##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 20-F
 
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 or
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number: 001-33340
 Tongjitang Chinese Medicines Company
  (Translation of Registrants name into English)
  (Jurisdiction of incorporation or organization)
 th
 
  th
 
  Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares, each representing four
    
    New York Stock ExchangeOrdinary Shares, par value $0.001 per share
 
 Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
 
 Securities
for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
 
  104,066,526 ordinary shares as of December 31, 2009.
 Yes
o No
þ
 Yes
o No
þ
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other o
 o o
 o þ
  Yes
o No
o




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    1PART I
    
    
    3ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    23ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    44ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    44ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    65ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    72ITEM 8. FINANCIAL INFORMATION
    
    
    74ITEM 9. THE OFFER AND LISTING
    
    
    74ITEM 10. ADDITIONAL INFORMATION
    
    
    75ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    87ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    88PART II
    
    
    90ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    90ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    90ITEM 15. CONTROLS AND PROCEDURES
    
    
    90ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    91ITEM 16B. CODE OF ETHICS
    
    
    91ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    91ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    92ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
    
    
    92ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    92ITEM 16G. CORPORATE GOVERNANCE
    
    
    93PART III
    
    
    94ITEM 17. FINANCIAL STATEMENTS
    
    
    94ITEM 18. FINANCIAL STATEMENTS
    
    
    94ITEM 19. EXHIBITS
    
    
    94Exhibit 4.9Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 13.2Exhibit 15.1Exhibit 15.2Exhibit 15.3Exhibit 15.4
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INTRODUCTION
  
    
    $, US$, USD and U.S. dollars are to the legal currency of the United States;
 
    
    ADSs are to our American depositary shares, each of which represents four ordinary
 shares;
 
    
    ADRs are to the American depositary receipts, which, if issued, evidence our ADSs;
 
    
    China and the PRC are to the Peoples Republic of China, excluding, for the
purposes of this annual report only, Taiwan and the special administrative regions of
Hong Kong and Macau;
 
    
    ordinary shares are to our ordinary shares, par value US$0.001 per share;
 
    
    National Medical Insurance Program are to Chinas national medical insurance
program;
 
    
    provinces are to 31 provincial level governments in China, including 22 provinces,
four municipalities directly administered under the PRC central government (for example,
Beijing and Shanghai) and five autonomous regions (for example, Guangxi and Tibet);
 
    
    RMB and Renminbi are to the legal currency of China;
 
    
    euro are to the official currency of the European Union and the currency that is
used in certain of its member states; and
 
    
    we, us, our company and our are to Tongjitang Chinese Medicines Company, its
predecessor entities and its consolidated subsidiaries.
   
 FORWARD-LOOKING INFORMATION
  
    
    our anticipated growth and marketing strategies;
 
    
    our future business development, results of operations and financial condition;
 
    
    expansion of the National Medical Insurance Program in terms of both funding and
enrollment;
  1




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
    
    our ability to maintain exclusive production rights for Xianling Gubao;
 
    
    market acceptance of our products;
 
    
    our ability to develop and commercialize new products;
 
    
    our ability to obtain regulatory approvals for new products and to maintain or update
the regulatory approvals for our existing products;
 
    
    our ability to maintain regulatory approvals for our production facilities and to
obtain new approvals for expansions of our production facilities;
 
    
    our ability to expand our business through organic growth and strategic acquisitions;
 
    
    our expectations regarding governmental support for the development of the
traditional Chinese pharmaceutical industry;
 
    
    our expectations with respect to our ability to secure raw materials in the future;
 
    
    competition from other manufacturers of pharmaceutical products, including
manufacturers of traditional Chinese medicines;
 
    
    our ability to effectively protect our existing and future intellectual property and
not to infringe on the intellectual property of others; and
 
    
    fluctuations in general economic and business conditions in China.
   2




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 Selected Financial Data
   Year Ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands, except share and per share data)Consolidated Statement of Operations DataNet revenues
    
    
    346,147
    
    
    
    484,992
    
    
    
    596,007
    
    
    
    451,032
    
    
    
    480,339
    
    
    
    70,370Cost of revenues
    
    
    (141,784
    )
    
    
    (161,675
    )
    
    
    (206,019
    )
    
    
    (167,345
    )
    
    
    (201,205
    )
    
    
    (29,477
    )Gross profit
    
    
    204,363
    
    
    
    323,317
    
    
    
    389,988
    
    
    
    283,687
    
    
    
    279,134
    
    
    
    40,893Advertising expenses
    
    
    (47,504
    )
    
    
    (85,088
    )
    
    
    (96,876
    )
    
    
    (80,180
    )
    
    
    (32,384
    )
    
    
    (4,744
    )Other selling and marketing expenses
    
    
    (37,626
    )
    
    
    (51,462
    )
    
    
    (68,357
    )
    
    
    (80,031
    )
    
    
    (151,755
    )
    
    
    (22,232
    )General and administrative expenses
    
    
    (26,164
    )
    
    
    (33,484
    )
    
    
    (92,487
    )
    
    
    (91,325
    )
    
    
    (86,501
    )
    
    
    (12,672
    )Research and development expenses
    
    
    (2,484
    )
    
    
    (4,680
    )
    
    
    (12,673
    )
    
    
    (17,368
    )
    
    
    (16,057
    )
    
    
    (2,352
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    
    
    
    
    Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (4,500
    )
    
    
    (659
    )Government grant (related to research and
development)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    232
    
    
    
    34Gain (loss) on disposal of property, plant and
equipment and land use right
    
    
    22,723
    
    
    
    
    
    
    
    (72
    )
    
    
    3,970
    
    
    
    (817
    )
    
    
    (120
    )Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    
    
    
    
    Other operating income
    
    
    935
    
    
    
    1,283
    
    
    
    1,395
    
    
    
    1,801
    
    
    
    1,700
    
    
    
    249Operating profit (loss)
    
    
    114,243
    
    
    
    149,886
    
    
    
    120,918
    
    
    
    (77,678
    )
    
    
    (10,948
    )
    
    
    (1,603
    )Other income (expenses)
    
    
    732
    
    
    
    873
    
    
    
    51,424
    
    
    
    25,672
    
    
    
    8,840
    
    
    
    1,295Income (loss) before income taxes
    
    
    114,975
    
    
    
    150,759
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (2,108
    )
    
    
    (308
    )Income taxes
    
    
    (4,359
    )
    
    
    (16,392
    )
    
    
    (1,200
    )
    
    
    (502
    )
    
    
    (1,617
    )
    
    
    (237
    )Equity in earnings of an affiliate
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    110,730
    
    
    
    134,367
    
    
    
    171,142
    
    
    
    (52,508
    )
    
    
    (3,725
    )
    
    
    (545
    )Less: Net income (loss) attributable to
non-controlling interest
    
    
    60
    
    
    
    (88
    )
    
    
    51
    
    
    
    208
    
    
    
    (66
    )
    
    
    (10
    )Net income (loss) attributable to ordinary shareholders
    
    
    110,790
    
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (3,791
    )
    
    
    (555
    )Net income (loss) per share attributable to ordinary shareholders  basic and dilutedOrdinary shares
    
    
    1.39
    
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.03
    )
    
    
    (0.01
    )Ordinary shares classified as mezzanine equity
    
    
    N/A
    
    
    
    1.47
    
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ANumber of shares used in computation of net income
(loss) per shareOrdinary sharesBasic
    
    
    79,520,000
    
    
    
    89,799,518
    
    
    
    124,479,794
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Diluted
    
    
    79,520,000
    
    
    
    89,799,518
    
    
    
    124,483,978
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Ordinary shares classified as mezzanine equityBasic
    
    
    N/A
    
    
    
    1,468,949
    
    
    
    2,149,018
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ADiluted
    
    
    N/A
    
    
    
    1,468,949
    
    
    
    2,149,018
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  3




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##### Table of Contents



As of December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands)Consolidated Balance Sheet DataCash and cash equivalents
    
    
    35,488
    
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    237,578
    
    
    
    34,805Inventories, net
    
    
    28,176
    
    
    
    41,390
    
    
    
    76,194
    
    
    
    97,553
    
    
    
    139,100
    
    
    
    20,378Accounts receivable, net of allowance for doubtful accounts
    
    
    142,809
    
    
    
    172,102
    
    
    
    272,562
    
    
    
    214,543
    
    
    
    232,038
    
    
    
    33,994Property, plant and equipment, net
    
    
    115,611
    
    
    
    151,568
    
    
    
    155,849
    
    
    
    152,249
    
    
    
    172,097
    
    
    
    25,212Total assets
    
    
    453,750
    
    
    
    748,872
    
    
    
    1,494,055
    
    
    
    1,383, 098
    
    
    
    1,305,206
    
    
    
    191,212Short-term borrowings
    
    
    133,072
    
    
    
    27,100
    
    
    
    89,100
    
    
    
    85,100
    
    
    
    101,100
    
    
    
    14,811Accrued expenses and other current liabilities
    
    
    47,189
    
    
    
    64,461
    
    
    
    57,810
    
    
    
    81,130
    
    
    
    161,433
    
    
    
    23,650Total current liabilities
    
    
    251,803
    
    
    
    132,482
    
    
    
    169,892
    
    
    
    190,536
    
    
    
    305,747
    
    
    
    44,790Long-term bank loans
    
    
    59,000
    
    
    
    118,000
    
    
    
    74,000
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    7,325Mezzanine equity
    
    
    
    
    
    
    120,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    142,602
    
    
    
    377,064
    
    
    
    1,236,576
    
    
    
    1,134,815
    
    
    
    937,591
    
    
    
    137,358Total liabilities and shareholders equity
    
    
    453,750
    
    
    
    748,872
    
    
    
    1,494,055
    
    
    
    1,383,098
    
    
    
    1,305,206
    
    
    
    191,212
 Exchange Rate Information
   Noon Buying Rate(RMB per US$1.00)Period
    
    Period End
    
    
    Average(1)
    
    
    Low
    
    
    High2005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.78002009
    
    
    6.8259
    
    
    
    6.8295
    
    
    
    6.8470
    
    
    
    6.8176December
    
    
    6.8259
    
    
    
    6.8275
    
    
    
    6.8299
    
    
    
    6.82442010January
    
    
    6.8268
    
    
    
    6.8269
    
    
    
    6.8295
    
    
    
    6.8258February
    
    
    6.8258
    
    
    
    6.8285
    
    
    
    6.8330
    
    
    
    6.8258March
    
    
    6.8258
    
    
    
    6.8262
    
    
    
    6.8270
    
    
    
    6.8254April
    
    
    6.8247
    
    
    
    6.8256
    
    
    
    6.8275
    
    
    
    6.8229May
    
    
    6.8305
    
    
    
    6.8275
    
    
    
    6.8310
    
    
    
    6.8245June (through June 25, 2010)
    
    
    6.7911
    
    
    
    6.8227
    
    
    
    6.8323
    
    
    
    6.7911
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. Capitalization and Indebtedness
  Reasons for the Offer and Use of Proceeds
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Risk Factors
 Risks Related to Our Company
 We depend heavily on the success of Xianling Gubao. Any reduction in the volume of Xianling Gubao
that we sell or the average price at which we sell Xianling Gubao would cause our net revenues to
decline.
  The growth and success of our business depends on our ability to successfully market Xianling Gubao
to hospitals and the selection of Xianling Gubao as a winning medicine under the tender process
used by state-owned hospitals for medicine purchases.
   The growth and success of our business depends on our ability to successfully market Xianling
Gubao to retail pharmacies.
  The retail prices of our principal products are subject to price controls administered by the PRC
government authorities. Therefore, the retail prices of our principal products may not be raised
above their respective price ceilings without obtaining the governments prior approval, which we
may not be able to obtain. Furthermore, as has previously happened, we may be required to lower the
wholesale prices of our products as a result of any government-mandated reduction in the price
ceilings of these products.
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Our products that have been included in national and provincial medicine catalogs of the National
Medical Insurance Program may be removed from the national or provincial medicine catalogs or
downgraded to a lower tier, and our new products may encounter difficulty in seeking inclusion in
these catalogs.
   Failure to obtain approval from the SFDA to convert a provisional national production standard of
our principal products to a national final production standard would require us to suspend or cease
the production of these products.
  If we lose the exclusive production rights for our products, such as Xianling Gubao and Zaoren
Anshen Capsules, other pharmaceutical manufacturers in China may produce medicines based on
identical or similar formulations to these products.
   6




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Our failure to further improve our barrenwort extraction efficiency could limit or impair our
ability to absorb or mitigate the impact of any future price increase of barrenwort, which in turn
would have an adverse effect on our profit margins.
  Our current products have certain side effects. If side effects associated with our current or
future products are not identified prior to their marketing and sale, we may be required to
withdraw such products from the market, perform lengthy additional clinical trials or change the
labeling of our products, any of which could hinder or adversely affect our ability to generate
revenues.
  
    
    those medicines listed in the national essential drug list or the national and
provincial medicine catalogs for the National Medical Insurance Program may be removed
from the catalogs or downgraded to a lower tier;
 
    
    regulatory authorities may withdraw or modify their approvals of such medicines;
 
    
    we may be required to reformulate these medicines, change the ways in which they are
marketed, conduct additional clinical trials, change the labeling of these medicines or
implement changes to obtain new approvals for our manufacturing facilities;
 
    
    we may be less successful in tendering processes used by state-owned hospitals for
medicine purchases;
 
    
    we may have to recall these medicines from the market and may not be able to
re-launch them;
 
    
    we may experience a significant decline in sales of the affected products;
 
    
    our reputation may suffer; and
 
    
    we may become a target of lawsuits.
  7




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We may not be able to obtain manufacturing or marketing approval for our future products, and
failure to obtain approvals for our future products could materially harm our business prospects.
  We depend on a limited number of distributors for a significant portion of our net revenues and
this dependence is likely to continue.
  Distributors potentially could divert our products designated for hospitals to retail pharmacies in
order to retain the difference between the wholesale prices for these two channels, and if we fail
to timely ascertain and promptly take actions against such diverted sales, our profitability would
be materially and adversely affected and our relationship with hospitals could be harmed.
  We may incur losses resulting from product liability claims or business interruptions resulting
from occurrence of natural catastrophes, acts of terrorism or fires, and we have limited insurance
coverage.
   8




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We may not be able to manage the expansion of our operations effectively.
  In 2008 and 2009 we were required to record impairment losses on goodwill and intangible assets and
we may have similar impairment losses in the future, which could cause our financial condition and
results of operations to be negatively affected in the future.
  Our future research and development projects may be unsuccessful, which would decrease our future
sources of revenues.
  Our failure to protect our intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly and ineffective.
   9




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Our failure to identify and acquire additional product candidates, or our failure to maintain or
expand our existing research cooperation arrangements with these research partners on terms we
desire, or if at all, could hinder our ability to develop new products and improve our existing
products, which in turn could limit our business prospects.
  We may be exposed to infringement or misappropriation claims by third parties, which, if adversely
determined against us, could cause us to pay significant damage awards.
  Customers may confuse our products with products of other traditional Chinese medicine companies
that use the Chinese characters of Tongjitang in their company names.
   10




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Adverse publicity associated with our company or our products could have a material adverse effect
on our results of operations.
  Our business depends substantially on the continuing efforts of our executive officers, and our
business may be severely disrupted if we lose their services.
  If we are unable to attract, train, retain and motivate our prescription medicine and OTC medicine
salespeople, sales of our products may be materially and adversely affected.
  Our future success depends in part on our ability to make strategic acquisitions and investments.
Our failure to consummate or handle the risks associated with these acquisitions and investments
could have a material adverse effect on our market penetration and revenues growth.
  
    
    high acquisition and financing costs;
 
    
    potential ongoing financial obligations and unforeseen or hidden liabilities;
  11




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
    
    failure to achieve the intended objectives, benefits or revenue-enhancing
opportunities;
 
    
    cost of and difficulties in integrating acquired businesses and managing a larger
business; and
 
    
    diversion of our resources and management attention.
  Our existing shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
  Sales of Xianling Gubao are subject to seasonal fluctuations, which may cause our operating results
to fluctuate from quarter to quarter. This may result in volatility in the price of our ADSs.
  Our future capital needs are uncertain and we may need to raise additional funds in the future.
  
    
    changes in business conditions or other future developments;
 
    
    the time and expenses required to obtain regulatory clearances and approvals;
 
    
    the resources we devote to developing, manufacturing, marketing and selling our
products;
 
    
    our ability to identify and our desire or need to pursue acquisitions or other
investments; and
 
    
    the extent to which our products generate market demand.
   12




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The recent financial crisis and current uncertainty in global economic conditions could negatively
affect our business, results of
operations and financial condition.
  We may be adversely affected by changes in environmental, employee health and safety and other laws
and regulations.
  The proposal by the Bidding Parties to privatize us may distract our management and other resources
from developing our business and may disrupt our relationships with our customers, suppliers, other
strategic partners or employees, which could have a material adverse effect on our business and
operations.
   Litigation may arise in connection with the proposed privatization, which could negatively impact
our business and our results of operations.
  Risks Related to Our Industry
 We face intense competition that may prevent us from maintaining or increasing market share for our
existing products and gaining market acceptance of our future products. Our competitors may develop
or commercialize products before or more successfully than us.
   13




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The production of traditional Chinese medicines depends on the supply of quality medicinal raw
materials.
  Pharmaceutical companies in China are required to hold a number of permits and licenses to carry on
their business. Our ability to obtain and maintain these regulatory approvals is uncertain.
   The ongoing anti-corruption efforts initiated by the Chinese government targeting state-owned
hospitals could adversely affect our sales designated for hospitals.
  If we do not keep pace with rapid technological change, we may be unable to capture and sustain a
meaningful market position.
   14




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Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.
  
    
    the degree of government involvement;
 
    
    the level of development;
 
    
    the growth rate;
 
    
    the control of foreign exchange;
 
    
    the access of companies to financing; and
 
    
    the allocation of resources.
    Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
    15




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Any limitation on the ability of our subsidiaries to make dividend or distribution payments to us
could have a material adverse effect on our ability to conduct our business.
  The dividends we receive from our wholly-owned operating subsidiaries and our global income may be
subject to PRC tax under the new PRC tax law, which would have a material adverse effect on our
results of operations.
   16




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##### Table of Contents



Our foreign ADS holders may be subject to PRC withholding tax on dividends payable by us and on
gains realized on the sale of our ADSs, if we are classified as a PRC resident enterprise.
  The regulations relating to offshore investment activities by PRC residents may limit our ability
to acquire PRC companies and could adversely affect our business, financial condition and results
of operations. The regulation also establishes more complex procedures for acquisitions by foreign
investors, which could make it more difficult to pursue growth through acquisitions.
    17




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Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
  Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
   Our business benefits from PRC government incentives, particularly those available to
foreign-invested enterprises. Expiration of, or changes to, these incentives could have a material
adverse effect on our operating results.
    18




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Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the
CSRC, for the listing and trading of our ADSs could have a material adverse effect on our business,
operating results, reputation and trading price of our ADSs.
   PRC regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries.
     19




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##### Table of Contents



We face risks related to health epidemics and other outbreaks.
  Risks Related to Our Ordinary Shares and ADSs
 The market price for our ADSs has been, and is likely continued to be, highly volatile.
  
    
    announcements of technological or competitive developments;
 
    
    regulatory developments in our target markets affecting us, our customers or our
competitors;
 
    
    announcements regarding patent litigation or the issuance of patents to us or our
competitors;
 
    
    announcements of studies and reports relating to the efficacy of our products or
those of our competitors;
 
    
    actual or anticipated fluctuations in our quarterly operating results;
 
    
    changes in financial estimates by securities research analysts;
 
    
    changes in the economic performance or market valuations of our competitors;
 
    
    additions or departures of our executive officers and key marketing personnel;
 
    
    release or expiry of lock-up or other transfer restrictions on our outstanding
ordinary shares or ADSs; and
 
    
    sales or perceived sales of additional ordinary shares or ADSs.
  We have a number of material weaknesses in our internal control over financial reporting in 2009.
If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results or prevent fraud.
    20




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We may be classified as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
  Substantial future sales or perceived sales of our ADSs or ordinary shares in the public market
could cause the price of our ADSs to decline.
  Holders of our ADSs may have fewer rights than shareholders and must act through the depositary to
exercise those rights.
  Holders of our ADSs may be subject to limitations on transfers of their ADSs.
   21




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Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings and you may not receive cash dividends or other distributions if it is impractical
to make them available to you.
   We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection for your shareholder rights than you would have under U.S. law.
  You may have difficulty enforcing judgments obtained against us.
  We have incurred and will continue to incur increased costs as a result of being a public company.
   22




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Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares and ADSs.
  
 ITEM 4. INFORMATION ON THE COMPANY
 History and Development of the Company
  
    
    Tongjitang Pharmaceutical, a wholly-owned subsidiary and our principal operating
company, engaging in the business of developing, manufacturing, marketing and selling of
medicines;
 
    
    Guizhou Tongjitang Pharmaceutical Distribution Co., Ltd., or Tongjitang Distribution,
a 98.53%-owned subsidiary of Tongjitang Pharmaceutical, engaging in the business of
wholesale distribution of medicines;
 
    
    Guizhou Tongjitang Pharmacy Chain Stores Co., Ltd., or Tongjitang Chain Stores, a
96%-owned subsidiary of Tongjitang Distribution, engaging in the business of retail
sales of medicines;
 
    
    Guizhou Long-Life Pharmaceutical Company Limited, or Guizhou LLF, a wholly-owned
subsidiary of Tongjitang Pharmaceutical, engaging in the business of producing and
selling traditional Chinese medicines and nutritional products;
 
    
    Qinghai Pulante Pharmaceutical Co., Ltd., or Pulante, a wholly-owned subsidiary of
Tongjitang Pharmaceutical, engaging in the business of developing, manufacturing,
marketing and distributing Tibetan recipe-originated plant-based medicines;
  23




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##### Table of Contents




    
    Anhui Jingfang Pharmaceutical Co., Ltd., or Jingfang, a 99.13%-owned subsidiary of
Tongjitang Pharmaceutical, engaging in the business of producing and selling western and
traditional Chinese medicines. Guizhou LLF owns the remaining equity interests in
Jingfang; and
 
    
    Guizhou Gui Liqour Co., Ltd., or Gui Liqour Ltd., a subsidiary of Tongjitang
Pharmaceutical, engaging in the business of manufacturing and selling three brands of
Chinese liquors: Guiyang Da Qu, Qian Chun Liquor and Gui Liquor. As of the date
of this annual report, this subsidiary is wholly owned by a joint venture in which we
hold 95% of its equity interest. We have received a deposit of RMB46 million as the full
purchase price from a third party who will acquire a minority equity interest in Gui
Liqour Ltd. As of the date of this annual report, the terms of the share transfer
agreement has yet to be finalized.
  
   24




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##### Table of Contents



Business Overview
         25




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##### Table of Contents




    
    Manufacturing exclusivity. Trade secret status ensures that for a five-year period,
SFDA will not approve any other products carrying the same medicinal formula in any
dosage formats.
 
    
    Pricing. Trade secret status can strengthen Tongjitangs pricing power for Xianling
Gubao despite potential fluctuations in Chinas national insurance coverage policies. As
a product protected by trade secret status, Xianling Gubaos position as the preferred
treatment for osteoporosis at many state-owned hospitals and clinics may be further
enhanced since the consumers are likely to perceive the trade secret status conferred by
the governmental organizations as supporting evidence or proof of Xianling Gubaos
efficacy.
 
    
    SFDA approval. Trade secret status can expedite the SFDAs approval of modified or
new dosage and format, and new indication treatment, such as Xianling Gubao chewable
tablets, and next generation Xianling Gubao products.
  Products
  Selected Marketed Drugs
    
    Indication
    
    Status
    
    Next MilestoneXianling Gubao
    
    Osteoporosis (Prescription)
    
    Marketed
    
    Osteoarthritis (Prescription)
    
    Marketed
    
    Ischemic bone necrosis (Prescription)
    
    Marketed
    
    Phase IV clinical trial ongoingBone fractures (Prescription)
    
    Marketed
    
    Osteoporosis (OTC)
    
    Marketed
    
    Zaoren Anshen Capsules
    
    Insomnia
    
    Marketed
    
    Moisturizing and Anti-Itching Capsules
    
    Inflammatory skin conditions
    
    Marketed
    
    
    26




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Xianling Gubao
          27




---



##### Table of Contents



Zaoren Anshen Capsules
      Moisturizing and Anti-Itching Capsules
   28




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##### Table of Contents



Other Medicines
  Medicines
    
    Function
    
    IndicationDianbaizhu Syrup
    
    Increase the volume of blood flow in heart and brain
    
    Treatment of vertigoCompound Glycyrrhiza Oral Solution
    
    Relieves cough and expectoration
    
    Treatment of upper respiratory infectionsJiao Ti Guo Jiao Bi Capsules
    
    Protects stomach lining
    
    Prevents gastritis and ulcersBu Shen Yi Lao Capsules
    
    Invigorates kidney and improves Qi
    
    Improves memory, breathing, hearing, and general malaiseXin Nao Kang Capsules
    
    Improves coronary, cerebral, and peripheral circulation
    
    Treatment of stroke and coronary artery diseaseJincishen Mixture
    
    Alleviates side-effects of radiotherapy and chemotherapy for cancer patients
    
    Ancillary to treatment of cancerHeiguteng Capsules
    
    Relieves rheumatic pain and promotes blood circulation
    
    Treatment of rheumatoid arthritisChongcao Qingfei Capsules
    
    Alleviates the symptoms of respiratory diseases
    
    Treatment of Chronic Obstructive Pulmonary DiseaseFengshi Gutong Capsules
    
    Relieve rheumatic pain
    
    Treatment of rheumatoid arthritisJingshu Granules
    
    Relieve stiffness and pain, promote blood circulation
    
    Treatment of degenerative osteoarthritis (cervical spondylosis)
  29




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##### Table of Contents



Product Pipeline.
 Selected Pipeline Candidates
    
    Indication
    
    Status
    
    Next MilestoneJing Tong Ting
    
    Menstrual pain
    
    Phase III clinical trial completed
    
    Applying for certificate of manufacturing and marketingDa An Granules
    
    Anxiety
    
    Phase III ongoing
    
    Release of clinical data in the second half of 2010Yushuda Tablets
    
    Depression
    
    Phase III clinical trial completed
    
    Applying for certificate of manufacturing and marketingDan Xian Kang Gu Capsules
    
    Ischemic necrosis
    
    Phase III clinical trial ongoing
    
    Release of clinical data in the second half of 2011Methylthioninium Chloride and Procainimide Injection
    
    Post-surgical acute pain
    
    Application filed with SFDA for conducting clinical trials
    
    OA-008
    
    Osteoarthritis
    
    Pre-clinical
    
    Xianling Gubao Chewable Tablets
    
    Osteoporosis
    
    Pre-clinical
    
    
     Marketing and Sales
  Marketing Strategy Division.
    30




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##### Table of Contents



Prescription Medicine Sales Force.
  2007
    
    
    2008
    
    
    2009Province
    
    Class 3
    
    
    Class 2
    
    
    Total
    
    
    Class 3
    
    
    Class 2
    
    
    Total
    
    
    Class 3
    
    
    Class 2
    
    
    TotalBeijing
    
    
    52
    
    
    
    89
    
    
    
    387
    
    
    
    128
    
    
    
    129
    
    
    
    1,321
    
    
    
    129
    
    
    
    132
    
    
    
    1,202Zhejiang
    
    
    42
    
    
    
    258
    
    
    
    481
    
    
    
    59
    
    
    
    114
    
    
    
    487
    
    
    
    54
    
    
    
    156
    
    
    
    501Guangdong
    
    
    51
    
    
    
    104
    
    
    
    249
    
    
    
    70
    
    
    
    158
    
    
    
    324
    
    
    
    66
    
    
    
    160
    
    
    
    358Jiangsu
    
    
    40
    
    
    
    100
    
    
    
    193
    
    
    
    45
    
    
    
    128
    
    
    
    281
    
    
    
    44
    
    
    
    132
    
    
    
    291Shanghai
    
    
    40
    
    
    
    113
    
    
    
    299
    
    
    
    22
    
    
    
    64
    
    
    
    277
    
    
    
    24
    
    
    
    64
    
    
    
    270Other 26 provinces
    
    
    362
    
    
    
    588
    
    
    
    1,182
    
    
    
    407
    
    
    
    669
    
    
    
    1,525
    
    
    
    374
    
    
    
    644
    
    
    
    2,873Total
    
    
    587
    
    
    
    952
    
    
    
    2,791
    
    
    
    731
    
    
    
    1,262
    
    
    
    4,215
    
    
    
    691
    
    
    
    1,288
    
    
    
    5,495
  2007
    
    
    2008
    
    
    2009Total Class 3 hospitals
    
    
    1,186
    
    
    
    1,192
    
    
    
    1,233Xianling Gubao formulary Class 3 hospitals
    
    
    587
    
    
    
    731
    
    
    
    691As a percentage of total Class 3 hospitals
    
    
    49.5
    %
    
    
    61.3
    %
    
    
    56.0
    %
 
 Source:
    
    The total number of Class 3 hospitals is based on statistics from the PRC Ministry of
Health in the relevant periods, which do not include hospitals administered by the Chinese
military or the Chinese Peoples Armed Police. OTC Medicine Sales Force.
  31




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##### Table of Contents



2007
    
    
    2008
    
    
    2009Stocking
    
    
    
    
    
    
    Stocking
    
    
    
    
    
    
    StockingRetail
    
    
    Authorized
    
    
    Retail
    
    
    Authorized
    
    
    Retail
    
    
    AuthorizedProvinces
    
    Pharmacies
    
    
    Pharmacies(1)
    
    
    Pharmacies
    
    
    Pharmacies(1)
    
    
    Pharmacies
    
    
    Pharmacies(1)Shanghai
    
    
    1400
    
    
    
    245
    
    
    
    1,650
    
    
    
    275
    
    
    
    1,174
    
    
    
    296Jiangsu
    
    
    3400
    
    
    
    850
    
    
    
    3,900
    
    
    
    930
    
    
    
    2,176
    
    
    
    1,161Zhejiang
    
    
    2605
    
    
    
    500
    
    
    
    2,042
    
    
    
    665
    
    
    
    1,104
    
    
    
    445Liaoning
    
    
    1460
    
    
    
    1207
    
    
    
    1,780
    
    
    
    1,250
    
    
    
    1,202
    
    
    
    1,044Other 27 provinces
    
    
    26,770
    
    
    
    N/A
    
    
    
    24,720
    
    
    
    N/A
    
    
    
    19,879
    
    
    
    N/AAll Provinces
    
    
    35,635
    
    
    
    N/A
    
    
    
    34,092
    
    
    
    N/A
    
    
    
    25,535
    
    
    
    N/A
 
 (1)
    
    We do not have information regarding the total number of authorized pharmacies that stocked
Xianling Gubao in the periods indicated other than for the four provinces listed in this
table. Sales Support Division
 Seasonality
  Distributors and Customers
     32




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##### Table of Contents



Manufacturing
  Production Capacity
  Annualized
    
    CapacityFacility
    
    Production Line
    
    Manufacturing Capacity
    
    Utilization RateXiuwen Facility
    
    Capsules
    
    800 million capsules
    
    
    80.8
    %Tablets
    
    600 million tablets
    
    
    11.7
    %Granules
    
    50 million packs
    
    
    32.8
    %Preliminary processing and extraction
    
    1,600 tonnes
    
    
    66.4
    %Xiaohe Facility
    
    Powder
    
    300 million packs
    
    
    40.0
    %Lozenge
    
    300 million pieces
    
    
    15.3
    %Capsules
    
    400 million capsules
    
    
    36.0
    %Tablets
    
    300 million tablets
    
    
    65.3
    %Syrup
    
    500 tonnes
    
    
    11.4
    %Plaster
    
    2.7 million pieces
    
    
    16.5
    %Alcoholature
    
    100 tonnes
    
    
    4.3
    %Liquor taken orally
    
    500 tonnes
    
    
    59.8
    %Guizhou LLF
    
    Mixture and liquor taken orally
    
    150  tonnes
    
    
    12.6
    %Capsules
    
    130 million capsules
    
    
    13.8
    %Pulante
    
    Capsules
    
    400 million capsules
    
    
    5.7
    %Granules
    
    10 million packs
    
    
    6.0
    %Tablets
    
    480 million tablets
    
    
    0.5
    %Ointment
    
    2.4 million pieces
    
    
    4.2
    %Jingfang
    
    Capsules
    
    360 million capsules
    
    
    11.9
    %Granules
    
    140 million packs
    
    
    32.1
    %Tablets
    
    80 million tablets
    
    
    Syrup
    
    5.4 million bottles
    
    
    23.9
    %
   33




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##### Table of Contents



Raw Materials
    
    
    selecting variants of barrenwort that contain a higher level of active ingredients;
 
    
    selecting parts of barrenwort that contain a higher level of active ingredients, such
as active ingredient-richer leaves and stems, instead of roots;
 
    
    using and purchasing barrenwort that is harvested between March and May, because
barrenwort harvested during this period has a higher level of active ingredients than
that harvested in other periods;
 
    
    using processing methods that can retain a higher amount of active ingredients
extracted from barrenwort;
 
    
    teaming with research partners to research extraction methods and technologies; and
 
    
    using a combination of various technical ratios to arrive at a formula that enables
us to increase our extraction efficiency.
    Intellectual Property
   34




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##### Table of Contents



Patents
 Invention Patents
 No.
    
    Description
    
    Valid Period
    
    Expiration Date1
    
    
    A controlled release pain killer chiefly used in the treatment of post-surgical wound and trauma wounds(1)
    
    20 years
    
    March 25, 20192
    
    
    A Chinese medicine preparation used in treatment of upper respiratory tract infections
    
    20 years
    
    October 29, 20233
    
    
    Moisturizing and Anti-Itching Capsules processing technology
    
    20 years
    
    January 29, 20224
    
    
    A plaster to treat aches and swelling
    
    20 years
    
    February 6, 20225
    
    
    Toothache treatment and processing technology(2)
    
    20 years
    
    February 24, 20156
    
    
    Shaoshi eye-protecting preparation and its processing method and usage
    
    20 years
    
    August 23, 20257
    
    
    A Chinese medicine for menorrhalgia treatment and its processing method
    
    20 years
    
    April 25, 20248
    
    
    A pharmaceutical preparation for depression treatment and its processing method
    
    20 years
    
    August 16, 20259
    
    
    An indication of a medicine for osteoporosis treatment
    
    20 years
    
    April 27, 202510
    
    
    A Chinese medicine preparation for bone necrosis treatment and its processing method
    
    20 years
    
    June 28, 202511
    
    
    A medicine for the treatment of painful obstructions
    
    20 years
    
    December 2, 202212
    
    
    An adjuvant medicine for treatment following radiotherapy for cancer
    
    20 years
    
    December 2, 202213
    
    
    A medicine to treat abdominal pain and diarrhea due to large intestine conditions
    
    20 years
    
    December 2, 202214
    
    
    Heiguteng Shenjin Tougu Spray and its processing method
    
    20 years
    
    December 29, 202415
    
    
    A Chinese medicated tape and method of preparation for the treatment of arthraligia due to wind, cold and dampness
    
    20 years
    
    August 9, 202516
    
    
    An oral solution of Rheum officinale Baill fruit acid and its processing method
    
    20 years
    
    August 1, 202617
    
    
    A choleretic capsule for the treatment of liver and gall system diseases
    
    20 years
    
    December 12, 202618
    
    
    An oral medicine for the treatment of gastric ulcer and digestive system diseases
    
    20 years
    
    April 24, 202719
    
    
    An externally used medicine for the treatment of skin diseases
    
    20 years
    
    January 27, 202920
    
    
    A processing method of barrenwort
    
    20 years
    
    April 8, 202821
    
    
    A Chinese medicine preparation for the treatment of generalized anxiety disorder and its processing method
    
    20 years
    
    June 24, 202822
    
    
    Antipyretic effervescent granules made of Cinnamomum delavayi Lecte for children and its processing method
    
    20 years
    
    September 23, 202823
    
    
    The processing method of Epmedin C as a control and its products
    
    20 years
    
    September 30, 202824
    
    
    A quality control method for preparation of drugs for the treatment of depression
    
    20 years
    
    October 23, 202825
    
    
    A synthetic method of medicinal Methylene blue
    
    20 years
    
    November 25, 202826
    
    
    A quality control method for preparation of Chinese medicine for the treatment of generalized anxiety disorder
    
    20 years
    
    July 21, 202927
    
    
    A quality control method for Shengmai granules
    
    20 years
    
    December 15, 202928
    
    
    A quality control method for preparation of drugs for the treatment of visual fatigue
    
    20 years
    
    December 15, 202929
    
    
    A Chinese medicine for the treatment of rheumatism and its processing method
    
    20 years
    
    July 26, 2025
 
 Note:(1)
    
    The owner of Patent 1, Professor Zhitao Xia, has granted an exclusive license to Guizhou
Tongjitang Pharmaceutical Joint Stock Limited Company, the predecessor of Tongjitang
Pharmaceutical for the periods from March 30, 2004 to the expiration dates of this patent.(2)
    
    Mr. Xiaochun Wang, the chairman of Tongjitang Pharmaceutical, is the owner of Patent 5 and
has licensed this patent to us. Trademarks
  35




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Proprietary Information
 Competition
   
    
    brand name and reputation;
 
    
    price;
 
    
    perceived efficacy;
 
    
    side effects;
 
    
    marketing ability;
 
    
    economies of scale;
 
    
    customer service and customer support capabilities; and
 
    
    customer base and customer loyalty.
  
    
    Qiang Gu (Bone-Strengthening) Capsules, and
 
    
    Gu Song Bao Capsules/Granules.
  36




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##### Table of Contents



Competing MedicinesTraditional Chinese Medicines
    
    Western MedicinesZaoren Anshen Capsules
    
    Fufang Zaoren Capsules
    
    Alprazolam (Xanax)Zaoren Anshen Granules
    
    Zolpidem (Ambien)Anshen Bunao LiquidMoisturizing and Anti-Itching Capsules
    
    Shiduqing Capsules
    
    
 Environmental Matters
   
    
    organic waste from the extraction processwe have set aside a specific area within
our Guizhou facilities to gather this organic waste for local farmers to remove and use
as fertilizer;
 
    
    waste waterwe have our own waste water treatment facilities to treat the waste water
from our production processes; and
 
    
    alcoholwe have our own facilities for recycling alcohol.
 Insurance
  Regulations Relating to the Pharmaceutical Industry
   37




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##### Table of Contents



Registration and Approval of Medicine
  New Medicine
 Provisional National Production Standard
 Transitional Period
  Continuing SFDA Regulation
  Pharmaceutical Product Manufacturing
 Permits and Licenses for Pharmaceutical Manufacturers.
 Good Manufacturing Practice.
  38




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##### Table of Contents



Pharmaceutical Distribution
   Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in
China.
 Good Supply Practice Standards.
  Price Controls
   39




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##### Table of Contents



Tendering Requirement for Hospital Purchases of Medicines
   Reimbursement under the National Medical Insurance Program
     40




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##### Table of Contents



National essential drug list
  Other Regulations
  Foreign Currency Exchange
   Foreign Exchange Registration of Offshore Investment by PRC Residents
    Employee Stock Options
   41




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##### Table of Contents



Dividend Distribution
  
    
    Wholly Foreign-Owned Enterprise Law (1986), as amended;
 
    
    Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
 
    
    Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended;
 
    
    Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as
amended; and
 
    
    The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
  Patents
   42




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##### Table of Contents



Organizational Structure
  Percentage ofordinary share/Place of
    
    registeredestablishment
    
    capital heldName of company
    
    and operation
    
    by the Company
    
    
    Principal activitiesTongjitang Pharmaceutical (Hong Kong) Limited
    
    Hong Kong
    
    
    100
    %
    
    Investment holdingUnisources
    
    BVI
    
    
    100
    %
    
    Investment holdingTongjitang Pharmaceutical
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of medicine productsTongjitang Distribution
    
    PRC
    
    
    100
    %
    
    Wholesale distribution of medicine productsTongjitang Chain Stores
    
    PRC
    
    
    100
    %
    
    Retail sales of medicine products and medical devicesGuizhou LLF
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of medicine productsPulante
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and distribution of Tibetan medicinesJingfang
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of medicine productsGui Liqour Ltd.
    
    PRC
    
    
    95
    %
    
    Manufacturing and sales of Chinese liquors
 Property, Plants and Equipment
         43




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ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements and the related notes
included elsewhere in this annual report on Form 20-F . This discussion may contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under Item 3. Key InformationD. Risk Factors or in
other parts of this annual report on Form 20-F.
 Operating Results
 Overview
      44




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Acquisitions
          45




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##### Table of Contents



Disposition
  Key Performance Indicators
    Industry-wide Factors Affecting Our Results of Operations
    46




---



##### Table of Contents



Specific Factors Affecting Our Results of Operations
  
    
    sales of Xianling Gubao designated for hospitals as a prescription medicine and
designated for retail pharmacies as an OTC medicine;
 
    
    pricing of Xianling Gubao and our other principal products;
 
    
    cost of barrenwort, the primary raw material used in manufacturing Xianling Gubao;
and
 
    
    seasonal variations in the demand for Xianling Gubao.
  Sales of Xianling Gubao Designated for Hospitals.
 
    
    our ability to communicate to physicians and hospital administrators that Xianling
Gubao is efficacious and safe for the treatment of osteoporosis and other approved
medical indications based on Xianling Gubaos clinical results; and
 
    
    patients perception of Xianling Gubaos efficacy and side effects.
    47




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##### Table of Contents



Sales of Xianling Gubao Designated for Retail Pharmacies.
 
    
    the level of consumer awareness of Xianling Gubao, which is significantly affected by
the effectiveness of our marketing of Xianling Gubao as an OTC medicine, including our
mass media advertising, community-based marketing activities, in-store promotions,
pharmacy salespeople education and incentive programs, and our direct marketing to
consumers; and
 
    
    consumers perception of Xianling Gubaos efficacy and side effects.
   Pricing of Our Principal Products.
 Retail Price Control
   48




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##### Table of Contents



Hospital Purchase Price Control
   Cost of Barrenwort.
   Seasonal Variations.
  49




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##### Table of Contents



Net Revenues
   
    
    Sales to Hospitals. A substantial majority of our sales of Xianling Gubao and our
other prescription medicines designated for hospitals was made through third-party
distributors, and a very small portion of these medicines, as well as third-party
medicines, was sold directly to hospitals in Guizhou Province through Tongjitang
Distribution, our wholesale distribution subsidiary. In particular, in 2007, 2008 and
2009, we generated 56.1%, 66.4% and 70.7% of our sales of Xianling Gubao from hospitals,
respectively; and
 
    
    Sales to Retail Pharmacies. A substantial majority of sales of our OTC medicines
was designated for retail pharmacies through distributors, and a very small portion of
these medicines, as well as third-party medicines, was sold to retail pharmacies in
Guizhou Province through Tongjitang Distribution and directly to consumers through
Tongjitang Chain Stores. In particular,
in 2007, 2008 and 2009, we generated 43.9%, 33.6% and 29.3% of our sales of
Xianling Gubao from retail pharmacies, respectively.
   Cost of Revenues
  Years Ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    %
    
    
    RMB
    
    
    %
    
    
    RMB
    
    
    US$
    
    
    %(in thousands, except percentages)Net revenues
    
    
    596,007
    
    
    
    100
    
    
    
    451,032
    
    
    
    100.0
    
    
    
    480,339
    
    
    
    70,370
    
    
    
    100.0Cost of revenues
    
    
    206,019
    
    
    
    34.6
    
    
    
    167,345
    
    
    
    37.1
    
    
    
    201,205
    
    
    
    29,477
    
    
    
    41.9Gross profit
    
    
    389,988
    
    
    
    65.4
    
    
    
    283,687
    
    
    
    62.9
    
    
    
    279,134
    
    
    
    40,893
    
    
    
    58.1
  
    
    raw materials, which are primarily comprised of barrenwort and other medicinal herbs.
Barrenwort, the primary raw material used in manufacturing Xianling Gubao, constituted
57.3% of our cost of raw materials used in 2009, as compared to 61% in 2008 and 65.7% in
2007. The average price per kilogram of barrenwort increased by 1.9% to RMB21.9 (US$3.2)
in 2009 from RMB21.5 in 2008, and increased by 1.4% in 2008 from RMB21.2 in 2007. The
unit prices of most of the raw materials we used increased only slightly during the same
periods, while the unit prices of a few other raw materials decreased slightly. We
expect that the price of barrenwort will continue to stabilize in the next few years and
prices of our other raw materials will rise in the near future. Our cost of raw
materials will continue to constitute a significant percentage of our cost of revenues;
 
    
    labor, including salaries and benefits for employees directly involved in
manufacturing activities;
 
    
    packaging costs, including cost of packaging materials for our products;
  50




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##### Table of Contents




    
    depreciation and amortization of manufacturing equipment and facilities. Due to our
capacity expansion, depreciation and amortization expenses, measured in absolute terms,
have increased significantly. We expect that depreciation and amortization expenses in
absolute terms will continue to increase in the near future as we continue to grow; and
 
    
    overhead, including utility, parts for and maintenance of production equipment,
testing, and other expenses related to the manufacturing of our products.
   Operating Expenses
  Years Ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    %
    
    
    RMB
    
    
    %
    
    
    RMB
    
    
    %(in thousands, except percentages)Net revenues
    
    
    596,007
    
    
    
    100.0
    
    
    
    451,032
    
    
    
    100.0
    
    
    
    480,339
    
    
    
    100.0Advertising expenses
    
    
    96,876
    
    
    
    16.3
    
    
    
    80,180
    
    
    
    17.8
    
    
    
    32,384
    
    
    
    6.7Other selling and marketing expenses
    
    
    68,357
    
    
    
    11.5
    
    
    
    80,031
    
    
    
    17.7
    
    
    
    151,755
    
    
    
    31.6General and administrative expenses
    
    
    92,487
    
    
    
    15.5
    
    
    
    91,325
    
    
    
    20.3
    
    
    
    86,501
    
    
    
    18.0Research and development expenses
    
    
    12,673
    
    
    
    2.1
    
    
    
    17,368
    
    
    
    3.9
    
    
    
    16,057
    
    
    
    3.3
 Advertising Expenses
   Other Selling and Marketing Expenses
   51




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General and Administrative Expenses
  Research and Development Expenses
  Taxation
  PRC Enterprise Income Tax
     52




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Discussion of Segment Operations
  Results of Operations
  Years Ended December 31,2007
    
    
    2008
    
    
    2009% of Net
    
    
    
    
    
    
    % of Net
    
    
    
    
    
    
    
    
    
    
    % of NetRMB
    
    
    Revenue
    
    
    RMB
    
    
    Revenue
    
    
    RMB
    
    
    US$
    
    
    Revenue(in thousands, except percentages)Net revenues
    
    
    596,007
    
    
    
    100.0
    
    
    
    451,032
    
    
    
    100.0
    
    
    
    480,339
    
    
    
    70,370
    
    
    
    100.0Cost of revenues
    
    
    (206,019
    )
    
    
    (34.6
    )
    
    
    (167,345
    )
    
    
    (37.1
    )
    
    
    (201,205
    )
    
    
    (29,477
    )
    
    
    (41.9
    )Gross profit
    
    
    389,988
    
    
    
    65.4
    
    
    
    283,687
    
    
    
    62.9
    
    
    
    279,134
    
    
    
    40,893
    
    
    
    58.1Advertising expenses
    
    
    (96,876
    )
    
    
    (16.3
    )
    
    
    (80,180
    )
    
    
    (17.8
    )
    
    
    (32,384
    )
    
    
    (4,744
    )
    
    
    (6.7
    )Other selling and marketing expenses
    
    
    (68,357
    )
    
    
    (11.5
    )
    
    
    (80,031
    )
    
    
    (17.7
    )
    
    
    (151,755
    )
    
    
    (22,232
    )
    
    
    (31.6
    )General and administrative expenses
    
    
    (92,487
    )
    
    
    (15.5
    )
    
    
    (91,325
    )
    
    
    (20.2
    )
    
    
    (86,501
    )
    
    
    (12,672
    )
    
    
    (18.0
    )Research and development expenses
    
    
    (12,673
    )
    
    
    (2.1
    )
    
    
    (17,368
    )
    
    
    (3.9
    )
    
    
    (16,057
    )
    
    
    (2,352
    )
    
    
    (3.3
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    (6.2
    )
    
    
    
    
    
    
    
    
    
    
    Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (16.2
    )
    
    
    (4,500
    )
    
    
    (659
    )
    
    
    (0.9
    )Government grant (related to research and development)
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    0.3
    
    
    
    232
    
    
    
    34
    
    
    
    0.0Gain (loss) on disposal of property, plant and equipment and
land use rights
    
    
    (72
    )
    
    
    0.0
    
    
    
    3,970
    
    
    
    0.9
    
    
    
    (817
    )
    
    
    (120
    )
    
    
    (0.2
    )Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    Other operating income
    
    
    1,395
    
    
    
    0.3
    
    
    
    1,801
    
    
    
    0.4
    
    
    
    1,700
    
    
    
    249
    
    
    
    0.4Operating profit (loss)
    
    
    120,918
    
    
    
    20.3
    
    
    
    (77,678
    )
    
    
    (17.2
    )
    
    
    (10,948
    )
    
    
    (1,603
    )
    
    
    (2.3
    )Other income (expenses):Interest income
    
    
    27,906
    
    
    
    4.7
    
    
    
    17,114
    
    
    
    3.8
    
    
    
    4,047
    
    
    
    593
    
    
    
    0.8Interest expenses
    
    
    (9,858
    )
    
    
    (1.7
    )
    
    
    (16,599
    )
    
    
    (3.7
    )
    
    
    (8,553
    )
    
    
    (1,253
    )
    
    
    (1.8
    )Government grants
    
    
    17,064
    
    
    
    2.9
    
    
    
    6,752
    
    
    
    1.5
    
    
    
    5,554
    
    
    
    814
    
    
    
    1.2Investment income (expenses)
    
    
    8,409
    
    
    
    1.4
    
    
    
    (1,830
    )
    
    
    (0.4
    )
    
    
    829
    
    
    
    121
    
    
    
    0.2Other income, net
    
    
    7,903
    
    
    
    1.3
    
    
    
    20,235
    
    
    
    4.5
    
    
    
    6,963
    
    
    
    1,020
    
    
    
    1.4Income (loss) before income taxes
    
    
    172,342
    
    
    
    28.9
    
    
    
    (52,006
    )
    
    
    (11.6
    )
    
    
    (2,108
    )
    
    
    (308
    )
    
    
    (0.4
    )Income taxes
    
    
    (1,200
    )
    
    
    (0.2
    )
    
    
    (502
    )
    
    
    (0.1
    )
    
    
    (1,617
    )
    
    
    (237
    )
    
    
    (0.3
    )Net income (loss)
    
    
    171,142
    
    
    
    28.7
    
    
    
    (52,508
    )
    
    
    (11.7
    )
    
    
    (3,725
    )
    
    
    (545
    )
    
    
    (0.8
    )Less: Net income (loss) attributable to non-controlling interest
    
    
    51
    
    
    
    
    
    
    
    208
    
    
    
    0.1
    
    
    
    (66
    )
    
    
    (10
    )
    
    
    (0.0
    )Net income (loss) attributable to ordinary shareholders
    
    
    171,193
    
    
    
    28.7
    
    
    
    (52,300
    )
    
    
    (11.6
    )
    
    
    (3,791
    )
    
    
    (555
    )
    
    
    (0.8
    )
 Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 Net Revenues
   53




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Cost of Revenues
 Gross Profit
 Advertising Expenses
 Other Selling and Marketing Expenses
 General and Administrative Expenses
 Research and Development Expenses
 Impairment Loss on Goodwill
 Impairment Loss on Intangible Assets
 Other Operating Income
 Loss from Operations
 Other Income (expenses)
  54




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##### Table of Contents



Loss Before Income Taxes
 Provision for Income Taxes
 Net Loss
 Net income (loss) attributable to Tongjitang Chinese Medicines Company shareholders.
 Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 Net Revenues
 
    
    a decrease in sales of Xianling Gubao from RMB444.9 million in 2007 to RMB315.5
million in 2008;
 
    
    a decrease in sales of Zaoren Anshen Capsules from RMB21.7 million in 2007 to RMB11.4
million in 2008; and
 
    
    a decrease in sales of Dianbaizhu Syrup from RMB25.9 million in 2007 to RMB0.8
million in 2008.
  Cost of Revenues
 Gross Profit
 Advertising Expenses
 Other Selling and Marketing Expenses
  55




---



##### Table of Contents



General and Administrative Expenses
 Research and Development Expenses
 Impairment Loss on Goodwill
 Impairment Loss on Intangible Assets
 Other Operating Income
 Loss from Operations
 Other Income (expenses)
 Loss Before Income Taxes and Minority Interest
 Provision for Income Taxes
 Net Loss
 Critical Accounting Policies
    56




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##### Table of Contents



Segment Reporting
  Goodwill
     Impairment of long-lived assets
  Revenue recognition
      57




---



##### Table of Contents



Government grants
  Income taxes
    Share-based compensation
  Liquidity and Capital Resources
   58




---



##### Table of Contents



Cash Flows and Working Capital
  Years Ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands)Net cash provided by operating activities
    
    
    23,294
    
    
    
    100,210
    
    
    
    88,450
    
    
    
    12,960Net cash used in investing activities
    
    
    (7,016
    )
    
    
    (296,207
    )
    
    
    (184,267
    )
    
    
    (26,996
    )Net cash provided by (used in) financing activities
    
    
    593,422
    
    
    
    (40,585
    )
    
    
    (183,029
    )
    
    
    (26,814
    )Effect of exchange rate changes
    
    
    (42,954
    )
    
    
    (45,086
    )
    
    
    337
    
    
    
    48Net increase (decrease) in cash and cash equivalents
    
    
    566,746
    
    
    
    (281,668
    )
    
    
    (278,509
    )
    
    
    (40,802
    )Cash and cash equivalents at beginning of year
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,607Cash and cash equivalents at end of year
    
    
    797,755
    
    
    
    516,087
    
    
    
    237,578
    
    
    
    34,805
 Operating Activities
    Investing Activities
     59




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##### Table of Contents



Financing Activities
    Accounts Receivable
     Restrictions on Cash Dividends
   60




---



##### Table of Contents



Borrowings
  Capital Expenditures
  Recently Issued Pronouncements
     61




---



##### Table of Contents



Research and Development, Patents and Licenses, etc.
    62




---



##### Table of Contents



Trend Information
  Off-Balance Sheet Arrangements
  Tabular Disclosure of Contractual Obligations
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 Years(in RMB thousands)Long-term debt obligations
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    Operating lease obligations(1)
    
    
    4,346
    
    
    
    1,680
    
    
    
    1,265
    
    
    
    607
    
    
    
    794Capital purchase and other purchase obligations(2)
    
    
    8,622
    
    
    
    8,622
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12,968
    
    
    
    10,302
    
    
    
    51,265
    
    
    
    607
    
    
    
    794
 
 (1)
    
    Includes lease obligations for our office premises and buildings under non-cancelable leases.(2)
    
    Represents commitments for payments for research and development services. These commitments
are not recorded on our balance sheet as of December 31, 2009, as we have not received related
goods or services or taken title to the properties. Safe Harbor
  
    
    our anticipated growth and marketing strategies;
 
    
    our future business development, results of operations and financial condition;
 
    
    expansion of the National Medical Insurance Program in terms of both funding and
enrollment;
 
    
    our ability to maintain exclusive production rights for Xianling Gubao;
  63




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##### Table of Contents




    
    market acceptance of our products;
 
    
    our ability to develop and commercialize new products;
 
    
    our ability to obtain regulatory approvals for new products and to maintain or update
the regulatory approvals for our existing products;
 
    
    our ability to maintain regulatory approvals for our production facilities and to
obtain new approvals for expansions of our production facilities;
 
    
    our ability to expand our business through organic growth and strategic acquisitions;
 
    
    our expectations regarding governmental support for the development of the
traditional Chinese pharmaceutical industry;
 
    
    our expectations with respect to our ability to secure raw materials in the future;
 
    
    competition from other manufacturers of pharmaceutical products, including
manufacturers of traditional Chinese medicines;
 
    
    our ability to effectively protect our existing and future intellectual property and
not to infringe on the intellectual property of others; and
 
    
    fluctuations in general economic and business conditions in China.
    64




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    Position/TitleXiaochun Wang
    
    
    42
    
    
    Chairman of the Board of Directors, Chief Executive OfficerJustin Yan Chen
    
    
    44
    
    
    Director and Chief Operating OfficerYongcun Chen
    
    
    44
    
    
    Independent DirectorHarry K. Genant
    
    
    67
    
    
    Independent DirectorDavid Ray White
    
    
    55
    
    
    Independent DirectorCharles Wang
    
    
    44
    
    
    Chief Financial OfficerLing Qin
    
    
    50
    
    
    Chief Technology Officer
 Mr. Xiaochun Wang
 Mr. Justin Yan Chen
 Mr. Yongcun Chen
 Dr. Harry K. Genant
 Mr. David Ray White
 Mr. Charles Wang
  65




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##### Table of Contents



Dr. Ling Qin
 Compensation of Directors and Executive Officers
  2006 Share Incentive Plan
  Types of Awards
 
    
    options to purchase our ordinary shares;
 
    
    share appreciation rights, which entitle the grantee the right to ordinary shares or
cash compensation measured by the appreciation in the value of ordinary shares;
 
    
    dividend equivalent rights, which entitle the grantee to compensation equivalent to
dividends paid with respect to ordinary shares;
 
    
    restricted shares, which are ordinary shares issued to the grantee that are subject
to transfer restrictions, right of first refusal, repurchase, forfeiture, and other
terms and conditions as established by our plan administrator;
 
    
    restricted share units, which may be earned upon the passage of time or the
attainment of performance criteria and which may be settled for cash, ordinary shares or
other securities, or a combination of cash, ordinary shares or other securities as
established by our plan administrator;
 
    
    share payments, which may be (a) payments in the form of shares; or (b) options or
other rights to purchase ordinary shares, as part of any bonus, deferred compensation or
other arrangement, made in lieu of all or any portion of the compensation; and
 
    
    deferred shares, which are rights to receive a specified number of ordinary shares
during specified time periods.
 Plan Administration
 Award Agreement
 Eligibility
  66




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Acceleration of Awards upon Corporate Transactions
 Exercise Price and Term of Awards
  Vesting Schedule
  No. ofRestricted Shares
    
    
    
    
    No. ofName
    
    Granted
    
    
    Vesting Period
    
    Share Options Granted
    
    
    Vesting PeriodXiaochun Wang
    
    
    400,000
    
    
    130,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 2007130,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 2008140,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Justin Yan Chen
    
    
    100,000
    
    
    30,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 200730,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 200840,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Yongcun Chen
    
    
    50,000
    
    
    16,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 200716,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 200818,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Harry K. Genant
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    
    
    
    13,000 on June 30, 200814,000 on June 30, 2009David R. White
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    
    
    
    13,000 on June 30, 200814,000 on June 30, 2009Ling Qin
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    400,000
    
    
    130,000 on June 30, 200713,000 on June 30, 2008
    
    
    
    
    
    130,000 on June 30, 200814,000 on June 30, 2009
    
    
    
    
    
    140,000 on June 30, 2009Charles Wang
    
    
    180,000
    
    
    60,000 on December 15, 2009
    
    
    240,000
    
    
    40,000 on December 15, 200960,000 on December 15, 2010
    
    
    
    
    
    80,000 on December 15, 201060,000 on December 15, 2011
    
    
    
    
    
    120,000 on December 15, 2011Other employees
    
    
    586,714
    
    
    Mostly on June 30, 2007Total:
    
    
    1,436,714
    
    
    
    
    
    4,240,000
  Board Practices
   67




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##### Table of Contents



Committees of the Board of Directors
  Audit Committee
  
    
    appointing our independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by our independent auditors;
 
    
    reviewing with our independent auditors any audit problems or difficulties and
managements response;
 
    
    reviewing and approving all proposed related-party transactions;
 
    
    reviewing and discussing the annual audited financial statements with management and
our independent auditors;
 
    
    reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies;
 
    
    annually reviewing and reassessing our audit committee charter;
 
    
    such other matters that are specifically delegated to our audit committee by our
board of directors from time to time;
 
    
    meeting separately and periodically with management and our independent auditors; and
 
    
    reporting regularly to the board of directors.
  Compensation Committee
  
    
    determining the compensation package of our executive officers;
 
    
    reviewing and making recommendations to the board with respect to the compensation of
our directors;
 
    
    reviewing and approving corporate goals and objectives relevant to the compensation
of our chief executive officer, evaluating the performance of our chief executive
officer in light of those goals and objectives, and setting the compensation level of
our chief executive officer based on this evaluation; and
 
    
    reviewing periodically and making recommendations to the board regarding any
long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
   68




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##### Table of Contents



Corporate Governance and Nominating Committee
  
    
    identifying and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any vacancy;
 
    
    reviewing annually with the board the current composition of the board in light of
the characteristics of independence, qualification, experience and availability of
service to us;
 
    
    identifying and recommending to the board the directors to serve as members of the
boards committees;
 
    
    developing and recommending to the board a set of corporate governance guidelines and
principles applicable to us; and
 
    
    monitoring compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
  Interested Transactions
  Remuneration
  Qualification
  Duties of Directors
  Terms of Directors and Executive Officers
   69




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##### Table of Contents



Employees
  Number of Employees
    
    
    Percentage of Total EmployeesManufacturing
    
    
    504
    
    
    
    20.7
    %Marketing and Sales
    
    
    1,303
    
    
    
    53.4
    %General and Administration
    
    
    304
    
    
    
    12.5
    %Research and Development
    
    
    130
    
    
    
    5.3
    %Others
    
    
    199
    
    
    
    8.1
    %Total
    
    
    2,440
    
    
    
    100.0
    %
  National
    
    
    
    
    
    
    
    
    
    
    Work RelatedMedical
    
    
    
    
    
    
    
    
    
    
    Injuries
    
    
    MaternityPension
    
    
    Insurance
    
    
    Housing
    
    
    Unemployment
    
    
    Insurance
    
    
    InsuranceEmployees plans and funds
    
    Plan
    
    
    Program
    
    
    Fund
    
    
    Insurance Plan
    
    
    Plan
    
    
    PlanPercentages
    
    
    20.0
    %
    
    
    7.2
    %
    
    
    12.0
    %
    
    
    1.5
    %
    
    
    1.0
    %
    
    
    0.4
    %
   Share Ownership
  
    
    each of our directors and executive officers; and
 
    
    each person known to us to own beneficially more than 5.0% of our ordinary shares.
  70




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##### Table of Contents



Shares Beneficially Owned(1)Number
    
    
    %Directors and Executive Officers:Xiaochun Wang(2)
    
    
    53,875,584
    
    
    
    51.8Justin Yan Chen(3)
    
    
    1, 300,000
    
    
    
    1.2Yongcun Chen(4)
    
    
    1,234,000
    
    
    
    1.2Harry K. Genant(5)
    
    
    40,000
    
    
    
    *David Ray White(6)
    
    
    40,000
    
    
    
    *Charles Wang(7)
    
    
    100,000
    
    
    
    *Ling Qin(8)
    
    
    440,000
    
    
    
    *All directors and executive officers as a group
    
    
    57,029,584
    
    
    
    54.8Principal Shareholders:Hanmax Investment Limited(9)
    
    
    52,675,584
    
    
    
    50.6Fosun Industrial Co., Limited(10)
    
    
    33,403,392
    
    
    
    32.1
 
 *
    
    Upon exercise of all options granted, would beneficially own less than 1.0% of our
outstanding ordinary shares.(1)
    
    Percentage of beneficial ownership of each listed person is based on 104,066,526 ordinary
shares outstanding as of June 29, 2010, as well as the ordinary shares underlying share
options exercisable by such person within 60 days of the date of this annual report.
Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or
investment power with respect to the securities.(2)
    
    Includes 52, 675,584 ordinary shares held by Hanmax Investment Limited, a British Virgin
Islands company wholly owned and controlled by Xiaochun Wang and 1,200,000 ordinary shares
issuable upon exercise of options held by Mr. Wang within 60 days of the date of this annual
report. The business address of Mr. Wang is 5th Floor, Block B, Nanshan Medical
Device Park, 1019 Nanhai Avenue, Shekou, Nanshan District, Shenzhen, 518067 Guangdong
Province, Peoples Republic of China.(3)
    
    Includes 100,000 ordinary shares held by Justin Yan Chen and 1,200,000 ordinary shares
issuable upon exercise of options held by Mr. Chen within 60 days of the date of this annual
report. The business address of Mr. Chen is 5th Floor, Block B, Nanshan Medical
Device Park, 1019 Nanhai Avenue, Shekou, Nanshan District, Shenzhen, 518067 Guangdong
Province, Peoples Republic of China.(4)
    
    Includes 34,000 ordinary shares held by Yongcun Chen and 1,200,000 ordinary shares issuable
upon exercise of options held by Mr. Chen within 60 days of the date of this annual report.
Mr. Yongcun Chen disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein. The business address of Mr. Chen is 5th Floor, Block B,
Nanshan Medical Device Park, 1019 Nanhai Avenue, Shekou, Nanshan District, Shenzhen, 518067
Guangdong Province, Peoples Republic of China.(5)
    
    The business address of Mr. Genant is 7 Tara Hill Road, Tiburon, CA 94920, U.S.A.(6)
    
    The business address of Mr. White is 841 Deer Ridge, Waco, Texas 76712, U.S.A.(7)
    
    Includes 60,000 ordinary shares held by Charles Wang and 40,000 ordinary shares issuable upon
exercise of options held by Mr. Wang within 60 days of the date of this annual report. The
business address of Mr. Wang is 5th Floor, Block B, Nanshan Medical Device Park,
1019 Nanhai Avenue, Shekou, Nanshan District, Shenzhen, 518067 Guangdong Province, Peoples
Republic of China.(8)
    
    Includes 40,000 ordinary shares held by Ling Qin and 400,000 ordinary shares issuable upon
exercise of options held by Mr. Qin within 60 days of the date of this annual report. The
business address of Mr. Qin is Flat D, 3/F, Royal Ascot, Futan, Shatin, N.T., Hong Kong.(9)
    
    Hanmax Investment Limited, a company incorporated in the British Virgin Islands, is wholly
owned and controlled by Xiaochun Wang. The registered address of Hanmax Investment Limited is
Pasea Estate, Road Town, Tortola, the British Virgin Islands.(10)
    
    Represents 33,403,392 ordinary shares in the form of 8,350,848 ADSs held by Fosun Industrial
Co., Limited, a company incorporated in Hong Kong, China. The business address of Fosun
Industrial Co., Limited is Flat/Room 808, ICBC Tower, 3 Garden Road, Hong Kong, China. Fosun
Industrial Co., Limited is a wholly owned subsidiary of Shanghai Fosun Pharma R&D Co. Ltd.
Shanghai. Fosun Pharma R&D Co. Ltd. is a wholly owned subsidiary of Shanghai Fosun
Pharmaceutical Group Co. Ltd, which in turn is a subsidiary of Fosun International Limited, a
Hong Kong company listed on the Hong Kong Stock Exchange. Fosun International Limited is a
subsidiary of Fosun Holdings Limited, which in turn is a subsidiary of Fosun International
Holdings Ltd. Fosun International Holdings Ltd. is controlled by Guo Guangchang.     71




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
  Related Party Transactions
 Transactions among Subsidiaries
   Transactions among Certain Directors, Shareholders and Affiliates
 Related Party Balances
    Privatization
   72




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Other Related Party Transactions
    Employment Agreements
    Share Incentives
  Interests of Experts and Counsel
   73




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ITEM 8. FINANCIAL INFORMATION
 Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
  Dividend Policy
    Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 Offer and Listing Details
    74




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Sales PriceHigh
    
    
    LowAnnual Highs and Lows2007 (from March 16, 2007)
    
    
    12.88
    
    
    
    7.502008
    
    
    9.95
    
    
    
    1.972009
    
    
    5.10
    
    
    
    2.33Quarterly Highs and Lows2008First Quarter
    
    
    9.95
    
    
    
    6.57Second Quarter
    
    
    8.95
    
    
    
    3.80Third Quarter
    
    
    4.50
    
    
    
    2.35Fourth Quarter
    
    
    3.38
    
    
    
    1.972009First Quarter
    
    
    3.90
    
    
    
    2.33Second Quarter
    
    
    4.99
    
    
    
    3.22Third Quarter
    
    
    4.14
    
    
    
    2.90Fourth Quarter
    
    
    5.10
    
    
    
    3.412010First Quarter
    
    
    4.00
    
    
    
    3.03Monthly Highs and LowsDecember 2009
    
    
    4.10
    
    
    
    3.41January 2010
    
    
    4.00
    
    
    
    3.56February 2010
    
    
    3.91
    
    
    
    3.42March 2010
    
    
    3.89
    
    
    
    3.03April 2010
    
    
    4.48
    
    
    
    3.27May 2010
    
    
    4.34
    
    
    
    3.59June 2010 (through June 29, 2010)
    
    
    4.13
    
    
    
    3.72
 Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  Registered Office and Objects
   75




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Board of Directors
  Ordinary Shares
 General
  Dividends
   76




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Voting Rights
    Transfer of Ordinary Shares
   Liquidation
  Calls on Ordinary Shares and Forfeiture of Ordinary Shares
  Redemption of Ordinary Shares
  Variations of Rights of Shares
  Inspection of Books and Records
   77




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##### Table of Contents



Changes in Capital
  
    
    increase the share capital by such sum, to be divided into shares of such classes and
amount, as the resolution shall prescribe;
 
    
    consolidate and divide all or any of our share capital into shares of a larger amount
than our existing shares;
 
    
    sub-divide our existing shares, or any of them, into shares of a smaller amount than
is fixed by our memorandum of association; and
 
    
    cancel any shares which, at the date of the passing of the resolution, have not been
taken or agreed to be taken by any person.
  Differences in Corporate Law
  Mergers and Similar Arrangements
  
    
    the statutory provisions as to the due majority vote have been met;
 
    
    the shareholders have been fairly represented at the meeting in question;
 
    
    the arrangement is such that a businessman would reasonably approve; and
 
    
    the arrangement is not one that would more properly be sanctioned under some other
provision of the Companies Law.
   78




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Shareholders Suits
  Indemnification of Directors and Executive Officers and Limitation of Liability
   Anti-Takeover Provisions in the Amended and Restated Memorandum and Articles of Association
   Directors Fiduciary Duties
    79




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Shareholder Action by Written Consent
  Shareholder Proposals
   Cumulative Voting
  Removal of Directors
  Transactions with Interested Shareholders
    80




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##### Table of Contents



Dissolution; Winding up
  Variation of Rights of Shares
  Amendment of Governing Documents
  Rights of Non-resident or Foreign Shareholders
  Material Contracts
  Exchange Controls
  Taxation
 The following summary of the material Cayman Islands, Peoples Republic of China and United
States federal income tax consequences of an investment in our ADSs or ordinary shares is based
upon laws and relevant interpretations thereof in effect as of the date of this annual report on
Form 20-F, all of which are subject to change. This summary does not all possible tax
consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences
under U.S. state, local and other tax laws not addressed herein.
 Cayman Islands Taxation
   81




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##### Table of Contents



Peoples Republic of China Taxation
   United States Federal Income Taxation
   
    
    banks;
 
    
    financial institutions;
 
    
    insurance companies;
 
    
    regulated investment companies;
 
    
    real estate investment trusts;
 
    
    broker-dealers;
 
    
    traders that elect to mark to market;
 
    
    U.S. expatriates;
 
    
    tax-exempt entities;
  82




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##### Table of Contents




    
    persons liable for alternative minimum tax;
 
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion
or integrated transaction;
 
    
    persons that actually or constructively own 10% or more of the total combined voting
power of all classes of our voting stock;
 
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee
share option or otherwise as compensation; or
 
    
    partnerships or pass-through entities, or persons holding ADSs or ordinary shares
through such entities.
 INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX
RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
  
    
    an individual who is a citizen or resident of the United States;
 
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) created or organized in the United States or under the laws of the United
States, any State thereof or the District of Columbia;
 
    
    an estate, the income of which is subject to U.S. federal income taxation regardless
of its source; or
 
    
    a trust that (1) is subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons for all substantial decisions or
(2) has a valid election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
   Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
   83




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##### Table of Contents



Taxation of Disposition of ADSs or Ordinary Shares
  Passive Foreign Investment Company
  
    
    at least 75% of its gross income for such year is passive income; or
 
    
    at least 50% of the value of its assets (based on an average of the quarterly values
of the assets) during such year is attributable to assets that produce passive income or
are held for the production of passive income.
   84




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##### Table of Contents




    
    the excess distribution or recognized gain will be allocated ratably over your
holding period for the ADSs or ordinary shares;
 
    
    the amount allocated to the current taxable year, and any taxable years in your
holding period prior to the first taxable year in which we were a PFIC, will be treated
as ordinary income; and
 
    
    the amount allocated to each other taxable year will be subject to the highest tax
rate in effect for individuals or corporations, as applicable, for each such year and
the interest charge generally applicable to underpayments of tax will be imposed on the
resulting tax attributable to each such year.
      85




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##### Table of Contents



You are strongly urged to consult your tax advisor regarding the application of the PFIC rules
to your investment in ADSs or ordinary shares.
 Information Reporting and Backup Withholding
   Dividends and Paying Agents
  Statement by Experts
  Documents on Display
    86




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##### Table of Contents



Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Exchange Risk
   Inflation
   87




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##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 Debt Securities
  Warrants and Rights
  Other Securities
  American Depositary Shares
  Fees and Charges Our ADS holders May Have to Pay
  Persons depositing orwithdrawing shares must pay:
    
    For:US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
    

    Issuance of ADSs, including issuances
resulting from a distribution of shares or rights
or other property    Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement
terminatesUS$0.02 (or less) per ADS
    
        Any cash distribution to registered ADS
holdersA fee equivalent to the fee that would be payable if
securities distributed had been shares and the shares
had been deposited for issuance of ADSs
    
        Distribution of securities distributed to
holders of deposited securities which are
distributed by the depositary to registered ADS
holdersUS$0.02 (or less) per ADS per calendar year (if the
depositary has not collected any cash distribution fee
during that year)
    
        Depositary servicesExpenses of the depositary
    
        Cable, telex and facsimile transmissions
(when expressly provided in the deposit agreement)    Converting foreign currency to U.S. dollarsRegistration or transfer fees
    
        Transfer and registration of shares on our
share register to or from the name of the
depositary or its agent when you deposit or
withdraw sharesTaxes and other governmental charges the depositary or
the custodian have to pay on any ADS or share
underlying an ADS, for example, stock transfer taxes,
stamp duty or withholding taxes
    
        As necessaryAny charges incurred by the depositary or its agents 
for servicing the deposited securities
    
        As necessary
  88




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Fees and Other Payments Made by the Depositary to Us
   89




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 Material Modification to the Rights of Security Holders
  Use of Proceeds
  
    
    approximately US$3.9 million to enhance our marketing of Xianling Gubao and other
products;
 
    
    approximately US$2.5 million to strengthen our research and development
infrastructure and broaden and commercialize our product pipeline; and
 
    
    approximately US$34.5 million for general corporate purposes, which include (1)
approximately US$3.8 million for our acquisition of Guizhou LLF, (2) approximately
US$6.1 million for our acquisition of Pulante, (3) approximately US$8.8 million for our
acquisition of Jingfang, (4) approximately US$15.8 million for our acquisition of a
parcel of land in Guiyang, Guizhou Province, and (5) approximately RMB120.6 million for
our acquisition of Guiyang Liqour Factory.
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
    90




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Changes in Internal Control Over Financial Reporting
       
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2008
    
    
    2009Audit fees (1)
    
    US$
    430,000
    
    
    
    387,000Audit-related fees(2)
    
    US$
    230,500
    
    
    
    169,200
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements.(2)
    
    Audit-related fees means the aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under
Audit fees. Services comprising the fees disclosed under the category of Audit-related
fees in 2008 and 2009 involve principally the interim review of financial statements.   91




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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  Total Number of ADSs
    
    
    Approximate DollarTotal Number of
    
    
    Average Price in US$
    
    
    Purchased as Part of
    
    
    Value of ADSs that MayADSs/Ordinary Shares
    
    
    Paid Per
    
    
    Publicly Announced
    
    
    Yet be Purchased UnderPeriod
    
    Purchased
    
    
    ADS(1)/Ordinary Share
    
    
    Plan(2)
    
    
    the Plan(2)December 1, 2008 
December 31, 2008
    
    440,900 ADSs
    
    
    
    2.38
    
    
    
    440,900
    
    
    US$
    18,938,374January 2, 2009  May 29,
2009
    
    1,320,300 ADSs
    
    
    
    3.14
    
    
    
    1,320,300
    
    
    US$
    14,791,591January 2, 2009  January
30, 2009
    
    529,800 ADSs
    
    
    
    2.68
    
    
    
    529,800
    
    
    
    17,517,388February 2, 2009 
February 27, 2009
    
    280,000 ADSs
    
    
    
    3.19
    
    
    
    280,000
    
    
    
    16,625,002March 2, 2009  March 31,
2009
    
    151,200 ADSs
    
    
    
    3.21
    
    
    
    151,200
    
    
    
    16,139,693April 1, 2009  April 30,
2009
    
    242,100 ADSs
    
    
    
    3.70
    
    
    
    242,100
    
    
    
    15,244,876May 1, 2009  May 29, 2009
    
    117,200 ADSs
    
    
    
    3.87
    
    
    
    117,200
    
    
    
    14,791,591September 25, 2009
    
    19.3 million Ordinary Shares
    (3)
    
    
    1.025
    
    
    
    N.A.
    
    
    
    N.A.November 10, 2009
    
    4.8 million Ordinary Shares
    (3)
    
    
    1.025
    
    
    
    N.A.
    
    
    
    N.A.Total
    
    31.1 million Ordinary Shares
    
    
    1.16 per Ordinary Share
    
    
    1,761,200
    
    
    US$
    14,791,591
 
 (1)
    
    Each of our ADSs represents four ordinary shares.(2)
    
    On September 9, 2008, we announced that our board of directors had approved a share
repurchase program to repurchase from the open market up to US$20 million worth of our
outstanding ADSs within 18 months after the shareholders approval. On October 30, 2008, our
shareholders approved the share repurchase program at the annual general meeting for the year
2008. We have canceled all of the ADSs repurchased and their underlying ordinary shares.(3)
    
    These Ordinary Shares were repurchased by us in privately negotiated transactions. 
 ITEM 16F.
CHANGE IN REGISTRANTs CERTIFYING ACCOUNTANT
       92




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ITEM 16G. CORPORATE GOVERNANCE
    93




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 Exhibit Number
    
    Description of Document1.1
    
    
    Amended and Restated Memorandum and Articles of Association of the
Registrant, as adopted by special resolution passed on
October 30, 2008 (incorporated by reference to Exhibit 1.1 of
our annual report on Form 20-F filed with the Commission on June 2, 2009)2.1
    
    
    Form of Registrants American Depositary Receipt (included in Exhibit 2.3)2.2
    
    
    Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)2.3
    
    
    Form of Deposit Agreement among the Registrant, the Depositary and Holders
of the American Depositary Receipts (incorporated by reference to
Exhibit 4.3 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)2.4
    
    
    Shareholders Agreement dated as of November 8, 2006 among the Registrant
and Shareholders (incorporated by reference to Exhibit 4.4 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)2.5
    
    
    Registration Rights Agreement dated as of November 8, 2006 among the
Registrant and certain Shareholders (incorporated by reference to
Exhibit 4.5 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.1
    
    
    Form of Indemnification Agreement with the Registrants Directors
(incorporated by reference to Exhibit 10.1 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.2
    
    
    Form of Employment Agreement (incorporated by reference to Exhibit 10.2
from our F-1 registration statement (File No. 333-140888), as amended,
initially filed with the Commission on February 26, 2007)4.3
    
    
    2006 Share Incentive Plan (as amended on October 30, 2008) (incorporated
by reference to Exhibit 99.1 from our Post-Effective Amendment No. 1 to
S-8 registration statement (File No. 333-140888) filed with the Commission
on December 23, 2008)4.4
    
    
    Subscription Agreement dated December 21, 2005 among Samtung Investment
Limited, Unisources Enterprises Limited, Xiaochun Wang and Shaolan Wang
(incorporated by reference to Exhibit 10.4 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.5
    
    
    Sale and Purchase Agreement dated June 15, 2006 among the Registrant,
Unisources Enterprises Limited and shareholders of Unisources Enterprises
Limited (incorporated by reference to Exhibit 10.5 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)4.6
    
    
    Share Purchase Agreement dated November 8, 2006 among the Registrant, ML
Global Private Equity Fund, L.P. and Merrill Lynch Ventures L.P. 2001
(incorporated by reference to Exhibit 10.6 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.7
    
    
    English Translation of License Agreement dated January 12, 2005 between
Xiaochun Wang and Tongjitang Pharmaceutical (incorporated by reference to
Exhibit 10.7 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.8
    
    
    Real Property Lease Agreement dated July 11, 2006 (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)4.9
    *
    
    Letter of Deloitte Touche Tohmatsu dated June 30, 20108.1
    *
    
    Subsidiaries of the Registrant11.1
    
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 99.1 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    *
    
    Consent of Deloitte Touche Tohmatsu15.2
    *
    
    Consent of Ernst & Young Hua Ming15.3
    *
    
    Consent of Global Law Office15.4
    *
    
    Consent of Maples and Calder
 
 *
    
    Filed with this Annual Report on Form 20-F  94




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##### Table of Contents



SIGNATURES
  TONGJITANG CHINESE MEDICINES COMPANYBy:
    /s/ Xiaochun WangName:
    Xiaochun WangTitle:
    Chairman and Chief Executive Officer   95




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageConsolidated Financial StatementsReport of Independent Registered Public Accounting Firm  Ernst and Young Hua Ming
    
    
    F-2Report of Independent Registered Public Accounting Firm  Deloitte Touche Tohmatsu
    
    
    F-3Consolidated Balance Sheets as of December 31, 2008 and 2009
    
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-6 - F-7Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the
Years Ended December 31, 2007, 2008 and 2009
    
    
    F-8Notes to the Consolidated Financial Statements
    
    
    F-9 - F-42
  F-1




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##### Table of Contents



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
   F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       DELOITTE TOUCHE TOHMATSU
  F-3




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of
shares and per share data)
 As of December 31,Note
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    516,087
    
    
    
    237,578
    
    
    
    34,805Short-term bank deposit
    
    
    
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    7,325Notes receivable
    
    
    
    
    
    
    55,987
    
    
    
    70,248
    
    
    
    10,291Accounts receivable (net of allowance for doubtful accounts
of RMB6,028 and RMB26,193 (US$3,838) as of December 31, 2008
and 2009, respectively)
    
    
    5
    
    
    
    214,543
    
    
    
    232,038
    
    
    
    33,994Inventories  net
    
    
    7
    
    
    
    97,553
    
    
    
    139,100
    
    
    
    20,378Trading securities
    
    
    17
    
    
    
    792
    
    
    
    1,447
    
    
    
    212Prepaid advertising expenses
    
    
    
    
    
    
    1,692
    
    
    
    1,204
    
    
    
    176Receivable on sale of property, plant and equipment
    
    
    6
    
    
    
    12,600
    
    
    
    9,320
    
    
    
    1,365Other prepaid expenses and other current assets
    
    
    
    
    
    
    21,548
    
    
    
    16,139
    
    
    
    2,364Deferred tax assets
    
    
    15
    
    
    
    
    
    
    
    7,565
    
    
    
    1,108Amount due from related parties
    
    
    16
    
    
    
    9,189
    
    
    
    
    
    
    
    Total current assets
    
    
    
    
    
    
    979,991
    
    
    
    764,639
    
    
    
    112,018Non-current assets:Property, plant and equipment, net
    
    
    8
    
    
    
    152,249
    
    
    
    172,097
    
    
    
    25,212Land use right, net
    
    
    
    
    
    
    28,902
    
    
    
    42,515
    
    
    
    6,228Deposit for acquisition of a subsidiary
    
    
    22
    
    
    
    
    
    
    
    120,599
    
    
    
    17,668Deposit for acquisition of property, plant and equipment
and intangible assets
    
    
    9
    
    
    
    188,103
    
    
    
    162,440
    
    
    
    23,798Deferred tax assets
    
    
    15
    
    
    
    1,107
    
    
    
    2,809
    
    
    
    412Long-term other assets
    
    
    
    
    
    
    1,800
    
    
    
    1,000
    
    
    
    147Acquired intangible assets, net
    
    
    11
    
    
    
    24,736
    
    
    
    27,592
    
    
    
    4,042Goodwill
    
    
    10
    
    
    
    
    
    
    
    2,345
    
    
    
    344Receivable on sale of property, plant and equipment
    
    
    6
    
    
    
    6,210
    
    
    
    9,170
    
    
    
    1,343Total non-current assets
    
    
    
    
    
    
    403,107
    
    
    
    540,567
    
    
    
    79,194Total assets
    
    
    
    
    
    
    1,383,098
    
    
    
    1,305,206
    
    
    
    191,212LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    
    12
    
    
    
    85,100
    
    
    
    101,100
    
    
    
    14,811Accounts payable
    
    
    
    
    
    
    14,663
    
    
    
    38,288
    
    
    
    5,607Accrued expenses and other liabilities
    
    
    13
    
    
    
    81,130
    
    
    
    161,433
    
    
    
    23,650Income tax payable
    
    
    15
    
    
    
    926
    
    
    
    3,089
    
    
    
    452Unrecognized tax benefit
    
    
    15
    
    
    
    
    
    
    
    937
    
    
    
    138Amount due to related parties
    
    
    16
    
    
    
    8,717
    
    
    
    900
    
    
    
    132Total current liabilities
    
    
    
    
    
    
    190,536
    
    
    
    305,747
    
    
    
    44,790Non-current liabilities:Long-term bank loans
    
    
    12
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    7,325Deferred tax liabilities
    
    
    15
    
    
    
    7,272
    
    
    
    11,868
    
    
    
    1,739Total non-current liabilities
    
    
    
    
    
    
    57,272
    
    
    
    61,868
    
    
    
    9,064Commitments and contingencies
    
    
    19Shareholders Equity:Ordinary shares (par value US$0.001 per share; 500,000,000
shares and 500,000,000 shares authorized; 135,209,722
shares and 104,066,526 shares issued and outstanding at
December 31, 2008 and 2009, respectively)
    
    
    
    
    
    
    1,070
    
    
    
    856
    
    
    
    126Treasury stock (US$0.001 par value: 1,763,600 shares and nil
shares as of December 31, 2008 and 2009 outstanding,
respectively)
    
    
    
    
    
    
    (7,159
    )
    
    
    
    
    
    
    Additional paid-in capital
    
    
    
    
    
    
    891,427
    
    
    
    894,487
    
    
    
    131,043Accumulated other comprehensive loss
    
    
    
    
    
    
    (88,093
    )
    
    
    (87,756
    )
    
    
    (12,856
    )Retained earnings
    
    
    
    
    
    
    337,570
    
    
    
    130,004
    
    
    
    19,045Total shareholders equity
    
    
    
    
    
    
    1,134,815
    
    
    
    937,591
    
    
    
    137,358Non-controlling interest
    
    
    
    
    
    
    475
    
    
    
    
    
    
    
    1,135,290
    
    
    
    937,591
    
    
    
    137,358Total liabilities and shareholders equity
    
    
    
    
    
    
    1,383,098
    
    
    
    1,305,206
    
    
    
    191,212
   F-4




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of 
shares and per share data)
 For the year ended December 31,Note
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net revenues:
    
    
    
    
    
    
    596,007
    
    
    
    451,032
    
    
    
    480,339
    
    
    
    70,370Cost of revenues:
    
    
    
    
    
    
    (206,019
    )
    
    
    (167,345
    )
    
    
    (201,205
    )
    
    
    (29,477
    )Gross profit
    
    
    
    
    
    
    389,988
    
    
    
    283,687
    
    
    
    279,134
    
    
    
    40,893Operating expenses:Advertising expenses
    
    
    
    
    
    
    (96,876
    )
    
    
    (80,180
    )
    
    
    (32,384
    )
    
    
    (4,744
    )Other selling and marketing expenses
    
    
    
    
    
    
    (68,357
    )
    
    
    (80,031
    )
    
    
    (151,755
    )
    
    
    (22,232
    )General and administrative expenses
    
    
    
    
    
    
    (92,487
    )
    
    
    (91,325
    )
    
    
    (86,501
    )
    
    
    (12,672
    )Research and development expenses
    
    
    
    
    
    
    (12,673
    )
    
    
    (17,368
    )
    
    
    (16,057
    )
    
    
    (2,352
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    
    
    
    
    Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (4,500
    )
    
    
    (659
    )Government grant (related to research and
development)
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    232
    
    
    
    34(Loss) gain on disposal of property, plant and
equipment and land use rights
    
    
    
    
    
    
    (72
    )
    
    
    3,970
    
    
    
    (817
    )
    
    
    (120
    )Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    
    
    
    
    Other operating income
    
    
    
    
    
    
    1,395
    
    
    
    1,801
    
    
    
    1,700
    
    
    
    249Total operating expenses
    
    
    
    
    
    
    (269,070
    )
    
    
    (361,365
    )
    
    
    (290,082
    )
    
    
    (42,496
    )Operating profit (loss)
    
    
    
    
    
    
    120,918
    
    
    
    (77,678
    )
    
    
    (10,948
    )
    
    
    (1,603
    )Interest expenses
    
    
    
    
    
    
    (9,858
    )
    
    
    (16,599
    )
    
    
    (8,553
    )
    
    
    (1,253
    )Interest income
    
    
    
    
    
    
    27,906
    
    
    
    17,114
    
    
    
    4,047
    
    
    
    593Investment income (expenses)
    
    
    
    
    
    
    8,409
    
    
    
    (1,830
    )
    
    
    829
    
    
    
    121Waiver of other payable
    
    
    
    
    
    
    5,542
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    
    
    
    
    2,361
    
    
    
    4,171
    
    
    
    6,963
    
    
    
    1,020Tax refund on reinvestment of profits
    
    
    
    
    
    
    
    
    
    
    16,064
    
    
    
    
    
    
    
    Government grants
    
    
    
    
    
    
    17,064
    
    
    
    6,752
    
    
    
    5,554
    
    
    
    814Income (loss) before income taxes
    
    
    
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (2,108
    )
    
    
    (308
    )Income taxes
    
    
    15
    
    
    
    (1,200
    )
    
    
    (502
    )
    
    
    (1,617
    )
    
    
    (237
    )Net income (loss)
    
    
    
    
    
    
    171,142
    
    
    
    (52,508
    )
    
    
    (3,725
    )
    
    
    (545
    )Net income (loss) attributable to non-controlling interest
    
    
    
    
    
    
    51
    
    
    
    208
    
    
    
    (66
    )
    
    
    (10
    )Net income (loss) attributable to ordinary shareholders
    
    
    
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (3,791
    )
    
    
    (555
    )Net Income (loss) per share attributable to ordinary
shareholders:Basic and Diluted
    
    
    
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.03
    )
    
    
    (0.01
    )Number of shares used in computation of net income (loss)
per share:Basic
    
    
    
    
    
    
    124,479,794
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Diluted
    
    
    
    
    
    
    124,483,978
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Net Income (loss) per share
attributable to ordinary shares
classified as mezzanine equity:Basic and Diluted
    
    
    
    
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ANumber of shares used in computation
of net income (loss) per share
attributable to ordinary shares
classified as mezzanine equity:Basic and Diluted
    
    
    
    
    
    
    2,149,018
    
    
    
    
    
    
    
    
    
    
    
    
   F-5




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$))
 For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    171,142
    
    
    
    (52,508
    )
    
    
    (3,725
    )
    
    
    (545
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Amortization of intangible assets
    
    
    4,563
    
    
    
    11,697
    
    
    
    3,855
    
    
    
    565Amortization of land use right
    
    
    360
    
    
    
    543
    
    
    
    2,507
    
    
    
    367Depreciation of property, plant and equipment
    
    
    12,306
    
    
    
    13,878
    
    
    
    16,208
    
    
    
    2,374Allowance for doubtful accounts and other receivables
    
    
    2,389
    
    
    
    1,586
    
    
    
    12,437
    
    
    
    1,822Gain on disposal of a subsidiary
    
    
    
    
    
    
    (1,312
    )
    
    
    
    
    
    
    Loss (gain) on disposal of property, plant
and equipment and land use rights
    
    
    72
    
    
    
    (3,970
    )
    
    
    817
    
    
    
    120Share-based compensation expenses
    
    
    37,100
    
    
    
    20,446
    
    
    
    5,799
    
    
    
    850Impairment loss on intangible assets
    
    
    
    
    
    
    72,910
    
    
    
    4,500
    
    
    
    659Impairment loss on goodwill
    
    
    
    
    
    
    28,062
    
    
    
    
    
    
    
    Impairment on deposit for property, plant
and equipment and land use rights
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    Write-down of inventories
    
    
    458
    
    
    
    1,181
    
    
    
    1,446
    
    
    
    212Deferred tax
    
    
    164
    
    
    
    (8,023
    )
    
    
    (4,274
    )
    
    
    (626
    )Changes in current assets and liabilities (net of
effects of acquisition and dispositions):Notes receivable
    
    
    (36,227
    )
    
    
    (7,028
    )
    
    
    (11,967
    )
    
    
    (1,753
    )Accounts receivable
    
    
    (103,001
    )
    
    
    56,700
    
    
    
    (23,080
    )
    
    
    (3,381
    )Amount due from related parties
    
    
    
    
    
    
    (7,917
    )
    
    
    9,189
    
    
    
    1,346Inventories
    
    
    (34,037
    )
    
    
    (15,274
    )
    
    
    (37,147
    )
    
    
    (5,442
    )Trading securities
    
    
    (2,797
    )
    
    
    2,005
    
    
    
    (655
    )
    
    
    (96
    )Prepaid advertising expenses
    
    
    17,062
    
    
    
    7,642
    
    
    
    6,288
    
    
    
    921Other prepaid expenses and other current assets
    
    
    6,784
    
    
    
    (14,495
    )
    
    
    10,939
    
    
    
    1,603Accounts payable
    
    
    (4,262
    )
    
    
    (4,544
    )
    
    
    17,772
    
    
    
    2,604Accrued expenses and other current liabilities
    
    
    (32,749
    )
    
    
    386
    
    
    
    74,566
    
    
    
    10,924Amount due to related parties
    
    
    (4
    )
    
    
    
    
    
    
    (432
    )
    
    
    (63
    )Income taxes payable
    
    
    (16,029
    )
    
    
    (2,154
    )
    
    
    3,407
    
    
    
    499Net cash provided by operating activities
    
    
    23,294
    
    
    
    100,210
    
    
    
    88,450
    
    
    
    12,960Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (13,595
    )
    
    
    (3,058
    )
    
    
    (11,026
    )
    
    
    (1,615
    )Proceeds from disposal of property, plant
and equipment and land use rights
    
    
    3,089
    
    
    
    78
    
    
    
    7
    
    
    
    1Deposits paid for acquisition of property,
plant and equipment and intangible assets
    
    
    (10,451
    )
    
    
    (189,785
    )
    
    
    (598
    )
    
    
    (88
    )Repayment of deposits for acquisition of property, plant and equipment and
intangible assets
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    2,930Deposits paid for acquisition of a subsidiary
    
    
    
    
    
    
    
    
    
    
    (120,599
    )
    
    
    (17,668
    )Acquisition of intangible assets
    
    
    (10,012
    )
    
    
    
    
    
    
    (8,715
    )
    
    
    (1,277
    )Acquisition of a subsidiary, net of cash acquired
    
    
    (27,751
    )
    
    
    (35,694
    )
    
    
    (60,577
    )
    
    
    (8,875
    )Proceeds on disposal of subsidiaries, net of cash disposed
    
    
    
    
    
    
    (103
    )
    
    
    
    
    
    
    Advance to a director and shareholder
    
    
    
    
    
    
    (17,645
    )
    
    
    
    
    
    
    Repayment from a related party
    
    
    1,704
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (2,759
    )
    
    
    (404
    )Increase (decrease) in short-term bank deposit
    
    
    50,000
    
    
    
    (50,000
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (7,016
    )
    
    
    (296,207
    )
    
    
    (184,267
    )
    
    
    (26,996
    )Cash flows from financing activities:Repayment of borrowings
    
    
    (44,150
    )
    
    
    (201,500
    )
    
    
    (84,000
    )
    
    
    (12,306
    )Repurchase of shares
    
    
    
    
    
    
    (7,159
    )
    
    
    (196,830
    )
    
    
    (28,836
    )New borrowings raised
    
    
    50,000
    
    
    
    170,000
    
    
    
    100,000
    
    
    
    14,650Repayment to related parties
    
    
    (41
    )
    
    
    (1,926
    )
    
    
    (2,199
    )
    
    
    (322
    )Issuance of share capital
    
    
    645,806
    
    
    
    
    
    
    
    
    
    
    
    Direct and incremental offering expenses paid
    
    
    (58,193
    )
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    593,422
    
    
    
    (40,585
    )
    
    
    (183,029
    )
    
    
    (26,814
    )Effect of exchange rate changes
    
    
    (42,954
    )
    
    
    (45,086
    )
    
    
    337
    
    
    
    48Net increase (decrease) in cash and cash equivalents
    
    
    566,746
    
    
    
    (281,668
    )
    
    
    (278,509
    )
    
    
    (40,802
    )Cash and cash equivalents at the beginning of year
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,607Cash and cash equivalents at the end of year
    
    
    797,755
    
    
    
    516,087
    
    
    
    237,578
    
    
    
    34,805
   F-6




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  CONTD
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$))
 For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Supplemental schedule of cash flow information:Interest paid
    
    
    9,858
    
    
    
    16,599
    
    
    
    8,553
    
    
    
    1,253Income tax paid
    
    
    17,065
    
    
    
    11,097
    
    
    
    2,145
    
    
    
    314Non-cash investing and financing activities:Payables for acquisition of a subsidiary
    
    
    
    
    
    
    22,190
    
    
    
    
    
    
    
    Deemed distribution of earnings to a
director and shareholder
    
    
    
    
    
    
    17,645
    
    
    
    
    
    
    
    Proceeds on disposal of property, plant
and equipment and land use rights included
in other receivables
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    Proceeds on disposal of property, plant
and equipment and land use rights included
in receivable on sale of property, plant
and equipment
    
    
    
    
    
    
    18,065
    
    
    
    18,490
    
    
    
    2,709Refund of deposit for property, plant and
equipment included in receivables on sale
of property, plant and equipment
    
    
    
    
    
    
    745
    
    
    
    
    
    
    
    Accounts payable for construction costs
and acquisition of property, plant and
equipment
    
    
    6,683
    
    
    
    6,882
    
    
    
    7,849
    
    
    
    1,150Forfeiture of unvested restricted shares
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
   F-7




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except number of shares)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    Total
    
    
    Non-Number of
    
    
    Ordinary
    
    
    Number of
    
    
    Treasury
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    shareholders
    
    
    controlling
    
    
    Comprehensiveordinary shares
    
    
    shares
    
    
    Treasury stock
    
    
    stock
    
    
    capital
    
    
    loss
    
    
    earnings
    
    
    equity
    
    
    interest
    
    
    income (loss)RMB
    
    
    
    
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    
    
    
    
    RMBBalance as of January 1, 2007
    
    
    90,364,000
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    140,019
    
    
    
    
    
    
    
    236,322
    
    
    
    377,064
    
    
    
    683Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,193
    
    
    
    171,193
    
    
    
    (51
    )
    
    
    171,193Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,990
    )
    
    
    
    
    
    
    (42,990
    )
    
    
    
    
    
    
    (42,990
    )Conversion of mezzanine
equity
    
    
    9,929,008
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    120,568
    
    
    
    
    
    
    
    
    
    
    
    120,645
    
    
    
    Issuance of shares upon the
initial public offering
    
    
    33,400,000
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    645,548
    
    
    
    
    
    
    
    
    
    
    
    645,806
    
    
    
    Offering expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,242
    )
    
    
    
    
    
    
    
    
    
    
    (72,242
    )
    
    
    Issuance of restricted shares
    
    
    1,656,714
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,100
    
    
    
    
    
    
    
    
    
    
    
    37,100
    
    
    
    Balance as of December 31,
2007
    
    
    135,349,722
    
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    870,980
    
    
    
    (42,990
    )
    
    
    407,515
    
    
    
    1,236,576
    
    
    
    632
    
    
    
    128,203Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,300
    )
    
    
    (52,300
    )
    
    
    (208
    )
    
    
    (52,300
    )Disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Deemed distribution to a
shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,645
    )
    
    
    (17,645
    )
    
    
    Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,103
    )
    
    
    
    
    
    
    (45,103
    )
    
    
    
    
    
    
    (45,103
    )Forfeiture of restricted shares
    
    
    (140,000
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,159
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,446
    
    
    
    
    
    
    
    
    
    
    
    20,446
    
    
    
    Balance as of December 31,
2008
    
    
    135,209,722
    
    
    
    1,070
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    891,427
    
    
    
    (88,093
    )
    
    
    337,570
    
    
    
    1,134,815
    
    
    
    475
    
    
    
    (97,403
    )Net income/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,791
    )
    
    
    (3,791
    )
    
    
    66
    
    
    
    (3,791
    )Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    29,379,596
    
    
    
    (196,830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (196,830
    )
    
    
    Deregistration of shares
    
    
    (31,143,196
    )
    
    
    (214
    )
    
    
    (31,143,196
    )
    
    
    203,989
    
    
    
    
    
    
    
    
    
    
    
    (203,775
    )
    
    
    
    
    
    
    Acquisition of a
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (521
    )Acquisition of non-controlling
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,441
    )
    
    
    
    
    
    
    
    
    
    
    (1,441
    )
    
    
    (1,318
    )Capital injection in a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,298
    )
    
    
    
    
    
    
    
    
    
    
    (1,298
    )
    
    
    1,298Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,799
    
    
    
    
    
    
    
    
    
    
    
    5,799
    
    
    
    Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337Balance as of December 31,
2009
    
    
    104,066,526
    
    
    
    856
    
    
    
    
    
    
    
    
    
    
    
    894,487
    
    
    
    (87,756
    )
    
    
    130,004
    
    
    
    937,591
    
    
    
    
    
    
    
    (3,454
    )Balance as of December 31,
2009, in US$
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    131,043
    
    
    
    (12,856
    )
    
    
    19,045
    
    
    
    137,358
    
    
    
    
    
    
    
    (506
    )
   F-8




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),

except for number of shares and per share data)
 1.
    
    ORGANIZATION AND BASIS OF PRESENTATION
     Percentage ofPlace of incorporation/
    
    shareholding/Name of subsidiary
    
    establishment
    
    ownership
    
    
    Principal activitiesUnisources
    
    British Virgin Islands
    
    
    100
    %
    
    Investment holdingTongjitang Hong Kong
    
    Hong Kong
    
    
    100
    %
    
    Investment holdingTongjitang Pharmaceutical
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsGuizhou Tongjitang Pharmaceutical Distribution Co., Ltd
(Tongjitang Distribution)
    
    PRC
    
    
    100
    %
    
    Wholesale distribution of medicine productsGuizhou Tongjitang Pharmacy Chain Stores Co., Ltd.
(Tongjitang Chain Stores)
    
    PRC
    
    
    100
    %
    
    Retail sales of medicines products and medical devicesGuizhou Longlife Pharmaceutical Co., Ltd. (Guizhou Longlife)
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsQinghai Pulante Pharmaceutical Co., Ltd. (Qinghai Pulante)
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsGuizhou Jincili Technology Development Co., Ltd. (Guizhou
Jincili)
    
    PRC
    
    
    100
    %
    
    Development of medicine productsAnhui Jingfang Pharmaceutical Co., Ltd. (Anhui Jingfang)
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicines productsAnhui Jingfang Chemical Co., Ltd. (Anhui Jingfang Chemical)
    
    PRC
    
    
    100
    %
    
    DormantGuizhou Tongjitang Asset Management Co., Ltd. (Tongjitang
Asset Management)
    
    PRC
    
    
    100
    %
    
    Dormant
  F-9




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation and principles of consolidation
   Segment reporting
  Cash and cash equivalents
  Notes receivable
  Inventories
  Trading securities
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Realized gain on trading securities
    
    
    9,555
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain (loss) on trading securities
    
    
    (1,146
    )
    
    
    (1,830
    )
    
    
    655
    
    
    
    96Dividends received
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    25Total
    
    
    8,409
    
    
    
    (1,830
    )
    
    
    829
    
    
    
    121
  F-10




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Property, plant and equipment, net
   Buildings
    
    Lesser of 50 years or lease termLeasehold improvement
    
    Lesser of 10 years or lease termPlant and machinery
    
    5 to 10 yearsOffice equipment, furniture and fixtures
    
    5 yearsMotor vehicles
    
    10 years
 Land use rights
   Goodwill
      F-11




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Acquired intangible assets, net
  Patents
    
    9.75 yearsTrademarks
    
    9.30 yearsDefensive intangible asset
    
    10 yearsRegistered drug formulae
    
    27 yearsDistribution networks
    
    10 yearsTechnical know-how
    
    10 yearsNon-compete agreement
    
    10 years
 Impairment of long-lived assets
  Revenue recognition
     Shipping and handling costs
  Advertising costs
   F-12




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Government grants
  Research and development costs
  Earnings (loss) per share
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Income (loss) available to ordinary shareholders
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (3,791
    )
    
    
    (555
    )Weighted average number of ordinary shares for
the calculation of basic earnings (loss) per
share
    
    
    124,479,794
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Effect of dilutive securitiesrestricted shares
    
    
    4,184
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of ordinary shares for
the calculation of diluted earnings (loss) per
share
    
    
    124,483,978
    
    
    
    134,758,695
    
    
    
    122,940,745
    
    
    
    122,940,745Weighted average number of ordinary shares
classified as mezzanine equity for the
calculation of basic earnings per share
    
    
    2,149,018
    
    
    
    
    
    
    
    
    
    
    
    Ordinary sharesBasic earnings (loss) per share
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.03
    )
    
    
    (0.01
    )Ordinary sharesDiluted earnings (loss) per share
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.03
    )
    
    
    (0.01
    )Ordinary shares classified as mezzanine
equitybasic and diluted earnings per share
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  F-13




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Income taxes
 Accounting for Income Taxes
   Foreign currency transactions
   Convenience translation into United States Dollars
  Share-based compensation
 Share-Based Payment Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 Comprehensive income (loss)
   F-14




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Use of estimates
  Fair value of financial instruments
   Employee benefit
  Leases
   F-15




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Recent accounting pronouncements
       F-16




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Recent accounting pronouncements (contd)
       F-17




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Concentration of credit risk
    Reimbursement under the National Medical Insurance Program
  Price control
   Current vulnerability due to certain other concentrations
   F-18




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 Current vulnerability due to certain other concentrations (cond)
   3.
    
    BUSINESS COMBINATION
 Acquisition in 2009
  RMBProperty, plant and equipment
    
    
    26,253Land use right
    
    
    14,293Intangible assetsPatents
    
    
    1,379Non-compete agreement
    
    
    1,116Deferred tax assets
    
    
    1,661Current assets
    
    
    31,768Current liabilities
    
    
    (20,120
    )Deferred tax liability
    
    
    (1,264
    )Non-controlling interest
    
    
    521Goodwill
    
    
    2,34557,952Cost of acquisition  cash consideration paid
    
    
    57,952
 The following unaudited pro forma consolidated financial information reflects the Groups
consolidated results of operations as if the acquisition had occurred at the beginning of 2009:
 Net revenues
    
    
    490,446Operating loss
    
    
    (10,058
    )Net loss
    
    
    (3,252
    )Net loss per shareBasic and diluted
    
    
    (0.03
    )
 These unaudited pro forma results have been prepared for information purposes only and do not
purport to be indicative of what the Groups consolidated results of operations would have been had
the acquisition of Anhui Jingfang actually taken place at the beginning of 2009.
  F-19




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TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 3.
    
    BUSINESS COMBINATION (CONTD)
 Acquisition in 2008
  RMBProperty, plant and equipment
    
    
    24,452Intangible assetsPatents
    
    
    9,698Trademarks
    
    
    2,289Distribution networks
    
    
    4,106Current assets
    
    
    10,625Current liabilities
    
    
    (16,042
    )Deferred tax liability
    
    
    (3,240
    )Goodwill
    
    
    28,06259,950Cost of acquisitionCash consideration paid
    
    
    37,760Consideration payable
    
    
    22,19059,950
  4.
    
    DISPOSAL
  RMBCash and cash equivalents
    
    
    103Other prepaid expenses and current assets
    
    
    2,267Property, plant and equipment
    
    
    641Amount due to related parties
    
    
    (2,380
    )Accrued expenses and other current liabilities
    
    
    (1,652
    )Non-controlling interest
    
    
    51Net liabilities disposed of
    
    
    (970
    )Consideration receivable
    
    
    342Gain on disposal
    
    
    1,312
  F-20




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 5.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Balance, beginning of year
    
    
    4,589
    
    
    
    6,175
    
    
    
    905Addition for the current year- Charged to costs and expenses
    
    
    1,586
    
    
    
    12,437
    
    
    
    1,822- Acquisitions
    
    
    
    
    
    
    7,581
    
    
    
    1,111Balance at end of the year
    
    
    6,175
    
    
    
    26,193
    
    
    
    3,838
  6.
    
    RECEIVABLES ON SALE OF PROPERTY, PLANT AND EQUIPMENT
  7.
    
    INVENTORIES
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Raw materials
    
    
    54,364
    
    
    
    72,064
    
    
    
    10,557Work-in-progress
    
    
    20,094
    
    
    
    30,347
    
    
    
    4,446Finished goods
    
    
    23,095
    
    
    
    36,689
    
    
    
    5,37597,553
    
    
    
    139,100
    
    
    
    20,378
   F-21




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 8.
    
    PROPERTY, PLANT AND EQUIPMENT, NET
  As of December 31,2008
    
    
    2009
    
    
    2008(RMB)
    
    
    (RMB)
    
    
    (US$)Buildings
    
    
    115,715
    
    
    
    133,851
    
    
    
    19,609Leasehold improvements
    
    
    21,057
    
    
    
    22,083
    
    
    
    3,235Plant and machinery
    
    
    59,896
    
    
    
    67,972
    
    
    
    9,958Office equipment, furniture and fixtures
    
    
    12,847
    
    
    
    14,159
    
    
    
    2,074Motor vehicles
    
    
    13,630
    
    
    
    19,329
    
    
    
    2,832223,145
    
    
    
    257,394
    
    
    
    37,708Less: Accumulated depreciation
    
    
    (70,896
    )
    
    
    (85,297
    )
    
    
    (12,496
    )152,249
    
    
    
    172,097
    
    
    
    25,212
    9.
    
    DEPOSIT FOR ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS
  As of December 31,2008
    
    
    2009
    
    
    2008(RMB)
    
    
    (RMB)
    
    
    (US$)Land use rights
    
    
    107,730
    
    
    
    107,730
    
    
    
    15,783Buildings
    
    
    73,344
    
    
    
    47,544
    
    
    
    6,966Intangible assets
    
    
    1,300
    
    
    
    2,320
    
    
    
    340Others
    
    
    5,729
    
    
    
    4,846
    
    
    
    709188,103
    
    
    
    162,440
    
    
    
    23,798
  10.
    
    GOODWILL
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Beginning balance
    
    
    
    
    
    
    
    
    
    
    Goodwill acquired during the year
    
    
    28,062
    
    
    
    2,345
    
    
    
    344Impairment loss
    
    
    (28,062
    )
    
    
    
    
    
    
    Ending balance
    
    
    
    
    
    
    2,345
    
    
    
    344
  F-22




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 10.
    
    GOODWILL (CONTD)
  11.
    
    ACQUIRED INTANGIBLE ASSETS, NET
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Carrying amount:Patent
    
    
    67,428
    
    
    
    68,560
    
    
    
    10,044Trademarks
    
    
    21,733
    
    
    
    21,696
    
    
    
    3,179Defensive Intangible asset
    
    
    
    
    
    
    9,000
    
    
    
    1,318Registered drug formulae
    
    
    5,232
    
    
    
    5,232
    
    
    
    766Distribution network
    
    
    5,425
    
    
    
    5,425
    
    
    
    795Technical know-how
    
    
    21,676
    
    
    
    21,676
    
    
    
    3,175Non-compete agreement
    
    
    
    
    
    
    1,116
    
    
    
    163121,494
    
    
    
    132,705
    
    
    
    19,440Accumulated amortization:Patent
    
    
    8,940
    
    
    
    10,552
    
    
    
    1,546Trademarks
    
    
    3,769
    
    
    
    4,090
    
    
    
    599Defensive intangible asset
    
    
    
    
    
    
    450
    
    
    
    65Registered drug formulae
    
    
    1,249
    
    
    
    1,265
    
    
    
    185Distribution network
    
    
    1,436
    
    
    
    1,561
    
    
    
    229Technical know-how
    
    
    8,454
    
    
    
    9,701
    
    
    
    1,422Non-compete agreement
    
    
    
    
    
    
    84
    
    
    
    1223,848
    
    
    
    27,703
    
    
    
    4,058
 As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Accumulated impairment charge:Patents
    
    
    50,382
    
    
    
    50,382
    
    
    
    7,381Trademarks
    
    
    15,324
    
    
    
    15,324
    
    
    
    2,245Registered drug formulae
    
    
    3,714
    
    
    
    3,714
    
    
    
    544Distribution networks
    
    
    3,490
    
    
    
    3,490
    
    
    
    511Technical know-how
    
    
    
    
    
    
    4,500
    
    
    
    65972,910
    
    
    
    77,410
    
    
    
    11,340Acquired intangible assets, net
    
    
    24,736
    
    
    
    27,592
    
    
    
    4,042
   F-23




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TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 11.
    
    ACQUIRED INTANGIBLE ASSETS, NET (CONTD)
    For the year ended December 31,2009(RMB)
    
    
    (US$)In 2010
    
    
    4,130
    
    
    
    605In 2011
    
    
    3,327
    
    
    
    487In 2012
    
    
    3,323
    
    
    
    487In 2013
    
    
    3,184
    
    
    
    466In 2014
    
    
    3,184
    
    
    
    466Total
    
    
    17,148
    
    
    
    2,511
 12.
    
    BANK BORROWINGS
 As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Bank borrowings- secured
    
    
    82,000
    
    
    
    80,000
    
    
    
    11,720- unsecured
    
    
    52,000
    
    
    
    70,000
    
    
    
    10,255Other borrowings
    
    
    1,100
    
    
    
    1,100
    
    
    
    161Total borrowings
    
    
    135,100
    
    
    
    151,100
    
    
    
    22,136Comprised of:Short-term
    
    
    71,100
    
    
    
    81,100
    
    
    
    11,881Long-term, current portion
    
    
    14,000
    
    
    
    20,000
    
    
    
    2,93085,100
    
    
    
    101,100
    
    
    
    14,811Long-term, non-current portion
    
    
    50,000
    
    
    
    50,000
    
    
    
    7,325135,100
    
    
    
    151,100
    
    
    
    22,136
   F-24




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 12.
    
    BANK BORROWINGS (CONTD)
   December 31, 2008
 Amount
    
    
    Secured by(RMB)82,000
    
    
    Secured by the Groups properties and land use rights with net book
value of RMB29,522 (Note 8) and RMB15,757 (Note 2), respectively.
 December 31, 2009
 Amount
    
    
    Secured by(RMB)80,000
    
    
    Secured by the groups properties and land use rights with net book
value of RMB21,036 (US$3,082) (Note 8) and RMB13,180 (US$1,931)
(Note 2), respectively (Note 8)
 13.
    
    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Other taxes payable
    
    
    17,196
    
    
    
    22,641
    
    
    
    3,317Accrued salary and welfare
    
    
    8,337
    
    
    
    14,108
    
    
    
    2,067Accrued operating expenses
    
    
    4,623
    
    
    
    4,187
    
    
    
    613Government grant
    
    
    13,304
    
    
    
    21,450
    
    
    
    3,142Expense reimbursements to employee and marketing agents
    
    
    2,379
    
    
    
    16,944
    
    
    
    2,482Payable for the acquisition of a subsidiary
    
    
    22,190
    
    
    
    
    
    
    
    Payable for the acquisition of property, plant and equipment
    
    
    6,882
    
    
    
    7,849
    
    
    
    1,150Advances from customers
    
    
    1,135
    
    
    
    8,525
    
    
    
    1,249Advertisement expense payable
    
    
    679
    
    
    
    90
    
    
    
    13Research and development
    
    
    1,616
    
    
    
    5,573
    
    
    
    816Accrual for sales rebate
    
    
    
    
    
    
    4,842
    
    
    
    709Deposit received for sale of an interest of an entity to be
acquired (Note 22)
    
    
    
    
    
    
    46,000
    
    
    
    6,739Others
    
    
    2,789
    
    
    
    9,224
    
    
    
    1,35381,130
    
    
    
    161,433
    
    
    
    23,650
  F-25




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 14.
    
    CAPITAL STRUCTURE
  Mezzanine equity
   Share repurchase program
  Share incentive plan
  (a) Share options
   F-26




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TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 14.
    
    CAPITAL STRUCTURE (CONTD)
 (a) Share options (contd)
  Granted on October 24,2007Average risk-free rate of return
    
    
    3.987
    %Weighted average expected option life
    
    4.9 yearsVolatility rate
    
    
    29.19
    %Dividend yield
    
    
    0
    %Fair value of options at grant date per share
    
    
    0.8980
   WeightedWeighted
    
    
    Weighted
    
    
    averageaverage
    
    
    average
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    grant-date
    
    
    contractual
    
    
    intrinsicoptions
    
    
    price
    
    
    fair value
    
    
    life
    
    
    value(US$)
    
    
    (US$)
    
    
    (Years)
    
    
    (US$)Outstanding, January 1, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    5,200,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    10
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, December 31, 2007
    
    
    5,200,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    9.67
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/Cancelled
    
    
    (400,000
    )
    
    
    2.91
    
    
    
    Outstanding, December 31, 2008
    
    
    4,800,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    8.67
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, December 31, 2009
    
    
    4,800,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    7.67
    
    
    
    Vested and expected to be
vested at December 31, 2009
    
    
    4,800,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    7.67
    
    
    
    Exercisable at December 31, 2009
    
    
    4,800,000
    
    
    
    2.91
    
    
    
    0.90
    
    
    
    7.67
    
    
    
    
  F-27




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 14.
    
    CAPITAL STRUCTURE (CONTD)
 (a)
    
    Share options (contd) Number ofoptions
    
    
    Total fair value(US$)Vested during the year ended December 31, 2007
    
    
    1,730,000
    
    
    
    1,554Vested during the year ended December 31, 2008
    
    
    1,730,000
    
    
    
    1,554Vested during the year ended December 31, 2009
    
    
    1,340,000
    
    
    
    1,203
   WeightedWeighted
    
    
    Weighted
    
    
    averageaverage
    
    
    average
    
    
    remainingNumber of
    
    
    exercise
    
    
    grant-date
    
    
    contractual
    
    
    Aggregateoptions
    
    
    price
    
    
    fair value
    
    
    life
    
    
    intrinsic value(US$)
    
    
    (US$)
    
    
    (Years)
    
    
    (US$)Granted on December 15, 2008
and options outstanding at
December 31, 2008 and 2009
    
    
    240,000
    
    
    
    1.00
    
    
    
    0.12
    
    
    
    9
    
    
    
    Vested and expected to be
vested at December 31, 2009
    
    
    240,000
    
    
    
    1.00
    
    
    
    0.12
    
    
    
    9
    
    
    
    Exercisable at December 31, 2009
    
    
    40,000
    
    
    
    1.00
    
    
    
    0.12
    
    
    
    9
    
    
    
    
 Number ofoptions
    
    
    Total fair value(US$)Vested during the year ended December 31, 2007
    
    
    
    
    
    
    Vested during the year ended December 31, 2008
    
    
    
    
    
    
    Vested during the year ended December 31, 2009
    
    
    40,000
    
    
    
    5
  F-28




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 14.
    
    CAPITAL STRUCTURE (CONTD)
 (a)
    
    Share options (contd)  Granted on December 15,2008Average risk-free rate of return
    
    
    1.727
    %Weighted average expected option life
    
    6.2 yearsVolatility rate
    
    
    36.04
    %Dividend yield
    
    
    0
    %Fair value of options at grant date per share
    
    $
    0.1211
  (b) Restricted shares
  Number of
    
    
    WeightedRestricted
    
    
    average grantShares
    
    
    date fair value(US$)Granted on October 24, 2007
    
    
    1,656,714
    
    
    
    2.87Vested
    
    
    (891,714
    )
    
    
    2.87Forfeited/Cancelled
    
    
    
    
    
    
    Nonvested, December 31, 2007
    
    
    765,000
    
    
    
    2.87Vested
    
    
    (365,000
    )
    
    
    2.87Forfeited/Cancelled
    
    
    (140,000
    )
    
    
    2.87Nonvested, December 31, 2008
    
    
    260,000
    
    
    
    2.87Vested
    
    
    (260,000
    )
    
    
    2.87Nonvested, December 31, 2009
    
    
    
  F-29




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 14.
    
    CAPITAL STRUCTURE (CONTD)
 (b)
    
    Restricted shares (contd) Number ofRestrictedShares
    
    
    Total fair value(US$)Vested during the year ended December 31, 2007
    
    
    891,714
    
    
    
    2,561Vested during the year ended December 31, 2008
    
    
    365,000
    
    
    
    1,048Vested during the year ended December 31, 2009
    
    
    260,000
    
    
    
    747
    For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Share Incentive PlanShare options
    
    
    15,599
    
    
    
    12,945
    
    
    
    2,467
    
    
    
    361Restricted shares
    
    
    21,501
    
    
    
    7,479
    
    
    
    2,800
    
    
    
    410Other share-based payments transactionsShare options
    
    
    
    
    
    
    4
    
    
    
    100
    
    
    
    15Restricted shares
    
    
    
    
    
    
    18
    
    
    
    432
    
    
    
    6337,100
    
    
    
    20,446
    
    
    
    5,799
    
    
    
    849
 15.
    
    INCOME TAXES
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)PRC
    
    
    189,625
    
    
    
    (46,476
    )
    
    
    13,278
    
    
    
    1,946Other jurisdictions
    
    
    (17,283
    )
    
    
    (5,530
    )
    
    
    (15,386
    )
    
    
    (2,254
    )172,342
    
    
    
    (52,006
    )
    
    
    (2,108
    )
    
    
    (308
    )
  F-30




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 15.
    
    INCOME TAXES (CONTD)
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Current
    
    
    1,036
    
    
    
    8,525
    
    
    
    5,890
    
    
    
    863Deferred
    
    
    164
    
    
    
    (8,023
    )
    
    
    (4,273
    )
    
    
    (626
    )1,200
    
    
    
    502
    
    
    
    1,617
    
    
    
    237
         F-31




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 15.
    
    INCOME TAXES (CONTD)
    2009
    
    
    2009(RMB000)
    
    
    (US$000)Beginning balance
    
    
    
    
    
    
    Additions as a result of tax positions taken for prior year
    
    
    785
    
    
    
    115Additions related to tax positions taken for the current year
    
    
    152
    
    
    
    23Ending balance
    
    
    937
    
    
    
    138
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Deferred tax assets:Current:Inventory write-down
    
    
    813
    
    
    
    872
    
    
    
    128Doubtful debt allowance
    
    
    2,099
    
    
    
    4,472
    
    
    
    655Temporary non-deductible promotion expenses
    
    
    1,911
    
    
    
    519
    
    
    
    76Temporary non-deductible accrued expenses
    
    
    
    
    
    
    2,909
    
    
    
    426Tax losses
    
    
    3,988
    
    
    
    1,467
    
    
    
    215Valuation allowance
    
    
    (8,811
    )
    
    
    (2,674
    )
    
    
    (392
    )Net current deferred tax assets
    
    
    
    
    
    
    7,565
    
    
    
    1,108Non-current:Property, plant and equipment, net
    
    
    50
    
    
    
    838
    
    
    
    123Intangible assets
    
    
    
    
    
    
    1,699
    
    
    
    249Land use rights
    
    
    1,057
    
    
    
    1,066
    
    
    
    156Valuation allowance
    
    
    
    
    
    
    (794
    )
    
    
    (116
    )Non-current deferred tax assets
    
    
    1,107
    
    
    
    2,809
    
    
    
    412Deferred tax liabilitiesNon-current:Intangible assets
    
    
    (1,817
    )
    
    
    (2,155
    )
    
    
    (316
    )Land use right
    
    
    
    
    
    
    (682
    )
    
    
    (100
    )Witholding tax on undistributed earnings
    
    
    (5,455
    )
    
    
    (9,031
    )
    
    
    (1,323
    )(7,272
    )
    
    
    (11,868
    )
    
    
    (1,739
    )
  F-32




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 15.
    
    INCOME TAXES (CONTD)
   For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Income (loss) before income taxes and non-controlling
interest
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (2,108
    )
    
    
    (308
    )PRC enterprise income tax rate
    
    
    33
    %
    
    
    25
    %
    
    
    25
    %
    
    
    25
    %Income tax at PRC EIT rate on income before income taxes
    
    
    56,873
    
    
    
    (13,002
    )
    
    
    (527
    )
    
    
    (77
    )Expenses not deductible for tax purposes
    
    
    3,586
    
    
    
    2,547
    
    
    
    8,668
    
    
    
    1,270Income not taxable for tax purposes
    
    
    
    
    
    
    (5,446
    )
    
    
    
    
    
    
    Effect of tax holidays and tax concessions
    
    
    (65,570
    )
    
    
    23
    
    
    
    (7,995
    )
    
    
    (1,171
    )Changes in valuation allowances
    
    
    (1,383
    )
    
    
    4,850
    
    
    
    (5,343
    )
    
    
    (783
    )Deferred tax liability on withholding tax on
undistributed profits of PRC subsidiaries
    
    
    
    
    
    
    5,455
    
    
    
    3,576
    
    
    
    524Effect of different tax rate of a subsidiary
operating in other jurisdictions
    
    
    6,406
    
    
    
    5,827
    
    
    
    3,742
    
    
    
    548Effect of change in tax rate
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    Changes in unrecognized tax benefits
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    22Others
    
    
    159
    
    
    
    248
    
    
    
    (656
    )
    
    
    (96
    )Total income tax expense
    
    
    1,200
    
    
    
    502
    
    
    
    1,617
    
    
    
    237
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Basic
    
    
    (0.52
    )
    
    
    0.01
    
    
    
    (0.07
    )
    
    
    (0.01
    )Diluted
    
    
    (0.52
    )
    
    
    0.01
    
    
    
    (0.07
    )
    
    
    (0.01
    )
 16.
    
    RELATED PARTY TRANSACTIONS AND BALANCES
 Balances with related parties
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Due from related parties:Due from an affiliate
    
    
    8,500
    
    
    
    
    
    
    
    Due from former non-controlling
shareholders of a subsidiary
    
    
    689
    
    
    
    
    
    
    
    Total
    
    
    9,189
    
    
    
    
    
    
    
    Due to related parties:Due to an affiliate
    
    
    1,332
    
    
    
    900
    
    
    
    132Due to former non-controlling shareholders of a subsidiary
    
    
    7,385
    
    
    
    
    
    
    
    Total
    
    
    8,717
    
    
    
    900
    
    
    
    132
   F-33




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 16.
    
    RELATED PARTY TRANSACTIONS AND BALANCES (CONTD)
 Related party transactions
    17.
    
    FAIR VALUE MEASUREMENTS
      Assets measured at fair value on a recurring basis
  Fair Value Measurement at Reporting Date UsingQuoted PricesIn Active
    
    
    SignificantMarket for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableTotal Fair Value as of
    
    
    Assets
    
    
    Inputs
    
    
    InputsDecember 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)RMB
    
    
    US$
    
    
    RMB
    
    
    RMB
    
    
    RMBCash equivalents
    
    
    5,000
    
    
    
    733
    
    
    
    5,000
    
    
    
    
    
    
    
    Short-term bank deposit
    
    
    50,000
    
    
    
    7,325
    
    
    
    50,000
    
    
    
    
    
    
    
    Trading securities
    
    
    1,447
    
    
    
    212
    
    
    
    1,447
    
    
    
    
    
    
    
    56,447
    
    
    
    8,270
    
    
    
    56,447
    
    
    
    
    
    
    
    
  F-34




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 17.
    
    FAIR VALUE MEASUREMENTS (CONTD)
 Assets measured at fair value on a recurring basis (contd)
  The following table summarizes the asset measured at fair value on a nonrecurring Basis for the
year ended December 31, 2009
 Fair Value Measurement at Reporting Date UsingQuoted PricesIn Active
    
    
    SignificantMarket for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableYear ended December 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total gains/(losses)RMB
    
    
    USD
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    USDIntangible assets
    
    
    3,492
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    3,492
    
    
    
    4,500
    
    
    
    6593,492
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    3,492
    
    
    
    4,500
    
    
    
    659
  18.
    
    STAFF RETIREMENT PLAN
    F-35




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 19.
    
    COMMITMENTS
 Operating lease commitments
   For the year endedDecember 31,2009(RMB)
    
    
    (US$)In 2010
    
    
    1,680
    
    
    
    246In 2011
    
    
    702
    
    
    
    103In 2012
    
    
    563
    
    
    
    82In 2013
    
    
    607
    
    
    
    89In 2014 and thereafter
    
    
    794
    
    
    
    116Total
    
    
    4,346
    
    
    
    636
  F-36




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 19.
    
    COMMITMENTS (CONTD)
 Other commitments
  Income taxes
  20.
    
    DISTRIBUTION OF PROFITS
   21.
    
    SEGMENT REPORTING
  Tongjitang
    
    
    Anhui
    
    
    Guizhou
    
    
    Qinghai
    
    
    Tongjitang
    
    
    TongjitangPharmaceutical
    
    
    Jingfang
    
    
    Longlife
    
    
    Pulante
    
    
    Distribution
    
    
    Chain Stores
    
    
    Others
    
    
    TotalYear ended 31
December, 2007Segment revenueRevenue from major
products
    
    
    570,331
    
    
    
    
    
    
    
    7,832
    
    
    
    
    
    
    
    21,820
    
    
    
    11,388
    
    
    
    
    
    
    
    611,371Intercompany sales
    
    
    (6,570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,794
    )
    
    
    
    
    
    
    
    
    
    
    (15,364
    )Revenue derived
from third party
    
    
    563,761
    
    
    
    
    
    
    
    7,832
    
    
    
    
    
    
    
    13,026
    
    
    
    11,388
    
    
    
    
    
    
    
    596,007Total costs
    
    
    (184,092
    )
    
    
    
    
    
    
    (1,073
    )
    
    
    
    
    
    
    (10,856
    )
    
    
    (7,877
    )
    
    
    (2,121
    )
    
    
    (206,019
    )Interest income
    
    
    1,712
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    9
    
    
    
    2
    
    
    
    26,172
    
    
    
    27,900Interest expense
    
    
    (9,654
    )
    
    
    
    
    
    
    (202
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,856
    )Depreciation,
depletion and
amortization
expense
    
    
    (6,115
    )
    
    
    
    
    
    
    (2,530
    )
    
    
    
    
    
    
    (1,198
    )
    
    
    (86
    )
    
    
    (183
    )
    
    
    (10,112
    )Investment income
    
    
    1,917
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,492
    
    
    
    8,459Other operating
income/ (expenses)
    
    
    (176,315
    )
    
    
    
    
    
    
    (2,253
    )
    
    
    
    
    
    
    1,071
    
    
    
    (2,161
    )
    
    
    (54,328
    )
    
    
    (233,986
    )Income tax expense
or benefit
    
    
    
    
    
    
    
    
    
    
    (551
    )
    
    
    
    
    
    
    
    
    
    
    (594
    )
    
    
    (55
    )
    
    
    (1,200
    )Net income (loss)
attributable to
controlling
interests
    
    
    191,214
    
    
    
    
    
    
    
    1,278
    
    
    
    
    
    
    
    2,052
    
    
    
    672
    
    
    
    (24,023
    )
    
    
    171,193
  F-37




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 21.
    
    SEGMENT REPORTING (CONTD)
 Tongjitang
    
    
    Anhui
    
    
    Guizhou
    
    
    Qinghai
    
    
    Tongjitang
    
    
    TongjitangPharmaceutical
    
    
    Jingfang
    
    
    Longlife
    
    
    Pulante
    
    
    Distribution
    
    
    Chain Stores
    
    
    Others
    
    
    TotalYear ended 31, December
2008Segment revenueRevenue from major
products
    
    
    403,562
    
    
    
    
    
    
    
    25,700
    
    
    
    5,185
    
    
    
    22,033
    
    
    
    14,722
    
    
    
    
    
    
    
    471,202Intercompany sales
    
    
    (8,732
    )
    
    
    
    
    
    
    (1,300
    )
    
    
    (527
    )
    
    
    (9,611
    )
    
    
    
    
    
    
    
    
    
    
    (20,170
    )Revenue derived from
third party
    
    
    394,830
    
    
    
    
    
    
    
    24,400
    
    
    
    4,658
    
    
    
    12,422
    
    
    
    14,722
    
    
    
    
    
    
    
    451,032Total costs
    
    
    (136,051
    )
    
    
    
    
    
    
    (3,859
    )
    
    
    (5,829
    )
    
    
    (10,784
    )
    
    
    (10,822
    )
    
    
    
    
    
    
    (167,345
    )Interest income
    
    
    3,438
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    9
    
    
    
    
    
    
    
    13,626
    
    
    
    17,107Interest expense
    
    
    (16,189
    )
    
    
    
    
    
    
    (370
    )
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,599
    )Depreciation, depletion
and amortization
expense
    
    
    (5,190
    )
    
    
    
    
    
    
    (8,611
    )
    
    
    (1,864
    )
    
    
    (1,156
    )
    
    
    (72
    )
    
    
    (292
    )
    
    
    (17,185
    )Investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,830
    )
    
    
    (1,830
    )Other operating expenses
    
    
    (173,743
    )
    
    
    
    
    
    
    (74,594
    )
    
    
    (45,344
    )
    
    
    (2,081
    )
    
    
    (3,263
    )
    
    
    (17,953
    )
    
    
    (316,978
    )Income tax expense or
benefit
    
    
    (12,542
    )
    
    
    
    
    
    
    9,350
    
    
    
    3,240
    
    
    
    
    
    
    
    (207
    )
    
    
    (343
    )
    
    
    (502
    )Net income (loss)
attributable to
controlling interests
    
    
    54,553
    
    
    
    
    
    
    
    (53,684
    )
    
    
    (45,145
    )
    
    
    (1,590
    )
    
    
    358
    
    
    
    (6,792
    )
    
    
    (52,300
    )
 Tongjitang
    
    
    Anhui
    
    
    Guizhou
    
    
    Qinghai
    
    
    Tongjitang
    
    
    TongjitangPharmaceutical
    
    
    Jingfang
    
    
    Longlife
    
    
    Pulante
    
    
    Distribution
    
    
    Chain Stores
    
    
    Others
    
    
    TotalYear ended 31 December,
2009Segment revenueRevenue from major
products
    
    
    384,441
    
    
    
    45,927
    
    
    
    9,400
    
    
    
    6,686
    
    
    
    67,621
    
    
    
    17,461
    
    
    
    
    
    
    
    531,536Intercompany sales
    
    
    (29,025
    )
    
    
    (4,901
    )
    
    
    (1,020
    )
    
    
    (470
    )
    
    
    (15,781
    )
    
    
    
    
    
    
    
    
    
    
    (51,197
    )Revenue derived from
third party
    
    
    355,416
    
    
    
    41,026
    
    
    
    8,380
    
    
    
    6,216
    
    
    
    51,840
    
    
    
    17,461
    
    
    
    
    
    
    
    480,339Total costs
    
    
    (124,641
    )
    
    
    (14,418
    )
    
    
    (3,411
    )
    
    
    (2,368
    )
    
    
    (44,259
    )
    
    
    (12,108
    )
    
    
    
    
    
    
    (201,205
    )Interest income
    
    
    2,039
    
    
    
    28
    
    
    
    11
    
    
    
    26
    
    
    
    17
    
    
    
    16
    
    
    
    1,910
    
    
    
    4,047Interest expense
    
    
    (8,312
    )
    
    
    
    
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,553
    )Depreciation, depletion
and amortization
expense
    
    
    (13,358
    )
    
    
    (4,027
    )
    
    
    (2,419
    )
    
    
    (1,248
    )
    
    
    (1,036
    )
    
    
    (321
    )
    
    
    (561
    )
    
    
    (22,970
    )Investment income
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    779
    
    
    
    829Other operating expenses
    
    
    (180,128
    )
    
    
    (25,816
    )
    
    
    (18,004
    )
    
    
    (4,178
    )
    
    
    (2,384
    )
    
    
    (3,997
    )
    
    
    (20,154
    )
    
    
    (254,661
    )Income tax expense or
benefit
    
    
    (4,313
    )
    
    
    342
    
    
    
    1,220
    
    
    
    (48
    )
    
    
    1,515
    
    
    
    (180
    )
    
    
    (153
    )
    
    
    (1,617
    )Net income (loss)
attributable to
controlling interests
    
    
    26,703
    
    
    
    (2,865
    )
    
    
    (14,414
    )
    
    
    (1,600
    )
    
    
    5,693
    
    
    
    871
    
    
    
    (18,179
    )
    
    
    (3,791
    )
  As of December 31,2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (US$)Tongjitang Pharmaceutical
    
    
    1,146,113
    
    
    
    1,128,773
    
    
    
    165,366Anhui Jingfang
    
    
    
    
    
    
    80,527
    
    
    
    11,797Guizhou Longlife
    
    
    41,184
    
    
    
    24,683
    
    
    
    3,616Qinghai Pulante
    
    
    37,310
    
    
    
    34,189
    
    
    
    5,009Tongjitang Distribution
    
    
    41,072
    
    
    
    91,186
    
    
    
    13,359Tongjitang Chain Stores
    
    
    8,692
    
    
    
    14,722
    
    
    
    2,157Others
    
    
    1,123,635
    
    
    
    1,132,556
    
    
    
    165,920Intercompany elimination
    
    
    (1,014,908
    )
    
    
    (1,201,430
    )
    
    
    (176,012
    )Total Groups consolidated assets
    
    
    1,383,098
    
    
    
    1,305,206
    
    
    
    191,212
 Geographic disclosures
   F-38




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 21.
    
    SEGMENT REPORTING (CONTD)
 Major customers
  For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Company A
    
    
    69,389
    
    
    
    
    
    
    
    
    
    
    
    Company B
    
    
    
    
    
    
    53,791
    
    
    
    
    
    
    
    69,389
    
    
    
    53,791
    
    
    
    
    
    
    
    
  22.
    
    SUBSEQUENT EVENTS
 Acquisition of distillery business
      F-39




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 23.
    
    ADDITIONAL INFORMATION  CONDENSED FINANCIAL STATEMENT OF THE COMPANY
  (a) Condensed balance sheets
 As of December 31,2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    215,266
    
    
    
    4,464
    
    
    
    654Other prepaid expenses and current assets
    
    
    194
    
    
    
    182
    
    
    
    27Total current assets
    
    
    215,460
    
    
    
    4,646
    
    
    
    681Amounts due from subsidiaries
    
    
    472,922
    
    
    
    417,698
    
    
    
    61,193Investments in subsidiaries
    
    
    448,487
    
    
    
    517,245
    
    
    
    75,776Total assets
    
    
    1,136,869
    
    
    
    939,589
    
    
    
    137,650LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Amounts due to subsidiaries
    
    
    1,997
    
    
    
    1,998
    
    
    
    292Accrued expenses and other current liabilities
    
    
    57
    
    
    
    
    
    
    
    Total liabilities
    
    
    2,054
    
    
    
    1,998
    
    
    
    292Shareholders equity:Ordinary shares (par value US$0.001 per share;
500,000,000 shares and 500,000,000 shares
authorized; 135,209,722 shares and 104,066,526
shares issued and outstanding at December 31,
2008 and 2009, respectively)
    
    
    1,070
    
    
    
    856
    
    
    
    126Treasury stock (US$0.001 par value: 1,763,600
shares and nil shares as of December 31, 2008
and 2009 outstanding, respectively)
    
    
    (7,159
    )
    
    
    
    
    
    
    Additional paid-in capital
    
    
    891,427
    
    
    
    894,487
    
    
    
    131,043Accumulated other comprehensive loss
    
    
    (88,093
    )
    
    
    (87,756
    )
    
    
    (12,856
    )Retained earnings
    
    
    337,570
    
    
    
    130,004
    
    
    
    19,045Total shareholders equity
    
    
    1,134,815
    
    
    
    937,591
    
    
    
    137,358Total liabilities and shareholders equity
    
    
    1,136,869
    
    
    
    939,589
    
    
    
    137,650
  F-40




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 23.
    
    ADDITIONAL INFORMATION  CONDENSED FINANCIAL STATEMENT OF THE COMPANY (CONTD)
 (b) Condensed statements of operations
 For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$General and administrative expenses
    
    
    (29,909
    )
    
    
    (27,053
    )
    
    
    (14,508
    )
    
    
    (2,126
    )Interest income
    
    
    30,732
    
    
    
    43,384
    
    
    
    1,496
    
    
    
    219Equity in income (loss) of subsidiaries
    
    
    170,370
    
    
    
    (68,631
    )
    
    
    9,221
    
    
    
    1,352Net income (loss)
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (3,791
    )
    
    
    (555
    )
 (c) Condensed statements of shareholders equity and comprehensive income (loss)
 TotalNumber of
    
    
    Ordinary
    
    
    Number of
    
    
    
    
    
    
    Additional paid-
    
    
    Accumulated other
    
    
    Retained
    
    
    shareholders
    
    
    Comprehensiveordinary shares
    
    
    shares
    
    
    Treasury stock
    
    
    Treasury stock
    
    
    in capital
    
    
    comprehensive loss
    
    
    earnings
    
    
    equity
    
    
    income (loss)RMB
    
    
    
    
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBBalance as of December 31, 2006
    
    
    90,364,000
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    140,019
    
    
    
    
    
    
    
    236,322
    
    
    
    377,064Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,193
    
    
    
    171,193
    
    
    
    171,193Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,990
    )
    
    
    
    
    
    
    (42,990
    )
    
    
    (42,990
    )Conversion of mezzanine equity
    
    
    9,929,008
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    120,568
    
    
    
    
    
    
    
    
    
    
    
    120,645Issuance of shares upon the
initial public offering
    
    
    33,400,000
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    645,548
    
    
    
    
    
    
    
    
    
    
    
    645,806Offering expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,242
    )
    
    
    
    
    
    
    
    
    
    
    (72,242
    )Issuance of restricted shares
    
    
    1,656,714
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,100
    
    
    
    
    
    
    
    
    
    
    
    37,100Balance as of December 31, 2007
    
    
    135,349,722
    
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    870,980
    
    
    
    (42,990
    )
    
    
    407,515
    
    
    
    1,236,576
    
    
    
    128,203Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,300
    )
    
    
    (52,300
    )
    
    
    (52,300
    )Deemed distribution to a
shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,645
    )
    
    
    (17,645
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,103
    )
    
    
    
    
    
    
    (45,103
    )
    
    
    (45,103
    )Forfeiture of restricted shares
    
    
    (140,000
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,159
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,446
    
    
    
    
    
    
    
    
    
    
    
    20,446Balance as of December 31, 2008
    
    
    135,209,722
    
    
    
    1,070
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    891,427
    
    
    
    (88,093
    )
    
    
    337,570
    
    
    
    1,134,815
    
    
    
    (97,403
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,791
    )
    
    
    (3,791
    )
    
    
    (3,791
    )Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    29,379,596
    
    
    
    (196,830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (196,830
    )Deregistration of shares
    
    
    (31,143,196
    )
    
    
    (214
    )
    
    
    (31,143,196
    )
    
    
    203,989
    
    
    
    
    
    
    
    
    
    
    
    (203,775
    )
    
    
    Acquisition of non-controlling
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,441
    )
    
    
    
    
    
    
    
    
    
    
    (1,441
    )Capital injection in a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,298
    )
    
    
    
    
    
    
    
    
    
    
    (1,298
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,799
    
    
    
    
    
    
    
    
    
    
    
    5,799Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337
    
    
    
    337Balance as of December 31, 2009
    
    
    104,066,526
    
    
    
    856
    
    
    
    
    
    
    
    
    
    
    
    894,487
    
    
    
    (87,756
    )
    
    
    130,004
    
    
    
    937,591
    
    
    
    (3,454
    )Balance as of December 31, 2009,
in US$
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    131,043
    
    
    
    (12,856
    )
    
    
    19,045
    
    
    
    137,358
    
    
    
    (506
    )
 (d)
    
    Condensed statements of cash flows For the year ended December 31,2007
    
    
    2008
    
    
    2009
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net cash provided by (used in) operating activities
    
    
    11,176
    
    
    
    2,942
    
    
    
    (69,533
    )
    
    
    (10,185
    )Net cash provided by (used in) provided by
investing activities:
    
    
    (68,851
    )
    
    
    (255,641
    )
    
    
    55,224
    
    
    
    8,090Net cash provided by (used in) financing activities
    
    
    587,613
    
    
    
    (7,159
    )
    
    
    (196,830
    )
    
    
    (28,836
    )Effect of exchange rate changes
    
    
    (33,419
    )
    
    
    (21,395
    )
    
    
    337
    
    
    
    48Net increase (decrease) in cash and cash equivalents
    
    
    496,519
    
    
    
    (281,253
    )
    
    
    (210,802
    )
    
    
    (30,883
    )Cash and cash equivalents at beginning of the year
    
    
    
    
    
    
    496,519
    
    
    
    215,266
    
    
    
    31,537Cash and cash equivalents at end of the year
    
    
    496,519
    
    
    
    215,266
    
    
    
    4,464
    
    
    
    654
  F-41




---



##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB) and U.S. dollar (US$),
except for number of shares and per share data)
 23.
    
    ADDITIONAL INFORMATION  CONDENSED FINANCIAL STATEMENT OF THE COMPANY (CONTD)
 (e) Basis of presentation
    F-42




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document1.1
    
    
    Amended and Restated Memorandum and Articles of Association of the
Registrant, as adopted by special resolution passed on
October 30, 2008 (incorporated by reference to Exhibit 1.1 of our
annual report on Form 20-F filed with the Commission on June 2, 2009)2.1
    
    
    Form of Registrants American Depositary Receipt (included in Exhibit 2.3)2.2
    
    
    Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)2.3
    
    
    Form of Deposit Agreement among the Registrant, the Depositary and Holders
of the American Depositary Receipts (incorporated by reference to
Exhibit 4.3 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)2.4
    
    
    Shareholders Agreement dated as of November 8, 2006 among the Registrant
and Shareholders (incorporated by reference to Exhibit 4.4 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)2.5
    
    
    Registration Rights Agreement dated as of November 8, 2006 among the
Registrant and certain Shareholders (incorporated by reference to
Exhibit 4.5 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.1
    
    
    Form of Indemnification Agreement with the Registrants Directors
(incorporated by reference to Exhibit 10.1 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.2
    
    
    Form of Employment Agreement (incorporated by reference to Exhibit 10.2
from our F-1 registration statement (File No. 333-140888), as amended,
initially filed with the Commission on February 26, 2007)4.3
    
    
    2006 Share Incentive Plan (as amended on October 30, 2008) (incorporated
by reference to Exhibit 99.1 from our Post-Effective Amendment No. 1 to
S-8 registration statement (File No. 333-140888) filed with the Commission
on December 23, 2008)4.4
    
    
    Subscription Agreement dated December 21, 2005 among Samtung Investment
Limited, Unisources Enterprises Limited, Xiaochun Wang and Shaolan Wang
(incorporated by reference to Exhibit 10.4 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.5
    
    
    Sale and Purchase Agreement dated June 15, 2006 among the Registrant,
Unisources Enterprises Limited and shareholders of Unisources Enterprises
Limited (incorporated by reference to Exhibit 10.5 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)4.6
    
    
    Share Purchase Agreement dated November 8, 2006 among the Registrant, ML
Global Private Equity Fund, L.P. and Merrill Lynch Ventures L.P. 2001
(incorporated by reference to Exhibit 10.6 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.7
    
    
    English Translation of License Agreement dated January 12, 2005 between
Xiaochun Wang and Tongjitang Pharmaceutical (incorporated by reference to
Exhibit 10.7 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.8
    
    
    Real Property Lease Agreement dated July 11, 2006 (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)4.9
    *
    
    Letter of Deloitte Touche Tohmatsu dated June 30, 20108.1
    *
    
    Subsidiaries of the Registrant11.1
    
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 99.1 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    *
    
    Consent of Deloitte Touche Tohmatsu15.2
    *
    
    Consent of Ernst & Young Hua Ming15.3
    *
    
    Consent of Global Law Office15.4
    *
    
    Consent of Maples and Calder
 
 *
    
    Filed with this Annual Report on Form 20-F