3SBio Inc. — Interim / Quarterly Report 2003

Sep 17, 2003

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HONGKONG CHINESE LIMITED 香港華人有限公司[*]

(Incorporated in Bermuda with limited liability)

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30TH JUNE, 2003

INTERIM RESULTS

The Directors of Hongkong Chinese Limited (the “Company”) are pleased to announce the unaudited consolidated interim results of the Company and its subsidiaries (together, the “Group”) for the six months ended 30th June, 2003 together with the comparative figures for the corresponding period in 2002 as follows:

Note Turnover 2 Cost of sales Gross profit Administrative expenses Other operating expenses Write-back of provision/(Provision) for loss on guaranteed return arrangement for fund management Net gain on investment securities and held-to-maturity securities 4 Provision for bad and doubtful debt relating to banking operation Loss on disposal of subsidiaries Profit/(Loss) from operating activities 5 Finance costs Share of results of associates Profit/(Loss) before tax Tax 6 Profit /(Loss) before minority interests Minority interests Net profit /(loss) from ordinary activities attributable to shareholders Earnings/(Loss) per share Basic 7 Diluted

Six months ended 30th June, 2003 2002 HK$’000 HK$’000 232,311 148,576 (161,364) (63,463) 70,947 85,113 (39,277) (48,145) (12,796) (15,594) 10,868 (16,502) 20,483 – – (4,025) – (10,545) 50,225 (9,698) (1,847) (2,173) (4,278) 283 44,100 (11,588) (414) (208) 43,686 (11,796) 534 86 44,220 (11,710) HK cents HK cents 3.3 (0.9) N/A N/A

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Note:

1. Principal Accounting Policies

The interim results are unaudited and the accounting policies and disclosure practices adopted in the preparation of the interim results are consistent with those adopted in the Group’s audited financial statements for the year ended 31st December, 2002 except that the Group has changed certain of its accounting policies and disclosure practices as a result of the adoption of the following Statement of Standard Accounting Practice (“SSAP”) issued by the Hong Kong Society of Accountants which is effective for accounting periods commencing on or after 1st January, 2003:

SSAP 12 (revised): Income Taxes

SSAP 12 (revised) prescribes the basis for accounting for income taxes payable or recoverable, arising from the taxable profit or loss for the current period (current tax); and income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carry forward of unused tax losses (deferred tax). The principal impact of the revision of this SSAP on the interim results is that:

• deferred tax assets and liabilities relating to the differences between capital allowances for tax purposes and depreciation for financial reporting purposes and other taxable and deductible temporary differences are fully provided for, whereas previously the deferred tax was recognised for timing differences only to the extent that it was probable that the deferred tax asset or liability would crystallise in the foreseeable future; and

• a deferred tax asset has been recognised for tax losses arising in the current/prior periods to the extent that it is probable that there will be sufficient future taxable profits against which such losses can be utilized.

Following the adoption of SSAP 12 (revised), deferred tax assets totalling HK$92,000,000 in respect of unused tax losses carried forward were quantified and recognised retrospectively in periods prior to 1st January, 2002 and distributable reserves as at that date were restated and increased by the same amount.

2. Turnover

Turnover represents the aggregate of gross income on treasury investment which includes interest income on bank deposits and held-to-maturity securities, gross proceeds from sales of investments, gross income from underwriting and securities broking, interest and other income from money lending business, gross income from fund management, gross premiums from insurance business, dividend income and net interest income, commissions, dealing income and other revenues from banking subsidiaries.

An analysis of the turnover of the Group by principal activity is as follows:

Treasury investment Securities investment Corporate finance and securities broking Banking businesses Insurance business Fund management Other	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 20,725 25,507 167,723 35,246 22,139 29,748 6,968 24,339 12,773 24,327 1,478 1,438 505 7,971 232,311 148,576	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 20,725 25,507 167,723 35,246 22,139 29,748 6,968 24,339 12,773 24,327 1,478 1,438 505 7,971 232,311 148,576
		148,576

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Turnover attributable to banking businesses represents turnover generated from The Macau Chinese Bank Limited (“MCB”), a licensed credit institution under the Financial System Act of the Macao Special Administrative Region of the People’s Republic of China. Turnover attributable to banking businesses for the last corresponding period represents turnover generated from MCB since its acquisition by the Group in May 2002 and that generated from The Hongkong Chinese Bank, Limited up to its disposal by the Group in January 2002. Turnover attributable to banking businesses is analysed as follows:

Interest income Interest expenses Commission income Commission expenses Net dealing income and other revenues	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 5,626 34,693 (836) (13,813) 1,766 2,188 – (274) 412 1,545 6,968 24,339

3. Segment Information

Segment information is presented by way of business segment as the primary reporting format and geographical segment as the secondary reporting format.

A description of the business segments is as follows:

• (a) the treasury investment segment includes investments in cash and bond markets;

• (b) the securities investment segment includes dealings in securities and disposals of investments;

• (c) the corporate finance and securities broking segment provides securities and futures brokerage, investment banking, underwriting and other related advisory services;

• (d) the banking businesses segment engages in the provisions of commercial and retail banking;

• (e) the insurance business segment includes the underwriting of general insurance business and the provision of general insurance agency services;

• (f) the fund management segment includes the provision of fund management services; and

• (g) the “other” segment comprises principally money lending and the letting of properties.

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An analysis of the Group’s segment revenue and segment results by business segment and geographical segment is set out below:

Business segment

Treasury investment HK$’000 Revenue External 20,725 Inter-segment 268 Total 20,993 Segment results 20,568 Unallocated corporate expenses Share of results of associates – Profit before tax Tax Profit before minority interests Minority interests Net profit from ordinary activities attributable to shareholders	Securities investment HK$’000 167,723 – 167,723 42,477 –	Corporate finance and securities broking HK$’000 22,139 – 22,139 (2,005 ) –	Six months ended 30th June, 2003 Banking Insurance Fund businesses business management HK$’000 HK$’000 HK$’000 6,968 12,773 1,478 – – – 6,968 12,773 1,478 1,024 (160 ) 10,240 – – –	Other HK$’000 505 – 505 (2,725 ) (4,278 )	Inter- segment elimination Consolidated HK$’000 HK$’000 – 232,311 (268 ) – (268 ) 232,311 295 69,714 (21,336 ) – (4,278 ) 44,100 (414 ) 43,686 534 44,220

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Six months ended 30th June, 2002

Revenue External Inter-segment Total Segment results Unallocated corporate expenses Share of results of associates Loss before tax Tax Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders	Treasury investment HK$’000 25,507 712 26,219 26,031 –	Securities investment HK$’000 35,246 – 35,246 (354 ) –	Corporate finance and securities broking HK$’000 29,748 – 29,748 (5,719 ) –	Banking businesses HK$’000 24,339 276 24,615 (1,472 ) –	Insurance business HK$’000 24,327 – 24,327 (260 ) 283	Fund management HK$’000 1,438 – 1,438 (17,698 ) –	Other HK$’000 7,971 41 8,012 3,621 –	Inter- segment elimination Consolidated HK$’000 HK$’000 – 148,576 (1,029 ) – (1,029 ) 148,576 – 4,149 (16,020 ) – 283 (11,588 ) (208 ) (11,796 ) 86 (11,710 )

Geographical segment

		Six months ended 30th June, 2003	Six months ended 30th June, 2003	Six months ended 30th June, 2003
	Hong Kong	Singapore	Indonesia	Other	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Revenue	106,266	96,618	18,354	11,073	232,311
Segment results	29,225	6,715	16,135	17,639	69,714

No geographical segment was presented in prior period as less than 10 per cent. of the Group’s revenue and results was attributable to locations outside Hong Kong.

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4. Net Gain on Investment Securities and Held-to-maturity Securities

Listed Unlisted	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 12,946 – 7,537 – 20,483 –	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 12,946 – 7,537 – 20,483 –
		–

During the period, investment securities in a total cost of HK$54,681,000 and held-to-maturity securities in a total amortised cost of HK$300,429,000 were transferred to other investments in securities at market value to reflect the Group’s current intention to sell the investments in response to changes in market conditions, resulting in an unrealised gain at the date of transfer of HK$20,483,000 (2002 – Nil).

5. Profit/(Loss) from Operating Activities

Profit/(Loss) from operating activities is arrived at after crediting/(charging):

	Six months ended 30th June,	Six months ended 30th June,
	2003	2002
	HK$’000	HK$’000
Dividend income from listed investment	2,945	–
Interest income:(Note)
Listed investments	8,904	1,968
Unlisted investments	3,546	470
Other	11,661	23,069
Net realised and unrealised holding gain on other investment in securities:
Listed	13,090	766
Unlisted	2,459	–
Net realised gain on held-to-maturity securities:
Listed	2,375	–
Unlisted	187	–
Depreciation	(949)	(3,126)
Amortisation of goodwill arising on acquisition of subsidiaries	(1,620)	(569)

Note: The amounts exclude income relating to banking operations of the Group.

6. Tax

The Company and its subsidiaries: Provision for the period: Hong Kong Overseas Tax charge for the period	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 – 203 414 5 414 208	Six months ended 30th June, 2003 2002 HK$’000 HK$’000 – 203 414 5 414 208
		208

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No provision for Hong Kong profits tax has been made as the Group had applied the tax losses brought forward from prior periods to off-set the estimated assessable profits for the current period. Hong Kong profits tax for the prior period has been provided for at the rate of 16 per cent. on the estimated assessable profits arising in Hong Kong for that period. Overseas tax has been calculated on the estimated assessable profits for the period at the tax rates prevailing in the countries in which the Group operates based on existing legislation, interpretations and practices in respect thereof.

There were no material deferred tax assets or liabilities as at 30th June, 2003 (2002 – Nil).

7. Earnings/(Loss) per share

• (a) Basic earnings/(loss) per share

Basic earnings/(loss) per share is calculated based on (i) the net profit from ordinary activities attributable to shareholders of HK$44,220,000 (2002 – loss of HK$11,710,000), and (ii) the weighted average number of 1,349,134,000 shares (2002 – 1,351,537,000 shares) in issue during the period.

• (b) Diluted earnings/(loss) per share

No diluted earnings/(loss) per share is presented for the periods ended 30th June, 2003 and 2002 as there were no dilutive potential ordinary shares.

MANAGEMENT DISCUSSION AND ANALYSIS

On the global front, 2003 started on a sombre and uncertain economic note as war clouds loomed over Iraq. Domestically, the sluggish economy of the previous year carried over into 2003 with continuing deflation and rising unemployment. The outbreak of the Severe Acute Respiratory Syndrome (“SARS”) in March made further and drastic cuts into domestic economic activities. Despite the difficult operating environment during the first half of the year, the restructuring of the Group’s businesses, which started years ago, has begun to bear fruit, resulting in the Group producing a net profit of HK$44.2 million for the six months ended 30th June, 2003, in contrast to a loss of HK$11.7 million for the corresponding period of last year.

Results for the period

Turnover for the first six months of 2003 totalled HK$232 million which was 56 per cent. higher than the HK$149 million recorded for the same period of 2002. Of this, 81 per cent. (2002 – 41 per cent.) was attributable to treasury and securities investments, 9.5 per cent. (2002 – 20 per cent.) to corporate finance and securities broking businesses and 8.5 per pent. (2002 – 33 per cent.) to banking and insurance businesses.

At the end of June 2003, total investment portfolio stood at HK$1.1 billion (31st December, 2002 – HK$0.65 billion). Turnover from treasury and securities investments jumped 210 per cent. to HK$188 million compared with the HK$61 million recorded in the corresponding period of 2002. The Group responded to reduced deposit rates and diversified into higher yielding bonds and equity investments. The bond portfolio of the Group earned an average return of over 6 per cent. per annum. The performance of the investment portfolio improved substantially. The realised and unrealised gain of HK$66 million represented an increase of 150 per cent. on the HK$26 million recorded for the same period in 2002.

In the first few months of 2003, the sluggish local stock market affected negatively the performance of the Group’s securities broking business. However as SARS receded and business confidence picked up with the return of foreign and local investors, the local stock market rebounded strongly in recent months facilitating a recovery in the Group’s securities broking business. Turnover from the Group’s corporate finance and securities broking businesses which totalled HK$22 million fell 26 per cent. from the HK$30 million recorded in the same period of 2002. Despite the lower turnover, the Group recorded a lower loss of HK$2 million from its corporate finance and securities broking businesses compared to the loss of HK$5.7 million recorded for first half of 2002.

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The disposal of The Hongkong Chinese Bank, Limited and its subsidiaries in early 2002 meant that banking and insurance no longer features substantially in the Group’s business. The income from banking business for the period represents contribution from The Macau Chinese Bank Limited (“MCB”), an 85 per cent. owned subsidiary of the Company. MCB recorded a slight increase of 5.6 per cent. in operating profit before tax for the first half of the year.

Despite the volatile market conditions, the Group was able to obtain substantially improved results in its fund management activities. The Group had had a guaranteed return arrangement with a fund managed by it which had been “out of money” for the Group for some years. However, better investment returns coupled with the early termination of the guaranteed return arrangement initiated by the Group, resulted in improved performance in the Group’s fund management, including a write-back of HK$10.9 million provision (2002 – provision of HK$16.5 million was made).

Financial position

Notwithstanding the final distribution made to the shareholders in June 2003, the net asset value of the Group remained constant at HK$2.78 billion and the consolidated net asset value per share stood at HK$2.06. Over 90 per cent. of the Group’s total assets were denominated in Hong Kong dollars or United States dollars which kept the Group’s exposure to exchange rate risk low. The Company repurchased a total of 4.7 million shares during the period, which slightly improved the net asset value per share.

The Group’s financial position remained strong with the current ratio standing at 5.0: 1 (31st December, 2002 – 3.9:1) and is relatively debt free. Gearing ratio (total borrowing to shareholders’ funds) is below 0.8 per cent. The borrowing of the Group as at 30th June, 2003 comprised unsecured bank loans of HK$20 million (31st December, 2002 – HK$21 million, of which about half was secured and the remaining half unsecured). The bank loans were denominated in Hong Kong dollars, repayable within one year and carried interest at floating rates.

As at the end of the period, there were no charges on the Group’s assets (31st December, 2002 – Nil). Other than those relating to the banking operation, the Group had no material capital commitments or contingent liabilities outstanding (31st December, 2002 – Nil).

Changes in accounting policies

Certain accounting policies of the Group and disclosure practices were changed as a result of the adoption of the new or revised accounting standards issued by the Hong Kong Society of Accountants, details of which and the relevant prior period adjustments are set out in Note 1 to the interim results. These have no material impact on the results nor net asset value of the Group for the current period.

Staff and remuneration

The Group had approximately 130 employees as at 30th June, 2003 (2002 – 140 employees). Total staff costs totalled HK$32.8 million which was 11 per cent. lower than the HK$36.8 million recorded for the same period in 2002. The Group offered competitive remuneration packages to its employees.

Outlook

With global and regional economic outlook improving in the recent months, the local economy is also expected to improve in the coming remaining months of the year. The Group shall continue to take advantage of improved operating performance and its strong financial position to seek appropriate new investment opportunities. Management shall continue to adopt a cautious and prudent approach in assessing new investment opportunities.

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BUSINESS REVIEW AND PROSPECTS

Business review

Despite the adverse impact of SARS and the sluggish local economy in the first half of 2003, the Group recorded an unaudited consolidated profit attributable to shareholders of HK$44,220,000 for the six months ended 30th June, 2003 compared to a loss of HK$11,710,000 in the first six months of 2002.

In the first half of 2003, the global economy was clouded by concerns over likely fallouts from the war in Iraq. Locally, the economy experienced continuing deflation, as reflected in rising unemployment, persistent fall in property prices and weakening of domestic demand. SARS hit the local tourist, catering, entertainment and retail businesses particularly badly. Overall, business sentiment was low. Notwithstanding, exports and reexports registered strong growth in the first half of 2003.

The local stock market was sluggish in the first few months of 2003. This affected the business and performance of Lippo Securities Holdings Limited, a wholly-owned subsidiary of the Company, and its subsidiaries, which are principally engaged in underwriting, securities brokerage, corporate finance, investment advisory and other related financial services. However, aided by the return of foreign and local investors, the recent months saw a pick up in the local stock market, with the sharp increase in the trading volume, sending the Hang Seng Index surging above the 11,000 point level. This return of favourable market conditions will benefit the securities business of the Group in the months ahead.

MCB continues to be a regular income earner for the Group. The recent signing of the Closer Economic Partnership Agreement (“CEPA”) which is aimed at attracting Hong Kong and Macau companies to participate in the Mainland China market, will open up opportunities for companies in the Group, including MCB, to extend its financial services into the Chinese market, especially in the Pearl River Delta region.

Despite the challenging business environment, the Group will continue to explore new market opportunities and new income sources and seek potential acquisition and alliance opportunities which are compatible with its long term growth strategy.

On 30th January, 2003, the Group acquired a 20 per cent. interest in the Convoy Group, one of the largest independent financial planning service groups in Hong Kong. This alliance will enable the Convoy Group to leverage on the diversified financial services and extensive business network of the Lippo Group and in that way, strengthen its position in the independent financial planning industry. The Group’s interest in the Convoy Group subsequently increased to approximately 23 per cent.

Prospects

With the over of SARS and the Hong Kong Government’s stimulatory economic measures working its way through, the domestic economy has shown signs of a turnaround. This should encourage further improvement in market sentiment in the coming months. Increase in tourist arrivals and the signing of CEPA will provide momentum to the economic recovery process. However, continuing high unemployment and cautious consumer spending may dampen the pace of economic recovery.

Overall, we maintain a cautious outlook for the Group’s business in the second half of the year. With its strong and healthy financial position, the Group is in an excellent position to benefit from any upturn in the local economy and to pursue opportunities for growth. The Group will continue to explore suitable investment opportunities, especially in the financial and investment sectors. Given the present uncertain economic environment, management will continue to adopt a cautious and prudent approach in assessing new investment opportunities.

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INTERIM DISTRIBUTION

The Directors have resolved to declare the payment of an interim distribution of HK1.5 cents (2002 – HK1.5 cents) per share for the six months ended 30th June, 2003, which will be paid on Tuesday, 21st October, 2003 to the shareholders whose names appear on the Company’s Register of Members on Tuesday, 14th October, 2003.

CLOSURE OF REGISTER OF MEMBERS

The Register of Members of the Company will be closed from Tuesday, 7th October, 2003 to Tuesday, 14th October, 2003 (both dates inclusive) during which period no transfer of shares will be registered. In order to qualify for the interim distribution for the six months ended 30th June, 2003, all transfers of shares accompanied by the relevant share certificates and transfer forms must be lodged with Tengis Limited, the Company’s Branch Registrars in Hong Kong, at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong not later than 4:30 p.m. on Monday, 6th October, 2003. Warrants in respect of the interim distribution will be dispatched to the shareholders on or about Tuesday, 21st October, 2003.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

During the six months ended 30th June, 2003, the Company had repurchased a total of 4,708,000 shares of HK$1.00 each in the Company on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), all of which were subsequently cancelled. Particulars of the aforesaid repurchases were as follows:

		Price per
	Number of	share or
	shares of	highest	Lowest	Total price
	HK$1.00 each	price paid	price paid	paid before
Month	repurchased	per share	per share	expenses
		HK$	HK$	HK$
January	1,570,000	0.62	0.60	946,000
February	100,000	0.63	N/A	63,000
April	876,000	0.60	0.59	521,340
May	2,162,000	0.68	0.63	1,415,340

Save as disclosed herein, there was no purchase, sale or redemption of the Company’s listed securities by the Company or any of its subsidiaries during the period.

COMPLIANCE WITH CODE OF BEST PRACTICE

None of the Directors is aware of information that would reasonably indicate that the Company is not, or was not for any part of the period during the six months ended 30th June, 2003, in compliance with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange, except that non-executive Directors were not appointed for a specific term but are subject to retirement by rotation and re-election at the Company’s annual general meetings in accordance with Bye-law 87 of the Company’s Bye-laws.

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INTERIM REPORT

The interim report of the Company for the six months ended 30th June, 2003 containing all the information required by paragraphs 46(1) to 46(6) of Appendix 16 of the Listing Rules will be published on the Stock Exchange’s website in due course.

By Order of the Board Hongkong Chinese Limited John Lee Luen Wai Director

Hong Kong, 17th September, 2003

• For identification purpose only

“Please also refer to the published version of this announcement in The Standard”.

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