Bloks Group Limited — Interim / Quarterly Report 2003

Dec 30, 2002

HONG KONG PHARMACEUTICAL HOLDINGS LIMITED ���������� *

(Incorporated in Bermuda with limited liability)

Interim Results for the six months ended 30 September 2002

The Board of Directors (the “Directors”) of Hong Kong Pharmaceutical Holdings Limited (the “Company”) announces the unaudited condensed consolidated interim results of the Company and its subsidiaries (the “Group”) for the six months ended 30 September 2002 (the “Period”) together with comparative figures for the corresponding period in 2001. 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

Notes TURNOVER 3 Cost of sales Gross profit Other revenue 3 Selling and distribution costs Administrative expenses Other operating expenses LOSS FROM OPERATING ACTIVITIES 4 Finance costs 5	For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 49,806 27,379 (33,545) (15,636) 16,261 11,743 2,203 2,048 (17,866) (14,301) (14,513) (11,945) (13,358) (5,463) (27,273) (17,918) (3,527) (3,064)

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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LOSS BEFORE TAX Tax 6 LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS LOSS PER SHARE 8 Basic Diluted Notes:	(30,800) (1) (30,801) 7,608 (23,193) (1.68) cents N/A	(20,982) – (20,982) 2,917 (18,065) (1.32) cents N/A

1. Basis of preparation and accounting policies

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” issued by the Hong Kong Society of Accountants and Appendix 16 to the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

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 2002, except that the Group has changed certain of its accounting policies following the adoption of the following recently-issued and revised SSAPs issued by the Hong Kong Society of Accountants which are effective for the first time in the preparation of the current period’s condensed consolidated financial statements:

• SSAP 1 (Revised) : “Presentation of financial statements”

• • SSAP 11 (Revised) : “Foreign currency translation” • SSAP 15 (Revised) : “Cash flow statements” • SSAP 25 (Revised) : “Interim financial reporting” • SSAP 34 : “Employee benefits”

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement 27th December 2003

2. Segment information

The following table presents revenue and results for the Group’s business segments for the six months ended 30 September.

Sum yung and pharmaceutical products (Unaudited) 2002 2001 HK$’000 HK$’000 Segment revenue: Sales to external customers 45,370 22,701 Intersegment sales 144 62 Other revenue 432 – Total 45,946 22,763 Segment results (6,310) (4,538) Interest and dividend income Unallocated revenue Unallocated expenses Loss from operating activities Finance costs Loss before tax Tax Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders	Biotechnological and transgenic products (Unaudited) 2002 2001 HK$’000 HK$’000 2,471 2,692 – – 383 – 2,854 2,692 (11,162) (4,588)	Property investment (Unaudited) 2002 2001 HK$’000 HK$’000 1,194 1,150 – – – – 1,194 1,150 1,088 1,003	Corporate and others (Unaudited) 2002 2001 HK$’000 HK$’000 771 836 – – – – 771 836 (7,821) (8,475)	Eliminations (Unaudited) 2002 2001 HK$’000 HK$’000 – – (144) (62) – – (144) (62)	Consolidated (Unaudited) 2002 2001 HK$’000 HK$’000 49,806 27,379 – – 815 – 50,621 27,379 (24,205) (16,598) 1,253 1,993 135 55 (4,456) (3,368) (27,273) (17,918) (3,527) (3,064) (30,800) (20,982) (1) – (30,801) (20,982) 7,608 2,917 (23,193) (18,065)

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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3. Turnover and revenue

Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts; the value of services rendered; and gross rental income received and receivable from investment properties after the elimination of all significant intra-group transactions during the Period.

An analysis of turnover and revenue is as follows:

Turnover Sale of sum yung and pharmaceutical products Sale of biotechnological and transgenic products Property investment – rental income Others Other revenue Interest income Dividend income Others	For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 45,370 22,701 2,471 2,692 1,194 1,150 771 836 49,806 27,379 For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 1,092 1,832 161 161 950 55 2,203 2,048	For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 45,370 22,701 2,471 2,692 1,194 1,150 771 836 49,806 27,379 For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 1,092 1,832 161 161 950 55 2,203 2,048
		2,048

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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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
	2002	2001
	(Unaudited)	(Unaudited)
	HK$’000	HK$’000
Depreciation	5,982	2,242
Amortisation of goodwill	755	198
Amortisation of know-how	1,216	596
Impairment loss of intangible asset	1,300	–
Loss on changes in fair value of short term investments	3,161	3,125

5. Finance costs

Interest expenses on bank loan and other borrowings wholly repayable within five years Hire purchase charges	For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 3,512 3,041 15 23 3,527 3,064	For the six months ended 30 September 2002 2001 (Unaudited) (Unaudited) HK$’000 HK$’000 3,512 3,041 15 23 3,527 3,064
		3,064

6. Tax

No Hong Kong profits tax has been provided for because the Group had no estimated assessable profits arising in Hong Kong during the Period (2001: Nil). Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

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7. Interim dividend

The Directors do not recommend the payment of an interim dividend for the six months ended 30 September 2002 (2001: Nil).

8. Loss per share

The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the Period of approximately HK$23,193,000 (2001: approximately HK$18,065,000) and the weighted average number of 1,383,629,485 (2001: 1,364,926,753) ordinary shares in issue during the Period.

Diluted loss per share for the six months ended 30 September 2002 and 2001 has not been presented because the effects of the assumed conversion of the share options and convertible notes of the Company during these periods were anti-dilutive.

BUSINESS REVIEW

The turnover of the Group for the six months ended 30 September 2002 was approximately HK$49.8 million, representing an increase of approximately 82% compared to that of the same period of last year. The significant increase has been mainly attributable to the inclusion of the financial results of Guizhou Ensure Chain Pharmacy Co., Ltd. (“Ensure”) and its subsidiary company, ���������� Guizhou Ensure Medical Co. Ltd, for the first time after becoming members of the Group on 30 March 2002.

Despite weak market sentiments and intense competition, the management of the Group is pleased to see an increase of approximately 10% in the turnover of the wholesale and retail of sum yung products segment, whilst the level of rental income from the investment properties segment showed an increase of approximately 4% when compared to the corresponding period of last year.

The management of the Group continues to be cautious and prudent during its implementation of retrenchment, rationalisation and consolidation of the Group’s operations, preparing a solid platform for future trading and financial success. During the Period, the net loss attributable to shareholders was approximately HK$23.2 million, representing an increase of approximately 28.2% when compared to approximately HK$18.1 million of the corresponding period of last year. The increase in net loss attributable to shareholders has been a direct result of the Group’s determination and conservative approach in preparing for future long term financial

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement 27th December 2003

success, to significantly increase provision for and write off non-performing assets , which are reflected in the Other operating expenses on the face of profit and loss account. As a result of the Group’s continuing effort to rationalise, the level of Other operating expenses rose significantly by approximately 145% from HK$5.5 million for the last corresponding period to approximately HK$13.3 million for this period. Excluding the relevant share of these various write-offs and provisions attributable to the Group, the net loss from ordinary activities of the Group for the Period stood at approximately HK$14.4 million compared to approximately HK$13.8 million for the last corresponding period, a slight increase of approximately 4%, and an encouraging sign of effectiveness of the Group’s retrenchment and reward for its perseverance. In view of the continuing improvement of its trading and operational performance , the management of the Group is confident that the financial performance of the operations both in HK and PRC will significantly improve in the ensuing years when the benefits of its retrenchment and consolidation are fully realised, together with its intended plans for product and market developments for the Group’s operations, widening the Group’s sources of income and improve profitability.

In March 2002, the Group completed the acquisition of 51% interest in Ensure for approximately HK$15.25 million. The acquisition has given the Group foothold and access to the PRC pharmaceutical retail distribution market that has yet to be opened to foreign investments. Ensure possesses GSP certification and is one of the first 41 medical chain pharmacies approved and licensed by the State Drug Administration to operate nationwide in the PRC. At present, there are 75 stores operating under its expanding network covering Guizhou and Hubei. The acquisition of Ensure has transformed the Group into the first pharmaceutical enterprise with pharmaceutical retail distribution networks encompassing China and Hong Kong. The Group intends to capitalise upon Ensure’s competitive advantages in its market and exploit the industry’s untapped potential further and plans to expand its pharmaceutical retail networks to 1,000 stores in the PRC over the course of next three years. The management of the Group believes that, with China’s accession to the WTO, established and extensive distribution network shall provide the Group a firm foundation to develop and to expand its business activities in the PRC and also, be better positioned to exploit opportunities and the potential that this market and industry have to offer in the ensuing years.

PROSPECTS

As part of its plan to diversify geographically and to widen its sources of income and profitability, one of the key strategies of the Group is to develop and expand its pharmaceutical distribution business in the PRC by capitalising on its competitive advantage of, among others, being the early entrant to the market, leveraging on the closed pharmaceutical distribution

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement 27th December 2003

market of the PRC and support from the government’s active rationalisation and integration of pharmaceutical enterprises in the industry. In the coming years, the Group plans to focus its efforts on seeking and to cultivate strategic collaborations with internationally renowned enterprises in the pharmaceutical distribution industry, whilst continue to consolidate and rationalise its activities, introduce advanced management concepts and skills and effective management models in order to enhance its management standards and internal competitive strengths. Moreover, through strategic acquisitions of pharmaceutical distribution projects in Southern, Eastern and South-western China, close co-operation with China Post; increase of the number of large-scale pharmacy stores; and selectively recruit promising franchisees, the Group aims to expand its scale of operation of the pharmaceutical distribution business nationwide in a bid to become one of China’s leading enterprises in the pharmaceutical distribution industry. Supported and fuelled by the rapid developments of its retail networks, the Group’s pharmaceutical distribution business will provide significant impetus to the growth of revenue and profitability in the future.

In the second half of the year, Shanghai Hua Xin High Biotechnology Inc. (“Hua Xin”) will introduce two new national category II drugs to the market, 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 Group shall continue its efforts of product and market developments in the domestic market as well as active collaboration in the fields of technology, products and market development with renowned biotech enterprises from Europe and the US; meanwhilst, explore opportunities for geographical expansion in the biotech drug markets in developing countries in South America, India and South-east Asia. The management remains confident that after its transition of business rationalisation, integration and, together with the continuing dedication of new product and market developments, both at home and in other developing countries, Hua Xin will be able to re-establish itself and enhance its competitiveness in the PRC biopharmaceutical market, paving the way to significant and positive contribution to the Group’s trading performance and profitability in the future.

The management of the Group firmly believes that the pharmaceutical industry is one of the most promising industries in China, offering tremendous development, growth and reward potential. The Group will strive to exploit the prevailing opportunities in the industry and the PRC market, expand and enhance the coverage and scale of its retail distribution networks, accelerate research and development and commercialisation of self-patented bio-pharmaceutical drugs to treat a broad range of the world’s most serious and incurable diseases. The Group is committed to becoming the leading biopharmaceutical company in Asia, through steadfast pursuit of excellence in product development and commercialisation, supported by efficient distribution capabilities, thus bringing good health and quality living to the public and bestow

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement 27th December 2003

best return to our shareholders.

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.

Liquidity and financial resources

The Group has been cautious in its funding policies and requirements and generally finances its short term funding requirements with cash generated from operation, credit facilities from suppliers and banking facilities provided by our principal bankers.

The current ratio of the Group showed moderate improvement and increased by approximately 8% from 1.04 last period to 1.13 this period. The gearing ratio (long term debts over equity and long term debts) slightly rose from 0.55 time of last period to 0.74 time this period. The slight increase in the gearing ratio had been directly attributable to the inclusion of bank loans of the newly acquired subsidiaries when consolidating their financial results into the current interim financial statements. Management of the Group expects that the gearing ratio shall further improve in the future as profitability ensues and conversions of the outstanding convertible notes are exercised.

Capital Structure

There has not been significant change in the capital structure of the Group during the Period under review.

Total bank and other borrowings of the Group amounted to, approximately HK$149.5 million, of which HK$55.1 million are denominated in Reminbi and re-translated accordingly at the appropriate exchange rate at the reporting date, and the balance of the borrowings are denominated in Hong Kong dollars. Approximately HK$27.9 million are due within one year and approximately HK$82 million of the total borrowings are secured.

The Group had been successful in negotiations with the relevant parties in re-scheduling repayments of bank and other loans. As a result, the total amount of bank and other borrowings repayable within one year reduced from approximately HK$62.2 million as at 1 April 2002 to approximately HK$27.9 million as at 30 September 2002.

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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In view of the stability of Reminbi, management of the Group did not consider necessary to hedge against foreign exchange exposure. During the Period, the Group did not engage in the use of any other financial instruments for hedging purposes, and there is no hedging instrument outstanding as at 30 September 2002.

STAFF AND REMUNERATION

As at 30 September 2002, the Group employed approximately 591 full time employees, of which approximately 475 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

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 complied with the Code of Best Practice (the “Code”) as set out in Appendix 14 of the Listing Rules on the Stock Exchange, throughout the accounting period covered by this interim report, except that the independent non-executive directors of the Company are not appointed for specific terms as required by paragraph 7 of the Code, but are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the provision of the Company’s bye-laws.

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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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 Sun Hiu Lu Chairman

Hong Kong, 27 December 2002

• For identification purpose only

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

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Hong Kong Pharmaceutical Holdings Limited – Result Announcement

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