Bloks Group Limited — Interim / Quarterly Report 2001

Dec 17, 2001

Hong Kong Pharmaceutical Holdings Limited

香港葯業集團有限公司*

(Incorporated in Bermuda with limited liability)

INTERIM RESULTS FOR THE SIX MONTHS

ENDED 30 SEPTEMBER 2001

The Board of Directors (the “Directors”) of Hong Kong Pharmaceutical Holdings Limited (the “Company”) is pleased to announce the unaudited condensed consolidated interim results of the Company and its subsidiaries (the “Group”) for the six months ended 30 September 2001 (the “Period”) together with comparative figures. These interim results have not been audited but have been reviewed by the Company’s audit committee and the auditors in accordance with the Statement of Auditing Standard 700 issued by the Hong Kong Society of Accountants.

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

		For the six months ended 30 September
		2001		2000
				(Unaudited
		(Unaudited)		and restated)
	Notes	HK$’000		HK$’000
TURNOVER	2	27,379		13,765
Cost of sales		(15,636	)	(7,395	)
Gross profit		11,743		6,370
Other revenue	3	2,048		2,335
Distribution costs		(14,301	)	(6,356	)
Administrative expenses		(11,945	)	(5,221	)
Other operating income/(expenses)		(5,463	)	1,329
LOSS FROM OPERATING
ACTIVITIES	4	(17,918	)	(1,543	)
Finance costs	5	(3,064	)	(2,990	)
LOSS BEFORE TAX		(20,982	)	(4,533	)
Tax	6	-		-
LOSS BEFORE MINORITY
INTERESTS		(20,982	)	(4,533	)
Minority interests		2,917		-
NET LOSS FROM ORDINARY
ACTIVITIES ATTRIBUTABLE
TO SHAREHOLDERS		(18,065	)	(4,533	)
LOSS PER SHARE	8
Basic		(1.32 cents	)	(0.46 cents	)
Diluted		N/A		N/A

Notes:

1. Accounting policies

Basis of preparation

The unaudited condensed consolidated interim financial statements are prepared in accordance with Hong Kong Statement of Standard Accounting Practice (“SSAP”) No. 25 “Interim Financial Reporting”. The accounting policies and basis of preparation used in the preparation of the interim financial statements are the same as those used in the annual audited financial statements for the year ended 31 March 2001, except that the Group has changed certain of its accounting policies following the adoption of the following new or revised SSAPs issued by the Hong Kong Society of Accountants which are effective for accounting periods commencing on or after 1 January 2001:

SSAP 9 (revised)	:	Events After the Balance Sheet Date
SSAP 14 (revised)	:	Leases (effective for periods commencing on or after 1 July 2000)
SSAP 28	:	Provisions, Contingent Liabilities and Contingent Assets
SSAP 29	:	Intangible Assets
SSAP 30	:	Business Combinations
SSAP 31	:	Impairment of Assets
SSAP 32	:	Consolidated Financial Statements and Accounting for Investments in Subsidiaries

Other than lease disclosures and the prior period adjustment as set out below, the implementation of the above SSAPs did not have a material impact on the Group’s financial statements.

Leases

In accordance with SSAP 14 (revised), the total future minimum lease payments are disclosed instead of annual payments to be made during the next year under non-cancellable operating leases.

Prior period adjustment

Goodwill/negative goodwill represents the excess/shortfall of the cost of an acquisition over the fair values of the Group’s share of the underlying net assets of the acquired subsidiaries at the date of acquisition. In previous years, goodwill/negative goodwill was eliminated against/credited to reserves in the year in which it arose.

With effect from 1 January 2001, with the introduction of SSAP 30, the Group adopted an accounting policy to recognise goodwill as an asset which is amortised on a straight-line basis over its estimated useful life. Negative goodwill will be presented as a deduction from assets and will be released to profit and loss account based on analysis of the circumstances from which the balance resulted.

The Group has taken advantage of the transitional provisions in SSAP 30 and the goodwill/negative goodwill that arose from acquisitions prior to 1 January 2001, which has been previously eliminated against/credited to reserves, has not been retrospectively restated under the new accounting policy. Therefore, goodwill arising on acquisitions prior to 1 January 2001 is held in reserves and will be charged to the profit and loss account at the time of disposal of the subsidiaries, or at such time as the goodwill is determined to be impaired. Negative goodwill arising on acquisitions prior to 1 January 2001 is held in reserves and will be credited to the profit and loss account at the time of disposal of the relevant subsidiaries.

As the Group had not previously followed a policy of recognising impairment losses in respect of goodwill eliminated against reserves, implementation of SSAP 31 is treated as a change in accounting policy in accordance with SSAP 2 “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies” and is applied retrospectively in accordance with the transitional provisions of SSAP 30. As a result, the goodwill arising from the acquisitions of subsidiaries in the prior periods was determined to have been impaired prior to 31 March 2001. The effect of this change in the accounting policy is to increase the accumulated losses and the capital reserve as at 1 April 2001 by approximately HK$773,000.

2. Segment information

An analysis of the Group’s turnover and contribution to profit/(loss) from operating activities by principal activity and geographical area of operations for the period ended 30 September 2001 is as follows:

					Contribution to profit/(loss) from operating activities For the six months ended 30 September
	Turnover For the six months ended 30 September
	2001		2000		2001		2000
			(Unaudited				(Unaudited
	(Unaudited)		and restated)		(Unaudited)		and restated)
	HK$’000		HK$’000		HK$’000		HK$’000
By activity:
Wholesale and retail of Chinese
and other medicines,
pharmaceutical products,
health products and dried
seafoods	25,393		12,441		(8,995	)	(3,188	)
Property investment -
rental income	1,150		1,324		1,018		1,241
Provision of Chinese clinical
services	836		-		(706	)	-
Others	-		-		(9,235	)	404
	27,379		13,765		(17,918	)	(1,543	)
By geographical area:
People’s Republic of China
(“PRC”)
- Hong Kong	24,664		13,765		(12,545	)	(1,543	)
- Elsewhere	2,715		-		(5,373	)	-
	27,379		13,765		(17,918	)	(1,543	)

Amounts of HK$10,517,500 and HK$10,157,500 representing the value of marketable securities sold and purchased were included in turnover and cost of sales respectively in the unaudited consolidated interim results of the Group for the six months ended 30 September 2000. The Directors redefined the Group’s core business and concluded that the trading of marketable securities do not form part of the Group’s principal activities. Accordingly, these items were reclassified to other revenue for the prior period interim results. In the opinion of the Directors, these reclassifications in the financial statements provide a better presentation.

3. Other revenue

	For the six months ended 30 September
	2001		2000
			(Unaudited
	(Unaudited)		And restated)
	HK$’000		HK$’000
Interest income	1,832		1,971
Dividend income	161		-
Gain on disposal of short term investments	-		361
Others	55		3
	2,048		2,335

4. Loss from operating activities

The Group’s loss from operating activities is arrived at after charging the following:

	For the six months ended 30 September
	2001		2000
	(Unaudited)		(Unaudited)
	HK$’000		HK$’000
Depreciation	2,242		685
Amortisation of goodwill	198		-
Amortisation of know-how	596		-
Loss on changes in fair value of short term investments	3,125		-

5. Finance costs

	For the six months ended 30 September
	2001		2000
	(Unaudited)		(Unaudited)
	HK$’000		HK$’000
Interest expenses on bank loans, overdrafts and
other borrowings wholly repayable within five years	3,041		2,966
Hire purchase charges	23		24
	3,064		2,990

6. Tax

No provision for Hong Kong or overseas (including PRC) profits tax has been made as the Group did not generate any assessable profits during the Period (2000: Nil).

7. Dividend

The Directors do not recommend the payment of any interim dividend for the six months ended 30 September 2001 (2000: Nil).

8. Loss per share

The calculation of the basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the Period of approximately HK$18,065,000 (2000: HK$4,533,000) and the weighted average number of 1,364,926,753 (2000: 986,869,048) ordinary shares in issue during the Period.

Diluted loss per share for the six months ended 30 September 2001 and 2000 has not been presented as the effect of the assumed conversion of the share options and convertible notes of the Company during these periods was anti-dilutive.

BUSINESS REVIEW

In March 2001, the Group completed its acquisition of 57% interest in Shanghai Hua Xin High Biotechnology Inc. (“Hua Xin”). Subsequent to the acquisition, the Group undertook measures to optimize and rationalize the research, production and sales of Hua Xin, while expediting introduction of new medicine and expansion of retail outlets to a fuller extent, and strengthening its management team. The said business rationalization is significantly improving the fundamentals of Hua Xin and had laid a solid foundation for its future development.

Pursuant to the requirements of the State Drug Administration (“SDA”), Hua Xin’s drug production permits were required to regain approval and confirmation of the relevant state departments upon relocation to GMP factory premises. This had hindered the pace of commercialization of Hua Xin’s new medicine varieties during the Period.

The Group continued its active exploration of new markets and business opportunities, and focused on business transformation by acquiring Chinese high biotechnology medicine projects and pharmaceutical retail networks with market dominance, in order to secure growth and to maximise shareholders’ value. During the report period, marked progress was made in respect of project acquisition according to existing schedules.

In April 2001, the Group and Yangzhou University jointly established a transgenic pharmaceutical research and development centre-Yang Zhou Genetic Engineering Ltd., financial results of which have been consolidated into the Group’s interim results for the Period. The centre has two high tech research laboratories with recognition by the local provincial government, covering the field of molecular cloning and animal embryo testing, renowned in the province for their pioneering research and development of transgenic drugs comparable to international standards. The management of the Group firmly believes that the co-existence of transgenic pharmaceutical research and development centre and Hua Xin can lead to synergistical benefits, which will, in turn, further enhance the competitive strengths of the Group in production as well as research and development of biomedicine products.

In anticipation of the incentive available to foreign investment in the development of western region of China, the Group announced in August 2001 its acquisition of a 51% interest in 貴州一樹連鎖葯業有限公司 Gui Zhou Ensure Chain Pharmacy Company Limited (“Ensure”) at a consideration of HK$15,254,400. The acquisition would represent penetration into the pharmaceutical distribution segments that have previously been inaccessible to foreign companies. Ensure was one of the first 41 pharmaceutical chain retail enterprises that were granted the trans-provincial operating right and approved in terms of GSP inspection and acceptance by SDA. Currently, Ensure is operating 61 chain stores in Guizhou and Hubei. Upon completion of acquisition of Ensure, the Group would become one of the major pharmaceutical enterprises with retail networks both in Hong Kong and China. The Group aims to expand its distribution outlets to 1000 in the next three years. The management believes that, greater opportunities and rate of growth will ensue following China’s imminent accession to the WTO, a pharmaceutical enterprise with structured retail network will be in good stead to take advantage of these opportunities and development potential.

PROSPECTS

Following the completion of major acquisitions, the Group has been successful in its strategic transformation into a modern high biotechnology medicine conglomerates with retail operations both in Hong Kong and China, while focusing on research and development, production, and sales of high biotechnology medicine.

In the second half of the year, Hua Xin will introduce two new national category II drugs, namely GM-CSF and IFN (water injection) to its existing portfolio of national category I drug, Interleukin-2; and national category II drug, Interferon a-2b. The management believes that given the completion of business integration, introduction of new products and expansion of retail networks, Hua Xin will rapidly enhance its competitiveness in the Chinese biomedicine market, which will, in turn, significantly increase its sales revenue and profitability in the future.

Amid the rapid expansion of its drug retail networks in China, Ensure will further provide impetus to the growth in sales of the Group in the coming years.

The management of the Group believes that biomedicine is one of the industries that offer greatest development potential in the new millennium. In the ensuing future, the Group will continue to undergo organic integration to consolidate and upgrade the quality of its existing investments and resources, overcome its weaknesses and build upon its strengths both internally and in the market. We expect to continue and accelerate the consolidation and expansion of its existing biomedicine and drugs retail network in the PRC, and committed to the development and introduction of new owner-patented biomedicine for treating a broad range of the world’s most serious diseases. The Group’s commitment to excellence in clinical development, developing quality products, delivering healthy and quality lives to the public at large is as important to us as our financial success.

On behalf of the Board of Directors, I express my utmost gratitude to all our shareholders and customers for their understanding, support and to our staff for their contribution during the Period.

FINANCIAL ANALYSIS

The unaudited turnover of the Group for the six months ended 30 September 2001was approximately HK$27.4 million, representing 98% increase over that of the corresponding period last year. The significant increase in turnover mainly came from the expansion in the number of retail shops, from 10 in 2000 to 16 in 2001 and the reward from the Group’s continuing effort in rationalizing and strengthening its existing retail network has led to the overall improvement of sales performance of the Group and of individual retail outlets in Hong Kong, the average sales per retail shop has risen by 15% compared to that of corresponding period last year.

Despite continued adverse economic and trading conditions in Hong Kong, the overall gross profit margin of the Group’s retail businesses has been maintained at 40%.

The rental income from the investment properties in Hong Kong and the PRC remains a stable source of income for the Group. It has reduced by approximately 13% compared to the same corresponding period last year, the small decrease is the result of rent reduction in response to the prevailing rental market conditions.

Since becoming a member of the Group, Hua Xin’s turnover contribution represents approximately 10% of the group’s turnover for the interim period. Though sustained loss for the interim period, we believe its financial performance for the second half of the year to be significantly improved as the bulk of its sales orders received in the first interim period are to be met and reflected in greater turnover and profitability in the second half of the financial year.

The loss reported by the Group for the interim period is mainly attributable to the increase in distribution costs as a direct result of the rationalization and expansion of its retail networks both in Hong Kong and the PRC, as well as the increased level of legal and professional costs relating to the acquisition and integration of newly acquired assets and investments. The management believes that the financial performance of the Group would significantly improve when the level of these expenditure are to reduce and reach a more cost efficient level when the benefits of a structured, expanded and strategic retail distribution networks and economies of scale are achieved.

LIQUIDITY AND FINANCIAL RESOURCES

On 27 April 2001, the Group issued 130 million new shares at the price of HK$0.1 per share pursuant to the conversion of the creditor convertible note by a creditor of the Group. The conversion of shares led to the enlargement of the equity base of the Group thus attributable to the improvement of the Group’s gearing ratio.

The Group’s interim results include those of a newly acquired subsidiary, Yang Zhou Genetic Engineering Limited, which results in the increase of non-current assets in the form of research laboratories under construction in progress and technical know-how. Both the increase of non-current assets and the conversion of equity shares contribute to the improvement of the Group’s gearing ratio (measured as Total borrowings/Total assets), measured at 0.44 time as at 30 September 2001 compared to 0.47 time as at 31 March 2001, an improvement of 7%.

STAFF AND REMUNERATION

As at 30 September 2001, the Group employed approximately 242 full time employees, of which approximately 109 were in the PRC. The remuneration of employees include salary and discretionary bonus. The Group also adopted a share option scheme to provide an incentive to the employees.

The remuneration policy and package, including the share options, of the Group’s employees are maintained at market level and reviewed annually by the management.

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

Other than the issue of 130 million new shares at the price of HK$0.10 per share in April 2001 pursuant to the conversion of the creditor convertible note by a creditor of the Company, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company’s listed securities during the Period.

CODE OF BEST PRACTICE

In the opinion of the Directors, the Company had complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities (“Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) during the period ended 30 September 2001, except that the independent non-executive directors of the Company are not appointed for a specific term but they are subject to retirement by rotation at Annual General Meeting of the Company in accordance with the Company’s bye-laws.

PUBLICATION OF RESULT ON THE STOCK EXCHANGE’S WEBSITE

The detailed results containing all the information required by paragraph 46(1) to 46(6) of Appendix 16 to the Listing Rules will be published on the website of the Stock Exchange in due course.

By order of the Board of Directors

Huang Shuyun

Deputy Chairman and Managing Director

Hong Kong, 15 December 2001

* for identification only

Please also refer to the published version of this announcement in the Hong Kong iMail Post dated 17/12/2001