CSPC Pharmaceutical Group Limited — M&A Activity 1999

May 3, 1999

Listed Company Information

CHINA PHARMA<1093> - Announcement The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. CHINA PHARMACEUTICAL ENTERPRISE AND INVESTMENT CORPORATION LIMITED (Incorporated in Hong Kong with limited liability) CONNECTED TRANSACTIONS SUMMARY The Company has entered into the Agreements, pursuant to which the Company will acquire a 99% interest in Fenghua and Jiali from the wholly owned subsidiaries of SPG respectively. Fenghua and Jiali are Sino-foreign equity joint ventures in the PRC. Fenghua is mainly engaged in the manufacture and sale of semi-synthetic antibiotics and medicines, while Jiali is mainly engaged in the manufacture and sale of ampicillin sodium. The Total Consideration will be settled by way of issuing and alloting the Consideration Shares at an issue price of HK$1.26 per Share to SPG and its subsidiary. The shareholding of SPG and its associates in the Company will increase from about 57.01% of the existing issued share capital to about 59.17% of the enlarged issued share capital of the Company immediately after the Completion. The Directors consider that the Agreements were negotiated on an arm's length basis and agreed on normal commercial terms between the parties involved. The Directors further consider that the terms of the Agreements, the issue of the Consideration Shares and the Transactions are fair and reasonable so far as the Shareholders are concerned and the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions are in the interest of the Company and the Shareholders as a whole. As SPG is the controlling shareholder of the Company, the Proposed Acquisitions and the issue of the Consideration Shares constitute connected transactions of the Company for the purpose of the Listing Rules and the Transactions will also constitute connected transactions of the Company after the Completion for the purpose of the Listing Rules. Accordingly, the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions are subject to, among other things, the approval of the Independent Shareholders. A circular containing, among other things, information on the Proposed Acquisitions and the opinion of the independent financial adviser will be dispatched to the Shareholders as soon as practicable. 1. CONDITIONAL AGREEMENTS FOR THE ACQUISITION OF INTERESTS IN FENGHUA AND JIALI DATED 30th April, 1999 Parties to Fenghua Agreement: i. HPF (Vendor) ii. Charmaine Pharmaceutical (Vendor) iii. the Company (the Purchaser) iv. SPG (the Guarantor) Particulars of the Fenghua Agreement: Pursuant to the Fenghua Agreement, the Company will acquire 69% of the registered capital of Fenghua from HPF for a consideration of HK$25,990,400 and 30% of the registered capital of Fenghua from Charmaine Pharmaceutical for a consideration of HK$11,300,200. Accordingly, after the completion of the Fenghua Agreement, Fenghua will be beneficially owned as to 99% by the Company and 1% by HPF. Since HPF still owns 1% equity interest in Fenghua after the Completion, Fenghua will continue to be an entity of the status of Sino-foreign equity joint venture in the PRC. The parties to Fenghua Agreement have agreed to proceed with the acquisition of 69% of Fenghua in the event the acquisition of another 30% of Fenghua is not completed. The aggregate consideration payable by the Company pursuant to the Fenghua Agreement has been determined after arm's length negotiation between the parties involved in the Fenghua Agreement by reference to the Fenghua Net Asset Value of about RMB40,303,900 (about HK$37,667,200) as at 31st December, 1998. The consideration payable to HPF and Charmaine Pharmaceutical will be satisfied by way of issue of 20,627,302 consideration shares of the Company to SPG and 8,968,413 consideration shares of the Company to Charmaine Pharmaceutical respectively. Further details in relation to the consideration payable are set out in the section headed "Consideration" below. The Directors consider that the terms of the Fenghua Agreement are based on normal commercial terms and are fair and reasonable so far as the Shareholders are concerned. Parties to Jiali Agreement: i. Hebei Pharmaceutical (Vendor) ii. Charmaine Pharmaceutical (Vendor) iii. the Company (the Purchaser) iv. SPG (the Guarantor) Particulars of Jiali Agreement: Pursuant to the Jiali Agreement, the Company will acquire 69% of the registered capital of Jiali from Hebei Pharmaceutical for a consideration of HK$22,492,500 and 30% of the registered capital of Jiali from Charmaine Pharmaceutical for a consideration of HK$9,779,300. Accordingly, after the completion of the Jiali Agreement, Jiali will be beneficially owned as to 99% by the Company and 1% by Hebei Pharmaceutical. Since Hebei Pharmaceutical still owns 1% equity interest in Jiali after the Completion, Jiali will continue to be an entity of the status of Sino- foreign equity joint venture in the PRC. The parties to Jiali Agreement have agreed to proceed with the acquisition of 69% of Jiali in the event the acquisition of another 30% of Jiali is not completed. The aggregate consideration payable by the Company pursuant to the Jiali Agreement was agreed after arm's length negotiation between the parties involved in the Jiali Agreement by reference to the Jiali Net Asset Value of about RMB34,879,600 (about HK$32,597,800) as at 31st December, 1998. The consideration payable to Hebei Pharmaceutical and Charmaine Pharmaceutical under the Jiali Agreement will be satisfied by way of issue of 17,851,190 consideration shares of the Company to SPG and 7,761,349 consideration shares of the Company to Charmaine Pharmaceutical respectively. Further details in relation to the consideration payable are set out in the section headed "Consideration" below. The Directors consider that the terms of the Jiali Agreement are based on normal commercial terms and are fair and reasonable so far as the Shareholders are concerned. Shareholding Structure: (For the following charts set out the equity-holding structure of Fenghua and Jiali immediately before and after the Completion, please refer to the press announcement today.) Information on Fenghua: Fenghua was established on 26th February, 1994 in the PRC as a Sino- foreign equity joint venture. Pursuant to the joint venture contract dated 23rd September, 1993 of Fenghua, Fenghua is originally owned as to 70% by HPF and as to 30% by YFCC. Upon its establishment, the total investment and registered capital of Fenghua amounted to US$4,500,000 (about HK$35,100,000) and US$3,000,000 (about HK$23,400,000) respectively. HPF and YFCC contributed 70% and 30% of the registered capital of Fenghua respectively. The registered capital of Fenghua has been fully paid up. Since the consideration of the acquisition of the 99% interest in Fenghua by the Company is to be satisfied by issuing consideration shares of the Company, YFCC does not wish to receive consideration shares of the Company for its disposals. Accordingly, pursuant to an acquisition agreement dated 30th April, 1999 between YFCC and Charmaine Pharmaceutical, Charmaine Pharmaceutical will acquire YFCC's interest in Fenghua at a consideration of HK$11,300,200. This consideration is equivalent to the amount of 30% of the Fenghua Net Asset Value of RMB40,303,900 (about HK$37,667,200). Fenghua will be owned as to 70% by HPF and 30% by Charmaine Pharmaceutical. The joint venture contract of Fenghua is for a term of 15 years commencing from 26th February, 1994. Upon the Completion, the joint venture contract shall be amended to extend the term of the joint venture to 30 years commencing from 26th February, 1994. Fenghua located in Shijiazhuang, the PRC and is mainly engaged in the manufacture and sale of semi-synthetic antibiotics and medicines including 6-APA, ampicillin and amoxicillin. Fenghua is one of the largest semi- synthetic antibiotics producers in the PRC. For the year ended 31st December, 1998, Fenghua produced about 216,000 kg of ampicillin, 12,000 kg of amoxicillin and 96,000 kg of 6-APA. Products of Fenghua are principally sold in the PRC markets. A majority of the ampicillin produced by Fenghua is sold to Jiali who in turn will chemically convert the ampicillin to ampicillin sodium. The amount of sales made to Jiali by Fenghua represented about 62% and 52% of Fenghua's total sales for each of the two years ended 31st December, 1998 respectively. Moreover, Fenghua also sells its products to the SPG Group. Further details in relation to the sales of Fenghua are set out in the sections headed "Trading results of the Acquiring Group" and "Ongoing connected transactions" below. The unaudited net asset value of Fenghua (after taking into account the surplus of about RMB6,532,000 (about HK$6,105,000) arising from the revaluation of the assets of Fenghua as confirmed by the Shijiazhuang Asset Bureau) as at 31st December, 1998 was RMB40,303,900 (about HK$37,667,200). Information on Jiali: Jiali was established on 13th March, 1996 in the PRC as a Sino-foreign equity joint venture. Upon its establishment, the total investment and registered capital of Jiali amounted to RMB20,000,000 (about HK$18,692,000) and RMB20,000,000 (HK$18,692,000) respectively. Hebei Pharmaceutical and Good Talent contributed 75% and 25% of the registered capital of Jiali respectively. The registered capital of Jiali has been fully paid up. Pursuant to the joint venture contract dated 20th December, 1995 of Jiali between Hebei Pharmaceutical and Good Talent, Jiali was owned as to 75% by Hebei Pharmaceutical and as to 25% by Good Talent. Pursuant to the equity transfer agreement in 1997 between Hebei Pharmaceutical and Good Talent, Hebei Pharmaceutical agreed to transfer 5% of its equity interest in Jiali to Good Talent at a consideration of RMB1,000,000 (about HK$935,000). This consideration is equivalent to the amount of 5% of the registered capital of Jiali. Accordingly, Jiali is owned as to 70% by Hebei Pharmaceutical and as to 30% by Good Talent. Since the consideration of the acquisition of the 99% interest in Jiali by the Company is to be satisfied by issuing consideration shares of the Company, Good Talent does not wish to receive consideration shares of the Company for its disposals. Accordingly, pursuant to an acquisition agreement dated 30th April, 1999 between Good Talent and Charmaine Pharmaceutical, Charmaine Pharmaceutical will acquire Good Talent's interest in Jiali at a consideration of HK$9,779,300. This consideration is equivalent to the amount of 30% of the Jiali Net Asset Value of RMB34,879,600 (about HK$32,597,800). Jiali will be owned as to 70% by Hebei Pharmaceutical and 30% by Charmaine Pharmaceutical. The joint venture contract of Jiali is for a term of 15 years commencing from 13th March, 1996. Upon the Completion, the joint venture contract shall be amended to extend the term of the joint venture to 30 years commencing from 13th March, 1996. Jiali is mainly engaged in the manufacture and sale of ampicillin sodium. Jiali is also one of the largest semi-synthetic antibiotics producers in the PRC. For the year ended 31st December, 1998, Jiali produced 131,000 kg of ampicillin sodium. The unaudited net asset value of Jiali (after taking into account the surplus of about RMB5,509,000 (about HK$5,149,000) arising from the revaluation of the assets of Jiali as confirmed by the Shijiazhuang Asset Bureau) as at 31st December, 1998 was RMB34,879,600 (about HK$32,597,800). As indicated above, Jiali purchases a majority of ampicillin from Fenghua as its raw materials. The amount of ampicillin purchased from Fenghua by Jiali represents about 87% and 86% of Jiali's total purchases for each of the two years ended 31st December, 1998 respectively. The ampicillin sodium produced by Jiali is then sold to its customers, including the SPG Group. Further details in relation to the sales of Jiali are set out in the sections headed "Trading results of the Acquiring Group" and "Ongoing connected transactions" below. Trading results of the Acquiring Group: Set out below is a summary of the unaudited pro forma consolidated results of the Acquiring Group for each of the two years ended 31st December, 1998. This summary is prepared on the assumptions that the operations, assets and liabilities of Fenghua and Jiali are wholly owned by a holding company which is in turn wholly owned by the Company and the only assets and liabilities of such holding company is its interest in Fenghua and Jiali. Accordingly, the intercompany sales and intercompany balances between Fenghua, Jiali and the Group have been eliminated upon consolidation for illustration purpose. For the year ended 31st December, 1997 1998 RMB'000 RMB'000 Turnover 73,643 114,365 Profit before taxation 266 17,849 Taxation (Note) 0 0 Profit after taxation 266 17,849 Note: Pursuant to the PRC income tax laws, each of Fenghua and Jiali is fully exempted from the PRC income tax for the two years starting from its first profit making year of operation and a 50% relief from PRC income tax for the following three years. The tax holiday for Fenghua began in the year 1998 and will lapse in the year 2002 while the tax holiday for Jiali began in the year 1997 and will lapse in the year 2001. After the expiry of the tax holiday, each of Fenghua and Jiali will be subject to an annual income tax of 24%. The Directors consider that the increase in the pro forma consolidated profit of the Acquiring Group for the year ended 31st December, 1998 over that of 1997 was mainly attributable to the increase in the sales volume of the ampicillin and ampicillin sodium and the increasing economics of scale of the operations of the Acquiring Group. The increase in turnover and sales volume of ampicillin sodium is mainly accomplished by the continuously increase in the production volume of Jiali since its establishment in 1996. Management of Jiali has now harnessed the technical know-how in producing ampicillin sodium since the establishment of Jiali and was able to increase its annual production from about 96,000 kg in 1997 to about 131,000 kg in 1998. Such increase in sales of ampicillin sodium of Jiali resulted in an increase in demand of ampicillin from Fenghua. During the period from the respective establishment of Fenghua and Jiali to 31st March, 1999, each of Fenghua and Jiali entered into an arrangement with the SPG Group that the SPG Group agreed to act as an agent for the sale of the products of Fenghua and Jiali respectively. The SPG Group did not charge any commission or fee in respect of its services as an agent for Fenghua and Jiali respectively for the sale of their products. As from 1st April, 1999, all the respective sales of Fenghua and Jiali have been carried out by themselves on their own accounts. The unaudited pro forma net asset of the Acquiring Group as at 31st December, 1998 was about RMB62,562,000 (about HK$58,469,000). Consideration: The Total Consideration of the Agreements payable by the Company for the 99% interest in each of Fenghua and Jiali is HK$69,562,400, subject to adjustment in accordance with the terms of the Agreements which is summarised below. The Total Consideration will be settled by issuing and alloting the Consideration Shares by the Company to SPG and Charmaine Pharmaceutical respectively pursuant to the Agreements. The Consideration Shares will be alloted and issued at a price of HK$1.26 per share (credited as fully paid) and shall rank pari passu in all respects with the existing Shares in issue including the right to receive dividends and distributions declared, paid or made after the date of its allotment. The issue price of the Consideration Shares is equivalent to the closing price of the Shares quoted on the Stock Exchange on 29th April, 1999 being the last trading day prior to the date of the Agreements. The issue price also represents about 20% premium to the average closing price of the Shares for the last 10 trading days up to 29th April, 1999 and 36% premium to the average closing price of the Shares for the last 30 trading days up to 29th April, 1999. The Consideration Shares represent about 5.3% of the issued share capital of the Company and about 5.0% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares. Pursuant to the Agreements, in the event that the 1999 Audited Adjusted Profit is less than RMB18,000,000 (about HK$16,854,000), an amount which is equivalent to 99% of 4.2 times the difference between the 1999 Audited Adjusted Profit and RMB18,000,000 shall be repaid by SPG to the Company in cash in Hong Kong dollars (at an exchange rate quoted by the Bank of China, Hong Kong Branch on the date of actual payment) within one month after the date of announcement of the audited results of the Group for the year ending 31st December, 1999. Based on the above formula, the Total Consideration payable by the Company for the 99% interest in each of Fenghua and Jiali represents a price earning multiple of about 4.2 times of the 1999 Audited Adjusted Profit or less. The Directors consider that taking into consideration of the proven track record of the Acquiring Group as well as the merits and growth potential of the Acquiring Group, the Total Consideration in acquiring the 99% interest in Fenghua and Jiali is fair and reasonable so far as the Shareholders are concerned. The management of Fenghua and Jiali is not aware of any extraordinary item which have arisen or are likely to arise in the year ending 31st December, 1999. The non-executive Directors will confirm on whether the 1999 Audited Adjusted Profit meets the requirement of RMB18,000,000 (about HK$16,854,000) and, if the above profit requirement is not met, opine on whether the SPG Group has fulfilled its obligations under the guarantee and such opinion will be disclosed in the annual report of the Company for the year ending 31st December, 1999. In addition, in the event that the above profit requirement is not met, a further announcement will be made by the Company. Completion date: On the day when all the conditions referred to below have been fulfilled which is expected to be on or before 31st August, 1999 or such other date as the parties to the Agreements may otherwise agree in writing. 2. ONGOING CONNECTED TRANSACTIONS Following the Completion, Hebei Pharmaceutical and HPF will enter into or continue to enter into the following transactions with Jiali and Fenghua respectively, which will constitute connected transactions for the Group under the Listing Rules: i. The Lease Agreement Jiali and HPF has entered into the Lease Agreement on 30th April, 1999, pursuant to which, Jiali continues to lease from Hebei Pharmaceutical certain units of the building situated at 34 Feng Shou Road, Chang An District, Shijiazhuang, the PRC, with a total gross floor area of about 750 sq.m. as its office and production premises. The term of the Lease Agreement is 15 years commencing from 13th March, 1996. The annual rental payable by Jiali to HPF is RMB100,000 (about HK$93,500). This rental payable translates to an annual rental charge of about RMB133 (about HK$124) per sq.m. The Directors consider that the terms of the Lease Agreement are on normal commercial terms and the rental charge is comparable with the market rental. Chesterton Petty Ltd., the independent international valuer, has reviewed the Lease Agreement and has confirmed that the rentals payable under the Lease Agreement are comparable with the market rental. ii. Jiali Trademark Agreement Jiali has entered into a trademark agreement with HPF on 30th April, 1999 pursuant to which HPF granted the right to Jiali to use the "Yuanzheng" trademark free of charge for the sale of the Jiali's products. The term of the Jiali Trademark Agreement is 6 years from the date of the agreement, subject to extension as agreed between Jiali and HPF. The registration of the trademark will be expired in March 2006, which is then subject to further renewal. In the event that HPF renews the registration of such trademark, HPF will continue to grant the right to Jiali to use the trademark at no consideration. iii. Fenghua Trademark Agreement Fenghua has entered into a trademark agreement with HPF on 30th April, 1999 pursuant to which HPF granted the right to Fenghua to use the "Yuanzheng" trademark free of charge for the sale of Fenghua's products. The term of the Fenghua Trademark Agreement is 6 years from the date of the agreement, subject to extension as agreed between Fenghua and HPF. The registration of the trademark will be expired in March 2006, which is then subject to further renewal. In the event that HPF renews the registration of such trademark, HPF will continue to grant the right to Jiali to use the trademark at no consideration. iv. Sales and purchases Each of Jiali and Fenghua and the SPG Group is selling certain antibiotics pharmaceutical raw materials and medicines and materials (including ampicillin sodium, ampicillin, 6-APA, amoxicillin, penicillin and packaging materials) to each other. It is expected that such transactions will continue following the Completion. These transactions have been, and will continue to be, carried out on normal commercial terms by reference to market prices and on an arm's length basis. For each of the two years ended 31st December, 1998, the amount of sales to the SPG Group (other than those sold through the SPG Group as an agent for Jiali) by Jiali was about RMB41,300,000 (about HK$38,598,000) and RMB55,270,000 (about HK$51,654,000) respectively, which accounted for about 88% and 75% of the total sales of Jiali for the relevant periods respectively. In addition, these sales of Jiali represent about 7% and 9% of the total sales of the Group for each of the two years ended 31st December, 1998 respectively. These sales of Jiali also represent about 5.6% and 6.7% of the net asset value of the Group for each of the two years ended 31st December, 1998 respectively. For each of the two years ended 31st December, 1998, the amount of sales to the SPG Group (other than those sold through the SPG Group as an agent for Fenghua) by Fenghua was about RMB2,437,000 (about HK$2,278,000) and RMB1,380,000 (about HK$1,290,000) respectively, which accounted for about 3% and 2% of the total sales of Fenghua for the relevant periods respectively. These sales of Fenghua represent about 1% and 1% of the total sales of the Group for each of the two years ended 31st December, 1998 respectively. These sales of Fenghua also represent about 0.3% and 0.2% of the net asset value of the Group for each of the two years ended 31st December, 1998 respectively. Moreover, the amount of purchases by Fenghua from the SPG Group for each of the two years ended 31st December, 1998 amounted to about RMB35,692,000 (about HK$33,357,000) and RMB38,342,000 (about 35,834,000) respectively, which accounted for about 51% and 51% of the Fenghua's cost of sales for the relevant periods respectively. In addition, these purchases by Fenghua represent about 6% and 6% of the Group's sales for each of the two years ended 31st December, 1998 respectively. These purchases by Fenghua also represent about 4.9% and 4.6% of the net asset value of the Group for each of the two years ended 31st December, 1998 respectively. The amount of purchases by Jiali from the SPG Group for each of the two years ended 31st December, 1998 amounted to about RMB7,104,000 (about HK$6,639,000) and RMB7,284,000 (about HK$6,807,000) respectively, which accounted for about 17% and 11% of Jiali's cost of sales for the relevant periods respectively. These purchases by Jiali represent about 1% and 1% of the Group's sales for each of the two years ended 31st December, 1998 respectively. These purchases by Jiali also represent about 1.0% and 0.9% of the net asset value of the Group for each of the two years ended 31st December, 1998 respectively. Under the Listing Rules, the transactions as stated in paragraph (iv) above would normally require full disclosure and/or prior independent shareholders' approval. However, as such transactions are in the normal course of business and occur on a regular basis, the Directors consider that it would not be practical to make disclosure or, if necessary, obtain shareholder's approval for each transaction as it arises. Accordingly, the Directors will request the Stock Exchange to grant a waiver from the relevant requirements of the Listing Rules, subject to Independent Shareholders' approval as referred to in paragraph 5 below. 3. REASONS FOR THE PROPOSED ACQUISITIONS The Group is principally engaged in the manufacture and sale of pharmaceutical products including vitamin C, penicillin G, theobromine, vitamin B12 and 7-ACA. The Directors consider that there will be a growth potential in the penicillin markets in the PRC and are confident of the prospects of the penicillin markets in the PRC. Since ampicillin, ampicillin sodium, amoxicillin and 6-APA are products derived from penicillin G, the Directors consider that the Proposed Acquisitions provide an invaluable opportunity for the Group to further diversify its product range and continue to enhance and expand its business in the production and sale of penicillin products. The Directors believe that the Proposed Acquisitions are in the interest of the Group and the Shareholders as a whole and that it will further enhance the profitability of the Group. In addition, the Directors consider that the settlement of the Total Consideration by way of issue of the Consideration Shares will not have a negative impact on the cashflow of the Group and will further strengthen the Company's capital base. Accordingly, the Directors consider that the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions are in the interest of the Company and are fair and reasonable so far as the Shareholders are concerned. 4. THE CONDITIONS Completion of the Proposed Acquisitions are conditional upon, inter alia, the following occurring on or before 31st August, 1999 or such other date as the parties to the Agreements may otherwise agree: i. the passing by Independent Shareholders of an ordinary resolution to approve the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions at EGM; ii. the Listing Committee of the Stock Exchange granted or agreeing to grant (either unconditionally or subject only to conditions to which neither the Company nor SPG will reasonably object) the listing of and permission to deal in the Consideration Shares; iii. the Stock Exchange not having notified the Company of the listing of its securities will or may be suspended at, upon, or as a result of, completion of the Proposed Acquisitions; iv. the completion of the Fenghua Agreement is conditional upon the Jiali Agreement being completed and vice versa v. the approvals and authorisations for the Proposed Acquisitions required by the relevant PRC laws and regulations being obtained; and vi. the receipt by the Company of a legal opinion issued by a firm of qualified lawyers in the PRC in such form and substance satisfactory to the Company in relation to, inter alia, Fenghua, Jiali and the Proposed Acquisitions. According to the PRC legal advisers of the Company, the acquisition of the 69% interest in each of Fenghua and Jiali by the Company is required to obtain approvals from the China Securities Regulatory Commission. The Company has already obtained such approvals from the China Securities Regulatory Commission. 5. APPROVAL BY THE INDEPENDENT SHAREHOLDERS As at 28th April, 1999 being the latest practicable date before the publication of this announcement, SPG and its associates (as defined in the Listing Rules) beneficially owned an aggregate of about 57.01% of the issued share capital of the Company. Accordingly, for the purpose of the Listing Rules, the Proposed Acquisitions constitute connected transactions to the Company and the Transactions will also constitute connected transactions to the Company upon the Completion and may only proceed with the approval of the Independent Shareholders. In view of SPG's interests in the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions, Independent Board Committee has been appointed to advise the Independent Shareholders on whether or not the terms of the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions are in the interests of the Company and are fair and reasonable so far as the Independent Shareholders are concerned. DBS Asia Capital Ltd. has been appointed as the independent financial adviser to advise the Independent Board Committee in respect of the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions. 6. EGM The EGM will be convened as soon as practicable at which an ordinary resolution will be proposed to approve the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions. In view of SPG's interests in the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions, SPG and its associates (as defined in the Listing Rules) will abstain from voting at the EGM. 7. GENERAL A circular containing, inter alia, details of the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions, the letter from an independent financial adviser containing its advice to the Independent Board Committee in relation to the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions, the recommendation of the Independent Board Committee in relation to the Proposed Acquisitions, the issue of the Consideration Shares and the Transactions and a notice convening the EGM referred to above will be dispatched to Shareholders as soon as practicable. 8. LISTING AND DEALING An application will be made to the Stock Exchange for listing of and permission to deal in the Consideration Shares. 9. TERMS USED IN THIS ANNOUNCEMENT "Agreements" the Fenghua Agreement and the Jiali Agreement "Acquiring Group" the group assumed to comprise a holding company (owned by the Company) who owns the entire interest of Fenghua and Jiali and the only assets and liabilities of such holding company is its interest in Fenghua and Jiali "Charmaine Pharmaceutical" China Charmaine Pharmaceutical Company Limited, a wholly owned subsidiary of HPF "Company" China Pharmaceutical Enterprise and Investment Corporation Limited, which shares are listed on the Stock Exchange "Completion" completion of the Agreements, which is expected to take place on or before 31st August, 1999 or such other date as the parties involved may otherwise agree on "Consideration Shares" the total of 55,208,254 new Shares proposed to be alloted and issued to SPG and Charmaine Pharmaceutical on Completion in satisfaction of the Total Considerations "Directors" the directors of the Company "EGM" an extraordinary general meeting of the Company to be convened "Fenghua" Hebei Fenghua Pharmaceutical Co., Ltd., a subsidiary of HPF "Fenghua Agreement" the conditional agreement dated 30th April, 1999 entered into between the Company, Charmaine Pharmaceutical, HPF and SPG regarding the acquisition of the 99% equity interest of Fenghua by the Company "Fenghua Net Asset Value" the unaudited net asset value of Fenghua (after taking into account the surplus arising from the revaluation of the assets of Fenghua as confirmed by the Shijiazhuang Asset Bureau) as at 31st December, 1998 was about RMB40,303,900 (about HK$37,667,200) "Fenghua Trademark Agreement" the trademark agreement entered into between Fenghua and HPF in relation to the right to use the trademark "Yuanzheng" "Good Talent" Good Talent Investment Limited, an independent third party not associated with the Company or the directors, chief executives and substantial shareholders of the Company or their respective associates (as defined in the Listing Rules) "Group" the Company together with its subsidiaries "Hebei Pharmaceutical" Hebei Pharmaceutical Group Company Limited, a wholly owned subsidiary of SPG "HK GAAP" generally accepted accounting principles in Hong Kong "HPF" Hebei Pharmaceutical Factory, a wholly owned subsidiary of Hebei Pharmaceutical "Independent Board Committee" an independent committee of the board of Directors of the Company "Independent Shareholders" Shareholders other than SPG and its associates as defined in the Listing Rules "Jiali" Shijiazhuang Jiali Pharmaceutical Co., Ltd., a subsidiary of Hebei Pharmaceutical "Jiali Agreement" the conditional agreement dated 30th April, 1999 entered into between the Company, Charmaine Pharmaceutical, Hebei Pharmaceutical and SPG regarding the acquisition of the 99% equity interest of Jiali by the Company "Jiali Net Asset Value" the unaudited net asset value of Jiali (after taking into account the surplus arising from the revaluation of the assets of Jiali as confirmed by the Shijiazhuang Asset Bureau) as at 31st December, 1998 was RMB34,879,600 (about HK$32,597,800) "Jiali Trademark Agreement" the trademark agreement entered into between Jiali and HPF in relation to the right to use the trademark "Yuanzheng" "Lease Agreement" the lease agreement entered into between HPF and Jiali in relation to the leasing of certain units of the building situated at 34 Feng Shou Road, Chang An District, Shijiazhuang, the PRC "Listing Rules" The Rules Governing the Listing of Securities on the Stock Exchange "Proposed Acquisitions" the acquisitions of the 99% equity interest in the registered capital of Fenghua and Jiali by the Company respectively "PRC" People's Republic of China "Shareholder(s)" holder(s) of the Shares in issue "Shares" share(s) of HK$0.10 each in the share capital of the Company "Shijiazhuang Asset Bureau" the State Asset Administration Bureau of Shijiazhuang Municipality "SPG" Shijiazhuang Pharmaceutical Group Company Limited, which is the controlling shareholder of the Company "SPG Group" SPG together with its subsidiaries excluding the Group "Stock Exchange" The Stock Exchange of Hong Kong Limited "Total Consideration" the aggregate sum of the considerations payable by the Company under the Fenghua Agreement and the Jiali Agreement of HK$69,562,400 "Transactions" the ongoing transactions between each of Jiali and Fenghua and the SPG Group (as described in the section headed "Ongoing connected transactions" above) "YFCC" Y.F. Chemical Corporation, an independent third party not associated with the Company or the directors, chief executives and substantial shareholders of the Company or their respective associates (as defined in the Listing Rules) "1999 Audited Adjusted Profit" the consolidated audited profit after taxation and minority interests excluding extraordinary and exceptional items of the Acquiring Group attributable to the Company in accordance with the HK GAAP for the year ending 31st December, 1999 "6-ACA" 6 aminocephalosporanic acid "7-ACA" 7 aminocephalosporanic acid "kg" kilogram "RMB" Renminbi, the official currency of the PRC "sq.m." square metres By Order of the Board Cai Dong Chen Chairman 30th April, 1999 Hong Kong Unless otherwise specified, the translation of Renminbi into Hong Kong dollars is based on the exchange rate of HK$1.00 and RMB1.07 and the translation of US dollars into Hong Kong dollars is based on the exchange rate of US$1.00 and HK$7.80.