and reports of Board of Directors, auditors, Supervisory Committee;
(v) special resolutions of our Company;
(vi) reports showing the aggregate par value, quantity, and maximum and minimum prices paid in respect of each class of shares repurchased by our Company since the end of the previous financial year and the total expenses incurred by our Company for this purpose (separated by domestic shares and foreign shares);
(vii) a copy of the latest annual application form filed with the SAIC or other relevant authorities;
(viii) minutes ofshareholders’general meetings, Board of Directors and Supervisory Committee; and
(ix) counterfoil of the corporate bonds, resolutions.
The Company places all the above-mentioned documents and other applicable documents as required by the Hong Kong Listing Rules at the Hong Kong address of the Company for inspection of shareholders and the public.
Whenever a Shareholder proposes to inspect the relevant information as described in the preceding clause or requests materials, he or she shall provide our Company with written documents certifying the type and number of the Shares held and our Company shall provide the relevant information and materials in accordance with the requirements of the Shareholder after verifying his or her identity.
16. QUORUM OFSHAREHOLDERS’ GENERAL MEETINGS
If the number of Shares carrying voting rights represented by the Shareholders intending to attend the meeting exceeds one half of the total number of Shares carrying voting rights, our Company may convene theShareholders’ general meeting. If the number of a class of Shares carrying voting rights represented by the Shareholders intending to attend the meeting exceeds one half of the total number of such class of Shares, our Company may convene a classifiedShareholders’ meeting.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION 17. RESTRICTIONS ON RIGHTS OF THE CONTROLLING SHAREHOLDERS
Apart from the obligations required in laws, administrative rules and regulations or the listing rules of the stock exchange on which the Shares are listed, the controlling shareholder shall not make any decision that is detrimental to the interest of all or part of the Shareholders on the following issues by exercising his or her Shareholder voting rights:
(a) releasing the Directors and Supervisors from the responsibility of acting honestly in the best interest of our Company;
(b) permitting the Directors and Supervisors (for their own orothers’ interests) to deprive our Company of assets in any form, including, but not limited to, any opportunity that is beneficial to our Company;
(c) permitting the Directors and Supervisors (for their own orothers’ interests) to deprive the Shareholders of their personal rights and interests, including, but not limited to, any dividend distribution or voting right, but excluding the restructuring of our Company approved at theShareholders’ general meeting pursuant to the Articles of Association.
18. COMPANY LIQUIDATION
Under any of the following circumstances, our Company shall be lawfully dissolved and liquidated:
(a) the term of operations of our Company specified in the Articles of Association expires or any other events of dissolution specified in the Articles of Association occur;
(b) theShareholders’ general meeting adopts a resolution to dissolve our Company; (c) our Company needs to be dissolved for the purpose of merger or division;
(d) our Company is declared legally bankrupt as a result of failure to pay debts upon maturity;
(e) the business licence of our Company is revoked, and our Company is ordered to close or terminate according to applicable laws; and
(f) where our Company encounters significant difficulties in business and management, continuous survival may be significantly detrimental to the interests of the Shareholders, and the difficulties may not be overcome through other means, Shareholders who hold more than10% of the Shares carrying voting rights may request thepeople’s court to dissolve our Company.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Where our Company is dissolved due to the provisions set forth in (a), (b), (d) and (e) above, the liquidation team shall be established within 15 days and the personnel of the liquidation team shall consist of the Directors or the relevant persons determined by means of an ordinary resolution. In the event of failure to establish the liquidation team on time, the creditors may request thepeople’s court to designate the relevant persons to form the liquidation team to effect liquidation. In the event that our Company is dissolved in accordance with the provisions set forth in (d) above, thepeople’s court shall organise the Shareholders, related agencies and professionals to form the liquidation team to effect liquidation pursuant to the relevant provisions of the law.
If the Board of Directors decides to dissolve our Company (except where our Company is liquidated after declaring bankruptcy), the Board of Directors shall state in the notice of theShareholders’ general meeting convened for this purpose that the Board of Directors has performed a comprehensive investigation of the status of our Company and believes that our Company is able to pay off all of our debts within 12 months of the start of liquidation.
After the resolution to dissolve our Company is adopted by theShareholders’ general meeting, the powers and duties of the Board of Directors shall terminate immediately.
In accordance with the instructions of theShareholders’general meeting, the liquidation team shall at least once a year report at theShareholders’general meeting on the income and expenditure of the liquidation team, progress of the business and liquidation of our Company, and submit a final report at theShareholders’general meeting upon completion of liquidation. Withintendaysoftheestablishmentoftheliquidationteam,thecreditorsshallbenotified andanannouncementshallbepublishedinanynewspaperrequiredbythelawsandregulations or designed by the national securities regulatory agency within 60 days. The creditors shall declare their claims to the liquidation team within 30 days of the date on which the notice is received or 45 days of the date of announcement if the notice is not received. The liquidation team shall carry out registration of thecreditors’ claims.
The liquidation team shall exercise the following powers during the liquidation period: (a) notify or publish an announcement to all creditors;
(b) take stock of ourCompany’s assets and prepare a balance sheet and a list of assets, respectively;
(c) deal with and liquidate any pending business associated with our Company;
(d) pay off all outstanding taxes and those taxes incurred during the liquidation period; (e) settle claims and debts;
(f) dispose of the remaining assets of our Company after paying up all the debts; and (g) represent our Company in any civil litigation action.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION After taking stock of the assets of our Company and preparing the balance sheet and list of properties, the liquidation team shall draw up a liquidation scheme and submit it to theShareholders’ meeting orpeople’s court for approval.
Following dissolution and liquidation of our Company, if the liquidation team finds that, after taking stock of ourCompany’s assets and preparing the balance sheet and list of assets, that the assets are insufficient to pay the debts, it shall immediately apply to thepeople’s court to declare bankruptcy.After our Company is declared insolvent by ruling of thepeople’s court, the liquidation team shall turn over matters regarding the liquidation to thepeople’s court. Upon completion of liquidation of our Company, the liquidation team shall prepare a liquidation report, income and expenditure report and financial record during the liquidation period, which, after being verified by a PRC-registered accountant, shall be submitted to ourShareholders’ general meeting orpeople’s court or other related competent agencies for approval.
Within 30 days of the date of approval by theShareholders’meeting orpeople’s court or other related competent agencies, the liquidation team shall submit the above-mentioned documents to the company registration authority and apply for cancellation of our registration and publish an announcement on its termination.
19. OTHER IMPORTANT PROVISIONS FOR OUR COMPANY OR THE
SHAREHOLDERS
(a) General Provisions
Our Company is a permanently existing joint stock company with limited liability. The Articles of Association is binding on the Shareholders, Directors, Supervisors and senior management. These personnel may assert their rights in connection with the affairs of our Company based on the Articles of Association. Pursuant to the Articles of Association, Shareholders may sue Shareholders, Shareholders may sue the Directors, Supervisors, President and other senior executive officers, Shareholders may sue our Company, and our Company may sue Shareholders, Directors, Supervisors, President and other senior executive officers.
(b) Capital increase and decrease
Our Company may, based on its requirements for operation and development and in accordance with the relevant provisions of laws, administrative regulations and the Articles of Association and by special resolution(s) at theshareholders’general meeting and completing required procedures by the related law, administrative regulations, approve an increase of capital.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Our Company may increase stock capital by the following means:
(i) public offering of shares;
(ii) non-public offering of shares;
(iii) place new Shares with existing Shareholders;
(iv) give new Shares to existing Shareholders;
(v) convert the reserve funds into share capital;
(vi) other means approved by law, administrative rules and regulations and the competent authority.
Our Company may decrease our registered share capital in line with the provisions of the Articles of Association. If our Company decreases our registered capital, we must prepare the balance sheet and list of assets.
AfterourCompany’sreductionincapital,ourregisteredcapitalmaynotbelessthan the statutory minimum amount.
(c) Shareholders
The Shareholders are persons lawfully holding the Shares and whose names (titles) are already listed in the register of Shareholders. Each Share of the same type has the same rights and assumes the same obligations.
Shares issued by our Company to overseas investors and subscribed to in foreign currenciesareknownasforeignShares.ForeignSharesthatarelistedoverseasareknown as overseas listed foreign Shares. Overseas investors refer to investors in other countries, Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan who subscribe to the Shares issued by our Company. Domestic Shareholders refer to investors within the territory of the PRC that subscribe to the Shares issued by our Company. Both domesticShareholdersandforeignShareholdersareordinaryShareholders,entitledtothe same rights and assuming the same obligations. The rights of our ordinary Shareholders are as follows:
(i) toreceivedistributionofdividendsandotherformsofbenefitsaccordingtothe number of Shares held;
(ii) torequest,convene,presideover,participatein,orappointashareholderproxy by law to participate in and exercise corresponding rights at theShareholders’ meeting;
(iii) to supervise our business and operational activities, provide suggestions or submit queries;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (iv) to transfer, gift or pledge the shares held according to the provisions of the laws, administrative regulations, related provisions of the security regulatory authority where the Shares are listed, as well as the Articles of Association; (v) to obtain relevant information according to the provisions of the Articles of Association;
(vi) to participate in the distribution of the remaining assets of our Company according to the number of shares held upon our termination or liquidation; (vii) to request our Company to purchase Shares of Shareholders objecting to a resolution adopted at theShareholders’general meeting concerning the merger or separation of our Company;
(viii) other rights conferred by laws, administrative rules and regulations and the Articles of Association.
Where any Shareholder holding more than5% of the Shares with voting rights pledges the Shares he or she holds, the Shareholder shall make a written report to our Company on the date this occurred.
When any person who owns rights and interests directly or indirectly exercises any right without disclosing such rights and interests to our Company, our Company shall not infringe upon any right attached to these shares by freezing or through other means.
Our Company shall adopt the registered method for the Shares.
The Share certificates are signed by the chairman of the Board of Directors. Where the stock exchange on which the Shares are listed requires our other senior executive officers to sign the Share certificates, they shall also be signed by other such personnel. The Share certificates shall become effective after being affixed with the stamp of our Company or print-stamped. Affixing our Company stamp or our securities stamp to the Share certificates is subject to the authorisation of the Board of Directors. The signature ofthechairmanoftheBoardorotherrelatedseniorexecutiveofficersmayalsobeprinted on the Share certificates. In the case of paperless transactions, the Share certificates shall be subject to separate requirements of the securities regulatory agency where the Shares are listed.
If any person whose name appears in the register of Shareholders or requests to register his or her name (title) in the register of Shareholders loses his or her Share certificates (that is, “original Share certificates”), he or she may apply to our Company to reissue new Share certificates for those Shares.
IncaseaholderofdomesticSharesappliestoourCompanyforareissueafterlosing the Share certificates, the matter shall be dealt with pursuant to related provisions of the Company Law.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION IntheeventaholderofoverseaslistedforeignSharesappliesforreissueafterlosing Share certificates, the matter shall be dealt with pursuant to the laws and listing rules of the stock exchange where the register of holders of the overseas listed foreign Shares is kept, or other related provisions. If a holder of H shares loses Share certificates and applies for a replacement issue, the Share certificates shall be issued in compliance with the following requirements:
(i) The applicant shall submit the application in the standard format designated by our Company and attach a notary certificate or legal declaration. The contents of the notary certificate or legal declaration shall include the reason for theapplicant’srequest,circumstancesandevidenceoflossofSharecertificates,as well as a statement that nobody else may request to be registered as a Shareholder with respect to the pertinent Shares.
(ii) Before deciding to issue new Share certificates, our Company does not receive any statement in which any person other than the applicant requests to be registered as the Shareholder with respect to the Shares.
(iii) If our Company decides to issue new Share certificates to the applicant, we shall publish an announcement in a newspaper designated by the Board of Directors indicating that we plan to re-issue new Share certificates. The announcement period shall be 90 days and the announcement shall be published at least once every 30 days.
(iv) Before publishing the announcement indicating that we plan to re-issue new Sharecertificates,ourCompanyshallsubmitacopyoftheannouncementtobe published to the securities exchange on which the Shares are listed and may publish the announcement after receiving a reply from the stock exchange confirming that the announcement has been displayed at the stock exchange. The period of displaying the announcement at the stock exchange is 90 days. If the application for re-issue of new Share certificates if not approved by the registered Shareholders of the related Shares, our Company shall mail the copy of the announcement to be published to the Shareholders.
(v) In the event that nobody raises any objection to the re-issue of new Share certificates to our Company, upon expiration of the 90-day display period of the announcement specified in (iii) and (iv) above, the new Share certificates may be re-issued according to the application.
(vi) Whenre-issuingnewSharecertificates,ourCompanyshallimmediatelycancel the original Share certificates and register the cancellation and replacement issue on the register of Shareholders.
(vii) All expenses incurred by our Company from the cancellation of the original Share certificates and replacement issue of the new Share certificates shall be borne by the applicant. Before the applicant has provided reasonable security, our Company shall have the right to refuse to take any action.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (d) Shareholders Failing to be Contacted
With regard to the dividend warrant sent by mail to the Shareholder by our Company, our Company has the right to stop mailing the dividend warrant to the ShareholderifthedividendhasbeenmailedtwicetotheShareholderwithouthavingbeen cashed.If,whenthefirsttimeitismailed,thedividendwarrantfailstoreachtherecipient and is returned, our Company may exercise this right.
Our Company is entitled to sell the Shares of a overseas listed foreign Shareholder failing to be contacted by the ways which the Board of Directors consider appropriate subject to the following requirements:
(i) our Company has paid dividends at least three times on these Shares within 12 years, but no one has claimed the dividends during that period;
(ii) upon expiration of the 12-year period, our Company publishes an announcement in a newspaper, indicating our intention to sell the Shares and notifies the stock exchange where the Shares are listed.
(e) Regulations on the Powers of the Board of Directors and Convening the Board ofDirectors’ Meetings
The Board of Directors is responsible to theShareholders’ general meeting and exercises the following powers:
(i)toconvenetheShareholders’generalmeetingandreportonworktothegeneralShareholders’ meeting;
(ii) implement the resolutions of theShareholders’ general meeting;
(iii) set our business and investment plans;
(iv) devise our annual financial budget and closing account plans;
(v) devise our profit distribution and loss offset plans;
(vi) set the plans for increasing or decreasing our registered capital, the issuance of corporate bonds or other securities, as well as the public listing programme; (vii) formulate plans for major purchase and buyback of the Shares, merger, separation, dissolution and changing the form of our Company;
(viii) determine such matters as our external investment, purchase/sale of major assets, asset collateralisation, providing external guarantees and entrusting wealth management, connected transactions and so on within the scope authorised by theShareholders’ general meeting, apart from other regulations of the securities regulatory agency and stock exchange where our Company is listed;
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (ix) decide on the setup of our internal management organisation;
(x) appoint or dismiss the President and secretary of the Board of Directors; based on the nomination of the President, appoint or dismiss the vice President, chief financial officer and other senior executive officers of our Company, and determine their remuneration, rewards and sanctions;
(xi) set our basic management systems;
(xii) set plans for amending the Articles of Association;
(xiii) manage the disclosure of company information;
(xiv) propose the appointment or replacement of the accounting firm that performs audits for our Company at theShareholders’ general meeting;
(xv) attendtotheworkreportofourPresidentandreviewtheworkofthePresident; and
(xvi) other powers and duties authorised by the law and administrative regulations or the Articles of Association, andShareholders’ general meeting.
All of the above resolutions adopted by the Board of Directors, except those in (vi), (vii) and (xii) and provisions of external guarantees must be approved by more than a two-thirds vote of the Directors, shall be approved by a simple majority of votes by the Directors.
Meetings of the Board of Directors shall be convened at least four times a year and be called by the chairman of the Board of Directors, and a notice shall be sent to all DirectorsandSupervisorsfourteendaysbeforethemeetingisconvened.Inanemergency, as proposed by the chairman or more than one-third of the Directors or the general manager of our Company, a provisional Board ofDirectors’ meeting may be convened notwithstanding the restrictions of the Articles of Association on the meeting notice.
Shareholders representing more than one-tenth of voting power or more than one-third of the Directors or the Supervisory Committee may propose convening aprovisionalBoardofDirectors’meeting.Thechairmanshallconveneandpresideoverthe Board of Directors meeting within ten days of receiving the proposal.
TheDirectorsshallattendtheBoardofDirectorsmeetinginperson.Intheeventthat Directors are unable to attend the meeting for some reason, the Directors may appoint in writing other Directors to attend the Board of Directors meeting and a proxy of attorney shall specify the scope of authorisation.
If a Director fails to attend the Board of Directors meeting in person twice consecutively and has not appoint another Director to attend the Board of Directors meeting, the Director shall be deemed to be unable to perform his or her duties, and the Board of Directors shall propose to theShareholders’ general meeting to dismiss and replace the Director.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Meetings of the Board of Directors shall be attended by more than one-half of the Directors (including Directors that appoint in writing other Directors to attend the Board ofDirectorsintheirplacepursuanttotheprovisionsoftheArticlesofAssociation)before the Board of Directors meeting can be convened. Each Director has one vote. Resolutions made by the Board of Directors must be approved by more than one-half of theDirectors’ votes.
WhereaDirectorisconnectedtoalegalpersoninvolvedinaresolutionoftheBoard meeting, that Director may not exercise the right to vote on the resolution or exercise the right to vote on behalf of other Director(s). The Board meeting may be convened only if it is attended by more than one-half of unconnected Directors and the resolutions of the Board meeting shall be approved by more than one-half of the votes of the unconnected Directors. In the event that the number of unconnected Directors attending the Board meeting is less than three, the matter shall be submitted to the generalShareholders’ meeting for deliberation.
(f) Independent Director
The members of the Board of Directors shall at least include one third independent Directors, and at least one independent Director shall be an accounting expert. The independent Directors shall carry out responsibilities in accordance with appropriate requirements of the laws, administrative rules and regulations, as well as regulations of the departments.
(g) Secretary of the Board of Directors
The secretary of the Board of Directors must be a natural person with the requisite expertise and experience and be appointed by the Board of Directors.
(h) Supervisory Committee
Our Company shall set up a Supervisory Committee.
The Supervisory Committee consists of three Supervisors and includes one chairman.
The Supervisors serve three-year terms and may be re-elected. The chairman of the Supervisory Committee shall be appointed and dismissed by more than a two-thirds vote of the members of the Supervisory Committee.
The Supervisory Committee shall consist of two representatives of the Shareholders and one representative of our Company staff. The representatives of the Shareholders shall be elected and dismissed by theShareholders’ general meeting while the representative of the staff shall be elected and dismissed by our Company staff.
The Directors, President, and other senior executive officers shall not also serve as Supervisors.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION Meetings of the Supervisory Committee shall be held at least once every six months and it is the responsibility of the chairman of the Supervisory Committee to convene such meetings.
The Supervisory Committee exercises the following powers:
(i) to review and provide written opinions on the regular reports prepared by the Board of Directors from time to time.
(ii) examine the financial standing of our Company;
(iii) supervise the performance of the Directors, President and other senior executive officers and put forward suggestions for dismissing any Directors or senior executive officers who violate laws, administrative rules and regulations, the Articles of Association or resolution(s) of theShareholders’ general meeting;
(iv) require the Directors, President and other senior executive officers to take corrective measures when their actions are detrimental to our interests;
(v) propose to convene an extraordinary general meeting, convene and preside over ourShareholders’general meeting when the Board of Directors does not perform the responsibilities for convening and presiding over theShareholders’ meeting as stipulated in the Company Law;
(vi) submit proposals at theShareholders’ general meeting;
(vii) initiatelitigationagainsttheDirectorsandseniormanagementaccordingtothe provisions of Article 152 of the Company Law;
(viii) check financial reports, operating results and profit distribution scheme, as well as other financial data to be submitted at theShareholders’ general meeting, and where anything doubtful is discovered, can on behalf of our Company appoint certified accountants and professional auditors to assist in reviewing this;
(ix) may carry out an investigation of any abnormality identified in the operations of our Company and, when necessary and at the expense of our Company, hire professional organisations such as accounting and law firms, etc., to assist in the investigation;
(x) other powers and duties stipulated in the Articles of Association.
The Supervisors may attend the Board meeting as observers, query or provide suggestions on the resolutions of the Board meeting.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (i) President
Our Company includes one President, who is appointed or dismissed by the Board of Directors. The President usually serves at least three-year terms and may be re-appointed.
The President attends the Board meeting as observers. As the President is not a Director, he or she does not have the right to vote at a Board meeting(s).
The President is responsible to the Board of Directors and exercises the following powers:
(i) to be responsible for business and operational management, and implement related resolutions of the Board of Directors and report to the Board of Directors on work;
(ii) be responsible for formulating and implementing our annual business plan; (iii) draft the setup scheme of our internal management organisation;
(iv) draft our basic management policies;
(v) set our specific rules and regulations;
(vi) request the Board of Directors to appoint or dismiss the vice President and chief financial officer of our Company;
(vii) decide on the appointment and dismissal of management personnel other than those whose appointment and dismissal shall be determined by the Board of Directors; and
(viii) other powers conferred by the Board of Directors or the Articles of Association.
(j) Reserves
When the annual after-tax profits of our Company are distributed, our Company must allocate10% of the profits to our statutory reserve. When the total amount of the statutory reserve reaches or exceeds50% of ourCompany’s registered capital, no more allocations need to be provided.
If our statutory reserve is insufficient to offset our losses incurred during the previous year, the profits generated during the current year must be used to make up the lossesbeforeallocatingthestatutoryreserveinaccordancewiththerequirementssetforth in the preceding paragraph.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION After allocation to the statutory reserve from the after-tax profits of our Company, we may also allocate to the reserves at will from after-tax profits in line with the resolution(s) adopted at theShareholders’ general meeting.
After offsetting the losses and allocating to the reserve, all remaining profits shall be distributed to the Shareholders based on the proportion of respective shareholdings unless theArticles ofAssociation stipulate that the profits shall not be distributed in this manner.
If, in violation of the requirements of the preceding paragraph, theShareholders’ general meeting distributes the profits to the Shareholders before offsetting the losses of our Company and allocating funds to the statutory reserve, the Shareholders must return all profits distributed in violation of our Company regulations.
The Shares held by our Company shall not participate in the distribution of the profits.
Our reserves must be used for offsetting our losses, expanding the scale of business andoperationsorforconversionintocapitaltoincreaseourcapital,butthecapitalreserve shall not be used to offset our losses.
When the statutory reserve is converted into registered capital, the balance of the reserve shall not be less than25% of the amount before converting the statutory reserve to the increase of the registered capital.
(k) Settlement of Disputes
Our Company shall comply with the following rules governing the settlement of disputes:
(i) Any dispute or claim arising out of the rights and obligations conferred on or imposed by the Articles of Association, the Company Law or any other laws and regulations with respect to the affairs of our Company between the holders of the overseas listed foreign Shares and our Company, holders of the overseas listed foreign Shares and the Directors, Supervisors, President or other senior executive officers of our Company, and holders of the overseas listed foreign Shares and the holders of domestic Shares shall be referred by the parties concerned to arbitration for resolution.
Wheresuchadisputeorclaimisreferredtoarbitration,itshallbefortheentire claim or dispute. For any person who has cause for action for the same reason or whose participation is needed for settling the dispute or claim, if his or her or its identity is our Company, a Shareholder, Director, Supervisor, President or other senior officer of our Company, that person shall submit to the arbitration. Disputes associated with the definition of Shareholders and the register of the Shareholders might not be resolved through arbitration.
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APPENDIX IV SUMMARY OF ARTICLES OF ASSOCIATION (ii) ThearbitrationapplicantmaychoosetheCIETACforarbitrationinaccordance with its arbitration rules or the HKIAC for arbitration in accordance with its securities arbitration rules. Once the arbitration applicant refers the dispute or claim to arbitration, the opposite party must undergo the arbitration procedures at the arbitration institution chosen by the arbitration applicant.
IfthearbitrationapplicantchoosestheHKIACforarbitration,eitherpartymay request the arbitration to be done in Shenzhen pursuant to the requirements of the securities arbitration rules of the HKIAC.
(iii) PRC laws shall apply in the event of settlement of any dispute or claim arising for the reasons stated in (i) above by means of arbitration, unless otherwise provided for in the laws and administrative rules and regulations.
(iv) The decision reached by the arbitration institution shall be final and binding upon the parties concerned.
(v) For disputes not involving (i), (ii), (iii) and (iv) above, the parties may choose to settle these by litigation or arbitration.
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APPENDIX V TAXATION AND FOREIGN EXCHANGE TAXATION
Taxation in the PRC
Taxes Applicable to the Company
Enterprise Income Tax
In accordance with the Enterprise IncomeTax Law of thePeople’s Republic of China (the “EIT Law”) ( ) promulgated on 16 March 2007 and the Regulations for the Implementation of the Enterprise Income Tax Law (
) promulgated on 6 December 2007, domestic enterprises and foreign-invested enterprises are subject to enterprise income tax at a uniform rate of25%. In accordance with the EIT Law and its implementation regulations, the Notice of the State Council on the Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax ) provides for a five-year transition periodinrespectofenterprisesincorporatedpriorto16March2007andentitledtoconcessions in enterprise income tax, so that the applicable tax rates for such enterprises would gradually be standardised at25%. Enterprises entitled to tax concessions for a specified period may continue to enjoy such concessions in the same manner as stipulated by the former tax law, administrative regulations and relevant documents until the conclusion of the concession period; as for such enterprises, those who have not benefited from the above tax concessions due to the absence of profit may enjoy the concession period starting from the effective date of the EIT Law, namely, 1 January 2008.
Business Tax
According to the Provisional Regulations of thePeople’s Republic of China on Business Tax ( ) which came into effect on 1 January 1994 and amended on 10 November 2008 and the Detailed Rules for Implementation of the Provisional Regulations of thePeople’s Republic of China on Business Tax (
), which came into effect on 25 December 1993 and amended on 28 October 2011, taxpayers providing taxable services in the PRC are generally subject to a business tax levied on the rate of3%,5% or5% to20% as the case may be, unless otherwise provided for. Forentitiesorindividualswhoprovidetaxablelabourservices,transferintangibleassetsorsell real estate in the PRC without a domestic business establishment, business taxes shall be withheldandpaidbytheirdomesticagentsontheirbehalf.Forentitiesorindividualswhohave not appointed any domestic agents, business taxes shall be withheld and paid by the transferees or buyers on their behalf.
Value-added Tax (VAT)
According to the Provisional Regulations of thePeople’s Republic of China on Value-added Tax ( ) amended on 10 November 2008 and the Detailed Rules for Implementation of the Provisional Regulations of thePeople’s Republic of China on Value-added Tax ( ) amended on 28
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APPENDIX V TAXATION AND FOREIGN EXCHANGE October 2011, all taxpayers selling goods or providing processing, repairing or replacementservicesandimportofgoodswithinthePRCshallpayVAT.Thetaxrateof17%shallbelevied on general taxpayers selling or importing various goods. The rate applicable to the export of goods by taxpayers shall be nil, unless otherwise stipulated. Furthermore, pursuant to the Pilot Scheme for the Conversion of Business Tax to VAT ( ) promulgated by the Ministry of Finance and the StateAdministration of Taxation (the “SAT”), the State started to introduce taxation reforms in a gradual manner with effect from 1 January 2012, whereby the collection of VAT in lieu of business tax was implemented on a trial basis in regions showing significant radiating effects in economic development and providing strong cases as examples of the reform, beginning with production service industries such as transportation and certain modern service industries.
Stamp duty
According to the Provisional Regulations of thePeople’s Republic of China on Stamp Duty ( ) enacted on 6August 1988 and summarily revised on 8 January 2011 and the Detailed Rules for Implementation of the Provisional Regulations of thePeople’s Republic of China on Stamp Tax (
)enactedon29September1988,allentitiesandindividualsexecutingorreceivingtaxable documents within the PRC shall pay stamp duty. The list of taxable documents includes purchaseandsalecontracts,processingcontracts,constructionprojectcontracts,propertylease contracts, cargo freight contracts, warehousing and storage contracts, loan contracts, property insurance contracts, technical contracts, other documents in the nature of contracts, title transfer deeds, business account books, certificates of rights, licences and other documents confirmed to be taxable by the Ministry of Finance.
Taxes Applicable to Shareholders of Companies
Dividend-related Tax
Individual Investors
1. Domestic Individuals
According to the Ministry of Finance and the SAT Notice on the Issues relating to Implementing the Differentiation of Individual Income Tax Policy of ListedCompany’s DividendandBonus(
, Cai Shui[2012] No. 85), from 1 January 2013, for the shares of listed companies that the individual investors obtain from the public offering and transfer market, the individual income tax will be levied based on the stock dividends and bonuses and the investors may enjoy the tax reduction based on the length of the stock holding period for the computation of their taxable income.
The above-referenced notice (Cai Shui[2012] No. 85) applies to the A-share and B-share listed companies. For the shareholders holding the H shares, there are no definite regulations to stipulate whether the future dividends and bonuses can be applied to the above individual income tax differentiation levy policy. If not applicable, the income of all future stock dividends and bonuses shall be deemed to be taxable.
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APPENDIX V TAXATION AND FOREIGN EXCHANGE 2. Foreign Individuals
For the individual holders of H shares of the Company who are non-PRC nationals, according to the Ministry of Finance and the SAT Notice on Certain Policy Issues of Individual Income Tax ( , Cai Shui Zi[1994] No. 20), the dividends, bonuses that foreign individuals obtain from foreign-invested enterprises will be temporarily exempted from individual income tax. In accordance with the Several Opinions of the NDRC and other Departments on Deepening the Reform of Income Distribution System Approved and Dispatched by the State Council (GUO FA[2013] No. 6) (
), tax preference of income tax levied on the foreign individuals with respect to the dividends, bonus and others sourced from the foreign invested enterprises is abolished.
Enterprise
Pursuant to theArrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect toTax on Income (
) signed on 21 August 2006, the PRC Government may impose tax on dividends paid to a Hong Kong resident including a natural person and a legal entity from a PRC company, but such tax shall not exceed10% of the total sum of the dividends payable.IfaHongKongresidentholds25%ormoreofequityinterestinaPRCcompany,suchtaxshall not exceed5% of the total sum of dividends payable by that PRC company.
Pursuant to the Enterprise Income Tax Law of the PRC (
) effective from 1 January 2008 and its implementation regulations, a non-resident enterprise which has not established a representative office or other premises or whose established representative office or premises are not actually related to dividends and bonuses received shall be subject to a10% enterprise income tax on its revenues sourced in the PRC. Such withholding tax may be reduced or exempted pursuant to an applicable double taxation treaty.
Pursuant to the SAT Notice on Issues concerning the Withholding and Payment of Enterprise Income Tax on the Dividends Paid by PRC-Resident Enterprises to Overseas Non-resident Corporate H-share Holders ( H
) promulgated by the SAT which became effective on 6 November 2008, a PRC-resident enterprise shall withhold and pay the enterpriseincometaxatauniformrateof10%inrespectofdividenddistributionsmadefortheyear2008 and beyond. The Reply to Questions on Levying Enterprise Income Tax on Dividends Derived by Non-resident Enterprises from Holding B-shares ( B
, Guo Shui Han[2009] No. 394) issued by the SAT on 24 July 2009 further provides that any PRC-resident enterprise that is listed on overseas stock exchange must withhold enterprise income tax at a rate of10% on dividends that it distributes to non-resident enterprises. Such withholding tax may be reduced or exempted pursuant to an applicable double taxation treaty.
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APPENDIX V TAXATION AND FOREIGN EXCHANGE Tax Treaties
InvestorswhoarenotPRCresidentsbuteitherresideincountrieswhichhaveenteredinto double-taxation treaties with the PRC or reside in Hong Kong or Macau SAR may be entitled to a reduction of the withholding tax imposed on the dividends paid to such investors by a PRC company. The PRC currently has signed double-taxation avoidance arrangements with Hong Kong and Macau SAR respectively, and has double-taxation avoidance treaties with a number of other countries, including but not limited to Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore and the United Kingdom, etc. Under each of such double taxation avoidance treaties or arrangements, the rate of withholding tax imposed byPRC’s taxation authorities may be generally reduced.
Share Transfer-related Tax
Individual Investors
1. Domestic Individuals
According to the Ministry Of Finance and SAT Notice on the Continued Exemption ofIndividualIncomeTaxesLeviedonIncomeObtainedfromtheTransferofShares(
, Cai Shui Zi[1998] No. 61), for the domestic investors of the B-shares, income derived from the transfer of company B shares shall be exempted from individual income tax. For the domestic investors holding H-shares, there are no clear policy guidelines as to whether the stated Cai Shui Zi[1998] No. 61 can apply to the transfer of company H shares; if it cannot be applied, such investors need to pay individual income tax in accordance with relevant laws and regulations.
2. Foreign Individuals
For the foreign individuals of the company holding H shares, the SAT Notice on the Taxation of Profits from the Transfer of Stocks (Equity) and Dividend Income of Foreign-investedEnterprises,ForeignEnterprisesandForeignIndividuals(
( )
, Guo Shui Fa[1993] No. 045) in which the foreign individuals may be exempted from income tax for the H shares transfer, has been repealed by Guo Ban Fa[2010] No.28 issued by the State Council, but there is no further definite policy guidance in this domain. If such foreign individuals constitute the tax residents in the territory ofChinainaccordancewiththerelevantprovisionsorwhentheirstockquantityexceed25% of thecompany’s total share capital, because the above Cai Shui Zi[1998] No. 61 is not applicable to the H-shares, such foreign investment may need to pay individual income tax in accordance with the relevant provisions of the Individual Income Tax Law.
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APPENDIX V TAXATION AND FOREIGN EXCHANGE Enterprise
Pursuant to the EIT Law and its implementation regulations and the SAT Notice on Certain Taxation Issues relating to the Persistent Implementation of the Enterprise Income Tax Law ( ), the revenue of an enterprise arising from the transfer of equity interests shall be recognised upon the transfer agreement becoming effective and the completion of formalities relating to the change in equity interests. The amount of revenue generated from the transfer of equity interests less costs incurred for the acquisition of such equity interests shall be deemed as income arising fromthetransferofequityinterests.Incomputingitsincomearisingfromthetransferofequity interests, an enterprise should not deduct the amount of retained earnings (unallocated profit) of the investee that might be attributable to the equity interests transferred. The final computation of enterprise income tax shall be based on such income.
Estate Duty or Inheritance Tax
There is no estate duty or inheritance tax levied in the PRC at present.
Stamp Duty
According to the terms of the Provisional Regulations of thePeople’s Republic of China on Stamp Duty ( ), the applicable stamp tax of the PRC on transfers of shares of PRC public companies shall not apply to purchases and disposals of H shares that take place outside the PRC. Such provisional regulations provide that PRC stamp tax shall be only levied on various types of documents executed or received and legally bound within the territory of the PRC and protected under PRC laws.
Taxation in Hong Kong
Tax on dividends
Under the current practise of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us.
Taxation on capital gains and profits
No tax is imposed in Hong Kong in respect of capital gains from the sale of the H Shares. Trading gains generated from the sale of H Shares by persons who carry out trade, professional services and businesses carried in Hong Kong will be subject to Hong Kong profit tax, if such gains are derived or sourced from such trade, professional services and businesses carried out in Hong Kong. Currently, the profit tax rate is16.5% for corporations and no more than15% for unincorporated businesses. Gains from sales of the H Shares effected on the Hong Kong Stock Exchange will be deemed to be derived from or sourced in Hong Kong. Therefore, persons engaged in securities trading or dealing businesses in Hong Kong are liable to paying Hong Kong profit tax for trading gains received from the sale of H Shares on the Hong Kong Stock Exchange.
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APPENDIX V TAXATION AND FOREIGN EXCHANGE Stamp duty
Hong Kong stamp duty will be payable by the purchaser on every purchase, and by the seller on every sale, of the H Shares. The duty is charged at the ad valorem rate of0.1% of the consideration for, or (if greater) the value of, the H Shares transferred on each of the seller and purchaser. In other words, a total of0.2% is currently payable on a typical transaction for the sale and purchase of H Shares. In addition, a fixed duty ofHK$5.00 is chargeable on each instrument of transfer (if required). Where a sale or purchase of H Shares is effected by a person who is not a resident of Hong Kong and who has not paid any stamp duty payable on the instrument of transfer, the transferee shall be liable to the payment of such duty and other duties payable in respect of relevant instrument of transfers (if any).
Estate duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on 11 February 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers areneededforanapplicationforagrantofrepresentationinrespectofholdersofHShareswho die on or after 11 February 2006.
PRC LAWS AND REGULATIONS CONCERNING FOREIGN EXCHANGE CONTROL Regulations for the Foreign Exchange Control ( )
To strengthen foreign exchange administration, maintain balance in international payments and facilitate the stable development of national economy, the PRC Government continues to exercise foreign exchange control.The Regulations for Foreign Exchange Control of thePeople’s Republic of China ( ) (amended in 2008) (the “Foreign Exchange Control Regulations”) are among the major foreign exchange control laws and regulations of China.
Under the Foreign Exchange Control Regulations, there are two categories of foreign exchange transactions: those under the current account and those under the capital account. Current account items refer to transactions conducted on a recurrent basis by way of international payments, such as trade income and expenditure, labour service income and expenditure and one-off transfer of funds; capital account items refer to transactions involving capital inflow or outflow of international payments that will result in the increase/decrease of assets and liabilities, such as direct investments, various types of loans and securities investments.
Articles 12 to 15 in Chapter Two of the Foreign Exchange Control Regulations provide for the administration of foreign exchange activities for current account items. Article 12 stipulates that foreign exchange income and expenditure for current account items should be based on true and legal transactions. Financial institutions engaged in the business of foreign exchange settlement and sales should conduct reasonable examinations on the authenticity of receipts evidencing the transaction and its consistency with foreign exchange income and expenditure.Moreover,theSAFEisauthorisedtocarryoutsupervisionandinspectionoverthe aforesaid matters.
– V-6–
APPENDIX V TAXATION AND FOREIGN EXCHANGE Regulations for Administration of Settlement, Sale and Payment of Foreign Exchange( )
On 20 June 1996, the PBOC promulgated Regulations for Administration of Settlement, Sale and Payment of Foreign Exchange (the “Settlement Regulations”) which became effective on 1 July 1996. The Settlement Regulations abolish the remaining restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items.
Clarification and Explanation of Issues relating to Regulations for the Settlement, Sale and Payment of Foreign Exchange and the SAFE Notice on Issues relating to the Processing of Outbound Remittance of Profit, Dividend and Bonus by Designated Foreign Exchange Banks (
)
According to the Clarification and Explanation of Issues relating to Regulations for the Settlement, Sale and Payment of Foreign Exchange (
) issued by the SAFE on 4 July 1996, the outbound remittance of profit by foreign-invested enterprises is considered a current account item. Procedures for the remittance of profit by foreign-invested enterprises shall include:
• Obtaining a tax certificate from the SAT and local tax bureau to certify compliance with relevant tax rules, before remitting profit to overseas locations; and
• Processing at designated foreign exchange banks.
According to the SAFE Notice on Issues relating to the Processing of Outbound Remittance of Profit, Dividend and Bonus by Designated Foreign Exchange Banks (
) promulgated by the SAFE on 22 September 1998 and further amended on 21 September 1999, foreign investors remittingtheirprofitentitlementsoverseasshallfurnishthefollowingdocumentstodesignated foreign banks:
• tax certificate evidencing the payment of tax;
• audit report on annual profit, dividend and distribution furnished by an accounting firm;
• board resolution on profit distribution and dividend;
• foreign exchange registration certificate;
• capital verification report furnished by an accounting firm; and
• other materials required by the SAFE authorities.
– V-7–
APPENDIX V TAXATION AND FOREIGN EXCHANGE If a foreign exchange transaction is considered an activity under the capital account, it must be registered with the SAFE authorities and approved by the SAFE and relevant government authorities depending on the business nature of the enterprise making the application.
In the event of violation of relevant foreign exchange control regulations, orders may be given for the underlying assets to be transferred back to the PRC and a penalty, normally equivalent to30% of the amount concerned, will be imposed. In case of serious violations, personnel in charge may be subject to criminal prosecution.
The Circular of the SAFE on Issues Concerning Foreign Exchange Control for Overseas Listing ( )
The SAFE issued the Circular of the SAFE on Issues Concerning Foreign Exchange Control for Overseas Listing ( ) (the “Circular”) on 28 January 2013, which sets out the detailed regulatory requirements on the foreign exchange control for the overseas listing of a domestic company.
Registration of the overseas listing
Pursuant to the Circular, the domestic company shall, within 15 business days upon its initial offerings of the overseas listing, go through registration formalities with the local hand of the SAFE at the place of its incorporation. Within 15 business days upon occurrence of any of the following circumstances, the domestic company shall go through the alteration registration of its overseas listing: (a) altering corporate name, registered address, majorshareholders’ information and other basic information; (b) changing capital such as issuing additional shares or increasing capital by capital reserves, surplus reserves or undistributed profits etc.; (c) redeeming overseas listed shares or converting bonds into shares; (d) altering the overseas listingcompany’s equity structure due to completion of domesticshareholders’ reducing, increasing, transferring in or out overseas listed shares; (e) altering plans and use of originally registered raised overseas funds.Where the domestic company delists from overseas securities market, it shall, within 15 business days upon the delisting, handle the cancellation ofoverseaslistingregistrationwiththelocalhandoftheSAFEattheplaceofitsincorporation. Where any domestic shareholder of the domestic company intends to increase or reduce his/her overseas listed shares after the overseas listing, he/she shall go through registration formalities with the local hand of the SAFE at his/her locality. Within 15 business days upon alteration of arrangement of a domesticshareholder’s overseas listed shares in the domestic company (inclusive of alteration of the ratio, price, duration or progress etc. of increasing or reducing the overseas listed shares), such shareholder shall go through the alteration registration with the local hand of the SAFE at his/her locality.
– V-8–
APPENDIX V TAXATION AND FOREIGN EXCHANGE Special domestic and overseas account
The domestic company shall, based on its registration certificate of the overseas listing, open respective special domestic account for the initial offerings (or additional offerings) and redemption at the bank where it is located so as to handle the corresponding funds remittance and transfer. The domesticcompany’s proceeds of the overseas listing may be transferred back to corresponding special domestic accounts or be kept in special overseas accounts, provided that the use of proceeds shall comply with the prospectus or corporate bonds collection documents,shareholders’ circulars, resolutions of theShareholders’ Meetings and other publicly disclosed documents. Where the proceeds raised by issuing corporate bonds convertible into shares need to be transferred back, such proceeds shall be transferred to the special foreign debt account and used pursuant to relevant regulations on foreign debt administration. In the event of the proceeds raised by issuing other forms of securities, such proceedsshallbetransferredtothecorrespondingspecialdomesticaccountswithrespecttothe overseas listing. In addition, a domestic shareholder of the domestic company shall, based on his/her registration certificate of the overseas listing shares, open respective special domestic account for increasing or reducing overseas listing shares at the bank where his/her domicile is located so as to handle the corresponding funds remittance and transfer. The domestic company and its domestic shareholders shall, within 10 business days upon opening, alteration or closing of the special overseas account, report relevant information to and file with the local hand of the SAFE in a timely manner.
Where a domestic shareholder intends to increase his/her overseas listed shares, he/she may use overseas funds in compliance with relevant regulations or remit from home. In the event of remitting from home, the shareholder may handle the transfer of funds back to the special domestic account with respect to increasing listed shares and remittance overseas by submitting relevant registration certificate of overseas listed shares. In the event of surplus of remittedfundsforincreasingoverseaslistedsharesuponcompletionthereof,suchsurplusshall be remitted back to the special domestic account, among which the amount of originally self-owned foreign exchange and its interests shall be transferred back to the original domestic account with respect to foreign exchange while the amount of originally purchased foreign exchange and its interests may be settled. The transfer and remittance formalities may be handled at banks by submitting the registration certificate of overseas listed shares. The domesticshareholder’s capital income obtained due to reducing or transferring overseas listed shares or the domesticcompany’s delisting from overseas securities market etc. shall be transferred back to the special domestic account with respect to reducing overseas listing shares within two years upon acquirement of the aforesaid income. The settlement of the above-mentioned transferred funds (if any) may be handled at banks by submitting the registration certificate of overseas listed shares.
– V-9–
APPENDIX V TAXATION AND FOREIGN EXCHANGE Redemption of the overseas listed shares
Where the domestic company intends to redeem overseas listed shares, it may use overseas funds in compliance with relevant regulations or remit from home. In the event of remitting from home, the domestic company may handle the transfer of funds back to the special domestic account with respect to the redemption and remittance overseas by submitting relevant registration certificate of overseas listing which specifies redemption information. In the event of surplus of remitted funds for redemption upon completion thereof, such surplus shall be remitted back to the special domestic account with respect to the redemption, among which the amount of originally self-owned foreign exchange and its interests shall be transferred back to the original domestic account with respect to foreign exchange while the amount of originally purchased foreign exchange and its interests may be settled. The transfer and remittance formalities may be handled at banks by submitting the registration certificate of overseas listing.
– V-10–
APPENDIX VI STATUTORY AND GENERAL INFORMATION A. FURTHER INFORMATION ABOUT OUR COMPANYAND OUR SUBSIDIARIES 1. Incorporation
Our Company was established in the PRC under the relevant PRC laws, rules and regulations as a sino-foreign joint venture on 26 January 1985 under the name of Zhuhai Special Economic Zone Livzon Pharmaceutical Development Co., Ltd. (
) which was renamed as Zhuhai Special Economic Zone Livzon Pharmaceutical (Group) Co., Ltd. ( ( ) ) (“Zhuhai Livzon”) in June 1989.
In September 1992, pursuant to the Approval on Agreeing the Establishment of Zhuhai Livzon Pharmaceutical Group Inc. (Yue Gu Shen[1992] No. 45 document) (
( [1992]45 )) issued by the Joint Examination Group for Pilot Joint Stock Enterprise in Guangdong Province (
)andGuangdongEconomicSystemReformCommittee(
), Zhuhai Livzon was approved to undergo a capital restructuring and be transformed into a sino-foreign fund raising company limited by shares under the name of Zhuhai Special Economic Zone Livzon Pharmaceutical Group Inc. ( ), raising funds from (a) Macau Nam Yue (Group) Co., Ltd. ( ( ) ), Zhuhai Credit Cooperative Union (
), Guangdong Medicine Group Co., Ltd. ( ), Zhuhai Medicine Corporation ( ), Guangzhou Medicines& Health Products Imp.& Exp. Corp ( ), Zhuhai Trust and Consultancy of the Bank of China ( ) and Zhuhai Guihua Employees Mutual Aid Association( )whichconvertedtheirinterestsinZhuhaiLivzon’snet assets into Shares; and (b) other domestic legal persons and internal staff.
In 1993, pursuant to Yue Zheng Jian Fa Zi[1993] No. 001 document (
[1993]001 ) issued by the Guangdong Securities Regulatory Commission (
), Shen RenYin Fu Zi[1993] No. 239 document ( [1993]
239 )issuedbythePBOC,ShenzhenSpecialEconomicZonebranchofthePBOC(
) and Zheng Jian Fa Shen Zi[1993] No. 19 document (
[1993]19 ) issued by CSRC, our B Shares andAShares were approved to be listed on the Shenzhen Stock Exchange on 20 July 1993 and 28 October 1993, respectively.
On 22 October 1996, pursuant to theApproval on the 3rdAmendment to theArticles of Association of the Joint Venture Zhuhai Special Economic Zone Livzon Pharmaceutical Group Inc. (Zhu Te Yin Wan Zi Guan Zi[1996] No. 451) (
( [1996]
451 )) issued by the Zhuhai Special Economic Zone Office for the Introduction of Foreign Investment ( ), the name of our Company was changed to Livzon Pharmaceutical Group Inc. ( ).
– VI-1–
APPENDIX VI STATUTORY AND GENERAL INFORMATION We have established a principal place of business in Hong Kong at Flat 02, 17/F, Bayfield Building, 99-101 Hennessy Road, Wanchai, Hong Kong and have been registered as a non-Hong Kong company under Part XI of the Companies Ordinance on 27 August 2013. Ms. Cheng Pik Yuk ( ) has been appointed as the authorised representative of our Company for the acceptance of service of process and notices on behalf of our Company in Hong Kong.
As our Company was incorporated in the PRC, our corporate structure and Articles ofAssociation are subject to the relevant laws and regulations of the PRC.Asummary of certain provisions of the Articles of Association is set out in Appendix IV to this listing document.Asummary of certain relevant aspects of the laws and regulations of the PRC is set out in Appendix III to this listing document.
2. Changes in share capital of our Company within the two years immediately preceding the date of this listing document
There has been no alteration in the share capital of our Company within the two yearsimmediatelyprecedingthedateofthislistingdocument.AsattheLatestPracticable Date, our issued share capital was RMB295,721,852, which comprised 183,728,498 A Shares and 111,993,354 B Shares. Upon completion of the Listing, our issued share capital will be RMB295,721,852, which will comprise 183,728,498 A Shares and 111,993,354 H Shares.
3. Resolutions passed at the extraordinary general meeting of our Company in relation to the Listing held on 20 February 2013
At an extraordinary general meeting of our Company held on 20 February 2013, among other things, the following resolutions were passed by the Shareholders:
(a) the Articles of Association has been approved and adopted, which shall only become effective on the Listing Date, subject to the approval of competent authorities;
(b) the Implementation Plan in relation to relevant details of the proposed conversion of all 111,993,354 B Shares into H Shares and the proposed listing of H Shares on the Main Board of the Hong Kong Stock Exchange by way of introduction, has been approved and adopted, subject to the approval of competent authorities;
(c) the Board of Directors and its authorised representatives were authorised to deal with all relevant matters relating to the proposed conversion of all 111,993,354 B Shares into H Shares and the proposed listing of H Shares on theMainBoardoftheHongKongStockExchangebywayofintroduction;and
– VI-2–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (d) the validity period of all relevant resolutions passed at such extraordinary general meeting of our Company in relation to the proposed conversion of all 111,993,354 B Shares into H Shares and the proposed listing of H Shares on theMainBoardoftheHongKongStockExchangebywayofintroductionshall be 12 months from the date of approval and adoption of all such relevant resolutions, being 20 February 2013.
4. Changes in the share capital of our major subsidiaries
Please refer to the section headed “History and Development– Our Shareholding and Group Structure” in this listing document for further details of our subsidiaries. The following alterations in the share capital (or registered capital, as the case may be) of our major subsidiaries have taken place within the two years preceding the date of this listing document:
(a) On 8 February 2012, the application for the absorption and merger of Zhuhai FTZ Livzon Pharmaceutical Co., Ltd. ( ) and an increase in the registered capital of Zhuhai FTZ Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) from RMB102,280,000.00 to RMB128,280,000.00 was approved by the relevant governmental authority.
5. Particulars of our major subsidiaries
The particulars of our major subsidiaries as at the Latest Practicable Date were as follows:
(1) Zhuhai Modern Chinese Medicine High Technology Co., Ltd.
Place of establishment : The PRC
Date of establishment : 28 May 2001
Nature of enterprise : Limited liability company
Registered capital : RMB6,000,000.00
Paid-up capital : RMB6,000,000.00
Parties and equity interest : Our Company : 75.00% Livzon Group Livzon : 25.00% Pharmaceutical Factory
( )
Nature of business : Research and development of Chinese
medicine, Chinese medicine engineering
technology and equipment; technical
services and consulting
– VI-3–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (2) Livzon Group Livzon Pharmaceutical Factory
Place of establishment : The PRC
Date of establishment : 26 November 1989
Nature of enterprise : Limited liability company
Registered capital : RMB442,109,309.00
Paid-up capital : RMB442,109,309.00
Parties and equity interest : Our Company : 74.99% Ando Development : 25.01% Limited
( )
Nature of business : Production and sale of Chinese herbal
medicines, Chinese herbal medicine
drinking tablets, ready-made Chinese
medicine, chemical raw materials and their preparations, antibiotics, biochemical
drugs, radioactive pharmaceuticals,
diagnostic drugs, medical devices, sanitary materials, biological products, biochemical reagents, pharmaceutical intermediates,
health food, genetic engineering products, chemical raw materials, cosmetics
produced by the company itself (the
company has been engaged in production and operation of project above according to the pharmaceutical manufacturing
permit (Yue No. 20110261), which is valid until 31 December 2015. The company
shall not engage in any operation not yet permitted by the permit)
(3) Livzon Group Livzon Pharmaceutical Marketing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 31 December 1993
Nature of enterprise : Limited liability company
Registered capital : RMB20,000,000.00
Paid-up capital : RMB20,000,000.00
Parties and equity interest : Our Company : 60.04% Ando Development : 39.96% Limited
( )
Nature of business : Sale (including wholesale and retail) of
the products produced by our Company
and our subordinate pharmaceutical
factories
– VI-4–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (4) Zhuhai Livzon Pharmaceutical Trading Co., Ltd.
Place of establishment : The PRC
Date of establishment : 22 June 1991
Nature of enterprise : Limited liability company
Registered capital : RMB60,000,000.00
Paid-up capital : RMB60,000,000.00
Parties and equity interest : Our Company : 66.70% Livzon Group Livzon : 33.30% Pharmaceutical Factory
( )
Nature of business : Import and export of products including
traditional Chinese and western drug
preparations, raw materials,
pharmaceutical intermediates (the
company has been engaged in the
operation according to the document
([1994] No. 157) issued by Economic and Trade Commission of Guangdong
Province); wholesale of ready-made
Chinese medicines, chemical raw
materials, chemical medicine preparation, antibiotics bulk medicines, antibiotics
preparation, biochemical drugs, biological products (except vaccines), anabolic
agents, peptide hormones (the permit is
valid until 23 September 2014)
– VI-5–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (5) Shanghai Livzon Pharmaceutical Manufacturing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 11 April 1995
Nature of enterprise : Limited liability company
Registered capital : RMB87,328,900.00
Paid-up capital : RMB87,328,900.00
Parties and equity interest : Our Company : 36.00% Livzon Group Livzon : 15.00% Pharmaceutical Factory
( )
Mr. Ding Gongcai : 49.00% ( )
Nature of business : Freeze-dried powder (hormones), powder for injection (hormones), small volume
injections, tablets, hard capsules, bulk
medicines, pharmaceutical ancillary
materials (the company has been engaged in the operation according to the permit), the business on import and export of
goods and technologies (the company has been engaged in the operation subject to
administrative permits and according to
the permits)
– VI-6–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (6) Zhuhai FTZ Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 9 September 1993
Nature of enterprise : Limited liability company
Registered capital : RMB128,280,000.00
Paid-up capital : RMB128,280,000.00
Parties and equity interest : Lizhu (Hong Kong) Co., : 50.04% Limited
( ( ) )
Ando Development : 39.96% Limited
( )
Livzon Group Livzon : 10.00% Pharmaceutical Factory
( )
Nature of business : Production and sales of sterile bulk
medicines, bulk medicines produced by
the company itself (the company has been engaged in the operation according to the pharmaceutical manufacturing permit (Yue No. 20110242, which is valid until 31
December 2015), pharmaceutical
intermediates, chemical products (the
items above exclude hazardous chemicals and toxic chemicals); warehousing
– VI-7–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (7) Zhuhai Livzon Diagnostic Reagents Inc.
Place of establishment : The PRC
Date of establishment : 26 January 1989
Nature of enterprise : Company limited by stock
Registered capital : RMB46,450,837.00
Paid-up capital : RMB46,450,837.00
Parties and equity interest : Our Company : 51.00% Zhuhai Zheng He Co., Ltd. : 49.00% ( )
Nature of business : Production of in vitro diagnostic reagents (the company has been engaged in the
operation according to the permit Yue No. 20110266, which is valid until 31
December 2015); production of type II
6840 in vitro diagnostic reagents, type III 6840 in vitro diagnostic reagents, type II 6840 clinical testing instrument type III
6840 clinical testing instrument (the
licence is valid until 4 March 2017);
wholesale of the vitro diagnostic reagents (the permit is valid until 8 September
2014); types III and II of clinical testing
instruments, cardiopulmonary bypass and blood processing equipment, disinfection and sterilisation equipment and apparatus, equipment and utensils for operating
theatre, emergency room, consultation
room, medical radionuclide equipment;
sale of type II medical optical apparatus
instruments and endoscopic equipment,
medical polymer materials and products
infusion (except one-time use infusion
blood transfusion apparatus) (the licence
is valid until 22 February 2017); sale of
vitro diagnostic reagents (except for
special diagnostic reagents) (the permit is valid until 22 May 2017); the company is also engaged in import and export
businesses according to[2003] No. 92
circular issued by Foreign Economic and Trade Commission of Zhuhai, leasing of
medical equipment
– VI-8–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (8) Datong Livzon Qiyuan Medicine Co., Ltd.
Place of establishment : The PRC
Date of establishment : 27 May 2005
Nature of enterprise : Limited liability company
Registered capital : RMB4,000,000.00
Paid-up capital : RMB4,000,000.00
Parties and equity interest : Livzon Group Limin : 92.50% Pharmaceutical
Manufacturing Factory
( )
Hunyuan County Heng Xin : 1.875% Agricultural Technology
Promotion Co., Ltd.
(
)
Hunyuan County Heng Qi : 5.625% Products Trading Co., Ltd.
(
)
Nature of business : Planting, processing, purchase and sale of astragalus ( ) and other Chinese herbal medicines (the company shall not engage in any operation prohibited by the laws
and regulations of the State and shall not engage in any operation before obtaining approval and can only engage in the
operation within the period of the permit)
– VI-9–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (9) Longxi Livzon Shenyuan Medicine Co., Ltd.
Place of establishment : The PRC
Date of establishment : 28 April 2009
Nature of enterprise : Limited liability company
Registered capital : RMB4,000,000.00
Paid-up capital : RMB4,000,000.00
Parties and equity interest : Livzon Group Limin : 90.00% Pharmaceutical
Manufacturing Factory
( )
Longxi County Tong Yuan : 10.00% Pharmaceutical Co., Ltd.
( )
Nature of business : Planting, purchase, sale, storage of the
Chinese herbal medicine allowed by the
State (except varieties restricted or
prohibited by the State or the project
which is operated with a permit)
(10) Zhuhai Livzon Advertising Co., Ltd.
Place of establishment : The PRC
Date of establishment : 20 July 2006
Nature of enterprise : Limited liability company
Registered capital : RMB1,000,000.00
Paid-up capital : RMB1,000,000.00
Parties and equity interest : Our Company : 10.00% Zhuhai Livzon : 90.00% Pharmaceutical Trading
Co., Ltd.
( )
Nature of business : Design, production, agency and placement of all types of advertisements in the PRC and overseas
– VI-10–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (11) Zhuhai Livzon Baiameng Biological Materials Co., Ltd.
Place of establishment : The PRC
Date of establishment : 6 December 1993
Nature of enterprise : Limited liability company
Registered capital : RMB12,000,000.00
Paid-up capital : RMB12,000,000.00
Parties and equity interest : The business licence was revoked on 9
November 2004 due to overdue
application for the annual inspection.
Nature of business : Production and sale of wet synthetic
hydroxyapatite powder (
), plasma spray HA-Ti dental
Implants ( HA-Ti )
and artificial hip ( ), HA porous ceramic particles (HA ),
porous hydroxyapatite ceramic products
( ) produced by
the company itself;70% of the products
for exports,30% of products for sales in the PRC
– VI-11–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (12) Zhuhai Livzon Meidaxin Technological Development Co., Ltd.
Place of establishment : The PRC
Date of establishment : 11 April 2000
Nature of enterprise : Limited liability company
Registered capital : RMB1,000,000.00
Paid-up capital : RMB1,000,000.00
Parties and equity interest : The business licence was revoked on 9
November 2004 due to overdue
application for the annual inspection.
Nature of business : Research and development of medicine,
information of health products and
products technologies; technology
consulting, technology services
(13) Livzon Group Livzon Medical Research Centre
Place of establishment : The PRC
Date of establishment : 19 May 1992
Nature of enterprise : Limited liability company
Registered capital : RMB10,000,000.00
Paid-up capital : RMB10,000,000.00
Parties and equity interest : Our Company : 60.04% Ando Development : 39.96% Limited
( )
Nature of business : Research and development of Chinese and OTC western medicine, bulk medicines,
pharmaceutical intermediates, Chinese
herbal medicine, traditional Chinese
medicine drinking tablets, health
supplements, medical cosmetics, sanitary materials, biochemical reagents, medical
devices etc., and related technological
consultation and transfer
– VI-12–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (14) Jiaozuo Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 6 July 2009
Nature of enterprise : Limited liability company
Registered capital : RMB70,000,000.00
Paid-up capital : RMB70,000,000.00
Parties and equity interest : Zhuhai FTZ Livzon : 75.00% Hecheng Pharmaceutical
Manufacturing Co., Ltd.
(
)
Ando Development : 25.00% Limited
( )
Nature of business : Production and sales of pharmaceutical
intermediates, chemical products (the
items above exclude hazardous chemicals and toxic chemicals) (Permit is required
for the production and operation of those items included in the scope above
involving special permit)
(15) Zhuhai Livzon MAB Biological Technology Co., Ltd.
Place of establishment : The PRC
Date of establishment : 2 July 2010
Nature of enterprise : Limited liability company
Registered capital : RMB100,000,000.00
Paid-up capital : RMB100,000,000.00
Parties and equity interest : Our Company : 51.00% Joincare : 49.00% Nature of business : Research and development on the
technologies of bio-pharmaceutical
products and antibody drugs
– VI-13–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (16) Livzon Group Vaccine Engineering Inc.
Place of establishment : The PRC
Date of establishment : 27 September 2010
Nature of enterprise : Company limited by stock
Registered capital : RMB65,000,000.00
Paid-up capital : RMB65,000,000.00
Parties and equity interest : Our Company : 83.85% Guangzhou Galaxy : 16.15% Sunshine Biological
Products Co., Ltd.
(
)
Nature of business : Research and development on the
technologies of bio-pharmaceutical
products and vaccines
(17) Wenshan Livzon Sanqi Plantation Co., Ltd.
Place of establishment : The PRC
Date of establishment : 17 May 2011
Nature of enterprise : Limited liability company
Registered capital : RMB9,200,000.00
Paid-up capital : RMB9,200,000.00
Parties and equity interest : Our Company : 51.00% Mr. Chen Gaoze : 49.00% ( )
Nature of business : Planting and sale of radix notoginseng (
) and sale of agricultural by-products
(exclude grain purchase) (the operation of activities above involving the special
approval by the laws, administrative
regulations of the State can only be
conducted within the prescribed period)
(18) Livzon Group Ningxia Xinbeijiang Pharmaceutical Manufacturing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 17 August 2011
Nature of enterprise : Limited liability company
Registered capital : RMB100,000,000.00
Paid-up capital : RMB100,000,000.00
Parties and equity interest : Our Company : 90.00% Livzon Group Xinbeijiang : 10.00% Pharmaceutical
Manufacturing Inc.
(
)
Nature of business : Operations not yet commenced
– VI-14–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (19) Livzon Group Ningxia Fuxing Pharmaceutical Manufacturing Co., Ltd. Place of establishment : The PRC
Date of establishment : 17 August 2011
Nature of enterprise : Limited liability company
Registered capital : RMB100,000,000.00
Paid-up capital : RMB100,000,000.00
Parties and equity interest : Our Company : 90.00% Livzon Group Fuzhou : 10.00% Fuxing Pharmaceutical
Co., Ltd.
(
)
Nature of business : Operations not yet commenced
(20) Sichuan Guangda Pharmaceutical Manufacturing Co., Ltd.
Place of establishment : The PRC
Date of establishment : 1 December 1993
Nature of enterprise : Limited liability company
Registered capital : RMB149,000,000.00
Paid-up capital : RMB149,000,000.00
Parties and equity interest : Our Company : 57.41% Winmain Investments : 42.59% Limited
Nature of business : Production and sales of Chinese and OTC western medicine, research of ready-made Chinese and western medicine, and
development of new products
– VI-15–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (21) Livzon Group Xinbeijiang Pharmaceutical Manufacturing Inc.
Place of establishment : The PRC
Date of establishment : 28 March 1993
Nature of enterprise : Company limited by stock
Registered capital : RMB134,925,200.00
Paid-up capital : RMB134,925,200.00
Parties and equity interest : Our Company : 92.14% Other legal persons : 4.01% Employees : 3.85% Nature of business : Bulk medicines (Tobramycin ( ), Pravastatin ( ), Lovastatin Spill
( ), Orlistat ( ),
Tacrolimus ( ), Mycophenolate
Mofetil ( ),
b-carotene (b-
), Acarbose ( )), small volume injections, capsules, tablets, granules
preparation (the company has been
engaged in the operation according to the pharmaceutical manufacturing permit,
which is valid until 31 December 2015).
Export of products and related
technologies by the companies and its
fellow members, imports of raw and
ancillary materials, machinery and
equipment, spare parts and related
technology required for production and
scientific research, processing imported
materials processing of materials, samples and assembly of spare parts, compensation trade by the company (the company has
been engaged in the operation according
to circular[99] No. 2256 issued by
Foreign Trade and Economic
Commission); product research and
development of products; bulk medicines (Polymyxin Sulfate ( )),
Salinomycin Sodium Premixes (
) (Antibiotics Fermentation (
)) (the company has been engaged in the operation according to veterinary drug production permit, which is valid until 30 November 2016)
– VI-16–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (22) Livzon Group Limin Pharmaceutical Manufacturing Factory
Place of establishment : The PRC
Date of establishment : 24 May 1997
Nature of enterprise : Limited liability company
Registered capital : RMB61,561,010.00
Paid-up capital : RMB61,561,010.00
Parties and equity interest : Our Company : 65.10% Ando Development : 34.90% Limited
( )
Nature of business : Production and operation of various
pharmaceutical preparations, bulk
medicines (except those permitted
products), food additives, feed additives,
nutritional supplements, the research and development of new drug products, sale of goods in the PRC and overseas
(23) Livzon Group Fuzhou Fuxing Pharmaceutical Co., Ltd.
Place of establishment : The PRC
Date of establishment : 13 November 1989
Nature of enterprise : Limited liability company
Registered capital : USD41,700,000.00
Paid-up capital : USD41,700,000.00
Parties and equity interest : Our Company : 75.00% Ando Development Limited : 25.00% ( )
Nature of business : Production of antibiotic bulk medicines
(Netilmicin Sulfate ( ),
Pasiniazid ( ), Amikacin Sulfate
( ), Erythromycin
Ethylsuccinate ( ), N(2)-L-
Propionate Aminoacyl-L-Glutamyl
Ammonia Amide (N(2)-L- -L-
), Rifampicin ( ), Tobramycin
Sulfate ( )), sterile bulk
medicines (Vancomycin Hydrochloride (
)) (the pharmaceutical
manufacturing permit is valid until 31
December 2015), intermediates and
preparations and chemical raw materials
for production of pharmaceutical
preparation products (excluding
flammable, explosives and hazardous
chemicals and those involving operations under permits)
– VI-17–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (24) Gutian Fuxing Pharmaceutical Co., Ltd.
Place of establishment : The PRC
Date of establishment : 21 August 1991
Nature of enterprise : Limited liability company
Registered capital : RMB26,700,000.00
Paid-up capital : RMB26,700,000.00
Parties and equity interest : Livzon Group Fuzhou : 75.00% Fuxing Pharmaceutical
Co., Ltd.
(
)
Livzon Group Livzon : 25.00% Pharmaceutical Factory
( )
Nature of business : Production of bulk medicines (Kanamycin Monosulfate ( ),
Tetracycline Hydrochloride ( ), Hydrochloric Chlortetracycline (
)) (valid to 31 December 2015);
production of non-sterile bulk medicines, Neomycin Sulfate ( )) (valid
until 6 November 2016) (Permit is
required for the operation of those items
included in the scope)
(25) Ando Development Limited
Place of incorporation : Hong Kong
Date of incorporation : 2 August 1988
Nature of enterprise : Limited liability company
Authorised share capital : HK$1,000,000 divided into 1,000,000
ordinary shares ofHK$1.00 each
Issued share capital : HK$500,000.00 divided into 500,000
ordinary shares ofHK$1.00 each
Registered owner : Lizhu (Hong Kong) Co., : 100.00% Limited
( ( ) )
Nature of business : General trading and investment holding
– VI-18–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (26) Lizhu (Hong Kong) Co., Limited ( )
Place of incorporation : Hong Kong
Date of incorporation : 28 March 1995
Nature of enterprise : Limited liability company
Authorised share capital : HK$61,000,000.00 divided into
61,000,000 ordinary shares ofHK$1.00
each
Issued share capital : HK$61,000,000.00 divided into
61,000,000 ordinary shares ofHK$1.00
each
Registered owner : Our Company : 100.00% Nature of business : General trading and investment holding
(27) Livzon Pharmaceutical Biotechnology Co., Limited
Place of incorporation : Hong Kong
Date of incorporation : 12 June 2000
Nature of enterprise : Limited liability company
Authorised share capital : HK$10,000.00 divided into 10,000
ordinary shares ofHK$1.00 each
Issued share capital : HK$80.00 divided into 80 ordinary shares ofHK$1.00 each
Registered owners : Lizhu (Hong Kong) Co., : 98.75% Limited
( ( ) )
Livzon Group Livzon : 1.25% Pharmaceutical Factory
( )
Nature of business : Pharmaceutical products and biological
technology. General trading and
investment holding
(28) Li Zhu (Macau) Limitada ( )
Place of establishment : Macau
Date of establishment : 15 February 2012
Nature of enterprise : Limited liability company
Registered capital : MOP100,000.00
Paid-up capital : MOP100,000.00
Parties and equity interest : Lizhu (Hong Kong) Co., : 99.00% Limited
( ( ) )
Ando Development : 1.00% Limited
( )
Nature of business : Operations not yet commenced
– VI-19–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (29) Companhia Macau Carason Limitada
Place of establishment : Macau
Date of establishment : 26 March 2012
Nature of enterprise : Limited liability company
Registered capital : MOP100,000.00
Paid-up capital : MOP100,000.00
Parties and equity interest : Zhuhai Livzon Diagnostic : 99.00% Reagent Inc.
( )
Li Lin : 1.00% Nature of business : Diagnostic reagent, equipment and
medical devices
(30) Winmain Investments Limited
Place of incorporation : British Virgin Islands
Date of incorporation : Incorporated on 22 March 1993 and
re-registered on 1 January 2007
Nature of enterprise : Limited liability company
Authorised share capital : USD50,000.00 divided into 50,000 shares of USD1.00 each
Issued share capital : USD1.00 represented by 1 share of
USD1.00
Registered owner : Lizhu (Hong Kong) Co., : 100.00% Limited
( ( ) )
Nature of business : Investment holding
– VI-20–
APPENDIX VI STATUTORY AND GENERAL INFORMATION 6. Particulars of our main two major associated companies
As at the Latest Practicable Date, we were interested in two major associated companies, particulars of which are as follows:
(1) Guangdong Blue Treasure Pharmaceutical Co., Ltd.
Place of establishment : The PRC
Date of establishment : 2 February 1994
Nature of enterprise : Sino-foreign joint venture
Registered capital : USD7,530,000.00
Paid-up capital : USD7,530,000.00
Parties and equity interest : Livzon Group : 29.75%
Xinbeijiang
Pharmaceutical
Manufacturing Inc.
(
)
Our Company : 8.50%
Sichuan Industrial : 4.25%
Institute of Antibiotics
of China Pharmaceutical
Group Corporation
Apotex Canada : 42.50%
Fermentation Co., Ltd.
Bioengineering Far East : 15.00%
Ltd.
Term of operation : 30 years. The term of operation of the
associated company may be extended if
the parties have submitted an application to the competent authority to apply for an extension of the term of operation.
Nature of business : Production and sale of bulk medicines
(Lovastatin, Pravastatin Sodium,
Tacrolimus) and intermediates
– VI-21–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (2) Tongyikangshimei Chain (Shenzhen) Co., Ltd. ( )
Place of establishment : The PRC
Date of establishment : 13 December 2004
Nature of enterprise : Sino-foreign enterprise
Registered capital : RMB100,000,000.00
Paid-up capital : RMB100,000,000.00
Parties and equity interest : Our Company : 35.00% BVI Tong Yi Chao Shang : 65.00% Drug Store PRC Holding
Co., Ltd.
(
)
Term of operation : 30 years. The term of operation of the
associated company may be extended if the parties have submitted an application to the competent authority to apply for an extension of the term of operation.
Nature of business : Sale of products
All transfer of registered share capital in the above associated companies are subject to pre-emptive rights (if any) of their respective partners as set out in the respective associated companies contracts (subject to revision from time to time) and articles of association. The entitlements of partners to profits, dividends and other distributions of the above associated companies are proportionate to their capital contribution ratios.
B. FURTHER INFORMATION ABOUT OUR BUSINESS
1. Summary of our material contracts
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by our Group within the two years immediately preceding the date of this document and are or may be material:
(a) a transfer agreement (the “TransferAgreement”) dated 25April 2013 entered into between Jiaozuo Joincare and Jiaozuo Livzon Hecheng Pharmaceutical Manufacturing Co., Ltd. ( ) (“Jiaozuo Livzon”) in relation to the transfer of land use rights situated in Jiaozuo, Henan from Jiaozuo Joincare to Jiaozuo Livzon at a consideration of RMB5.5684 million and other related matters; and
(b) a supplemental agreement to the Transfer Agreement dated 25 April 2013 entered into between Jiaozuo Joincare and Jiaozuo Livzon amending certain terms of the Transfer Agreement concerning the payment method of consideration.
– VI-22–
APPENDIX VI STATUTORY AND GENERAL INFORMATION 2. Our intellectual property rights
(a) Trademarks
As at the Latest Practicable Date, our Group was the registered owner of the following trademarks which are material to our business:
Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
HongKong 05 28April1998 28April2015 199908718
HongKong 05 18June2007 17June2017 300893926
HongKong 05 18June2007 17June2017 300893917
PRC 05 10November 9November 503255
1989 2019
PRC 05 20February 19February 583053
1992 2022
PRC 05 30March1992 29March2022 588380
PRC 05 28October1994 27October2014 712642
PRC 10 7July1995 6July2015 754317
PRC 05 21July1995 20July2015 756534
PRC 25 28August1995 27August2015 764023
PRC 42 14November 13November 771984
1994 2014
PRC 37 28November 27November 772783
1994 2014
– VI-23–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
PRC 35 7December1994 6December2014 773041
PRC 36 14December 13December 773568
1994 2014
PRC 30 21November 20November 792953
1995 2015
PRC 05 21March1996 20March2016 824334
PRC 05 21March1996 20March2016 824335
PRC 10 14June1996 13June2016 846580
PRC 05 7February1998 6February2018 1148532
PRC 05 28August1998 27August2018 1202275
PRC 05 28January1999 27January2019 1242236
PRC 05 7February1999 6February2019 1244204
PRC 05 7March1999 6March2019 1252281
PRC 05 28April1999 27April2019 1267731
PRC 05 21July1999 20July2019 1295241
PRC 05 28July2000 27July2020 1425437
PRC 05 28July2000 27July2020 1425438
PRC 05 28July2000 27July2020 1425483
PRC 05 7January2001 6January2021 1500446
– VI-24–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
PRC 05 14February 13February 1521714
2001 2021
PRC 05 14February 13February 1521715
2001 2021
PRC 05 14February 13February 1521824
2001 2021
PRC 05 14February 13February 1521829
2001 2021
PRC 05 14March2001 13March2021 1537836
PRC 05 14March2001 13March2021 1537900
PRC 05 7June2001 6June2021 1580402
PRC 05 7July2001 6July2021 1596409
PRC 05 7September 6September 1628404
2001 2021
PRC 05 7September 6September 1628431
2001 2021
PRC 05 7September 6September 1628461
2001 2021
PRC 05 14October2001 13October2021 1648507
PRC 05 14October2001 13October2021 1648514
PRC 05 21February 20February 1716404
2002 2022
PRC 05 21February 20February 1716407
2002 2022
PRC 05 14May2002 13May2022 1765636
PRC 05 28May2002 27May2022 1775588
PRC 05 14June2002 13June2022 1785577
– VI-25–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
PRC 05 28June2002 27June2022 1795576
PRC 05 28June2002 27June2022 1795577
PRC 05 21October2002 20October2022 1906774
PRC 05 7May2003 6May2023 3106329
PRC 05 7June2003 6June2023 3140626
PRC 05 7January2004 6January2014 3252754
PRC 05 7February2004 6February2014 3283791
PRC 05 21January2004 20January2014 3287846
PRC 05 7October2004 6October2014 3427951
PRC 05 21November 20November 3460626
2004 2014
PRC 05 21November 20November 3460643
2004 2014
PRC 05 14October2005 13October2015 3618468
PRC 05 7May2006 6May2016 3870631
PRC 05 21January2007 20January2017 4046790
PRC 34 21July2006 20July2016 4094729
PRC 06 14October2006 13October2016 4094730
– VI-26–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
PRC 14 28August2007 27August2017 4221278
PRC 12 7February2007 6February2017 4221279
PRC 09 7February2007 6February2017 4221280
PRC 07 7February2007 6February2017 4221281
PRC 21 28October2007 27October2017 4297796
PRC 20 7March2011 6March2021 4297797
PRC 18 21May2008 20May2018 4297798
PRC 42 14August2008 13August2018 4402905
PRC 43 14August2008 13August2018 4402906
PRC 44 14August2008 13August2018 4402907
PRC 05 14February 13February 4413650
2008 2018
PRC 12 28October2007 27October2017 4497435
PRC 14 14May2008 13May2018 4497436
PRC 18 21December 20December 4497437
2008 2018
PRC 38 28September 27September 4497438
2008 2018
PRC 40 28September 27September 4497439
2008 2018
PRC 43 28September 27September 4497440
2008 2018
– VI-27–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Registration Registration
Trademark Registration Class Date ExpirationDate Number
PRC 44 28September 27September 4497441
2008 2018
PRC 45 28September 27September 4497442
2008 2018
PRC 01 28September 27September 4534408
2008 2018
PRC 02 28September 27September 4534409
2008 2018
PRC 04 21June2008 20June2018 4534410
PRC 28 21November 20November 4534411
2008 2018
PRC 45 21September 20September 4534412
2008 2018
PRC 09 14December 13December 4534413
2007 2017
PRC 11 14December 13December 4534414
2007 2017
PRC 24 21November 20November 4534415
2008 2018
PRC 28 21November 20November 4534416
2008 2018
PRC 05 21October2008 20October2018 4594220
PRC 05 21December 20December 5223678
2009 2019
PRC 05 21February 20February 6110254
2010 2020
PRC 05 21July2010 20July2020 6934868
PRC 05 28February 27February 4054574
2007 2017
– VI-28–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (b) Patents
As at the Latest Practicable Date, our Group was the registered owner of the following patents which are material to our business:
Placeof Application
NameofInventionPatents Registration Date PatentNumber
ACRFtherapeuticagent(TCMComposition PRC 11November ZL200310110934.2 fortreatingtoxuria)andpreparationthereof 2003
( )
Amedicationtotreatcardio-cerebral-vascular PRC 20February ZL03104665.7
disorders( 2003
)
AnintravenouslyadministeredPanax PRC 7May2003 ZL03130709.4
NotoginsengSaponinsLDFinjection
therapeuticagentandpreparationthereof
( )
ApplicationofCompositionofCodonopsisand PRC 18June2003 ZL03137351.8
AstragalusinpreparationofMyocardial
Ischaemiamedications(
)
TheindicationsforCompositionofCodonopsis PRC 2September ZL03156284.1
andAstragalusinprophylaxisandtreatment 2003
ofacutecasesoflunginjury(
)
Asustained-releaseFamciclovircapsuleused PRC 30June2004 ZL200410027929.X forantiviraltherapyandpreparationthereof
(
)
TheindicationsforShenqiFuzhengInjection PRC 27October ZL200410087116.X ( ) 2004
AnimmunomodulatoryCompositionof PRC 13April2005 ZL200510064551.5 CodonopsisandAstragalusandpreparation
thereof(
)
PreparationprocessforFingeredCitron PRC 9June2005 ZL200510076974.9 compoundcapsule(
)
Anewsustained-releaseSDFSodiumFerulate PRC 7July2005 ZL200510082792.2 ( )
AnewHBVsurfaceantigenassaykit( PRC 5September ZL200510098412.4 ) 2005
TCMcompositionfortreatmentofavian PRC 20January ZL200610001538.X influenza,preparationandusagethereof( 2006
)
– VI-29–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Application
NameofInventionPatents Registration Date PatentNumber
Pharmaceuticalcompositionfortreatmentof PRC 20January ZL200610001539.4 avianinfluenza,preparationandusage 2006
thereof(
)
ApplicationofCompositionofCodonopsisand PRC 29April2006 ZL200610076684.9 Astragalusintreatmentofnervoussystem
disorders
(
)
PharmacologicalapplicationofCompositionof PRC 13June2006 ZL200610091884.1 CodonopsisandAstragalusinimprovingthe
qualitiesoflifeforsufferersofadvanced
tumour(
)
QualitycontroltechniquesforShenqiFuzheng PRC 19July2006 ZL200610098953.1 Injection( )
SubstitutedSulfoxidecompoundsand PRC 24March ZL200680001258.7 preparationandapplicationthereof( 2006
)
AliveBacillusBifiduspreparationandspecial PRC 2February ZL200710006529.4 bufferagentthereof( 2007
)
ARanitidineBismuthCitratetherapeuticagent PRC 29April2007 ZL200710107770.6 andpreparationthereof(
)
APancreaticKininogenaseTabletand PRC 6June2007 ZL200710110454.4 preparationthereof(
)
AmethodforpreparingDeoxyribonucleotideor PRC 5September ZL200710121398.4 itssaltproducts( 2007
)
Amethodforpreparingpharmaceutical PRC 11May2007 ZL200710098289.5 ingredientofPancreaticKininogenase
( )
CefodizimeSodiumandpreparationthereof( PRC 22October ZL200810171705.4 ) 2008
Thebulkfillerandpreparationthereoffor PRC 11February ZL200910007607.1 suppositoryorpasteointmentfortreatment 2009
ofProstatitis(
)
MethodforpreparingImidesDerivatives PRC 16October ZL200810167903.3 ( ) 2008
AmethodforsynthesisingValaciclovir PRC 9August2006 ZL200610104357.X Hydrochloride(
)
– VI-30–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Application
NameofInventionPatents Registration Date PatentNumber
APowderInjectionTherapeuticAgentfor PRC 23October ZL200910180006.0 treatmentofpepticulcerandpreparation 2009
thereof(
)
ApurificationmethodforChoragon PRC 12March ZL201010132780.7 ( ) 2010
Voriconazolebroad-spectrumantifungal PRC 5May2008 ZL200810094145.7 compounds,preparationandapplication
thereof(
)
ATCMcompositionforthepreparationforthe PRC 16June2009 ZL200910148341.2 preventionandtreatmentofswinefludrugs
and/orhealthproducts(
/
)
ApurificationmethodforGonadotrophin PRC 12March ZL201010132785.X ( ) 2010
The validity period for each of the above invention patents is 20 years, starting from the date on which the relevant application is filed.
Placeof Application
NameofUtilityPatentsorDesignPatents Registration Date PatentNumber
PackagingBox(BismuthPotassiumCitrate PRC 27October ZL200330116006.8 particles)( ( )) 2003
PackagingBox(BismuthPotassiumCitrate PRC 27October ZL200330116005.3 capsules)( ( )) 2003
PackagingBox(Oralbifidobacteriaviable PRC 27October ZL200330116010.4 preparations)( ( 2003
))
PackagingBox(Anti-viralGranules–Original PRC 3December ZL200430094362.9 pack)( ( - )) 2004
PackagingBox(LivzonWeiSanLianBismuth PRC 9December ZL200430096103.X PotassiumAluminium-plasticpackaging 2004
combinationsetsdrug)(
))
PackagingBox(CefodizimeforInjection–1g PRC 7December ZL200730332494.4–Kanglineng–2007)( ( 2007
1g- -2007))
PackagingBox(CefodizimeforInjection–2g PRC 7December ZL200730332496.3–Kanglineng–2007)( ( 2007
2g- -2007))
– VI-31–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Placeof Application
NameofUtilityPatentsorDesignPatents Registration Date PatentNumber
PackagingBox(BifidobacteriumViable PRC 7December ZL200730332505.9Capsule–LivzonChangLe10s-2007) 2007
( ( -
10s-2007))
PackagingBox( ) PRC 7December ZL200730332490.6 2007
PackagingBox(CefodizimeforInjection– PRC 7December ZL200730332499.7250mg–Kanglineng–2007)( ( 2007
250mg- -2007))
PackagingBox(BismuthPotassiumCitrate PRC 7December ZL200730332503.X GranulesCapsule-HB-2007) 2007
( ( -HB-2007))
PackagingBox(LivzonChangLe-HB-2007) PRC 7December ZL200730332509.7 ( ( -HB-2007)) 2007
PackagingBox(XinNaoLiLongHB-2008) PRC 5December ZL200830221165.7 ( ( HB-2008)) 2008
PackagingBox(Xueshuantong5ml-08) PRC 5December ZL200830221170.8 ( ( 5ML-08)) 2008
PackagingBox(Xueshuantong2ml*-2008)( PRC 5December ZL200830221171.2 ( 2ML*-2008)) 2008
PackagingBox(Anti-viralGranulesHB-08) PRC 5December ZL200830221172.7 ( ( HB-08)) 2008
PackagingBox(Gemifloxacin3S-08) PRC 8December ZL200830221327.7 ( ( 3S-08)) 2008
PackagingBox(Anti-viralGranulesSugar-free PRC 10December ZL200830221602.5–08)( ( -08)) 2008
PackagingBox(XinNaoLiLong10s-2008) PRC 10December ZL200830221600.6 ( ( 10s-2008)) 2008
PackagingBox(YiLiAn–IlaprazoleTables PRC 10December ZL200830221603.X 5-6-2008) 2008
( ( 5-6-2008))
PackagingBox(Anti-viralGranulesSucrose- PRC 10December ZL200830221604.4type–08)( ( -08)) 2008
Label(YiLiAn5-6HB08) PRC 20April2009 ZL200930074165.3 ( ( 5-6HB08))
Label(YiLiAn–Ilaprazole5-08) PRC 20April2009 ZL200930074168.7 ( ( - 5-08))
PackagingBox(YiLiAnMediumSize PRC 20April2009 ZL200930074170.4 Ilaprazole5-08)( (
5-08))
PackagingBox(YiLiAn5-6-HB2008) PRC 20April2009 ZL200930074163.4 ( ( 5-6-HB2008))
PackagingBox(YiLiAnMediumSizeBox PRC 20April2009 ZL200930074169.1 HB-08)( ( HB-08))
Tablets(YiLiAn–Ilaprazole5-08) PRC 15May2009 ZL200930077133.9 ( ( - YLA5-08))
– VI-32–
APPENDIX VI STATUTORY AND GENERAL INFORMATION The validity period for each of the above utility patents and design patents is 10 years, starting from the date of the relevant application is filed.
As at the Latest Practicable Date, our Group has applied for the registration of the following patents, the registration of which has not yet been granted:
Place of
Name of Invention Patents Application Patent Number Adetection method for Ilaprazole metabolites in urine PRC 200910176625.2 ( )
Freeze-dried powder of uFSH injection agent and preparation PRC 200910180568.5 thereof ( )
An chemical derivative therapeutic agent of Ilaprazole and PRC 201010001215.7 application thereof ( )
Monohydrate of Ilaprazole Salt and preparation and PRC 201010104923.3 application thereof (
)
Clopidogrel BisulfateTablet and preparation thereof PRC 201010579305.4 ( )
The preparation method, end product and application of PRC 201010610915.6 LeuprorelinAcetate ( )
Ilaprazole Enteric CoatedTablet and preparation thereof PRC 201010610936.8 ( )
Ilaprazole Enteric CoatedTablet and preparation thereof PRC 201010610953.1 ( )
Ilaprazole Enteric Coated Capsule and preparation thereof PRC 201010610955.0 ( )
Ilaprazole Enteric Coated Capsule and preparation thereof PRC 201010610964.X ( )
(c) Domain names
As at the Latest Practicable Date, our Group had registered the following domain names which are material to our business:
Registration
Domain Name Registrant Date Expiry Date
livzon.cn Our Company 17 March 2003 17 March 2014
livzon.com Our Company 7 January 1998 7 January 2019
livzon.com.cn Our Company 9 June 1997 1 July 2022
– VI-33–
APPENDIX VI STATUTORY AND GENERAL INFORMATION 3. Our property interests
Owned Property
As at the Latest Practicable Date, the owned properties of our Group consists of the land use right of 37 lands parcels with an aggregate gross site area of approximately 1,175,356.35 sq.m. and 121 buildings and units with an aggregate gross floor area of approximately 242,620.20 sq.m.. As at the Latest Practicable Date, save as disclosed in theAccountants’ Report in Appendix I to this listing document, there was no restrictive instances of mortgage, pledge, defeation or foreclosure on these land parcels and properties.
The details for the major owned buildings and units of our Group are set out below:
Numberofbuilding
ownershipcertificates Usesof
orrealestate propertiesas
titlecertificates setoutinthe Grossfloorarea Owner Locationoftheproperties (asthecasemaybe) certificates (sq.m.)
1 OurCompany Units1&2,No.108Guihua YueFangDiZhengZi Industrial 19,594.13
NorthRoad,Gongbei,Zhuhai ( )No.
C3276246
2 OurCompany Block3,No.108Guihua YueFangDiZhengZi Industrial 5,695.81
NorthRoad,Gongbei,Zhuhai ( )No.
C3276247
3 OurCompany Unit1,Block2,No.108 YueFangDiZhengZi Industrial 7,571.82
GuihuaNorthRoad,Gongbei, ( )
Zhuhai No.C3276248
4 LivzonGroupLivzon Block1,No.110Guihua YueFangDiZhengZi Industrial 6,544.88
PharmaceuticalFactory( NorthRoad,Gongbei,Zhuhai ( )No.
) C4446834
5 OurCompany No.132GuihuaNorthRoad, YueFangDiZheng Office 10,464.04
Gongbei,Zhuhai Zi( )No.
C5637583
6 SichuanGuangda No.56WaibeiStreet, PengFangQuanZheng Production, 16,432.21
Pharmaceutical TianpengTown JianZhengZi( office,
ManufacturingCo.,Ltd. )No.0030763 warehouse
7 LivzonGroupFuzhou JiangyinTownIndustrial RongFangQuanRZi Office 47,681.8
FuxingPharmaceutical Zone ( R )No.
Co.,Ltd. 0901093
8 ZhuhaiFTZLivzon ZhuhaiFreeTradeZone YueFangDiZheng Nodescription 7,479.33
HechengPharmaceutical Zi( )No. inthecertificate
ManufacturingCo.,Ltd. 2143534
– VI-34–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Numberofbuilding
ownershipcertificates Usesof
orrealestate propertiesas
titlecertificates setoutinthe Grossfloorarea Owner Locationoftheproperties (asthecasemaybe) certificates (sq.m.)
9 ShanghaiLivzon No.1150GuiQiaoRoad WuFangDiPu( Industrial 11,877.00
Pharmaceutical )(2001)No.115256
ManufacturingCo.,Ltd.
( )
10 LivzonGroupXinbeijiang No.1FermentationBuilding, YueFangDiZhengZi Non-residential 3,004.20
Pharmaceutical XinbeijiangPharmaceutical ( )No.
ManufacturingInc.( ManufacturingInc., C3803282
RenminRoad,
) Qingyuan
11 LivzonGroupXinbeijiang CapsuleWorkshop, YueFangDiZhengZi Non-residential 2,985.55
Pharmaceutical No.39JianKangRoad, ( )No.
ManufacturingInc.( ZhouXinLongHuaRoad, C4612106
ZhouXinStreet,
) QingchengDistrict,
Qingyuan
12 LivzonGroupXinbeijiang STRefiningBuilding, YueFangDiZhengZi Non-residential 2,812.45
Pharmaceutical XinbeijiangPharmaceutical ( )No.
ManufacturingInc.( ManufacturingInc., C3803290
RenminRoad,
) Qingyuan
13 LivzonGroupLimin BlockS7,IndustrialWest YueFangDiZhengZi Nodescription 3,560.10
PharmaceuticalFactory( Road,WujiangDistrict, ( )No. inthecertificate
) Shaoguan 0322013
14 LivzonGroupLimin BlockS4,IndustrialWest YueFangDiZhengZi Nodescription 2,509.70
PharmaceuticalFactory( Road,WujiangDistrict, ( )No. inthecertificate
) Shaoguan 0322016
– VI-35–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Leased Property
As at the Latest Practicable Date, the leased properties of our Group consist of 31 buildings and units with an aggregate gross floor area of approximately 2,784,416.59 sq.m.. The details for the major leased properties of our Group are set out below:
Area Uses of leased
Location of leased property (sq.m.) property Term of lease
Upper Nantun Village, Old 566,666.67 Plantation 1 December 2012–
County, Malong County, 31 December 2014
Qujing
Phase 1 Office Building and 2,819,766.64 Staff quarters 2 November 2009–
Staff Quarters, No. 1 Third 30 September 2015
Pingdong Road, Nanping
Science Park, Zhuhai
BlockA, Standard Industrial 4,453,333.29 Industrial plants 1 October 2005–
Plants, No. 1 Third Pingdong 30 September 2015
Road, Nanping Science Park,
Zhuhai
Hunyuan County Bridge, Da 1,333,333.32 Plantation 1April 2012–
Dao Liang, Qingpowei Plots, 31 March 2042
Zeren Fields, Kouliang
Fields, Yijiaopo
Hunyuan County, Fei Village 333,333.33 Plantation 1 February 2011–
Bridge, Hua Bao Liang, 31 January 2041
Shang Hong Ling Gou, Xiang
Lou Ya
– VI-36–
APPENDIX VI STATUTORY AND GENERAL INFORMATION C. FURTHER INFORMATION ABOUT OUR DIRECTORS, SUPERVISORS AND SUBSTANTIAL SHAREHOLDERS
1. Disclosure of the interests
(a) Interests and short positions of our Directors, Supervisors and chief executive in the shares, underlying shares and debentures of our Company or its associated corporation
Immediately following completion of the Listing, our Directors, Supervisors and chief executive will have the following interests and/or short positions in the shares, underlying shares and debentures of our Company or its associated corporations (within the meaning of Part XV of the SFO) which will have to be notified to us and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO) or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Listing Rules, to be notified to us and the Hong Kong Stock Exchange once our H Shares are listed on the Hong Kong Stock Exchange (for this purpose, the relevant provisions of the SFO will be interpreted as if they applied to our Supervisors): Numberof
Name of shares directly Approximate
Director/ Name of Capacity/nature orindirectly percentage of
Supervisor corporation of interests held shareholding
Mr. Zhu Our Company Interest in a 89,462,538 30.25%
controlled AShares
corporation 50,660,052 17.13%
(Note 1) B Shares
Mr. Zhu Zhuhai Livzon Interest in a RMB147 million49%
MAB Biological controlled in registered
Technology Co., corporation capital
Ltd. (
(Notes 1& 2)
)
Notes:
1. Joincareisheldasto48.03%byShenzhenBaiyeyuan,whichisinturnheldasto90%by Mr.Zhu.PursuanttotheprovisionsofDivisions7and8ofPartXVoftheSFO,Mr.Zhu is deemed to be interested in the shares of the Company and the equity interest of theCompany’s associated corporations in which Joincare is or is deemed to be interested. 2. 49.00%equityinterestinZhuhaiLivzonMABBiologicalTechnologyCo.,Ltd.(
) is held by Joincare.
– VI-37–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (b) Interests and short positions of our Substantial Shareholders in the Shares and underlying Shares
Save as disclosed in the sections headed “History and Development” and “Substantial Shareholders” in this listing document, our Directors, Supervisors and chief executive are not aware of any other person, not being a Director, Supervisor or chief executive of our Company, who has an interest or short position in the Shares and underlying Shares of our Company which, once our H Shares are listed on the Hong Kong Stock Exchange, would be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly, interested in10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of our Company.
2. Particulars of service contracts
Each of our Directors has entered into a service agreement with us on 10 January 2014 for an initial period commencing from the Listing Date up to the date on which the current term of the Board expires (i.e. 30 June 2014).
EachofourSupervisorsenteredintoaserviceagreementwithuson10January2014 in respect of, among others, compliance with relevant laws and regulations, observations of the Articles of Association and provision on arbitration.
Save as disclosed above, none of our Directors or Supervisors has or is proposed to have a service contract with any member of our Group (other than contracts expiring or determinable by the employer within one year without the payment of compensation (other than statutory compensation)).
3. Remuneration of our Directors and Supervisors
For each of the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013, the aggregate of the remuneration paid and benefits in kind granted to our Directors and Supervisors by our Group in their capacities as Directors and Supervisors were approximately RMB2,434,200.00, RMB2,428,600.00, RMB3,349,600.00 and RMB1,751,300.00, respectively.
Under the arrangements currently in force, we estimate the aggregate remuneration payable and benefits in kind granted to our Directors and Supervisors for the year ended 31 December 2013 is approximately RMB2,651,900.
– VI-38–
APPENDIX VI STATUTORY AND GENERAL INFORMATION Save as disclosed in this listing document, no Director or Supervisor or the five highest paid individuals has been paid in cash or shares or otherwise by any person either to induce him/her to become, or to qualify him/her as a Director, or otherwise for services rendered by him/her in connection with the promotion or formation of our Company. There was no arrangement under which a Director or Supervisor has waived or agreed to waive any emoluments during the Track Record Period.
4. Related party transactions
Save as disclosed in theAccountants’ Report set out in Appendix I to this listing document and other parts of this listing document, we have not engaged in any other material related party transactions within the two years immediately preceding the date of this listing document.
D. PERSONAL GUARANTEES
Our Directors and Supervisors have not provided personal guarantees in favour of lenders in connection with banking facilities granted to us.
E. AGENCY FEES OR COMMISSIONS RECEIVED
Save as disclosed in this listing document, none of our Directors, Supervisors or any of the persons whose names are listed in the paragraph headed “Consents of experts” in this Appendix had received any commissions, discounts, agency fees, brokerages or other special terms were granted within the two years preceding the date of this listing document in connection with the issue or sale of any capital of any member of our Group.
F. DISCLAIMERS
Save as disclosed herein, as at the Latest Practicable Date:
(a) none of our Directors, Supervisors or the chief executive of our Company had any interest or short position in the Shares, underlying Shares or debentures of our Company or any of its associated corporation (within the meaning of the SFO) which will have to be notified to our Company and the Hong Kong Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he is taken or deemed to have under such provisions of the SFO) or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required to be notified to our Company and the Hong Kong Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Listing Rules once our H Shares are listed on the Hong Kong Stock Exchange. For this purpose, the relevant provisions of the SFO will be interpreted as if they applied to the Supervisors;
– VI-39–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (b) none of our Directors, Supervisors or any of the persons whose names are listed in the paragraph headed “Consents of experts” in this Appendix had any direct or indirect interest in the promotion of our Company, or in any assets which have within the two years immediately preceding the date of this listing document been acquired or disposed of by or leased to any member of our Group, or are proposed to be acquired or disposed of by or leased to any member of our Group;
(c) none of our Directors or Supervisors was materially interested in any contract or arrangement subsisting at the date of this listing document which is significant in relation to the business of our Group taken as a whole;
(d) save as disclosed in the paragraph headed “Particulars of service contracts” in this Appendix,noneofourDirectorsorSupervisorshadanyexistingorproposedservice contracts with any member of our Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation));
(e) none of our Directors knew of any person (not being a Director, Supervisor or chief executive of our Company) who will, immediately following completion of the Listing, have an interest or short position in the Shares or underlying Shares of our Company which would fall to be disclosed to our Company under the provisions of Divisions 2 and 3 of Part XV of SFO or be interested, directly or indirectly, in10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of our Group; and
(f) so far as was known to our Directors, none of our Directors, Supervisors, or their respective associates (as defined under the Hong Kong Listing Rules) or our Shareholders who are interested in more than5% of the issued share capital of our Company had any interests in the five largest customers or the five largest suppliers of our Group.
G. OTHER INFORMATION
1. Estate Duty
Our Directors have been advised that no material liability for estate duty is likely to fall on our Group in the PRC.
2. Litigation
Save as disclosed in this listing document, as at the Latest Practicable Date, we had not been engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to our Directors to be pending or threatened by or against us, that would have a material adverse effect on our results of operations or financial condition.
– VI-40–
APPENDIX VI STATUTORY AND GENERAL INFORMATION 3. The Sole Sponsor
The Sole Sponsor has made an application on our behalf to the Listing Committee for the listing of, and permission to deal in, our Shares as mentioned in this listing document.
As a result of the exercise of the Cash Option, as at the Latest Practicable Date, an affiliate of the Sole Sponsor beneficially owned 19,569 Shares representingapproximately0.007%oftotalissuedsharecapitalofourCompany.TheSoleSponsorhas declared pursuant to Rule 3A.08 of the Hong Kong Listing Rules that it is independent pursuant to Rule 3A.07 of the Hong Kong Listing Rules.
4. Preliminary Expenses
Our preliminary expenses in relation to our establishment in 1985 were RMB5 million and were paid by us.
5. Promoter
We do not have any promoter. Save as disclosed in this listing document, within the two years immediately preceding the date of this listing document, no cash, securities or other benefit has been paid, allotted or given nor are any proposed to be paid, allotted or given to any promoters in connection with the Listing and the related transactions described in this listing document.
6. Taxation of holders of Shares
(a) Hong Kong
The sale, purchase and transfer of Shares registered with our Hong Kong branch register of members will be subject to Hong Kong stamp duty. The current rate charged on each of the purchaser and seller is0.1% of the consideration of, if higher,ofthefairvalueoftheSharesbeingsoldortransferred.Profitsfromdealings in the Shares arising in or derived from Hong Kong may also be subject to Hong Kongprofitstax.TheRevenue(AbolitionofEstateDuty)Ordinance2005cameinto effect on 11 February 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for a grant of representation in respect of holders of Shares whose death occurs on or after 11 February 2006.
(b) Consultation with professional advisers
Potential holders of the Shares are recommended to consult their professional advisers if they are in any doubt about the taxation implications of the subscription, holding or disposal of, dealing in, or the exercise of any rights in relation to, the Shares. It is emphasised that none of our Company, our Directors, our Supervisors,
– VI-41–
APPENDIX VI STATUTORY AND GENERAL INFORMATION the Sole Sponsor, any of our/their respective directors, agents, employees, advisors oraffiliatesoranyotherpersoninvolvedintheListingacceptsresponsibilityforany tax effects on, or liabilities of, any person resulting from the subscription, holding or disposal of, dealing in, or the exercise of any rights in relation to, the Shares. 7. Qualification of Experts
Thefollowingarethequalificationsoftheexpertswhohavegivenopinionoradvice which are contained in this listing document:
Name Qualifications
Guosen HK Capital Licenced corporation under the SFO to carry on type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities
Ruihua Certified Public Accountants Certified Public Accountants, PRC
(LLP)
King& Wood Mallesons Legal advisers to our Company as to PRC law
Biaodian Industry expert
8. Consents of Experts
Each of Guosen HK Capital, Ruihua Certified Public Accountants (LLP), King& Wood Mallesons and Biaodian has given and has not withdrawn its written consent to the issue of this listing document with the inclusion of its reports, letters, valuation certificate, opinions or summaries of opinions (as the case may be) and the references to its name included herein in the form and context in which they are respectively included. 9. Bilingual Listing Document
The English language and Chinese language versions of this listing document are being published separately in reliance on the exemption provided in section 4 of the Companies Ordinance (Exemption of Companies and Prospectus from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
10. Exemption from the requirement of a property valuation report
No property valuation report in respect of ourGroup’s property interests is required in reliance upon the exemption provided by section 6(2) of the Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong). Our Directors confirm that none of our property interests is individually material to us in terms of income contribution or rental expense.
– VI-42–
APPENDIX VI STATUTORY AND GENERAL INFORMATION 11. Miscellaneous
(a) Save as disclosed in this listing document:
(i) within the two years immediately preceding the date of this listing document, neither we nor any of our subsidiaries has issued or agreed to issue any share or loan capital fully or partly paid up either for cash or for a consideration other than cash;
(ii) within the two years immediately preceding the date of this listing document, no share or loan capital of our Company or any of our subsidiaries is under option or is agreed conditionally or unconditionally to be put under option;
(iii) within the two years immediately preceding the date of this listing document, no commission has been paid or payable (to any persons for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any shares of our Company or any of our subsidiaries;
(iv) no founder, management or deferred shares of our Company or any of our subsidiaries have been issued or agreed to be issued;
(v) our Directors confirm that since 30 September 2013 (being the date on which the latest audited consolidated financial statements of our Group weremadeup),therehasbeennomaterialadversechangeinourfinancial or trading position or prospects;
(vi) our Directors confirm that there has not been any interruption in our business which may have or have had a material adverse effect on the financial position of our Group in the 12 months immediately preceding the date of this listing document;
(vii) our Group had no outstanding hire purchase commitments, guarantees or other material contingent liabilities as at the Latest Practicable Date;
(viii)our Group had no outstanding convertible debt securities or debentures as at the Latest Practicable Date; and
(ix) none of Guosen HK Capital, Ruihua Certified PublicAccountants (LLP), King& Wood Mallesons and Biaodian:
(A) is interested beneficially or non-beneficially in any Shares in any member of our Group; or
(B) has any right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any Shares in any member of our Group.
– VI-43–
APPENDIX VI STATUTORY AND GENERAL INFORMATION (b) Save for the Shares of our Company which are listed on the Shenzhen Stock Exchange, none of the equity and debt securities of our Group is listed or dealt with in any other stock exchange nor is any listing or permission to deal being or proposed to be sought.
(c) All necessary arrangements have been made enabling our H Shares to be admitted into CCASS for clearing and settlement.
– VI-44–
APPENDIX VII DOCUMENTS AVAILABLE FOR INSPECTION DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the offices of King& Wood Mallesons at 13/F, Gloucester Tower, The Landmark, 15Queen’s Road Central, Central, Hong Kong during normal office hours up to and including the date which is 14 days from the date of this listing document:
(i) the Articles of Association;
(ii) theaccountants’report prepared by Ruihua Certified PublicAccountants (LLP), the text of which is set out in Appendix I to this listing document;
(iii) the audited consolidated financial statements of our Group for the three years ended 31 December 2010, 2011 and 2012 and nine months ended 30 September 2013;
(iv) the letters relating to profit estimate of our Group, the text of which are set out in Appendix II to this listing document;
(v) the PRC legal opinion issued by King& Wood Mallesons, our PRC legal advisers, dated 14 January 2014, confirming that it has reviewed the summaries of relevant PRC laws and regulations as contained inAppendix III and is of the view that such summaries are correct summaries relevant to PRC laws and regulations;
(vi) the material contracts referred to in the paragraph headed “Summary of our material contracts” in Appendix VI to this listing document;
(vii) the service contracts referred to in the paragraph headed “Particulars of service contracts” in Appendix VI to this listing document;
(viii)the written consents referred to in the paragraph headed “Consents of Experts” in Appendix VI to this listing document; and
(ix) the Biaodian Report.
In addition:
(i) the Company Law can be accessed at http://www.gov.cn/flfg/2005-10/28/content_85478.htm.
Any information contained in, or that can be accessed via the above website, does not constitute or form part of this listing document.
– VII-1–
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