Sihuan Pharmaceutical Holdings Group Ltd. - Proxy Solicitation & Information Statement 2020

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about this circular or as to the action to be taken, you should consult licensed securities dealer or other registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Sihuan Pharmaceutical Holdings Group Ltd., you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or other registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to 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 circular.

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Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(incorporated in Bermuda with limited liability)

(Stock Code: 0460)

DISCLOSEABLE AND CONNECTED TRANSACTION PROPOSED SPECIAL CASH DIVIDEND AND

NOTICE OF SPECIAL GENERAL MEETING

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

SOMERLEY CAPITAL LIMITED

A letter from the Board is set out on pages 6 to 25 of this circular. A letter from the Independent Board Committee containing its recommendations to the Independent Shareholders is set out on pages 26 to 27 of this circular. A letter from the Independent Financial Adviser containing its advice and recommendation to the Independent Board Committee and the Independent Shareholders is set out on pages 28 to 63 of this circular.

A notice convening the SGM to be held at Conference Room Mission 4+5, 4th Floor, Hilton Shenzhen Futian, Tower B, Great China International Finance Centre, 1003 Shennan Road, Futian, Shenzhen, the People’s Republic of China on Monday, 15 June 2020 at 10:30 a.m. is set out on pages 92 to 94 of this circular. A form of proxy for use at the SGM is also enclosed. Such form of proxy is also published on the websites of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and the Company (www.sihuanpharm.com). Whether or not you are able to attend the SGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Company’s Hong Kong branch share registrar and transfer office, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time fixed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM should you so wish.

29 May 2020

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . .	26
LETTER FROM SOMERLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
APPENDIX I — VALUATION REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	64
APPENDIX II — LETTER FROM ERNST & YOUNG . . . . . . . . . . . . . . . . . . . . . . . . . . .	80
APPENDIX III — LETTER FROM THE BOARD IN RELATION
TO THE PROFIT FORECAST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	82
APPENDIX IV — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	84
NOTICE OF SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	92

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions shall have the following meanings:

‘‘associate(s)’’ has the meaning ascribed to it under the Listing Rules ‘‘Board’’ the board of Directors
‘‘BVI’’ the British Virgin Islands
‘‘Bye-laws’’ the bye-laws of the Company, as amended, supplemented or modified from time to time
‘‘Chonghui Investment’’ Chonghui Investment Limited (重輝投資有限公司), a company incorporated in the BVI with limited liability and an indirect wholly-owned subsidiary of the Company as at the Latest Practicable Date
‘‘Company’’ Sihuan Pharmaceutical Holdings Group Ltd. (四環醫藥控股集團有限公司), a company incorporated in Bermuda with limited liability, the issued shares of which are listed on the Main Board of the Stock Exchange
‘‘Completion’’ completion of the Disposal in accordance with the Sale and Purchase Agreements and the assignment of the Shareholder’s Loan
‘‘connected person(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Consideration’’ the aggregate consideration for the Disposal, being RMB425.4 million (equivalent to approximately HK$466.5 million)
‘‘controlling shareholder’’ has the meaning ascribed to it under the Listing Rules
‘‘Deed of Non-Competition’’
the Deed of Non-competition entered into between the Company, and, among others, Dr. Che and Dr. Guo on 9 October 2010
‘‘Director(s)’’ the director(s) of the Company
‘‘Disposal’’
the disposal of the entire issued share capital of each of the Target Companies and the assignment of the Shareholder’s Loan in accordance with the terms and conditions of the Sale and Purchase Agreements
‘‘Dr. Che’’
Dr. Che Fengsheng, executive Director and chairman of the Company

– 1 –

DEFINITIONS

‘‘Dr. Guo’’
‘‘Dr. Zhang’’
‘‘EY’’
‘‘Group’’
‘‘HK$’’
‘‘Hong Kong’’
‘‘Independent Board Committee’’
‘‘Independent Financial Adviser’’ or ‘‘Somerley’’
‘‘Independent Shareholder(s)’’
‘‘Latest Practicable Date’’
‘‘Listing Rules’’
‘‘Main Board’’
‘‘Mr. Meng’’
‘‘Non-compete Confirmation’’
Dr. Guo Weicheng, executive Director, deputy chairman and chief executive officer of the Company
Dr. Zhang Jionglong, executive Director of the Company
Ernst & Young, the auditor of the Company
the Company and its subsidiaries
Hong Kong dollar, the lawful currency of Hong Kong
the Hong Kong Special Administrative Region of the PRC
a committee of the Board comprising all of the three independent non-executive Directors, namely Mr. Patrick Sun, Mr. Tsang Wah Kwong and Dr. Zhu Xun established for the purpose of giving recommendation to the Independent Shareholders regarding the Sale and Purchase Agreements and the Disposal contemplated thereunder
Somerley Capital Limited, being the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders on the Sale and Purchase Agreements and the Disposal contemplated thereunder
the Shareholders other than Dr. Che, Dr. Guo, Dr. Zhang and Mr. Meng and their respective associates
18 May 2020, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular
the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
the stock exchange (excluding the option market) operated by the Stock Exchange which is independent from and operates in parallel with the Growth Enterprise Market of the Stock Exchange
Mr. Meng Xianhui
the letter from the Company to each of Dr. Che and Dr. Guo in respect of certain acknowledgements and confirmations relating to the Deed of Non-competition

– 2 –

DEFINITIONS

‘‘PRC’’

the People’s Republic of China, which for the purpose of interpretation of this circular only, except where the context requires otherwise, does not include Hong Kong, the Macau Special Administrative Region and Taiwan
‘‘Purchaser A’’ CFS Development Holding Limited, a limited company incorporated in the BVI
‘‘Purchaser B’’ Weicheng Investment Holding Limited, a limited company incorporated in the BVI
‘‘Purchasers’’
Purchaser A and Purchaser B
‘‘Record Date’’
24 June 2020, being the record date for determining entitlements of the Shareholders to the Special Cash Dividend
‘‘RMB’’ Renminbi, the lawful currency of the PRC
‘‘Sale and Purchase Agreement A’’
the sale and purchase agreement dated 3 May 2020 between the Seller and Purchaser A in relation to the sale and purchase of the entire issued share capital of Chonghui Investment and the assignment of the Shareholder’s Loan
‘‘Sale and Purchase Agreement B’’
the sale and purchase agreement dated 3 May 2020 between the Seller and Purchaser B in relation to the sale and purchase of the entire issued share capital of Tengwei Investment
‘‘Sale and Purchase Sale and Purchase Agreement A and Sale and Purchase Agreements’’ Agreement B
‘‘Seller’’ Sun Moral International (HK) Limited (耀忠國際(香港)有限公司), a limited liability company incorporated in Hong Kong and a wholly-owned subsidiary of the Company
‘‘SFO’’
the Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong, as amended from time to time
‘‘SGM’’
the special general meeting of the Company to be held at Conference Room Mission 4+5, 4th Floor, Hilton Shenzhen Futian, Tower B, Great China International Finance Centre, 1003 Shennan Road, Futian, Shenzhen, the People’s Republic of China on Monday, 15 June 2020 at 10:30 a.m. to consider and, if thought fit, approve, among other things, the Sale and Purchase Agreements, the Disposal and the Special Cash Dividend

– 3 –

DEFINITIONS

‘‘Share(s)’’
‘‘Shareholder(s)’’
‘‘Shareholder’s Loan’’
‘‘Shareholder Loan Assignment Agreement’’
‘‘Special Cash Dividend’’
‘‘Special Cash Dividend Conditions’’
‘‘Stock Exchange’’
‘‘Target Company(ies)’’
‘‘Target Group’’
‘‘Target Group A Companies’’
‘‘Target Group B Companies’’
‘‘Tengwei Investment’’
‘‘Transaction Agreements’’
ordinary share(s) in the issued and paid-up capital of the Company

the holder(s) of the Share(s)

the shareholder’s loan from the Seller to Chonghui Investment in the amount of RMB145.8 million
the shareholder loan assignment agreement to be entered into between the Seller and Purchaser A in respect of the Shareholder’s Loan
the cash dividend of RMB10.6 cents (equivalent to HK11.6 cents) per Share payable to all Shareholders whose names appear on the register of members of the Company on the Record Date, subject to and conditional on the Special Cash Dividend Conditions being satisfied
the conditions precedent to the Special Cash Dividend as set out in the section headed ‘‘Special Cash Dividend Conditions’’ in this circular

The Stock Exchange of Hong Kong Limited

Chonghui Investment and Tengwei Investment
the Target Companies, the Target Group A Companies and the Target Group B Companies
Chonghui Management, CS Sciences, Hainan Maifu, Beijing Stemexcel, Xi’an Tengyun and Jiangsu Antai (as defined in the Letter from the Board)
Hainan Tengwei, Shanghai LIDE, Huaxing Kangping Partnership, Huaxing Kangping, Zhejiang Zhida and Shenzhen Henghe (as defined in the Letter from the Board)
Tengwei Investment Limited (騰為投資有限公司), a company incorporated in the BVI with limited liability and an indirect wholly-owned subsidiary of the Company as at the Latest Practicable Date
the Sale and Purchase Agreements, the Non-compete Confirmation, the Transitional Services Agreements (in respect of the Sale and Purchase Agreement A) and the Shareholder Loan Assignment Agreement (in respect of the Sale and Purchase Agreement A)

– 4 –

DEFINITIONS

‘‘Transitional Services Agreements’’

the transitional services agreements to be entered into between the Target Group A Companies and the Group in respect of certain transactions and services which will continue upon Completion

‘‘Valuation Report’’

a valuation report issued by the Valuer, the text of which is set out in Appendix I of this circular

‘‘Valuer’’ or ‘‘JLL’’
Jones Lang LaSalle Corporate Appraisal and Advisory Limited, an independent professional valuer
‘‘%’’ per cent
For identification purpose only

For the purpose of illustration only and unless otherwise stated, conversion of RMB into HK$ in this circular is based on the exchange rate of RMB1.00 to HK$1.09659. Such conversion should not be construed as a representation that any amount has been, could have been, or may be, exchanged at this or any other rate.

– 5 –

LETTER FROM THE BOARD

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Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(incorporated in Bermuda with limited liability)

(Stock Code: 0460)

Executive Directors: Che Fengsheng Guo Weicheng Zhang Jionglong Choi Yiau Chong Chen Yanling

Registered office: Clarendon House 2 Church Street P.O. Box HM1022 Hamilton HM DX Bermuda

Non-executive Director: Kim Jin Ha

Independent Non-executive Directors: Patrick Sun Tsang Wah Kwong Zhu Xun

Principal place of business in Hong Kong: Room 4309 Office Tower Convention Plaza 1 Harbour Road, Wan Chai Hong Kong

29 May 2020

To the Shareholders

Dear Sir or Madam

DISCLOSEABLE AND CONNECTED TRANSACTION PROPOSED SPECIAL CASH DIVIDEND AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 3 May 2020 in respect of, among other things, the Disposal and the Special Cash Dividend.

– 6 –

LETTER FROM THE BOARD

the Seller has conditionally agreed to assign and Purchaser A has conditionally agreed to accept the assignment of the Shareholder’s Loan, at an aggregate consideration of RMB289.2 million (equivalent to approximately HK$317.1 million) in accordance with the terms and conditions of the Sale and Purchase Agreement A.

On 3 May 2020, the Seller and Purchaser B entered into the Sale and Purchase Agreement B, pursuant to which the Seller has conditionally agreed to sell and Purchaser B has conditionally agreed to purchase the entire issued share capital of Tengwei Investment at an aggregate consideration of RMB136.2 million (equivalent to approximately HK$149.4 million) in accordance with the terms and conditions of the Sale and Purchase Agreement B.

The purpose of this circular is to provide you with, among other things:

(i) the particulars of the Disposal and the Special Cash Dividend;
(ii) the letter from the Independent Board Committee with its view on the Sale and Purchase Agreements and the Disposal contemplated thereunder; and
(iii) the letter from the Independent Financial Adviser with its advice on the Sale and Purchase Agreements and the Disposal contemplated thereunder to the Independent Board Committee and the Independent Shareholders; and
(iv) a notice convening the SGM.

THE SALE AND PURCHASE AGREEMENTS

Set out below are the principal terms of each of the Sale and Purchase Agreements:

Date: 3 May 2020

Sale and Purchase Agreement A

(1) the Seller, a wholly-owned subsidiary of the Company; and
(2) Purchaser A, CFS Development Holding Limited, a company established under a trust the settlor of which is Dr. Che, a connected person of the Company.

Sale and Purchase Agreement B

(1) the Seller, a wholly-owned subsidiary of the Company; and
(2) Purchaser B, Weicheng Investment Holding Limited, a company established under a trust the settlor of which is Dr. Guo, a connected person of the Company.

– 7 –

LETTER FROM THE BOARD

Reorganisation and assets to be disposed of

Pursuant to the Sale and Purchase Agreement A, the Seller shall complete the reorganization involving Chonghui Investment and the Target Group A Companies such that prior to Completion, Chonghui Investment shall directly or indirectly hold the equity interest in each of the Target Group A Companies set opposite against the name of each of the Target Group A Companies in the table below.

		Equity
		interest held
		by Chonghui
	Name of company	Investment
1	重輝投資管理有限公司(Chonghui Investment Management	100.00%
	Limited*) (‘‘Chonghui Management’’)
2	CS Sciences Limited (‘‘CS Sciences’’)	88.46%
3	海南麥孚營養科技有限公司(Hainan Maifu Nutrition Technology	70.19%
	Co., Ltd.*) (‘‘Hainan Maifu’’)
4	北京斯丹姆賽爾技術有限責任公司(Beijing Stemexcel Technology	21.13%
	Co., Ltd.*) (‘‘Beijing Stemexcel’’)
5	西安騰雲網絡科技有限公司(Xi’an Tengyun Network Technology	49.00%
	Co., Ltd.*) (‘‘Xi’an Tengyun’’)
6	江蘇安泰生物技術有限公司(Jiangsu Antai Biotechnology	10.00%
	Co., Ltd.*) (‘‘Jiangsu Antai’’)

– 8 –

LETTER FROM THE BOARD

Pursuant to the Sale and Purchase Agreement B, the Seller shall complete the reorganization involving Tengwei Investment and the Target Group B Companies such that prior to Completion, Tengwei Investment shall directly or indirectly hold the equity interest in each of the Target Group B Companies set opposite against the name of each of the Target Group B Companies in the table below.

		Equity
		interest held
		by Tengwei
	Name of company	Investment
1	海南騰為健康科技有限公司(Hainan Tengwei Health Technology	100.00%
	Co., Ltd.*) (‘‘Hainan Tengwei’’)
2	上海立迪生物技術股份有限公司(Shanghai LIDE Biotech Co.,	17.02%
	Ltd.*) (‘‘Shanghai LIDE’’)
3	福建平潭華興康平醫藥產業投資合夥企業(有限合夥)	50.00%
	(Fujian Pingtan Huaxing Kangping Pharmaceutical Industry
	Investment Partnership (Limited Partnership)*)
	(‘‘Huaxing Kangping Partnership’’)
4	華興康平醫藥產業(平潭)投資管理有限公司(Huaxing Kangping	33.00%
	Pharmaceutical Industry (Pingtan) Investment Management Co.,
	Ltd.*) (‘‘Huaxing Kangping’’)
5	浙江智達藥業有限公司(Zhejiang Zhida Pharmaceutical Co.,	10.00%
	Ltd.*) (‘‘Zhejiang Zhida’’)
6	深圳恒合互聯網絡科技有限公司(Shenzhen Henghe Internet	20.34%
	Technology Co., Ltd.*) (‘‘Shenzhen Henghe’’)

As at the Latest Practicable Date, each of Chonghui Management, CS Sciences, Hainan Maifu and Hainan Tengwei is a subsidiary of the Company. Immediately upon Completion, each of these companies will cease to be a subsidiary of the Company.

Consideration

The Consideration for the sale and purchase of the entire issued share capital of the Target Companies and the assignment of the Shareholder’s Loan is RMB425.4 million (equivalent to approximately HK$466.5 million) in aggregate, comprising RMB289.2 million (equivalent to approximately HK$317.1 million) in respect of the entire issued share capital of Chonghui Investment and the Shareholder’s Loan; and RMB136.2 million (equivalent to approximately HK$149.4 million) in respect of the entire issued share capital of Tengwei Investment. The respective consideration for each Target Company shall be paid by the respective Purchaser to the Seller in cash (in HK$ equivalent) on the later of (a) the date falling 5 business days after the satisfaction (or, if applicable, waiver) of the conditions precedent specified in the respective Sale and Purchase Agreements as set out in the section

– 9 –

LETTER FROM THE BOARD

below headed ‘‘Conditions Precedent’’ (except condition precedent (h) in respect of Sale and Purchase Agreement A), and (b) the date falling 20 business days after the completion of the declaration and payment of the Special Cash Dividend.

The consideration under the Sale and Purchase Agreement A was determined after arm’s length negotiations between the Seller and Purchaser A taking into consideration (i) the valuation of Target Group A Companies of RMB143.4 million (equivalent to approximately HK$157.3 million) as at 31 December 2019; and (ii) the Shareholder’s Loan in the amount of RMB145.8 million (equivalent to approximately HK$159.8 million).

The consideration under the Sale and Purchase Agreement B was determined after arm’s length negotiations between the Seller and Purchaser B taking into consideration the valuation of Target Group B Companies of RMB136.2 million (equivalent to approximately HK$149.4 million) as at 31 December 2019.

The Valuation Report was prepared by the Valuer on the following bases in accordance with International Valuation Standards:

. the market value of loss-making companies was primarily determined by the cost approach.
. the market value of Beijing Stemexcel, a profit-making company, was assessed by adopting the guideline public company method (i.e. referencing comparable public companies) under the market approach.
. Huaxing Kangping Partnership and Huaxing Kangping represent limited and general partnership in a fund. The market value of the net asset value of the fund was assessed by adopting the cost approach, while the market value of Huaxing Kangping Partnership and Huaxing Kangping was developed through the application of the income approach known as binomial option pricing method.

In this respect, the valuation of Huaxing Kangping and Huaxing Kangping Partnership constitutes a profit forecast for the purpose of Rule 14.61 of the Listing Rules and accordingly, the requirements under Rules 14.60A and 14.62 of the Listing Rules are applicable with respect to the valuation of Huaxing Kangping and Huaxing Kangping Partnership. For the purpose of complying with Rule 14.62 of the Listing Rules, the following key assumptions in determining the market value of the equity interest have been made:

. that there will be no material change in the existing political, legal, technological, fiscal or economic conditions, which might adversely affect the business of Huaxing Kangping and Huaxing Kangping Partnership;
. that the operational and contractual terms stipulated in the relevant contracts and agreements will be honoured;
. that the facilities and systems proposed are sufficient for future expansion in order to realize the growth potential of the business and maintain a competitive edge;

– 10 –

LETTER FROM THE BOARD

. that information provided by the Company is reliable and legitimate;
. that there are no hidden or unexpected conditions associated with the assets valued that might adversely affect the reported value;
. that the fund’s net asset follows a lognormal distribution that it cannot take a negative value and are bounded by zero;
. that the fund will only be exited on its expiration date;
. that the interest rate and the volatility are assumed to be constant;
. that there are no riskless arbitrage opportunities; and
. that there are no transaction costs or taxes.

The Valuer also assumed the accuracy of the financial and operational information provided by the Company and relied to a considerable extent on such information in arriving at their conclusion of value.

Pursuant to Rule 14.62 of the Listing Rules, the Board has reviewed the principal assumptions upon which the valuation of Huaxing Kangping and Huaxing Kangping Partnership is based and is of the view that the profit forecast has been made after due and careful enquiry. Ernst & Young, the Company’s auditor, had also reviewed the arithmetical calculations and the compilation of the discounted future estimated cash flows on which the valuation of Huaxing Kangping and Huaxing Kangping Partnership was based in accordance with the bases and assumptions determined by the Directors. A letter from the Board with respect to Rule 14.60(A) of the Listing Rules has been submitted to the Stock Exchange, the texts of which are included in Appendix III to this circular. A report from Ernst & Young with respect to the profit forecast as required under Rule 14.62(2) of the Listing Rules has been submitted to the Stock Exchange, the texts of which are included in Appendix II to this circular.

In addition, the Group recognised accumulated impairment losses amounted to RMB91.5 million on the investments in Shanghai LIDE, Xi’an Tengyun and Shenzhen Henghe as at 31 December 2019. Such impairment losses were recognised in the Group’s consolidated financial statement. The Valuer considered the impairment losses were not relevant in determining the market value of the aforementioned companies, and that it was not necessary to add back the impairment losses in the valuation. It is because the Valuer adopted the summation method under the cost approach, based on the financial statements of these companies, instead of their respective carrying amount recognised on the Group’s consolidated statement of financial position.

As at the Latest Practicable Date, there has not been any development in the Target Group or any change in circumstances from the Valuation Date (as defined in the Valuation Report) that would materially improve the valuation of the Target Group.

– 11 –

LETTER FROM THE BOARD

Conditions Precedent

Completion of each of the Sale and Purchase Agreement A and the Sale and Purchase Agreement B is conditional upon the fulfilment or waiver (as the case may be) of the following conditions precedent:

(a) The Sale and Purchase Agreements and the transactions contemplated thereunder having been approved by the Independent Shareholders at the SGM;
(b) The declaration and distribution of the Special Cash Dividend having been approved by the Independent Shareholders at the SGM;
(c) The Company having paid the Special Cash Dividend in accordance with the Byelaws and relevant laws and regulations (including the Listing Rules);
(d) The reorganization contemplated under the Sale and Purchase Agreement A and the Sale and Purchase Agreement B having been completed in accordance with the terms thereunder to the reasonable satisfaction of the relevant Purchaser;
(e) The Sale and Purchase Agreements having been duly executed and becoming unconditional;
(f) (in respect of the Sale and Purchase Agreement A) Each of the Transitional Services Agreements having been duly executed in a form to the reasonable satisfaction of Purchaser A and taken effect;
(g) The Non-compete Confirmation having been duly executed and taken effect;
(h) (in respect of the Sale and Purchase Agreement A) The Shareholder Loan Assignment Agreement having been duly executed in a form to the reasonable satisfaction of Purchaser A and taken effect;
(i) Each member of the Target Group having obtained all necessary authorisations (where applicable) from any of their respective shareholders, creditors, relevant regulatory authorities and/or any other third parties and having completed all necessary filings and applications with any regulatory authorities and other third parties, which are required for the execution and performance of the Transaction Agreements and the transactions contemplated thereunder (including the reorganisation) and which have not been revoked prior to Completion;
(j) The representations and warranties of the Seller remaining true and accurate and not misleading as at Completion by reference to the facts and circumstances then existing;
(k) There having been no material adverse change;
(l) There having been no material breach of any obligation under the Transaction Agreements by the Group;

– 12 –

LETTER FROM THE BOARD

(m) Each party having obtained all necessary authorisations (where applicable) and having completed all necessary filings with any regulatory authorities and other relevant third parties, which are required for the execution and performance of the Transaction Agreements and which have not been revoked prior to Completion; and
(n) At any time prior to Completion, no relevant governmental or regulatory authority or body, court or agency having granted any order or made any decision that restricts or prohibits the implementation of the transactions contemplated under the Transaction Agreements.

In respect of the Sale and Purchase Agreement A, no party shall have the right to waive any of the conditions precedent set out in paragraphs (a), (b), (e), (g), (h), (i), (m) and (n) above. Purchaser A may at its discretion waive any of the conditions precedent set out in paragraphs (c), (d), (f), (j), (k) and (l) above. In respect of the Sale and Purchase Agreement B, no party shall have the right to waive any of the conditions precedent set out in paragraphs (a), (b), (e), (g), (i), (m) and (n) above. Purchaser B may at its discretion waive any of the conditions precedent set out in paragraphs (c), (d), (j), (k) and (l) above. In the event that any of the above conditions precedent has not been satisfied, or, if applicable, waived prior to the date falling nine months after the date of the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) (or such other date as may be agreed by the parties in writing), the relevant Purchaser may elect to terminate the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) by notice in writing to the Seller whereby the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) shall cease to be of any effect, save for specific provisions as set forth therein which are to survive such termination and save in respect of claims arising out of any antecedent breach thereof.

Completion

Completion shall take place on the date falling 5 business days after the day on which the last in time of the conditions precedent to Completion has been satisfied or, if applicable, waived, or such other date as the parties may agree in writing.

Use of Proceeds

The proceeds from the Disposal, net of professional fees and relevant expenses, are expected to be approximately RMB422.1 million (equivalent to approximately HK$462.9 million). The net proceeds from the Disposal will be used for general working capital of the Group.

Transitional Services Agreements

– 13 –

LETTER FROM THE BOARD

are less than 0.1%, the transactions under such Transitional Services Agreements are fully exempt from the shareholders’ approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules pursuant to Rule 14A.76(1) of the Listing Rules.

Non-compete Confirmation

Pursuant to the Deed of Non-Competition entered between the Company, and, among others, Dr. Che and Dr. Guo on 9 October 2010, Dr. Che and Dr. Guo undertook, among other things, not to engage in any businesses which is the same as, similar to or in competition with the business of the Group. In light of the Disposal, the Company has irrevocably agreed to waive any rights the Company has under the Deed of Non-Competition in relation to any breach as a result of the Disposal and the operation of the companies comprising the Target Group.

INFORMATION ON THE TARGET GROUP

Chonghui Investment is an investment holding company established for the sole purpose of holding equity interests in Chonghui Management and CS Sciences. Tengwei Investment is an investment holding company established for the sole purpose of holding equity interests in Hainan Tengwei. Chonghui Management and Hainan Tengwei are investment holding companies established for the sole purpose of holding equity interests in members of the Target Group (other than CS Sciences). Set out below are further information on each member of the Target Group:

CS Sciences

CS Sciences is an investment holding company incorporated in the Cayman Islands, which holds the entire equity interest in CS-Bay Therapeutics Inc., CS Pharmatech Limited and 北京軒義醫藥科技有限公司 (Xuanyi (Beijing) Medical Technology Co., Ltd.*) (CS Sciences and its subsidiaries collectively, ‘‘CS Group’’). CS Group is a biotech pharmaceutical group primarily engaged in the research and development of drugs at the clinical stage.

CS Sciences has submitted a number of patent applications to cover compounds of interests as project leads, only one US patent covering EGFR inhibitors was granted. These patent applications and one granted US patent do not hold any value unless such patent-covered compound can be evolved into a marketed drug through the successful completion of multiple phases of clinical trials and a successful new drug application (‘‘NDA’’). The EGFR inhibitor was planned to commence phase 1 clinical trial during the second half of 2020. It is anticipated that if the clinical trial process, which consist of multiple phases, progresses smoothly and CS Sciences gets approval for marketing the drug, it will take not less than 6 years before the drug can be marketed.

– 14 –

LETTER FROM THE BOARD

The unaudited consolidated financial information of CS Sciences for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss) before tax	(25,264)	(35,417)
Net (loss) after tax	(25,274)	(35,423)

The net asset value of CS Sciences as at 31 December 2019 was RMB13.3 million.

Hainan Maifu

Hainan Maifu is a company incorporated in the PRC, and is primarily engaged in the research and development and manufacturing of food for special medical purpose (FSMP) (i.e. nutritional solutions for the dietary management of specific disorders or diseaserelated medical conditions). In 2020, Hainan Maifu has acquired the right to use a plot of land in Meihekou, Jilin Province, the PRC with an area of 218,861 square meters (the ‘‘Meihekou Land Use Rights’’) from 吉林四環製藥有限公司 (Jilin Sihuan Pharmaceutical Co., Ltd.*), a subsidiary of the Company.

The unaudited consolidated financial information of Hainan Maifu for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	4,557	9,846
Net (loss) before tax	(10,886)	(13,792)
Net (loss) after tax	(10,887)	(13,792)

The net asset value of Hainan Maifu, taking into account the inclusion of the Meihekou Land Use Right, as at 31 December 2019 was RMB48.3 million.

Beijing Stemexcel

Beijing Stemexcel is a company incorporated in the PRC. It is an international and standardised contract research organization (CRO) which is primarily engaged in the provision of services including the registration of drugs, all-around clinical trial of drugs and drug warning.

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LETTER FROM THE BOARD

The unaudited financial information of Beijing Stemexcel for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	87,049	127,067
Net profit before tax	25,394	9,900
Net profit after tax	20,051	8,529

The net asset value of Beijing Stemexcel as at 31 December 2019 was RMB52.3 million.

Xi’an Tengyun

Xi’an Tengyun is a company incorporated in the PRC, and is primarily engaged in the research and production of apparatus for testing of helicobacter pylori bacteria.

The unaudited consolidated financial information of Xi’an Tengyun for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	9,194	10,688
Net profit/(loss) before tax	3,889	(577)
Net profit/(loss) after tax	3,871	(581)

The net asset value of Xi’an Tengyun as at 31 December 2019 was RMB59.0 million.

Jiangsu Antai

Jiangsu Antai is a company incorporated in the PRC, which was primarily engaged in the research and development and clinical research of cell vaccines and cell related drugs which has since been suspended due to changes in laws and regulations in the PRC.

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LETTER FROM THE BOARD

The unaudited financial information of Jiangsu Antai for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	19,957	1,423
Net profit before tax	7,158	16,151
Net profit after tax	6,085	13,729

The net asset value of Jiangsu Antai as at 31 December 2019 was RMB68.5 million.

Shanghai LIDE

Shanghai LIDE is a company incorporated in the PRC, which is a contract research organization (CRO) primarily engaged in personalised precision anti-tumor medical research, service and product development, and the provision of technical support and services required for the research and development of innovative anti-tumor drugs.

The unaudited consolidated financial information of Shanghai LIDE for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	18,828	37,664
Net (loss) before tax	(13,258)	(7,695)
Net (loss) after tax	(13,258)	(7,695)

The net asset value of Shanghai LIDE as at 31 December 2019 was negative RMB1.7 million.

Huaxing Kangping Partnership

Huaxing Kangping Partnership is a partnership established in the PRC for investment in the high return projects for drugs, medical equipment, medical services and sustainable health.

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LETTER FROM THE BOARD

The unaudited consolidated financial information of Huaxing Kangping Partnership for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss)/profit before tax	(2,670)	15,773
Net (loss)/profit after tax	(2,670)	12,497

The net asset value of Huaxing Kangping Partnership as at 31 December 2019 was RMB230.9 million.

Huaxing Kangping

Huaxing Kangping is a company incorporated in the PRC and is engaged in investment management and asset management.

The unaudited financial information of Huaxing Kangping for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	2,524	5,229
Net profit before tax	339	2,454
Net profit after tax	293	1,840

The net asset value of Huaxing Kangping as at 31 December 2019 was RMB4.7 million.

Zhejiang Zhida

Zhejiang Zhida is a company incorporated in the PRC, which is primarily engaged in the research and development and commercialization of innovative drugs which are administered by the new drug delivery system (NDDS).

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LETTER FROM THE BOARD

The unaudited financial information of Zhejiang Zhida for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss) before tax	(8,546)	(18,917)
Net (loss) after tax	(8,546)	(18,917)

The net asset value of Zhejiang Zhida as at 31 December 2019 was RMB25.0 million.

Shenzhen Henghe

Shenzhen Henghe is a company incorporated in the PRC, which is primarily engaged in the development of computer software, provision of services in relation to economic data and collection of economic information.

The unaudited financial information of Shenzhen Henghe for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the	year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	582	677
Net (loss) before tax	(6,349)	(10,888)
Net (loss) after tax	(6,349)	(10,888)

The net asset value of Shenzhen Henghe as at 31 December 2019 was RMB18.2 million.

Save as disclosed above, companies of the Target Group were not granted any drug patents as at the Latest Practicable Date. Furthermore, there is currently no plan by companies of the Target Group to submit any drug registration applications within the next 2 years.

The Disposal of the Target Group would not materially impact the R&D capabilities of the Group. The R&D expenses of the Target Group for the year ended 31 December 2019 represented 5.4% of the total R&D expenses of the Group for the year ended 31 December 2019.

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LETTER FROM THE BOARD

FINANCIAL EFFECT OF THE DISPOSAL

It is expected that the Group will record a gain in the amount of approximately RMB46.0 million from the Disposal, being the difference between the Consideration and the identifiable net assets of Chonghui Investment and Tengwei Investment in the accounts of the Group. Before taking into account the effect of the Special Cash Dividend, completion of the Disposal would result in an immediate cash inflow of RMB425.4 million to the Group, and an increase of RMB49.3 million in equity attributable to the owners of the Group.

REASONS FOR AND BENEFITS OF THE DISPOSAL

The Directors consider that it is in the interest of the Group to dispose of the Target Group for the following reasons:

(i) Recent regulatory changes in the PRC pharmaceutical industry led to considerable changes in the industry landscape. For instance, the promulgation of the National Catalog of the First Batch of Drugs under Close Monitoring of Rational Drug Use 一
(for Chemical Medicines and Biological Products) 《( 第批國家重點監控合理用藥藥品目錄發佈（化藥及生物製品）》) in July 2019 brought an impact on prescription and procurement patterns. In light of these changes, the Group intends to define its business positioning in a clearer way, by streamlining the core business of the Group and focusing resources into the strategic development of the Group’s core business.
(ii) Some companies under the Target Group are currently in an early stage of development. As disclosed in the section headed ‘‘Information on the Target Group’’, most of them are currently loss making. The Company is of the view that these members of the Target Group would require further injection of substantial financial resources for an extended period of time before they could evolve into commercially viable business operations. Some of the companies under the Target Group are also affected by the regulatory changes in the PRC pharmaceutical industry and the resulting changes in the industry landscape, which add uncertainty to their respective developments.
(iii) There are also companies under the Target Group which the Group does not have controlling interest. While some of them are profit making, the Company is of the view that the businesses of these members of the Target Group demonstrate relatively low synergy with the core business activities of the Group.
(iv) Since the companies under the Target Group are engaged in non-core business activities of the Group and do not complement the further development of the Group as a whole, the Disposal would enable the Group to re-allocate the management and financial resources to strengthen the operation and financial position of the Group.

In light of the above, the Directors (including the independent non-executive Directors after reviewing and considering the advice of the Independent Financial Adviser which is set out in the letter from Somerley in this circular, but excluding Dr. Che, Dr. Guo, Dr. Zhang and Mr. Kim Jin Ha who have abstained from voting in respect of the board resolution proposed to approve the Disposal) are of the view that the Sale and Purchase Agreements and the Disposal

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LETTER FROM THE BOARD

contemplated thereunder have been negotiated on an arm’s length basis, agreed on normal commercial terms, and are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

INFORMATION ON THE COMPANY, THE SELLER AND THE PURCHASERS

The Company

The Company is an investment holding company, and the Group is a leading pharmaceutical group with the largest cardio-cerebral vascular drug franchise in PRC’s prescription drug market in terms of market share. The Group has a differentiated and proven sales and marketing model, supported by an extensive nationwide distribution network covering around 10,000 hospitals through over 3,000 distributors in all 31 provinces, autonomous regions and cities throughout the PRC.

Seller

The Seller is an investment holding company incorporated in Hong Kong and a whollyowned subsidiary of the Company.

Purchaser A

Purchaser A is an investment holding company incorporated in the BVI with limited liability. Purchaser A was established under a trust the settlor of which is Dr. Che. It did not hold any other investments as at the Latest Practicable Date.

Purchaser B

Purchaser B is an investment holding company incorporated in the BVI with limited liability. Purchaser B was established under a trust the settlor of which is Dr. Guo. It did not hold any other investments as at the Latest Practicable Date.

LISTING RULES IMPLICATIONS

As the highest applicable percentage ratio in respect of the Disposal exceeds 5% but is less than 25%, the Disposal constitutes a disclosable transaction of the Company under Chapter 14 of the Listing Rules and is subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.

As Purchaser A is a company established under a trust the settlor of which is Dr. Che, Purchaser A is an associate of Dr. Che. As Purchaser B is a company established under a trust the settlor of which is Dr. Guo, Purchaser B is an associate of Dr. Guo. As at the Latest Practicable Date, each of Dr. Che and Dr. Guo is deemed to be indirectly interested in 62.64% of the issued share capital of the Company and is therefore a controlling shareholder of the Company. Dr. Che is an executive Director and chairman of the Company, and Dr. Guo is an executive Director, deputy chairman and chief executive officer of the Company. As such, each of Purchaser A and Purchaser B is a connected person of the Company under the Listing Rules, and therefore the Disposal also constitutes a connected transaction of the Company under

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LETTER FROM THE BOARD

Chapter 14A of the Listing Rules. As the highest applicable percentage ratio is more than 5%, the Disposal is subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

PROPOSED SPECIAL CASH DIVIDEND

In connection with the Disposal and subject to the satisfaction of the Special Cash Dividend Conditions, the Company proposes to pay the Special Cash Dividend of RMB10.6 cents (equivalent to approximately HK11.6 cents) per Share. The aggregate amount of the Special Cash Dividend is expected to be approximately RMB1,003.4 million (based on the total number of issued Shares as at the Latest Practicable Date and assuming there are no changes to the Company’s share capital up to and including the Record Date).

The Special Cash Dividend, subject to the satisfaction of the Special Cash Dividend Conditions, will be payable on or around Friday, 3 July 2020 to Shareholders whose names appear on the register of members of the Company on Wednesday, 24 June 2020, being the Record Date.

For details on closure of the register of members of the Company for entitlement to the Special Cash Dividend, please refer to the paragraph headed ‘‘Closure of Register of Members’’ below.

Special Cash Dividend Conditions

The payment of the Special Cash Dividend is conditional upon the following conditions having been satisfied:

(a) the passing of an ordinary resolution by the Independent Shareholders at the SGM approving the Special Cash Dividend; and
(b) the passing of an ordinary resolution by the Independent Shareholders at the SGM approving the Sale and Purchase Agreements and the Disposal contemplated thereunder.

Payment of the Special Cash Dividend will not take place unless all the above Special Cash Dividend Conditions have been satisfied.

Some companies under the Target Group are in its early stage of development. These companies require the injection of substantial financial resources for a prolonged period of time before they could evolve into commercially viable business operations. Furthermore, the loss-making companies had a negative impact on the consolidated statement of financial performance of the Group. In view of the fact that the aggregated losses incurred by these lossmaking companies exceeded the aggregated profits generated by the other companies under the Target Group to a large extent, therefore, it is in the best interest of the Company and its Shareholders as a whole to dispose of the Target Group. During the negotiation process for the Sale and Purchase Agreements, it was mutually agreed between the Purchasers and the Seller that the declaration and payment of the Special Cash Dividend shall be one of the conditions precedent for Completion. Considering (i) a balance of cash and cash equivalents of

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LETTER FROM THE BOARD

RMB5,117.1 million of the Group as at 31 December 2019; (ii) the proceeds of RMB454.3 million from the Disposal and an estimated gain on disposal of RMB46.0 million; (iii) the substantial financial resources required to be injected into the Target Group; and (iv) improvement in the consolidated financial performance the Company can derive from disposing of the Target Group, the Company agreed to the declaration and payment of the Special Cash Dividend in order to facilitate the Disposal. As such, the Special Cash Dividend, and the Sale and Purchase Agreements and the Disposal contemplated thereunder are interconditional, and the Company is of the view that the arrangement is in the best interest of the Company and its Shareholders as a whole.

NOTICE OF SGM

Set out on pages 92 to 94 of this circular is the notice of SGM at which, inter alia, ordinary resolutions will be proposed to Shareholders to consider and approve among other things, the Sale and Purchase Agreements, the Disposal contemplated thereunder and the Special Cash Dividend.

As Dr. Che, Dr. Guo and their respective associates have a material interest in the Sale and Purchase Agreements and the Disposal contemplated thereunder, Dr. Che and Dr. Guo shall abstain from voting on the ordinary resolution approving the Sale and Purchase Agreements and the Disposal contemplated thereunder at the SGM.

As Dr. Zhang and Mr. Meng and their respective associates are parties acting in concert with Dr. Che and Dr. Guo, Dr. Zhang and Mr. Meng and their respective associates shall also abstain from voting on the ordinary resolution approving the Sale and Purchase Agreements and the Disposal contemplated thereunder at the SGM.

Each of Dr. Che, Dr. Guo, Dr. Zhang and Mr. Meng and their respective associates are deemed to be interested in 62.64% of the issued share capital of the Company as at the Latest Practicable Date.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on pages 26 to 27 of this circular which contains the recommendation from the Independent Board Committee to the Independent Shareholders, and the letter from the Independent Financial Adviser set out on pages 28 to 63 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders.

The Directors (including the independent non-executive Directors after reviewing and considering the advice of the Independent Financial Adviser which is set out in the Letter from Somerley in this circular, but excluding Dr. Che, Dr. Guo, Dr. Zhang and Mr. Kim Jin Ha (who have abstained from voting in respect of the board resolution proposed to approve the Sale and Purchase Agreements and the Disposal contemplated thereunder) are of the view that the Sale and Purchase Agreements and the Disposal contemplated thereunder have been negotiated on an arm’s length basis, agreed on normal commercial terms, and are fair and reasonable, and in the interests of the Company and the Shareholders as a whole, and

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LETTER FROM THE BOARD

accordingly recommend the Independent Shareholders to vote in favour of the ordinary resolution approving the Sale and Purchase Agreements and the Disposal contemplated thereunder to be proposed at the SGM.

The Directors also consider that the Special Cash Dividend is in the interests of the Company and the Shareholders as a whole and therefore recommend Shareholders to vote in favour of the ordinary resolution approving the Special Cash Dividend to be proposed at the SGM.

CLOSURE OF REGISTER OF MEMBERS

The transfer books and register of members will be closed from Wednesday, 10 June 2020 to Monday, 15 June 2020, both days inclusive, in order to determine the entitlement of Shareholders to attend and vote at the SGM, during which period no share transfers can be registered. In order to qualify for attending and voting at the SGM, all transfers accompanied by the relevant share certificates must be lodged with the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Tuesday, 9 June 2020.

Subject to satisfaction of the Special Dividend Conditions, the transfer books and register of members will be closed from Monday, 22 June 2020 to Wednesday, 24 June 2020, both days inclusive, in order to determine the entitlement of Shareholders to receive the proposed Special Cash Dividend, during which period no share transfers can be registered. In order to qualify for the proposed Special Cash Dividend, all transfers accompanied by the relevant share certificates must be lodged with the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Friday, 19 June 2020.

FORM OF PROXY

A form of proxy is enclosed for use at the SGM. Such form of proxy is also published on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.sihuanpharm.com). Whether or not you are able to attend the SGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time fixed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude Shareholders from attending and voting at the SGM in person should they so wish.

VOTING BY POLL

Pursuant to Rule 13.39(4) of the Listing Rules and Bye-law 66 of the Bye-Laws, at any general meeting, a resolution put to the vote of the meeting is to be decided by way of a poll.

On a poll, every Shareholder present in person or by proxy or, in the case of a Shareholder being a corporation, by its duly authorised representative, shall have one vote for every fully paid Share of which he/she/it is the holder but no amount paid up or credited as

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LETTER FROM THE BOARD

paid up on a Share in advance of calls or instalments is treated for the foregoing purposes as paid up on the Share. A person/corporation entitled to more than one vote on a poll need not use all his/her/its votes or cast all the votes he/she/it uses in the same way.

An announcement on the results of the voting by poll will be made by the Company after the SGM in the manner prescribed under Rule 13.39(5) of the Listing Rules.

Yours faithfully By order of the Board Sihuan Pharmaceutical Holdings Group Ltd. Dr. Che Fengsheng Chairman and Executive Director

– 25 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [76 x 100] intentionally omitted <==

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(incorporated in Bermuda with limited liability)

(Stock Code: 0460)

29 May 2020

To the Independent Shareholders

Dear Sirs or Madams,

DISCLOSEABLE AND CONNECTED TRANSACTION

We refer to the circular issued by the Company to the Shareholders dated 29 May 2020 (the ‘‘Circular’’) of which this letter forms part. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings in this letter.

We have been appointed by the Board to advise the Independent Shareholders as to whether (i) the Sale and Purchase Agreements and the Disposal contemplated thereunder are on normal commercial terms, and (ii) the terms of the Sale and Purchase Agreements and the Disposal are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Somerley Capital Limited has been appointed to act as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Disposal. The text of the letter of advice from the Independent Financial Adviser containing its recommendations and the principal factors that it has taken into account in arriving at its recommendations are set out from pages 28 to 63 of the Circular.

Having taken into account, among other things, the terms of the Sale and Purchase Agreements and the Disposal and the advice of the Independent Financial Adviser, we are of the opinion that (i) the Sale and Purchase Agreements and the Disposal are on normal commercial terms, and that (ii) the terms of the Sale and Purchase Agreements and the Disposal are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 26 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We therefore recommend the Independent Shareholders to vote in favour of the ordinary resolution approving the Sale and Purchase Agreements and the Disposal contemplated thereunder to be proposed at the SGM.

Yours faithfully,

For and on behalf of the Independent Board Committee

Mr. Patrick Sun Mr. Tsang Wah Kwong Dr. Zhu Xun Independent Non-executive Independent Non-executive Independent Non-executive Director Director Director

– 27 –

LETTER FROM SOMERLEY

The following is the text of a letter of advice from Somerley Capital Limited prepared for the purpose of inclusion in this circular, setting out its advice to the Independent Board Committee and the Independent Shareholders in respect of the Sale and Purchase Agreements and the Disposal contemplated thereunder.

SOMERLEY CAPITAL LIMITED

20th Floor China Building 29 Queen’s Road Central Hong Kong

29 May 2020

To: The Independent Board Committee and the Independent Shareholders

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION ON PROPOSED DISPOSAL

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee in connection with the Disposal, details of which are set out in the letter from the board contained in the circular to the Shareholders dated 29 May 2020 (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.

On 3 May 2020, the Seller and the Purchasers entered into the Sale and Purchase Agreements pursuant to which the Seller conditionally agreed to sell and the Purchasers conditionally agreed to purchase the Sale Shares.

On 3 May 2020, the Seller and Purchaser A entered into the Sale and Purchase Agreement A, pursuant to which the Seller has conditionally agreed to sell and Purchaser A has conditionally agreed to purchase the entire issued share capital of Chonghui Investment, and the Seller has conditionally agreed to assign and Purchaser A has conditionally agreed to accept the assignment of the Shareholder’s Loan, at an aggregate consideration of RMB289.2 million (equivalent to approximately HK$317.1) million in accordance with the terms and conditions of the Sale and Purchase Agreement A.

– 28 –

LETTER FROM SOMERLEY

As the highest applicable percentage ratio in respect of the Disposal exceeds 5% but is less than 25%, the Disposal constitutes a discloseable transaction of the Company under Chapter 14 of the Listing Rules and is subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.

As at the Latest Practicable Date, each of Dr. Che and Dr. Guo is deemed to be indirectly interested in 62.64% of the issued share capital of the Company and is therefore a controlling shareholder of the Company. Dr. Che is the chairman and an executive Director of the Company. Dr. Guo is the chief executive officer, deputy chairman and an executive Director of the Company. As disclosed in the Circular, Dr. Che and Dr. Guo have a material interest in the Sale and Purchase Agreements and the Disposal contemplated thereunder, as such, Dr. Che and Dr. Guo have abstained from voting on the relevant Board resolutions.

As Purchaser A is a company established under a trust the settlor of which is Dr. Che, Purchaser A is an associate of Dr. Che. As Purchaser B is a company established under a trust and settlor of which is Dr. Guo, Purchaser B is an associate of Dr. Guo. As such, both Purchaser A and Purchaser B are connected persons of the Company under the Listing Rules. As a result, the Disposal also constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules. As the highest applicable percentage ratio is more than 5%, the Disposal is subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The Independent Board Committee, comprising all the independent non-executive Directors, namely Mr. Patrick Sun, Mr. Tsang Wah Kwong and Dr. Zhu Xun has been established to advise the Shareholders as to whether the terms of the Disposal are on normal commercial terms, fair and reasonable and in the interest of the Company and the Shareholders as a whole, and in the ordinary and usual course of business of the Group. We, Somerley Capital Limited, have been appointed by the Company as the independent financial adviser to advise the Independent Board Committee and the Shareholders on the Disposal. Details of the Disposal are set out in the Circular.

We are not associated or connected with the Company, the Purchasers or their respective substantial shareholders or associates and, accordingly, are considered eligible to give independent advice on the Disposal. Apart from normal professional fees payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company, the Purchasers or their respective substantial shareholders or associates.

– 29 –

LETTER FROM SOMERLEY

In formulating our advice and recommendation, we have relied on the information and facts supplied, and the opinions expressed, by the Directors and management of the Company (collectively, the ‘‘Management’’), which we have assumed to be true, accurate, complete and not misleading as at the date of this letter. We have reviewed the published information on the Company, including the annual report of the Company for the year ended 31 December 2018 (the ‘‘2018 Annual Report’’) and annual report of the Company for the year ended 31 December 2019 (the ‘‘2019 Annual Report’’), the valuation report of the Target Groups issued by JLL (the ‘‘Valuation Report’’) as set out in Appendix I to the Circular and other information contained in the Circular. We have sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed by them. We consider that the information we have received is sufficient for us to reach our opinion and advice as set out in this letter. We have no reason to doubt the truth, accuracy or completeness of the information provided to us or to believe that any material facts have been omitted or withheld. We have not, however, conducted any independent investigation into the business and affairs of the Group, nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendation with regard to the Disposal, we have taken into account the following principal factors and reasons:

1. Information on the Group

1.1 Background information of the Group

The Company is a limited liability company incorporated in Bermuda. The Shares have been listed on the Stock Exchange since 28 October 2010. The Group is engaged in only one business segment, being the research and development (‘‘R&D’’) and the manufacture and sale of pharmaceutical products in the PRC. The Group’s current products and R&D pipeline encompass the top five medical therapeutic areas: cardio-cerebral vascular (‘‘CCV’’) system, central nervous system, metabolism, oncology and anti-infectives.

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LETTER FROM SOMERLEY

1.2 Financial performance of the Group

Set out below is key financial information on the Group for the three years ended 31 December 2017 (‘‘FY2017’’), 2018 (‘‘FY2018’’) and 2019 (‘‘FY2019’’) as extracted from the 2018 and 2019 Annual Reports.

Revenue Cost of sales Gross profit Distribution expenses Administrative expenses Research and development expenses Impairment losses on goodwill Impairment losses on intangible assets Impairment losses on investments accounted for using the equity method Impairment losses on property, plant and equipment Other operating income — net Operating profit Finance expenses Share of (losses)/profits of investments accounted for using the equity method (Loss)/profit before income tax Income tax expense (Loss)/profit for the year Changes in fair value on available-for-sale investment Reclassification adjustments for gains included in the consolidated statement of profit or loss — gain on disposal on available-for-sale investment Total comprehensive (loss)/income for the year Attributable to: Owners of the Company Non-controlling interests Total comprehensive (loss)/income for the year	For the financial year ended 2019 2018 RMB’000 RMB’000 2,886,979 2,917,405 (592,052) (538,317) 2,294,927 2,379,088 (251,723) (271,119) (484,750) (396,106) (632,972) (480,325) (2,843,903) — (759,615) — (91,521) — (276,464) — 591,158 794,405 (2,454,863) 2,025,943 (4,870) (6,060) (7,190) (7,718) (2,466,923) 2,012,165 (290,388) (332,804) (2,757,311) 1,679,361 — — — — (2,757,311) 1,679,361 (2,753,332) 1,619,956 (3,979) 59,405 (2,757,311) 1,679,361	31 December 2017 RMB’000 2,745,809 (758,956) 1,986,853 (227,633) (325,102) (303,926) — — — — 558,064 1,688,256 (46) 40,865 1,729,075 (250,167) 1,478,908 93,138 (85,137) 1,486,909 1,456,936 29,973 1,486,909

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As shown above, revenue of the Group has been relatively steady for each for the FY2017, FY2018 and FY2019 respectively, increased by approximately 6.3% between FY2017 and FY2018 and slightly declined by approximately 1.0% for FY2019. Gross profit for each of the FY2017, FY2018 and FY2019 were also relatively in line with the changes in revenue, increased by approximately 19.7% in FY2018 and declined by approximately 3.5% in FY2019. Based on the disclosures made in the 2018 Annual Report, the growth in total revenue was mainly attributable to the expansion of its CCV drug business by effective targeted market management and the enhancement in sale of products in other therapeutic areas during FY2018. In addition to the higher total revenue reported for FY2018, the moderately higher gross profit reported in FY2018 was mainly attributable to the implementation of production cost control procedures of the Group. According to the 2019 Annual Report, due to the rollout of new pharmaceutical policies in FY2019, total revenue of the Group was slightly affected, and so as the gross profit.

Distribution expenses for FY2018 increased by approximately 19.1% from approximately RMB227.6 million in FY2017 to approximately RMB271.1 million in FY2018. This increase was mainly attributable to the Group’s enhanced academic promotion across the nation aiming for brand strengthening. Distribution expenses for FY2019 fell by approximately 7.2% from FY2018. Such decline was mainly due to a decrease in marketing expenses relating to sale of monitoring drugs.

Administrative expenses of the Group increased by approximately 21.8% for FY2018 as compared to that of FY2017, which was mainly attributable to the changes in staff cost. Administrative expenses for the Group further increased by approximately 22.4% in FY2019 mainly because of the Group’s continued overall expansion in operation during 2019.

R&D expenses of the Group increased by approximately 58.0% in FY2018 and 31.8% in FY2019 mainly as a result of the Company’s continued efforts to expand its research and development activities and its R&D team.

In FY2019, the Group recognised an impairment provision of approximately RMB2,843.9 million against the value of goodwill which arose from acquisition of subsidiaries, as a result of the fact that the Chinese government promulgated the National Catalog of the First Batch of Drugs under Close Monitoring of Rational Drug Use (for Chemical Medicines and Biological Products) (the ‘‘Key Monitoring Drug List’’) in July 2019 which had an impact on prescription and procurement patterns and influenced Sale prices of chemical medicines and biological products. Such impairment loss on goodwill was made based on the results of the impairment testing conducted by the Group in which the Group reassessed the recoverable amount of the cash-generating units to which the goodwill relates. No impairment loss on goodwill was recognised in FY2017 and FY2018.

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The Group also recognised impairment losses of intangible assets and property, plant and equipment of approximately RMB759.6 million and RMB276.5 million respectively in FY2019, which were based on an assessment of the impact on prescription and procurement patters after the promulgation of the National Catalog of the First Batch of Drugs under Close Monitoring of Rational Drug Use (for Chemical Medicines and Biological Products) in July 2019 and other impairment indications. No relevant impairment losses on intangible assets and property, plant and equipment were recognised in FY2017 and FY2018.

In addition to the above, the Group also recognised impairments for its investments in two associates and a joint venture in aggregate of approximately RMB91.5 million in FY2019, mainly as a result of potential legal proceedings and investigation risk, termination of listing status in the Mainland China listed market and low acceptance of the core business strategy (the ‘‘Impairment Losses on Investments’’). No impairment losses on investments accounted for using the equity method were recognised in FY2017 and FY2018.

We have discussed and understand from the Management that save for the Impairment Losses on Investments, no aforementioned impairments reported for FY2019 were relevant to the Target Companies (as defined below). The Impairment Losses on Investments recognised were relevant to Shanghai LIDE (as defined below), Xi’an Tengyun (as defined below) and Shenzhen Henghe (as defined below) respectively. Further details relating to how the Impairment Losses on Investments were accounted for in determining the Valuation can be found under the section headed ‘‘5. Evaluation of Consideration’’.

The Group recorded net profit attributable to shareholders of approximately RMB1,620.0 million for FY2018, representing an increase of approximately 11.8% from FY2017. The increase was mainly in line with the increases in revenue and gross profit as discussed above. The Group reported a net loss attributable to shareholders of approximately RMB2,753.3 million as compared to a net profit of approximately RMB1,620.0 million for FY2018, which was mainly attributable to the recognition of impairment losses on goodwill, intangible assets, investments accounted for using the equity method and property, plant and equipment and an increase in R&D activities for the year as discussed in detail above. It was further stated in the 2019 Annual Report that, the adjusted profit attributable to owners of the Company after adding back those impairment losses decreased by 24.8% to approximately RMB1,218.2 million for FY2019.

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1.3 Financial position of the Group

Set out below is a summary of the condensed consolidated balance sheet of the Group as at 31 December 2018 and 31 December 2019 from the 2019 Annual Report:

Non-current assets Property, plant and equipment Goodwill Intangible assets Investments accounted for using the equity method Other non-current assets Current assets Inventories Trade and other receivables Financial assets at fair value through profit or loss Cash and cash equivalents TOTAL ASSETS Current liabilities Trade and other payables Contract liabilities Other current liabilities Non-current liabilities Deferred tax liabilities Other non-current liabilities TOTAL LIABILITIES Equity Share capital Share premium Other reserves Retained earnings Non-controlling interests TOTAL EQUITY	As at 31 December 2019 2018 RMB’000 RMB’000 2,731,010 2,775,371 — 2,843,903 480,008 1,252,251 1,083,858 1,168,623 1,971,413 1,626,908 6,266,289 9,667,056 409,595 301,117 630,073 857,181 148,336 1,303,276 5,117,143 3,314,845 6,305,147 5,776,419 12,571,436 15,443,475 1,905,792 1,686,749 326,295 517,519 28,693 44,351 2,260,780 2,248,619 282,621 256,937 85,841 163,556 368,462 420,493 2,629,242 2,669,112 78,186 78,233 4,084,846 4,093,317 192,674 159,631 5,250,978 8,179,232 9,606,684 12,510,413 335,510 263,950 9,942,194 12,774,363	As at 31 December 2019 2018 RMB’000 RMB’000 2,731,010 2,775,371 — 2,843,903 480,008 1,252,251 1,083,858 1,168,623 1,971,413 1,626,908 6,266,289 9,667,056 409,595 301,117 630,073 857,181 148,336 1,303,276 5,117,143 3,314,845 6,305,147 5,776,419 12,571,436 15,443,475 1,905,792 1,686,749 326,295 517,519 28,693 44,351 2,260,780 2,248,619 282,621 256,937 85,841 163,556 368,462 420,493 2,629,242 2,669,112 78,186 78,233 4,084,846 4,093,317 192,674 159,631 5,250,978 8,179,232 9,606,684 12,510,413 335,510 263,950 9,942,194 12,774,363
		9,667,056
		301,117 857,181 1,303,276 3,314,845
		5,776,419
		15,443,475
		1,686,749 517,519 44,351
		2,248,619
		256,937 163,556
		420,493
		2,669,112
		78,233 4,093,317 159,631 8,179,232
		12,510,413 263,950
		12,774,363

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Non-current assets of the Group as at 31 December 2018 mainly comprised of, among others, property plant and equipment, investments accounted for using the equity method and intangible assets. Balance of total non-current assets decreased from approximately RMB9,667.1 million as at 31 December 2018 to approximately RMB6,266.3 million as at 31 December 2019, representing a decline of approximately 35.2%. Such decrease was mainly due to the recognition of impairment of goodwill of approximately RMB2,843.9 million, impairment of intangible assets of approximately RMB759.6 million, impairment of investments accounted for using the equity method of approximately RMB91.5 million and impairment of property, plant and equipment of approximately RMB276.5 million for FY2019. The reasons for the impairments are discussed in detail under the section headed ‘‘1.2 Financial performance of the Group’’.

As at 31 December 2018 and 31 December 2019 respectively, current assets of the Group comprised of inventories, trade and other receivables, financial assets at fair value through profit or loss and cash and cash equivalents. Balance for total current assets increased by approximately 9.2% mainly because of the increases in cash and cash equivalents from approximately RMB3,314.8 million as at 31 December 2018 to approximately RMB5,117.1 million as at 31 December 2019 as a result of realised financial assets at fair value through profit or loss for 31 December 2019 amounting to approximately RMB1,154.9 million.

Current liabilities of the Group as at 31 December 2018 and 31 December 2019 mainly comprised of, among other things, trade and other payables and contract liabilities. The balance as at 31 December 2019 was comparable to that as of 31 December 2018.

Non-current liabilities of the Group as at 31 December 2018 and 31 December 2019 mainly comprised of deferred tax liabilities and other non-current liabilities including deferred government grants and other borrowings of the Group. The balance for total non-current liabilities of the Group as at 31 December 2019 declined from approximately RMB420.5 million to approximately RMB368.5 million, representing a drop of approximately 12.4%. The decline was mainly attributable to the decrease in other borrowings from non-controlling shareholders of the Group’s subsidiary from approximately RMB95.0 million as at 31 December 2018 to approximately RMB9.0 million as at 31 December 2019. The other borrowings of approximately RMB9.0 million as at 31 December 2019 represents the new borrowings from non-controlling shareholders of the Group’s subsidiary which is interest-bearing, unsecured and repayable in ten years. The balance of the borrowing in 2018 was fully repaid by the end of 2019.

The debt to equity ratio of the Group, which is expressed as a percentage of other borrowings over equity attributable to owners of the Company, remained below 1.0% as at 31 December 2018 and 2019.

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Equity attributable to owners of the Company declined by approximately 23.2% from approximately RMB12,510.4 million as at 31 December 2018 to approximately RMB9,606.7 million as at 31 December 2019 mainly due to the net loss attributable to owners of the Company of approximately RMB2,753.3 million reported for FY2019. Equity attributable to owners of the Company per Share, based on the total number of issued Shares of 9,465,682,206 as at the Latest Practicable Date, was approximately RMB1.01 as at 31 December 2019.

2. Information on the Target Group

2.1 Background information on the Target Group

Pursuant to the Sale and Purchase Agreement A, the Seller shall complete the reorganisation involving Chonghui Investment and the Target Group A Companies such that prior to Completion, Chonghui Investment shall directly or indirectly hold, the equity interest in each of the Target Group A Companies set opposite against the name of each of the Target Group A Companies in the table below.

		Equity
		interest held
		by Chonghui
	Name of company	Investment
1	重輝投資管理有限公司(Chonghui Investment	100.00%
	Management Limited*) (‘‘Chonghui Management’’)
2	CS Sciences Limited (‘‘CS Sciences’’)	88.00%
3	海南麥孚營養科技有限公司(Hainan Maifu Nutrition	70.00%
	Technology Co., Ltd.*) (‘‘Hainan Maifu’’)
4	北京斯丹姆賽爾技術有限責任公司(Beijing Stemexcel	21.00%
	Technology Co., Ltd.*) (‘‘Beijing Stemexcel’’)
5	西安騰雲網路科技有限公司(Xi’an Tengyun Network	49.00%
	Technology Co., Ltd.*) (‘‘Xi’an Tengyun’’)
6	江蘇安泰生物技術有限公司(Jiangsu Antai	10.00%
	Biotechnology Co., Ltd.*) (‘‘Jiangsu Antai’’)

For identification purposes only

As confirmed by the Management, each of Chonghui Investment and Chonghui Management is an investment holding company and save for their respective indirect and direct interests in the Target Group A Companies, each of them has no other material assets and liabilities as at the Latest Practicable Date and has no business operation since its incorporation.

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Purchase B is an investment holding company incorporated in the BVI with limited liability. Purchaser B was established under a trust the settlor of which is Dr. Guo. It did not hold any other investments as at the Latest Practicable Date.

Pursuant to the Sale and Purchase Agreement B, the Seller shall complete the reorganisation involving Tengwei Investment and the Target Group B Companies such that prior to Completion, Tengwei Investment shall directly or indirectly hold the equity interest in each of the Target Group B Companies set opposite against the name of each of the Target Group B Companies in the table below.

		Equity
		interest held
		by Tengwei
	Name of company	Investment
1	海南騰為健康科技有限公司(Hainan Tengwei Health	100.00%
	Technology Co., Ltd*) (‘‘Hainan Tengwei’’)
2	上海立迪生物技術股份有限公司(Shanghai LIDE	17.00%
	Biotech Co., Ltd.*) (‘‘Shanghai LIDE’’)
3	福建平潭華興康平醫藥產業投資合夥企業(有限合夥)	50.00%
	(Fujian Pingtan Huaxing Kangping Pharmaceutical
	Industry Investment Partnership (Limited Partnership)
	*) (‘‘Huaxing Kangping Partnership’’)
4	華興康平醫藥產業(平潭)投資管理有限公司(Huaxing	33.00%
	Kangping Pharmaceutical Industry (Pingtan)
	Investment Management Co., Ltd.*) (‘‘Huaxing
	Kangping’’)
5	浙江智達藥業有限公司(Zhejiang Zhida Pharmaceutical	10.00%
	Co., Ltd.*) (‘‘Zhejiang Zhida’’)
6	深圳恒合互聯網路科技有限公司(Shenzhen Henghe	20.34%
	Internet Technology Co., Ltd.*) (‘‘Shenzhen Henghe’’)

For identification purposes only

As confirmed by the Management, each of Tengwei Investment and Hainan Tengwei is an investment holding company and save for their respective indirect and direct interests in the Target Group B Companies, each of them has no other substantial material assets and liabilities as at the Latest Practicable Date and has no business operation since its incorporation.

The Target Group A Companies (except for Chonghui Management) and the Target Group B Companies (except for Hainan Tengwei) are defined as the ‘‘Target ’’ Companies .

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2.2 Background information on the Target Companies

Chonghui Management

Chonghui Investment is established for the sole purpose of holding equity interests in Chonghui Management and CS Sciences. Chonghui Management is an investment holding company incorporated on 23 January 2020 and holds direct equity interests in 70.19% shareholding interest in Hainan Maifu, 21.13% shareholding interest in Beijing Stemexcel, 49.00% in Xi’an Tengyun and 10.00% interest in Jiangsu Antai.

Hainan Tengwei

Hainan Tengwei is an investment holding company incorporated on 23 January 2020. Other than its 17.02% shareholding interest in Shanghai LIDE, 50.00% in Huaxing Kangping Partnership, 33.00% in Huaxing Kangping, 10.00% in Zhejiang Zhida and 20.34% in Shenzhen Henghe, Hainan Tengwei does not hold any other substantial assets or liabilities.

CS Sciences

CS Sciences is an investment holding company incorporated in the Cayman Islands on 3 April 2017. CS Sciences holds the entire equity interest in CS-Bay Therapeutics Inc., CS Pharmtech Limited and 北京軒義醫藥科技有限公司 (Xuanyi (Beijing) Medical Technology Co., Ltd*) (CS Sciences and its subsidiaries collectively, the ‘‘CS Group’’). The CS Group is a biotech pharmaceutical group primarily engaged in the research and development of drugs at the clinical stage. According to the Management, CS Sciences was set up by the Group in 2017 and has since been a subsidiary of the Company.

CS Sciences has submitted a number of patent applications to cover compounds of interests as project leads, only one US patent covering epidermal growth factor receptor (‘‘EGFR’’) inhibitors was granted. These patent applications and one granted US patent do not hold any value unless such patent-covered compound can be evolved into a marketed drug through the successful completion of multiple phases of clinical trials and successful new drug application. The EGFR inhibitor was planned to commence phase 1 clinical trial during the second half of 2020. It is anticipated that if the clinical trial process, which consist of multiple phases, progresses smoothly and CS Sciences gets approval for marketing the drug, it will take not less than 6 years before the drug can be marketed.

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The unaudited consolidated financial information of the CS Group for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss) before tax	(25,264)	(35,417)
Net (loss) after tax	(25,274)	(35,423)

The CS Group reported no revenue for the two financial years ended 31 December 2019 as it is still in the early stage of product development. Based on the financial information provided by the Company, the net loss after tax of approximately RMB25.3 million for the year ended 31 December 2018 was mainly attributable to the R&D cost of approximately RMB23.3 million incurred during the year. While the net loss after tax of approximately RMB35.4 million for the year ended 31 December 2019 was mainly attributable to the R&D cost of approximately RMB30.1 million incurred during the year.

Net asset value of the CS Group as at 31 December 2019 were RMB13.3 million. Total assets of the CS Group as at 31 December 2019 were approximately RMB27.0 million and total liabilities of the CS Group as at 31 December 2019 were approximately RMB13.7 million. The balance for the CS Group’s total assets were mainly composed of bank and cash balance of approximately RMB5.5 million and fixed assets of approximately RMB10.3 million, which is mainly related to equipment necessary for the CS Group to carry out the research and development activities. Total liabilities of the CS Group as at 31 December 2019 were mainly composed of shareholder’s loan approximately RMB7.3 million and wage payable of approximately RMB1.7 million.

Hainan Maifu

Hainan Maifu is a company incorporated in the PRC in 2016, which is primarily engaged in the R&D and manufacturing of food for special medical purpose (FSMP) (i.e. nutritional solutions for the dietary management of specific disorders or disease related medical conditions). According to the Management, Hainan Maifu was set up by the Group in 2016 and has since then become a subsidiary of the Company.

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The unaudited consolidated financial information of Hainan Maifu for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	4,557	9,846
Net (loss) before tax	(10,886)	(13,792)
Net (loss) after tax	(10,887)	(13,792)

Hainan Maifu has reported revenues of approximately RMB4.6 million and RMB9.8 million respectively for the two financial years ended 31 December 2018 and 2019. Based on the financial information provided by the Company, the key revenue attributor is sales of specialised health products and the growth in revenue for the year ended 31 December 2019 were mainly due to the increase in sales in its key specialised health product. The net losses after tax for both years ended 31 December 2018 and 2019 was primarily due to the fact that Hainan Maifu is still at the startup stage of its business development. The net loss after tax of approximately RMB10.9 million for the year ended 31 December 2018 was mainly attributable to the R&D cost of approximately RMB1.7 million incurred, administrative costs of approximately RMB8.1 million and selling costs of approximately RMB3.5 million. The net loss after tax of approximately RMB13.8 million for the year ended 31 December 2019 was mainly attributable to the R&D cost of approximately RMB3.8 million incurred, administrative costs of approximately RMB8.4 million and selling costs of approximately RMB6.3 million.

Net asset value of Hainan Maifu as at 31 December 2019 was RMB36.3 million. Based on our understanding from the Management, total assets of Hainan Maifu as at 31 December 2019 were approximately RMB43.0 million and were mainly composed of prepaid expenses of RMB13.4 million, which was in relation to authorisation for the use of intellectual properties, inventory with a carrying value of approximately RMB6.2 million and long term investment in Medifood International SA, which is a Swiss based medical nutrition company with a carrying value of approximately RMB9.8 million. Total liabilities of Hainan Maifu as at 31 December 2019 were approximately RMB8.2 million and were mainly composed of trade payables of approximately RMB2.9 million, unearned revenue of approximately RMB2.7 million, and other payables of RMB1.4 million. Based on our understanding from the Management, the aforesaid other payables of Hainan Maifu were primarily related to deposits payables for contracted equipment orders.

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As disclosed in the letter from the Board in the Circular, subsequent to 31 December 2019. In 2020, Jilin Sihuan Pharmaceutical Co., Ltd. 吉林四環製藥有限公司 (Jilin Sihuan Pharmaceutical Co., Ltd.), a subsidiary of the Company, disposed to Hainan Maifu the land use right of a plot of land in Meihekou, Jilin Province, the PRC with an area of 218,861 square meters (the ‘‘Meihekou Land Use Right’’). We understand the disposal was to be completed by way of a transfer of the entire equity interest in 吉林麥達食品有限公司 (Jiling Maida Food Co., Ltd) (‘‘Jilin Maida’’) (the ‘‘Recent Acquisition’’). As at 31 December 2019, Jilin Maida had the sole asset of the Meihekou Land Use Right with a book value of approximately RMB101.1 million and a market value of approximately RMB116 million (based on a property valuation by JLL), and liabilities due to a subsidiary of the Company in an aggregate amount of RMB89.1 million. Jilin Maida is a newly set up company entity incorporated in 2020.

Beijing Stemexcel

Beijing Stemexcel is a company incorporated in the PRC in 2005. It is an international and standardised contract research organization (CRO) which is primarily engaged in the provision of services including the registration of drugs, all-around clinical trial of drugs and drug warning. As advised by the Management, the Group became interested in 21.13% equity of Beijing Stemexcel by way of share subscription in January 2018 and since then, Beijing Stemexcel has been an associate of the Company and accounted for using the equity accounting method in the consolidated accounts of the Group.

The unaudited consolidated financial information of Beijing Stemexcel for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	87,049	127,067
Net profit before tax	25,394	9,900
Net profit after tax	20,051	8,529

Beijing Stemexcel reported revenues of approximately RMB87.0 million and RMB127.1 million respectively for the two financial years ended 31 December 2018 and 2019. Based on the understanding obtained from the Management, the increase in revenue of approximately 46.0% for the year ended 31 December 2019 was because of increase in contracted services during the year. Beijing Stemexcel reported a net profit after tax of approximately

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RMB8.5 million for the year ended 31 December 2019, representing a decline of approximately 57.5% from the previous year as a result of a decline in profit margin due to the increased costs.

The net asset value of Beijing Stemexcel as at 31 December 2019 was RMB52.3 million. Total assets of Beijing Stemexcel as at 31 December 2019 were approximately RMB87.0 million which were mainly composed of operation related prepaid expenses of approximately RMB18.8 million and trade receivable of approximately RMB43.4 million. Total liabilities of Beijing Stemexcel as at 31 December 2019 were approximately RMB34.7 million which were mainly composed of trade payables of approximately RMB18.6 million and wage payables of approximately RMB4.8 million.

Xi’an Tengyun

Xi’an Tengyun is a company incorporated in the PRC and is primarily engaged in the research and production of apparatus for testing of helicobacter pylori bacteria. According to the Management, the Group has became interested in 49.00% equity of Xi’an Tengyun by way of share subscription in July 2016 and since then, Xi’an Tengyun has been an associate of the Company and accounted for using the equity accounting method in the consolidated accounts of the Group.

The unaudited consolidated financial information of Xi’an Tengyun for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	9,194	10,688
Net profit/(loss) before tax	3,889	(577)
Net profit/(loss) after tax	3,871	(581)

Xi’an Tengyun reported a revenue of approximately RMB9.2 million and RMB10.7 million respectively for the two financial years ended 31 December 2018 and 2019. Xi’an Tengyun reported a net profit after tax of approximately RMB3.9 million for year ended 31 December 2018 which was, based on our understanding from the Management, mainly attributable to an interest income of RMB2.4 million. Xi’an Tengyun reported a net loss after tax of approximately RMB0.6 million for the year ended 31 December 2019 as compared to a profit from the previous year. We have discussed and understand from the Management that such decline was mainly attributable to a smaller

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interest income of approximately RMB0.2 million, and significantly higher R&D costs incurred of approximately RMB5.0 million in 2019 as compared to only approximately RMB1.7 million incurred in 2018.

The net asset value of Xi’an Tengyun as at 31 December 2019 was approximately RMB59.0 million. Total assets of Xi’an Tengyun as at 31 December 2019 were approximately RMB65.5 million comprising, among others, a 10% equity investment in Jiangsu Antai with a carrying value of approximately RMB20.0 million, cash balance of approximately RMB10.6 million and financial assets held for trading with a carrying value of approximately RMB16.7 million. Total liabilities of Xi’an Tengyun as at 31 December 2019 were approximately RMB6.5 million and were mainly composed of rent payable of approximately RMB2.7 million.

Jiangsu Antai

Jiangsu Antai is a company incorporated in the PRC, which is primarily engaged in the R&D and clinical research of cell vaccines and cell related drugs which has since been suspended due to changes in laws and regulations in the PRC. According to the Management, the Group, through Xi’an Tengyun, has became interested in 10.00% equity in Jiangsu Antai by way of share subscription in July 2018 and since then, Jiangsu Antai has been accounted for as financial assets at fair market value through profit and loss in the consolidated accounts of the Group.

The unaudited consolidated financial information of Jiangsu Antai for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	19,957	1,423
Net profit before tax	7,158	16,151
Net profit after tax	6,085	13,729

Jiangsu Antai reported a revenue of approximately RMB20.0 million and RMB1.4 million respectively for the two financial years ended 31 December 2018 and 2019. Based on our understanding from the Management, the drop in revenue between year ended 31 December 2018 and 2019 was mainly due to termination of its key product which targets cell therapy as a result of a change in government policies. Jiangsu Antai’s net profit after tax for the year ended 31 December 2019 was approximately RMB13.7 million, which represented an increase of approximately 125.6% from the previous year. The Management provided that such increase was a result of an increase in non-operation related

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income attributable to a one-off recognition of other income resulting from forfeited prepayments of revenue, from approximately RMB0.4 million for the year ended 31 December 2018 to approximately RMB21.6 million for year ended 31 December 2019, and accordingly, if such non-recurring income was excluded, Jiangsu Antai would have suffered from a loss for the year ended 31 December 2019.

The net asset value of Jiangsu Antai as at 31 December 2019 was RMB68.5 million. Based on our understanding from the Management, total assets of Jiangsu Antai as at 31 December 2019 were approximately RMB76.2 million which were mainly composed of short term treasury investment products with a carrying value of approximately RMB26.0 million and long term investments in relation to investments in associates with a book value of approximately RMB36.2 million. Total liabilities of Jiangsu Antai as at 31 December 2019 were approximately RMB7.7 million and were mainly composed of balances relating to wages and tax payable.

Shanghai LIDE

Shanghai LIDE is a company incorporated in the PRC in November 2011, which is a contract research organisation (CRO) primarily engaged in personalised precision anti-tumor medical research, service and product development, and also provide technical support and services to the R&D of innovative anti-tumor drugs. According to the Management, the Group invested in the 17.02% equity of Shanghai LIDE through two capital injections in September 2015 and May 2017 and since then, it has been accounted for as an associate of the Company using the equity accounting method in the consolidated accounts of the Group.

The unaudited consolidated financial information of Shanghai LIDE for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year	ended 31
	December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	18,828	37,664
Net (loss) before tax	(13,258)	(7,695)
Net (loss) after tax	(13,258)	(7,695)

Shanghai LIDE reported a revenue of approximately RMB18.8 million for the year ended 31 December 2018 and a revenue of approximately RMB37.7 million for the year ended 31 December 2019, representing an increase of approximately 100.0%. We have discussed and understand from the Management that the increase in revenue for the year ended 31 December 2019

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was mainly due to increase in contract value of the contract research organizational services provided. Net loss after tax for the year ended 31 December 2019 was approximately RMB7.7 million, which narrowed by approximately 42.0% from the net loss after tax of approximately RMB13.3 million reported for year ended 31 December 2018. We were advised that such narrowing of net loss after tax in 2019 was mainly due to the increase in revenue. We have discussed and understand that the main contributors to the net loss positions for years ended 31 December 2018 and 2019 were R&D costs which were in the amounts of approximately RMB5.1 million and RMB3.6 million respectively.

The net liabilities of Shanghai LIDE of approximately RMB1.7 million were recorded as of 31 December 2019. Total assets of Shanghai LIDE as at 31 December 2019 were approximately RMB32.4 million which were mainly composed of trade receivables of approximately RMB15.4 million, cash balance of approximately RMB7.3 million and inventories of approximately RMB4.1 million. Total liabilities of Shanghai LIDE as at 31 December 2019 were approximately RMB34.1 million, the balance of which was mainly attributable to, among others, short term loans of approximately RMB15.0 million.

Huaxing Kangping Partnership

Huaxing Kangping Partnership is a partnership established in the PRC for investment in the high return projects for drugs, medical equipment, medical services and sustainable health (the ‘‘Fund’’). As advised by the Management, the Group has been a 50.00% investor of Huaxing Kangping Partnership since February 2018 and Huaxing Kangping Partnership has been accounted for as a jointly controlled entity in the consolidated accounts of the Group.

The unaudited consolidated financial information of Huaxing Kangping Partnership for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss)/profit before tax	(2,670)	15,773
Net (loss)/profit after tax	(2,670)	12,497

Huaxing Kangping Partnership reported no revenue for each of the two financial years ended 31 December 2019 because no investments held by the Fund declared any dividends which could be recognised as revenue or income of the Fund. Based on our understanding from the Management, the reporting of

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a net loss after tax of approximately RMB2.7 million for the year ended 31 December 2018 was mainly due to the accrued payment of management fees of approximately RMB2.7 million to the Fund manager, Huaxing Kangping, during the year. We further understand from the Management that the net profit after tax of approximately RMB12.5 million reported for the year ended 31 December 2019 was mainly attributable to mark-to-market fair value adjustment of approximately RMB22.0 million for one of the Fund’s investments held during the year, partly offset by management fees payable to the fund manager during the year.

The net asset value of Huaxing Kangping Partnership as at 31 December 2019 was RMB230.9 million. Total assets of Huaxing Kangping Partnership as at 31 December 2019 were approximately RMB230.9 million and were mainly composed of its long term investments in three underlying private companies engaged in the R&D/manufacturing and sales of pharmaceutical products in the PRC (the ‘‘Fund Investments’’) which had an aggregate carrying value of approximately RMB215.8 million as at 31 December 2019. The total liabilities of Huaxing Kangping Partnership as at 31 December 2019 were approximately RMB461 which comprised mainly other payables.

Huaxing Kangping

Huaxing Kangping is a company incorporated in the PRC and is engaged in investment management and asset management. As advised by the Management, the Group has been a 33.00% equity shareholder of Huaxing Kangping since its incorporation in February 2018 and Huaxing Kangping has since been accounted for as an associate of the Company using equity accounting method in the consolidated accounts of the Group.

The unaudited consolidated financial information of Huaxing Kangping for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	2,524	5,229
Net profit before tax	339	2,454
Net profit after tax	293	1,840

Based on our discussion with the Management and as mentioned above, Huaxing Kangping is the investment manager engaged for the purpose of the Fund. Huaxing Kangping reported revenues of approximately RMB2.5 million and RMB5.2 million respectively for each of the two financial years ended 31 December 2018 and 2019. Based on our understanding from the Management,

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revenue generated from Huaxing Kangping was mainly attributable to its asset management business in the form of fund management fees. As such, the increase in revenue for the year ended 31 December 2019 of approximately 107.2% was mainly due to recognition of managements fees for its fund management business.

The net asset value of Huaxing Kangping as at 31 December 2019 were approximately RMB4.7 million. Based on our understanding from the Management, total assets of Huaxing Kangping as at 31 December 2019 mainly comprised cash and receivables, whilst majority of its liabilities were trade payables.

Zhejiang Zhida

Zhejiang Zhida is a company incorporated on 15 May 2018 in the PRC, and is primarily engaged in the R&D and commercialisation of innovative drugs which are administered by the new drug delivery system (NDDS). According to the Management, the Group became interested in 10.00% equity of Zhejiang Zhida after its share subscription in July 2018 and since then, Zhejiang Zhida has been accounted for as financial assets at fair market value through profit and loss in the consolidated accounts of the Group.

The unaudited consolidated financial information of Zhejiang Zhida for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	—	—
Net (loss) before tax	(8,546)	(18,917)
Net (loss) after tax	(8,546)	(18,917)

Based on our understanding from the Management, Zhejiang Zhida reported no revenue for the two financial years ended 31 December 2018 and 2019 because it is still in the early stage of product development. We have discussed and understand form the Management that the net loss after tax of approximately RMB8.5 million for the year ended 31 December 2018 was mainly attributable to the incurrence of R&D cost of approximately RMB5.5 million. The net loss after tax of approximately RMB18.9 million for the year ended 31 December 2019 was mainly attributable to the incurrence of R&D cost of approximately RMB12.8 million.

The net asset value of Zhejiang Zhida as at 31 December 2019 was RMB25.0 million. Based on financial information provided by the Management, total assets of Zhejiang Zhida as at 31 December 2019 were approximately

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RMB30.8 million and total liabilities of Zhejiang Zhida were approximately RMB5.8 million. Zhejiang Zhida’s total assets balance were mainly composed of the carrying value for fixed assets of approximately RMB24.2 million. We have discussed and understand from the Management that Zhejiang Zhida’s fixed assets mostly R&D related equipment. Total liabilities of Zhejiang Zhida as at 31 December 2019 were mainly composed of loan with a carrying value of approximately RMB4.0 million.

Shenzhen Henghe

Shenzhen Henghe is a company incorporated on 12 April 2017 in the PRC, which is primarily engaged in the development of computer software, provision of services in relation to economic data and collection of economic information. According to the Management, the Group acquired 30% of equity interest in Shenzhen Henghe in May 2018. It subscribed for a further 17.53% of equity interests through a capital injection exercise in August 2018 after which, its total equity interest was diluted to 20.34%. Since then, Shenzhen Henghe has been accounted for as an associate of the Company using equity accounting method in the consolidated accounts of the Group.

The unaudited consolidated financial information of Shenzhen Henghe for the two financial years ended 31 December 2018 and 2019 is as follows:

	For the year ended	For the year ended
	31 December
	2018	2019
	RMB’000	RMB’000
	(Unaudited)	(Unaudited)
Revenue	582	677
Net (loss) before tax	(6,349)	(10,888)
Net (loss) after tax	(6,349)	(10,888)

Shenzhen Henghe reported a revenue of approximately RMB0.6 million for the year ended 31 December 2018 and a revenue of approximately RMB0.7 million for the year ended 31 December 2019. We have discussed and understand from the Management that the increase in revenue for the year ended 31 December 2019 was mainly due to higher contracted service value during the year. Net loss after tax for the year ended 31 December 2018 was approximately RMB6.3 million. Based on our discussion with the Management, the losses were mainly due to expenses incurred for the purpose of business development. Net loss after tax for the year ended 31 December 2019 was approximately RMB10.9 million. This was mainly due to expenses incurred for the purpose of business development.

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The net asset value of Shenzhen Henghe as at 31 December 2019 was RMB18.2 million. Total assets of Shenzehn Henghe as at 31 December 2019 were approximately RMB20.8 million which were mainly composed of carrying value of financial assets of approximately RMB14.0 million and cash balance of approximately RMB5.3 million. We understand from the Management that the financial assets mainly involve treasury investments made by Shenzhen Henghe. Total liabilities of Shenzhen Henghe as at 31 December 2019 were approximately RMB2.6 million, the balance of which was mainly attributable to other payables which had a carrying value of approximately RMB1.5 million and wage payable which had a carrying value of approximately RMB1.0 million.

As disclosed in the letter from the Board in the Circular, the Target Companies were not granted any drug patents as at the Latest Practicable Date. Furthermore, there is currently no plan by companies of the Target Group to submit any drug registration applications within the next 2 years.

3. Reasons for and benefits of the Disposal

As disclosed in the letter from the Board in the Circular, the Group is a leading pharmaceutical company with the largest cardio-cerebral vascular drug franchise in the PRC’s prescription drug market by market share. It is also disclosed in the letter from the Board in the Circular that the Directors consider the Disposal being in the interest of the Group for the following reasons:

(i) Recent regulatory changes in the PRC pharmaceutical industry led to considerable changes in the industry landscape. For instance, the promulgation of the National Catalog of the First Batch of Drugs under Close Monitoring of Rational Drug Use (for Chemical Medicines and Biological Products) 《( 第一批國家重點監控合理用藥藥品目錄發佈（化藥及生物製品）》) in July 2019 brought an impact on prescription and procurement patterns. In light of these changes, the Group intends to define its business positioning in a clearer way, by streamlining the core business of the Group and focusing resources into the strategic development of the Group’s core business.
(ii) Some companies under the Target Group are currently in an early stage of development. As disclosed in the section headed ‘‘Information on the Target Group’’ in the Circular, most of them are currently loss making. The Company is of the view that these members of the Target Group would require further injection of substantial financial resources for an extended period of time before they could evolve into commercially viable business operations. Some of the companies under the Target Group are also affected by the regulatory changes in the PRC pharmaceutical industry and the resulting changes in the industry landscape, which add uncertainty to their respective developments.

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(iii) There are also companies under the Target Group which the Group does not have controlling interest. While some of them are profit making, the Company is of the view that the businesses of these members of the Target Group demonstrate relatively low synergy with the core business activities of the Group.
(iv) Since the companies under the Target Group are engaged in non-core business activities of the Group and do not complement further development of the Group as a whole, the Disposal would enable the Group to re-allocate the management and financial resources to strengthen the operation and financial position of the Group.

As discussed in the section headed ‘‘2.2 Background information on the Target Companies’’ above, and including Jiangsu Antai which would have reported net loss for the year ended 31 December 2019 if the aforesaid one-off non-operation related gains and other income were excluded, we note that there were 7 out of the total 10 Target Companies that have been loss-making for at least the latest financial year ended 31 December 2019, given most of them being in preliminary product development stage with minimal reported revenue but relatively substantial R&D and other expenses. We have discussed and understand from the Management that the capital required to further the R&D process of the respective Target Companies are exponential and the timing to reach commercialisation, if successful, is highly uncertain. As derived from our discussion with the Management, for instance, R&D activities that are carried out by certain Target Companies like CS Sciences may or may not eventually lead to successful commercialisation as there are already commercialised products in the market with similar effects and progress made by CS Sciences appears to have been lagging behind the competitors. Even if the Company continues to provide capital for the Target Companies to facilitate its R&D, and the end product successfully passes clinical trials and eventually proceeds to commercialisation, its success would depend on many factors including but not limited to, the relevant government regulations at the time and market competition. Based on our discussion with the Management, we understand that government policies regulating drug development and price is a key factor affecting the development and performance of the Target Companies. As disclosed in the 2019 Annual Report, the implementation of various policies such as the National Centralised Drug Procurement, the National Catalog of the First Batch of Drugs under Close Monitoring of Rational Drug Use (for Chemical Medicines and Biological Products) 《( 第一批國家重點監控合理用藥藥品目錄發佈（化藥及生物製品）》) (the ‘‘National Catalog of Drugs’’), the adjustment to the National Reimbursement Drug List, the Drug Negotiation List as well as the Drug Administration Law, have had the impact of reducing profit margin of various drugs in general, even those which has already been commercialised by pharmaceutical players such as the Company itself, including innovative drugs and is accelerating the restructuring of the pharmaceutical industry. We have also researched and noted from the National Health Commission’s publication titled ‘‘State Council approves centralised medicine procurement’’ that the State Council has approved a state run centralised medicine procurement which is an effort to deepen reform the medical and health sector and optimize the pricing system of drugs in the PRC. As stated in the publication, the procurement is intended to be open to all approved enterprises that can produce drugs in the PRC and public hospitals in the PRC would be purchasing approximately 60–70% of

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its annual drug purchases through the program. In this respect, we concur with the Directors’ view and consider that the introduction of government policies to restructure the pharmaceutical industry, such as the aforementioned, would play a key role impacting the marketability, including prices of pharmaceutical drugs and products in the future and as such, whether the business performance and profitability of companies such as the Target Companies engaged in R&D of new product would be able to eventually turnaround or improve if its product reach commercialisation stage is still subject to uncertainties.

We noted that each of Beijing Stemexcel, Huaxing Kangping Partnership and Huaxing Kangping reported net profits after tax for year ended 31 December 2019. However, we also note that (i) businesses of these Target Companies, being contract research business, fund investments and asset management, are non-core business activities of the Group which are not considered by the Company to be complementary to its further development and have had no substantial income contribution to the Group over the recent two years; and (ii) in particular, profit margins for the business of Beijing Stemexcel have been narrowing whilst reported net profits have been declining over the recent years mainly due to the emergence of competition in the market leading to uncertainties with future profits.

As such, based on all the above, we concur with the view of the Directors that the Disposal would help the Group to streamline its business so as to allow it to focus its resources into the strategic development of its core business and therefore, the entering into the Sale and Purchase Agreement A and Sale and Purchase Agreement B are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

We further noted from the Circular that the Director has also assessed and is of the view that the Disposal would not materially impact the R&D capabilities of the Group as the R&D expenses of the Target Group for the year ended 31 December 2019 represented 5.4% of the total R&D expenses of the Group for the year ended 31 December 2019. Given the fact that the Target Group’s business mostly differs from the Group’s core business, and given the size of the Disposal as compared to the business of the Group, in addition to the relative size of the historical R&D expenses of the Target Group for the year ended 31 December 2019 as discussed in the Circular, we concur with the Directors’ view that the Disposal would not materially impair the Company’s R&D capabilities.

As stated in the letter from the Board in the Circular, in connection with the Disposal and subject to the satisfaction of the Special Cash Dividend Conditions, the Company proposes to pay the Special Cash Dividend of RMB10.6 cents (equivalent to approximately HK11.6 cents) per Share to the Shareholders whose names appear on the register of members of the Company on the Record Date. We consider the payment of the Special Cash Dividend to be not unfavourable to the interests of Shareholders as it is provided to all Shareholders on a pro-rata basis. The aggregate amount of the Special Cash Dividend is expected to be approximately RMB1,003.4 million (based on the total number of issued Shares as at the Latest Practicable Date and assuming there are no changes to the Company’s share capital up to and including the Record Date).

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4. Principal terms of the Sale and Purchase Agreement

4.1 Consideration

The Consideration for the sale and purchase of the entire issued share capital of the Target Companies and the assignment of the Shareholder’s Loan is RMB425.4 million (equivalent to approximately HK$466.5 million) in aggregate, comprising RMB289.2 million (equivalent to approximately HK$317.1 million) in respect of the entire issued share capital of Chonghui Investment and the Shareholder’s Loan, and RMB136.2 million (equivalent to approximately HK$149.4 million) in respect of the entire issued share capital of Tengwei Investment. The respective consideration for each Target Company shall be paid by the respective Purchaser to the Seller in cash (in HK$ equivalent) on the later of (a) the date falling 5 business days after the satisfaction (or, if applicable, waiver) of the conditions precedent specified in the respective Sale and Purchase Agreements as set out in the conditions precedents (except condition precedent (h) in respect of Sale and Purchase Agreement A), and (b) the date falling 20 business days after the completion of the declaration and payment of the Special Cash Dividend.

The consideration under Sale and Purchase Agreement A was determined after arm’s length negotiations between the Seller and Purchaser A taking into consideration (i) the valuation of the Target Group A Companies of RMB143.4 million (equivalent to approximately HK$157.3 million) as at 31 December 2019 and (ii) the Shareholder’s Loan in the amount of RMB145.8 million (equivalent to approximately HK$159.8 million).

The consideration under Sale and Purchase Agreement B was determined after arm’s length negotiations between the Seller and Purchaser B taking into consideration the valuation of the Target Group B Companies of RMB136.2 million (equivalent to approximately HK$149.4 million) as at 31 December 2019.

Further discussion on the valuation on the Target Group are set out in section headed ‘‘5. Evaluation of the Consideration’’ below.

4.2 Conditions precedent

Completion of each of the Sale and Purchase Agreement A and the Sale and Purchase Agreement B is conditional upon the fulfilment or waiver (as the case may be) of the following conditions precedent:

(a) The Sale and Purchase Agreements and the transactions contemplated thereunder having been approved by the Independent Shareholders at the SGM;
(b) The declaration and distribution of the Special Cash Dividend is approved by the Independent Shareholders at the SGM;

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(c) The Company having paid the Special Cash Dividend in accordance with the Bye-laws and relevant laws and regulations (including the Listing Rules);
(d) The reorganisation contemplated under the Sale and Purchase Agreement A and Sale and Purchase Agreement B having been completed in accordance with the terms thereunder to the reasonable satisfaction of the relevant Purchaser;
(e) The Sale and Purchase Agreements having been duly executed and becoming unconditional;
(f) (in respect of the Sale and Purchase Agreement A) Each of the Transitional Services Agreements having been duly executed in a form to the reasonable satisfaction of Purchaser A and taken effect;
(g) The Non-compete Confirmation having been duly executed and taken effect;
(h) (in respect of the Sale and Purchase Agreement A) The Shareholder Loan Assignment Agreement having been duly executed in a form to the reasonable satisfaction of Purchaser A and taken effect;
(i) Each member of the Target Group having obtained all necessary authorisations (where applicable) from any of their respective shareholders, creditors, relevant regulatory authorities and/or any other third parties and having completed all necessary filings and applications with any regulatory authorities and other third parties, which are required for the execution and performance of the Transaction Agreements and the transactions contemplated thereunder (including the reorganisation) and which have not been revoked prior to Completion;
(j) The representations and warranties of the Seller remaining true and accurate and not misleading as at Completion by reference to the facts and circumstances then existing;
(k) There having been no material adverse change;
(l) There having been no material breach of any obligation under the Transaction Agreements by the Group;
(m) Each party having obtained all necessary authorisations (where applicable) and having completed all necessary filings with any regulatory authorities and other relevant third parties, which are required for the execution and performance of the Transaction Agreements and which have not been revoked prior to Completion; and

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(n) At any time prior to Completion, no relevant governmental or regulatory authority or body, court or agency having granted any order or made any decision that restricts or prohibits the implementation of the transactions contemplated under the Transaction Agreements.

In respect of the Sale and Purchase Agreement A, no party shall have the right to waive any of the conditions precedent set out in paragraphs (a), (b), (e), (g), (h), (i), (m) and (n) above. Purchase A may at its discretion waive any of the conditions precedent set out in paragraphs (c), (d), (f), (j), (k) and (l) above. In respect of the Sale and Purchase Agreement B, no party shall have the right to waive any of the conditions precedent set out in paragraphs (a), (b), (e), (g), (i), (m) and (n) above. Purchaser B may at its discretion waive any of the conditions precedent set out in paragraphs (c), (d), (j), (k) and (l) above. In the event that any of the above conditions precedent has not been satisfied, or, if applicable, waived prior to the date failing nine months after the date of the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) (or such other date as may be agreed by the parties in writing), the relevant Purchaser may elect to terminate the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) by notice in writing to the Seller whereby the Sale and Purchase Agreement A or the Sale and Purchase Agreement B (as the case may be) shall cease to be of any effect, save for specific provisions as set forth therein which are to survive such termination and save in respect of claims arising out of any antecedent breach thereof.

4.3 Use of proceeds

As stated in the letter from the Board in the Circular, the proceeds from the Disposal, net of professional fees and relevant expenses, are expected to be approximately RMB422.1 million (equivalent to approximately HK$462.9 million). The net proceeds from the Disposal will be used for general working capital of the Group.

4.4 Transitional Services Agreements

The Transitional Services Agreements between the Group and the Target Group A Companies will constitute continuing connected transaction of the Company under Chapter 14A of the Listing Rules. As the applicable percentage ratios (as defined under the Listing Rules) in respect of such Transitional Services Agreements calculated on an aggregate basis are less than 0.1%, the transactions under such Transitional Services Agreements are fully exempt from the shareholders’ approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules pursuant to Rule 14A.76(1) of the Listing Rules.

4.5 Non-compete confirmation

Pursuant to the Deed of Non-Competition entered between the Company, and, among others, Dr. Che and Dr. Guo on 9 October 2010, Dr. Che and Dr. Guo undertook to, among other things, not to engage in any businesses which is the same

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as, similar to or in competition with the business of the Group. In light of the Disposal the Company has irrevocably agreed to waive any rights the Company has under the Deed of Non-Competition in relation to any breach as a result of the Disposal and the operation of the companies comprising the Target Group (the ‘‘NCU Waiver’’).

We note the Disposal is proposed for the reasons outlined under the ‘‘3. Reasons for and benefits of the Disposal’’. We have discussed and understand from the Management that the NCU Waiver is considered to be in place to facilitate the Disposal. We have also discussed and was advised by the Management that the NCU Waiver is intended to only cover the scope of the Disposal and as at the Latest Practicable Date, it has no intention to enlarge the scope of the NCU Waiver or amend details to the Deed of Non-Competition entered between the Company and among others, Dr. Che and Dr. Guo on 9 October 2010. In this respect, we consider the NCU Waiver not to be unreasonable.

5. Evaluation of the Consideration

As disclosed in the letter from the Board in the Circular, the Consideration was determined after arm’s length negotiation between the Seller and Purchasers taking into consideration the valuations of the Target Group A Companies of RMB143.4 million and Target Group B Companies of RMB136.2 million as at 31 December 2019 (the ‘‘Valuation Date’’). We note from the Circular that as at the Latest Practicable Date, there has not been any development in the Target Group or any change in circumstances from the Valuation Date that would materially improve the valuation of the Target Group. The valuations of the Target Group A and Target Group B are evaluated by way of summing the underlying valuations of individual Target Companies prepared by JLL, an independent and duly qualified Hong Kong valuer. The full text of the Valuation Report and values associated with individual Target Companies are set out in Appendix I to the Circular.

In compliance with the requirements under note 1(d) to Rule 13.80 of the Listing Rules, we have assessed the qualification and experience of the responsible person of JLL for its engagement as the independent professional to value the Target Groups. We note that Mr. Simon M.K. Chan, the person in charge of the Valuation fellow (FCPA) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and CPA Australia. He is also fellow of the Royal Drugs Institution of Chartered Surveyors (FRICS) where he now serves on their North Asia Valuation Practice Group, an International Certified Valuation Specialist (ICVS) and a Chartered Valuer and Appraiser (Singapore). Mr. Simon M.K. Chan has over 20 years of experience in accounting, auditing, corporate advisory and valuation. He has provided a wide range of valuation services to a number of listed and listing companies from different industries in the PRC, Hong Kong, Singapore and the United States. Although JLL has been previously engaged by the Company for several business, financial instruments and properties valuations, we are confirmed by both the Company and JLL that neither of them is aware of any relationship which may render them not independent and we are satisfied that JLL is independent from the Company. Furthermore, JLL confirmed that it is an independent third party to the parties to the Sale

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and Purchase Agreements and their respective core connected persons. In addition, we also reviewed JLL’s terms of engagement and noted that the scope of work is appropriate for arriving at the opinion of the fair value of the Target Groups. Nothing has come to our attention that parties to the Sale and Purchase Agreements had made formal or informal representation to JLL that contravenes with our understanding of the information, to a material extent, as set out in the Circular.

We have reviewed and discussed with JLL the limiting conditions set out in the Valuation Report and understand that such limiting conditions are standard disclaimers. We note similar limiting conditions were included in previous published valuation reports issued by JLL, namely China Travel International Investment Hong Kong Limited (stock code: 308) in relation to a major transaction (circular dated 27 March 2020), Hope Education Group., Ltd. (stock code: 1765) in relation to its acquisition of Chengdu Maysunshine Education Management Co., Ltd. (circular dated 20 June 2019) and Hope Education in its acquisition of INTI Education Holdings Sdn. Bhd. (circular dated 29 April 2020).

Valuation of CS Sciences, Shanghai LIDE, Hainan Maifu, Xi’an Tengyun, Zhejiang Zhida, Jiangsu Antai and Shenzhen Henghe

We have reviewed the Valuation Report and discussed with JLL methodologies of, and bases and assumptions adopted for, the valuations and adjustments made to arrive at the valuation. We noted that JLL has adopted the cost approach for valuing equity interests in CS Sciences, Shanghai LIDE, Hainan Maifu, Xi’an Tengyun, Zhejiang Zhida, Jiangsu Antai, Shenzhen Henghe. Based on our discussion with the Valuer, we understand that the cost approach is a common approach used to value companies which are currently loss making and/or is still in an early stage of developing its product. We have discussed with JLL and concur with the selection of valuation methodology because the cost approach provides an indication of value using economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility. Based on our understanding from JLL, the key principle for the valuation of the aforementioned Target Companies involves adjusting their respective intangible assets where necessary using historical costs incurred for the purpose of R&D activities, taking into account of inflation. In this case intangible assets represent the early stage research and development projects of drugs and the future economic benefits to be generated by these research and development projects are highly uncertain as these drugs have to undergo multiple phases of clinical trials, which have a relatively low overall success rate, before they can be commercialised. JLL has also advised that given the lack of objective inputs for the preparation of financial forecasts of these projects are not readily available, therefore, the income approach is generally not appropriate. Similarly, finding a suitable market comparable company for reference in value is also difficult and as such, the market approach is also not appropriate for the purpose of valuing intangible assets such as that of the Target Companies.

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Under the cost approach, we understand that JLL based its Valuation on the respective Target Company’s consolidated level financial statements for the most recent financial year ended 31 December 2019. In assessing the necessary adjustments, we understand that save for Xi’an Tengyun, JLL have not adjusted for the carrying value of assets and liabilities other than that of intangible assets, if and where appropriate. In the case for Xi’an Tengyun, we have noted that JLL has also adjusted for the carrying value of Xi’an Tengyun’s 10% interests in Jiangsu Antai using the latest valuation of Jiangsu Antai, which we consider to be fair and reasonable. The balances of other assets and liabilities of each of CS Sciences, Shanghai LIDE, Hainan Maifu, Xi’an Tengyun, Zhejiang Zhida, Jiangsu Antai and Shenzhen Henghe were not adjusted because they are mainly comprising bank and cash balance, trade receivables and payables, short term loans, payroll tax payable and wage payable, are considered to be commonly found in an ordinary business and the values of these items in their respective balance sheets have already reflected the replacement cost in the market. We have also discussed with JLL with reference to the Impairment Losses on Investments recognised by the Company in FY2019 in relation to Shanghai LIDE, Xi’an Tengyuan and Shenzhen Henghe. We understand from JLL that the Impairment Losses on Investments were not considered to be necessary or relevant for the purpose of determining the valuation for Shanghai LIDE, Xi’an Tengyuan and Shenzhen Henghe mainly because in adopting the cost approach, JLL used each Target Company’s own consolidated financial statements for the year ended 31 December 2019.

As said, the major adjustments for the Target Companies valued using the cost approach were mainly made on the balance for intangible assets, and were mainly accounted for by adding back the present value of the historical costs incurred for the purpose of R&D activities (the ‘‘R&D Costs’’) undertaken by the respective Target Companies. These R&D Costs would include, but not limited to payroll of R&D staff, R&D material and any consultants engaged throughout the R&D process. We further understand from JLL that it used a 3% inflation rate to account for the time value of money of such R&D Costs incurred. We noted that the inflation rate was estimated with reference to the recent historical inflation rates in the PRC, sourced from Bloomberg.

In view of the Recent Acquisition by Hainan Maifu as discussed under the section headed ‘‘2.1 Background information on the Target Groups’’ above, we note that JLL has also made relevant adjustments to reflect the market value of the Meihekou Land Use Right as at 31 December 2019 for the purpose of calculating the revalued net asset value. We have discussed and understand from JLL that the Meihekou Land is a piece of land approved only for industrial purposes. JLL has valued the Meihekou Land Use Right using the market comparison approach by making reference to comparable market evidence as available in the relevant market. We have reviewed and understand that the market data was derived from three properties located in areas within close proximity of the subject transacted within the recent three years. We consider such approach in arriving at the market value of properties in line with common market practice.

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Based on our review and discussion with JLL, of those Target Companies valued by using the cost approach, the fair values for Jiangsu Antai and Shenzhen Henghe are considered to be equivalent to their respective net asset values as at 31 December 2019 (being the date of the latest available financial statements), which is because, according to JLL, no historical costs classified as R&D Costs have been incurred to date for the process of product development for such two companies.

In view of the fact that Shanghai LIDE, Xi’an Tengyun, Jiangsu Antai, Zhejiang Zhida and Shenzhen Henghe are held as to approximately 17.02%, 49.00%, 10.00%, 10.00% and 20.34% respectively by the Target Groups, JLL has applied a discount for the lack of control (‘‘DLOC’’) of 20.00% to the revalued net asset values of each of Shanghai LIDE, Xi’an Tengyun, Jiangsu Antai, Zhejiang Zhida and Shenzhen Henghe, to reflect the current non-controlling shareholding interest. We have discussed the application of the DLOC with JLL and note the DLOC was derived from the information and data published in ‘‘Control Premium Study’’ published by FactSet Mergerstat and Business Valuation Resources. We have reviewed and noted FactSet Mergerstat is a global provider of financial data solutions and Business Valuation Resources is a global market data, news and research and expert opinion provider.

Having discussed the above cost approach adopted by JLL and reviewed, among others, the reasons for adopting such valuation methodology and the bases and assumptions used, we are of the opinion that the valuation methodology used to establish the valuations in relation to CS Sciences, Shanghai LIDE, Hainan Maifu, Xi’an Tengyun, Zhejiang Zhida, Jiangsu Antai, Shenzhen Henghe, are appropriate.

Valuation of Huaxing Kangping Partnership and Huaxing Kangping

From our discussion with JLL, we understand that Huaxing Kangping Partnership and Huaxing Kangping are the limited partner and general partner of 華興康平基金 (the ‘‘Fund’’ as defined above) respectively. As at the Latest Practicable Date, the Company indirectly holds 33.00% interest in Huaxing Kangping and 50.00% equity interest in Huaxing Kangping Partnership. According to information provided by the Company, the major assets of the Fund are the Fund Investments.

We have discussed and was confirmed by the Management that the Fund has not conducted any fundraising exercise on or after its most recent financial year ended 31 December 2019, which would otherwise provide an indicative market valuation of the Fund. In light of this, we have discussed and understand from JLL that the market value of the net asset value of the Fund was derived through the application of the summation method under the cost approach. JLL advised that the summation method is typically adopted for a valuation subject when its value is primarily a factor of the values of the valuation subject’s holding assets and liabilities. We also understand from JLL in determining the net asset value of the Fund, it has also reviewed the carrying values of the Fund Investments. Based on our understanding from JLL, fair value adjustments for non-controlling interests in private companies held by funds such as the Fund Investments would be appropriate

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if there are recent market transactions. As such, based on JLL’s review, no additional fair value adjustments were made to two of the Fund Investments because there were no available information to suggest any material adverse factors which would be likely to impact the respective carrying values. JLL has however, adjusted the carrying value for one Fund Investment as there was a recent reported transaction executed by a fellow equity investor (the ‘‘Fund Comparable Transaction’’) and the transaction price reported for the said Fund Comparable Transaction was used as a reference for the purpose of valuation of this Fund Investment. We have discussed and understand from JLL that the approach outlined above is commonly used for the purpose of valuing funds of a similar nature.

The market value of the Target Group B’s interests in Huaxing Kangping Partnership and Huaxing Kangping was then determined through the application of income approach by way of binomial option pricing model. As discussed with JLL, the binomial option pricing model is based on the simplification that over a single period of a very short duration that the Fund’s net asset value can only move from its current price to an upper and lower level with defined probability. By increasing the number of periods, a ‘tree’ is developed. This tree represents the possible paths that the future price of the fund’s net asset value can take within the periods.

As noted from JLL, the binomial option pricing model utilizes the binomial tree of the fund’s net asset value by incorporating in the terms and structures of the Fund. Since the binomial tree provides the possible future prices for each period in time as well as the respective probability, value of the payoff to Huaxing Kangping and Huaxing Kangping Partnership then be determined. Based on our discussion with JLL, this methodology was used because the ending valuation (or the fair value) is based on the amount of the payoff to Huaxing Kangping and Huaxing Kangping Partnership would be received after accounting for management fees for the operation of the Fund should the Fund is liquidated by disposing its interests in the Fund Investments. We have discussed and understand from JLL that the aforementioned approach to value equity interests similar to that of the Huaxing Kangping and Huaxing Kangping Partnership are commonly used.

We have also discussed and reviewed the underlying assumptions used by JLL in adopting the income approach by way of binomial option pricing model. We note that the investment date for the fund was signed on 6 May 2018 and the investment period for the Fund is seven years. Given the Valuation Date, the time to maturity of the Fund for the purpose of the binomial option pricing model would therefore be approximately 5.43 years. We note the valuer has used the hurdle rate of return of 8% in its calculation. We also note it has adopted a payoff split prior to achieving the hurdle rate of return of 100%:0% i.e. the return generated being 100% attributable to the limited partner of the Fund and after achieving the hurdle rate return of 80%:20% i.e. the limited partner will be eligible for 80% of the return and the general partner will be eligible for the remaining 20% of return. We have discussed and understand that such assumptions, including the hurdle rate itself were directly extracted from the terms of the Fund, which we have reviewed and noted. We note that a risk-free rate of 2.90% was used by JLL in the process of applying

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the binomial option pricing model. We have discussed and understand from JLL that such rate was derived by considering the interest yield derived from 5-year and 7- year China Sovereign Bonds issued by PRC government and that are traded. We noted that a volatility rate of 27.67% was used by JLL as an assumption for the binomial pricing model and such volatility is derived from the median historical volatility of 14 comparable funds to the Fund (the ‘‘Comparable Funds’’). We have discussed and understand from JLL that the Comparable Funds are selected on the basis of the fact that (i) they are invested in the PRC healthcare sector; and (ii) their historical pricing data is available. We have reviewed the particulars of the Comparable Funds provided and based on our discussion with JLL, we note and understand this methodology of estimating the volatility rate for unlisted funds is in line with normal market practice and is therefore fair and reasonable. As also discussed with JLL, no dividend yield was assumed because the Fund itself has not paid any forms of dividend so far.

As disclosed in the Circular, pursuant to Rule 14.62 of the Listing Rules, we note the Board has also reviewed the principal assumptions upon which the valuation of Huaxing Kangping and Huaxing Kangping Partnership is based and is of the view that the profit forecast has been made after due and careful enquiry. Ernst & Young, the Company’s auditor, had also reviewed the arithmetical calculations and the compilation of the discounted future estimated cash flows, in the form of the payoff to Huaxing Kangping and Huaxing Kangping Partnership, on which the valuation of Huaxing Kangping and Huaxing Kangping Partnership was based in accordance with the bases and assumptions determined by the Directors.

Having discussed the above approach adopted by JLL and reviewed, among others, the reasons for adopting such valuation methodology and the bases and assumptions used, we are of the opinion that the valuation methodology used to establish valuations in relation to Huaxing Kangping Partnership and Huaxing Kangping, is appropriate.

Valuation of Beijing Stemexcel

We note that JLL has adopted the market valuation approach using comparable companies (‘‘Comparable Companies’’) in determining the valuation for Beijing Stemexcel because it achieved a profit in the year ended 31 December 2019. We discussed with JLL and concur with the use of market approach in this case because price to earnings ratio analysis, which is a commonly used trading multiple analysis under the market approach, is feasible and the market approach has generally less reliance on unobservable and subjective assumptions.

We have discussed and understand from JLL that the selection criteria for the comparable companies include, among others, (i) having to engage in a similar line of business as that of Beijing Stemexcel, (ii) its market capitalisation must be lower than approximately United States Dollar 2,686 million. We have discussed and understand from JLL that the market capitalisation criteria is referenced from the ranges and criteria based on a size premium study published by the Duff & Phelps

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Study 2019 (published by a global valuation and corporate finance adviser, Duff & Phelps Corporation); (iii) a public listed entity in Hong Kong or the PRC and its financial information being available to the general public. Under such selection criteria, we noted that JLL has identified six entities as Comparable Companies. Details of the Comparable Companies are set out in the Valuation Report in Appendix I to the Circular. We have reviewed particulars of the Comparable Companies identified by JLL and the selection criteria under which the selection process is followed, including the nature of business carried out by the Comparable Companies, and we are of the view that the selection of the Comparable Companies is in line with normal market practice and is fair and reasonable.

JLL has advised that the 2019 trailing 12-month price earnings ratios (the ‘‘PE Ratio(s)’’) of the Comparable Companies as at the Valuation Date were calculated with reference to the respective market capitalisation of the Comparable Companies as at the Valuation Date and their respective trailing twelve months earnings up to 31 December 2019 sourced from Bloomberg, were used as valuation multiples for the purpose of valuing Beijing Stemexcel. JLL further explained and we concur that, the use of PE Ratio is more appropriate because the earnings figure of an entity would be able to better reflect income and cost structure relating to the operation of the business itself and given Beijing Stemexcel is profit making, the use of PE Ratio would therefore be considered as suitable. We also understand from JLL that in view of the different risk profile attributable to, among others, different sizes of the Comparable Companies as compared to that of Beijing Stemexcel, the PE Ratio of each of the Comparable Companies has been adjusted by applying a specific size premium based on the size premium data published in Duff & Phelps in 2019. We have reviewed and noted the country risk, and size differential assigned to each of the Comparable Companies were in accordance to the data published in Duff& Phelps Cost of Capital Navigator and based on which adjustments on the PE Ratio calculation for the Comparable Companies relative to the size difference between the Beijing Stemexcel and the respective Comparable Companies were then made. As stated in the Valuation Report, the median adjusted PE Ratio of the Comparable Companies as at 31 December 2019 was 10.37 times (the ‘‘Median PE Ratio’’). The final valuation for Beijing Stemexcel was then arrived at by multiplying Beijing Stemexcel’s net profit for the year ended 31 December 2019 by the Median PE Ratio and applying a discount for lack of marketability (‘‘DLOM’’) of 15.71% as Beijing Stemexcel is not a listed company whereas the Comparable Companies are. We note the DLOM is estimated using the Black Scholes model which is a common and widely adopted method in estimating DLOM in the market.

6. Financial effects of the Disposal

Earnings

As disclosed in the letter from the Board in the Circular, it is expected that the Group will record a gain in the amount of approximately RMB46.0 million upon completion of the Disposal, being the difference between the Consideration and the identifiable net assets of Chonghui Investment and Tengwei Investment in the

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accounts of the Group. The earnings of the Group will increase by an amount equivalent to such gain from the Disposal. The final amount of the gain from the Disposal is subject to the review by the auditor of the Company.

Net assets attributable to Shareholders

As disclosed in the letter from the Board in the Circular, it is expected that completion of the Disposal (before the Payment of special Cash Dividend) would result in an increase of approximately RMB49.3 million in equity attributable to the owners of the Group.

Liquidity

As at 31 December 2019, the Group had a cash and bank balance of approximately RMB5,117.1 million and a working capital (i.e. total current assets less total current liabilities) of approximately RMB4,044.4 million. As disclosed in the letter from the Board in the Circular, it is expected that completion of the Disposal would result in an immediate cash inflow of approximately RMB425.4 million to the Group. Taking into consideration of the payment of Special Cash Dividend of approximately RMB1,003.4 million, it is expected that a net cash outflow of approximately RMB578.0 million will be reported. It is expected that the Disposal, together with the payment of Special Cash Dividend, the Group will not have material adverse effect on the working capital of the Group.

It should be noted that the aforementioned analysis are for illustrative purpose only and do not purport to represent how the financial position/results of the Group will be upon completion of the Disposal.

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OPINION AND RECOMMENDATION

In summary, in reaching our opinion and recommendation, we have considered the above principal factors and reasons, in particular,

(i) as discussed in the section headed ‘‘3. Reasons for and benefits of the Disposal’’ above, the Target Companies are operating non-core business and/or are mainly lossmaking with businesses that are subject to uncertainties in view of their heavy capital requirements and vulnerability to changes in government regulations. The Disposal therefore is expected to help the Group to streamline its business so as to allow it to focus its resources into the strategic development of its core business;
(ii) the Consideration is based on the fair value of the Target Groups determined by the Valuation prepared by JLL and as discussed in details in the section headed ‘‘5. Evaluation of the Consideration’’ above, the use of the valuation methodology, bases and assumptions to establish the valuation of the Target Groups are considered appropriate, fair and reasonable;
(iii) the payment of the Special Cash Dividend of RMB10.6 cents (equivalent to approximately HK11.6 cents) per Share is conditional upon, among other things, the passing of the resolution approving the Sale and Purchase Agreements and the Disposal. As such, Shareholders may have a chance to be entitled to the payment of such Special Cash Dividend if the Disposal is approved; and
(iv) as discussed in the section ‘‘6. Financial effects of the Disposal’’ above, no material adverse financial effect on the remaining Group is expected immediately upon completion of the Disposal. The estimated gain on the Disposal of approximately RMB46.2 million is expected to improve both the earnings and the net assets attributable to the Shareholders immediately upon completion of the Disposal.

Having taken into account the principal factors and reasons set out in our letter, we are of the view that the entering into of the Sale and Purchase Agreements and the Disposal, although not in the ordinary and usual course of business of the Group, are in the interests of the Company and the Shareholders as a whole and the terms of the Sale and Purchase Agreements and the Disposal are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned. We therefore advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the SGM to approve the Disposal.

Yours faithfully, for and on behalf of SOMERLEY CAPITAL LIMITED Lyan Tam Director

Ms. Lyan Tam is a licensed person registered with the Securities and Futures Commission and as a responsible officer of Somerley to carry out Type 6 (advising on corporate finance) regulated activities under the SFO and has over 17 years of experience in corporate finance industry.

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APPENDIX I

==> picture [70 x 54] intentionally omitted <==

7/F One Taikoo Place 979 King’s Road Hong Kong tel +852 2846 5000 fax +852 2169 6001 Company Licence No.: C-030171

29 May 2020

The Board of Directors

Sihuan Pharmaceutical Holdings Group Ltd. Room 4309, Office Tower, Convention Plaza, 1 Harbour Road, Wan Chai, Hong Kong

Dear Sirs,

In accordance with the instructions from Sihuan Pharmaceutical Holdings Group Ltd. (the ‘‘Company’’), Jones Lang LaSalle Corporate Appraisal and Advisory Limited (‘‘JLL’’) has undertaken a valuation exercise which requires us to express an independent opinion on the market value of the net asset of Chonghui Investment Limited (‘‘Chonghui Investment’’) and Tengwei Investment Limited (‘‘Tengwei Investment’’) (collectively, the ‘‘Target Companies’’) as at 31 December 2019 (the ‘‘Valuation Date’’).

The purpose of this valuation is for internal reference by the Company and inclusion in its public disclosure.

Our valuation was carried out on a market value basis. Market value is defined as ‘‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’’.

BACKGROUND OF THE TARGET COMPANIES

The Target Companies are investment holding companies established for the sole purpose of holding equity interests in 10 portfolio companies (the ‘‘Portfolio Companies’’) and two investment holding companies, namely Chonghui Investment Management Limited (‘‘Chonghui Management’’) and Hainan Tengwei Health Technology Co., Ltd. (‘‘Hainan Tengwei’’). The description Portfolio Companies are listed as below.

1. CS Sciences Limited (‘‘CS Sciences’’)

CS Sciences is an investment holding company incorporated in the Cayman Islands, which holds the entire equity interest in CS-Bay Therapeutics Inc., CS Pharmatech Limited and Xuanyi (Beijing) Medical Technology Co., Ltd. (CS Sciences and its subsidiaries collectively, ‘‘CS Group’’). CS Group is a biotech pharmaceutical group primarily engaged in the research and development of drugs at the clinical stage.

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APPENDIX I

2. Shanghai LIDE Biotech Co., Ltd. (‘‘Shanghai LIDE’’)

3. Hainan Maifu Nutrition Technology Co., Ltd. (‘‘Hainan Maifu’’)

Hainan Maifu is a company incorporated in the PRC, and is primarily engaged in the research and development and manufacturing of food for special medical purpose (FSMP) (i.e. nutritional solutions for the dietary management of specific disorders or diseaserelated medical conditions). In 2020, Hainan Maifu has acquired the right to use a plot of land in Meihekou, Jilin Province, the PRC with an area of 218,861 square meters (the ‘‘Meihekou Land Use Rights’’) from Jilin Sihuan Pharmaceutical Co., Ltd., a subsidiary of the Company.

4. Fujian Pingtan Huaxing Kangping Pharmaceutical Industry Investment Partnership (Limited Partnership) (‘‘Huaxing Kangping Partnership’’)

Huaxing Kangping Partnership is a partnership established in the PRC for investment in the high return projects for drugs, medical equipment, medical services and sustainable health.

5. Huaxing Kangping Pharmaceutical Industry (Pingtan) Investment Management Co., Ltd. (‘‘Huaxing Kangping’’)

Huaxing Kangping is a company incorporated in the PRC and is engaged in investment management and asset management.

6. Beijing Stemexcel Technology Co., Ltd. (‘‘Beijing Stemexcel’’)

7. Xi’an Tengyun Network Technology Co., Ltd. (‘‘Xi’an Tengyun’’)

Xi’an Tengyun is a company incorporated in the PRC, and is primarily engaged in the research and production of apparatus for testing of helicobacter pylori bacteria.

8. Jiangsu Antai Biotechnology Co., Ltd. (‘‘Jiangsu Antai’’)

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APPENDIX I

9. Zhejiang Zhida Pharmaceutical Co., Ltd. (‘‘Zhejiang Zhida’’)

10. Shenzhen Henghe Internet Technology Co., Ltd. (‘‘Shenzhen Henghe’’)

Pursuant to the sale and purchase agreements in relation to the disposal of the Target Companies, Sun Moral International (HK) Limited (the ‘‘Seller’’), which is a wholly owned subsidiary of the Company, shall complete the reorganization involving the Target Companies and the Portfolio Companies such that prior to completion of the disposal (the ‘‘Completion’’), the Target Companies shall directly, or indirectly through the investment holding companies, hold the equity interest in each of the Portfolio Companies set opposite against the name of each of the Portfolio Companies in the table below.

Chonghui Investment

	Equity Interest held by
Name of company	Chonghui Investment
Chonghui Management	100.00%
CS Sciences	88.46%
Hainan Maifu	70.19%
Beijing Stemexcel	21.13%
Xi’an Tengyun	49.00%
Jiangsu Antai	10.00%

Tengwei Investment

	Equity Interest held by
Name of company	Tengwei Investment
Hainan Tengwei	100.00%
Shanghai LIDE	17.02%
Huaxing Kangping Partnership	50.00%
Huaxing Kangping	33.00%
Zhejiang Zhida	10.00%
Shenzhen Henghe	20.34%

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APPENDIX I

The unaudited profits after tax for the year ended as at Valuation Date and net asset values as at the Valuation Date of the Portfolio Companies were as below:

	Unaudited
	Profits After	Unaudited Net
Portfolio Companies	Tax	Asset Value
	(RMB Million)	(RMB Million)
CS Sciences	(35.42)	13.33
Shanghai LIDE	(7.70)	(1.73)
Hainan Maifu	(13.79)	48.25
Huaxing Kangping Partnership	12.50	230.91
Huaxing Kangping	1.84	4.75
Beijing Stemexcel	8.53	52.30
Xi’an Tengyun	(0.58)	58.97
Jiangsu Antai	13.73*	68.51
Zhejiang Zhida	(18.92)	25.04
Shenzhen Henghe	(10.89)	18.18

Note: As advised by the Company, the profit after tax for Jiangsu Antai included income from a forefeiture of customer deposit, which was not generated by the ordinary and usual course of business. Jiangsu Antai was loss-making if such income was excluded.

SOURCES OF INFORMATION

In conducting our valuation of the Target Companies, we have reviewed information from several sources, including, but not limited to:

. Background of the Portfolio Companies and relevant corporate information;
. Historical financial information of the Portfolio Companies; and
. Other operation and market information in relation to the Portfolio Companies’ business.

We have held discussions with management of the Company and conducted market research from public sources to assess the reasonableness and fairness of information provided. We assumed such information to be reliable and legitimate; and we have relied to a considerable extent on the information provided in arriving at our conclusion of value.

BASIS OF OPINION

We have conducted our valuation with reference to International Valuation Standards issued by International Valuation Standards Council (‘‘IVSC’’). The valuation procedures employed include a review of legal status and economic condition of the Portfolio Companies and an assessment of key assumptions, estimates and representations made by the proprietor or the operator of the Portfolio Companies. All matters we consider essential to the proper understanding of the valuation are disclosed in this valuation report.

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APPENDIX I

The following factors form an integral part of our basis of opinion:

. The economic outlook in general;
. The nature of business and history of the operation concerned;
. The financial condition of the Portfolio Companies;
. Market-driven investment returns of companies engaged in similar lines of business;
. Financial and business risk of the businesses;
. Consideration and analysis on the micro and macro economy affecting the subject assets; and
. Assessment of the liquidity of the subject assets.

We planned and performed our valuation so as to obtain all the information and explanations that we considered necessary in order to provide us with sufficient evidence to express our opinion on the Target Companies.

MAJOR ASSUMPTIONS

Assumptions considered to have significant sensitivity effects in this valuation have been evaluated in order to provide a more accurate and reasonable basis for arriving at our assessed value. The following key assumptions in determining the market value of the equity interest have been made:

. There will be no material change in the existing political, legal, technological, fiscal or economic conditions, which might adversely affect the business of the Target Companies;
. The operational and contractual terms stipulated in the relevant contracts and agreements will be honoured;
. The facilities and systems proposed are sufficient for future expansion in order to realize the growth potential of the business and maintain a competitive edge;
. The operating licenses and incorporation documents of the Target Companies provided to us are assumed to be reliable and legitimate;
. The financial and operational information provided to us by the Company are assumed to be accurate; and
. There are no hidden or unexpected conditions associated with the assets valued that might adversely affect the reported value.

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APPENDIX I

VALUATION METHODOLOGY

In arriving at our assessed value, we have considered three generally accepted approaches, namely market approach, cost approach and income approach.

Market Approach considers prices recently paid for similar assets, with adjustments made to market prices to reflect condition and utility of the appraised assets relative to the market comparative. Assets for which there is an established secondary market may be valued by this approach. Benefits of using this approach include its simplicity, clarity, speed and the need for few or no assumptions. It also introduces objectivity in application as publicly available inputs are used. However, one has to be wary of the hidden assumptions in those inputs as there are inherent assumptions on the value of those comparable assets. It is also difficult to find comparable assets. Furthermore, this approach relies exclusively on the efficient market hypothesis.

Cost Approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation or obsolescence present, whether arising from physical, functional or economic causes. The cost approach generally furnishes the most reliable indication of value for assets without a known secondary market. Despite the simplicity and transparency of this approach, it does not directly incorporate information about the economic benefits contributed by the subject assets.

Income Approach is the conversion of expected periodic benefits of ownership into an indication of value. It is based on the principle that an informed buyer would pay no more for the project than an amount equal to the present worth of anticipated future benefits (income) from the same or a substantially similar project with a similar risk profile. This approach allows for the prospective valuation of future profits and there are numerous empirical and theoretical justifications for the present value of expected future cash flows. However, this approach relies on numerous assumptions over a long-time horizon and the result may be very sensitive to certain inputs. It also presents a single scenario only.

Given the unique characteristics of the Target Companies, there are substantial limitations for the income approach and the market approach for valuing the underlying asset. Firstly, the income approach requires subjective assumptions to which the valuation is highly sensitive and detailed operational information and long-term financial projections are also needed to arrive at an indication of value. Secondly, the market approach relies generally on deriving value through a measure of the values of market comparables or transactions. Considering the unique characteristics of the Target Companies, there was a lack of market comparables or transactions available as at the Valuation Date to derive an indicative value with a sufficient level of accuracy.

Under the cost approach, the summation method is typically adopted for a valuation subject when its value is primarily a factor of the values of the valuation subject’s holding assets and liabilities. Details about the methodology on the in dividual assets and liabilities are discussed in the next section.

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APPENDIX I

SUMMARY OF THE SUMMATION METHOD

Based on the nature and financial positions of the Portfolio Companies, we have classified them into following categories with different valuation approach adopted for each of them.

I. Loss-making Companies

Given that CS Sciences, Shanghai LIDE, Hainan Maifu, Xi’an Tengyun, Zhejiang Zhida, Jiangsu Antai and Shenzhen Henghe were in the loss-making position, their market values were primarily determined by the cost approach. In arriving at our opinion of the market value of the equity interest in these companies, we have adopted the following approaches in the valuation of various categories of assets and liabilities:

Intangible assets in relation to research and development

The intangible assets represent the early stage research and development projects of drugs. The future economic benefits to be generated by these research and development projects are highly uncertain as these drugs have to undergo multiple phases of clinical trials, which have a relatively low overall success rate, before they can be commercialised. Also, objective input for the preparation of financial forecasts of these projects are not readily available. Therefore, the income approach is not appropriate. Also, there was a lack of market comparables or transactions such that we can make comparisons with similar intangible asset. As such, the market approach is not appropriate. As a result, the cost approach is adopted, with reference to the historical cost, adjusted for inflation.

Other assets and liabilities

Other assets and liabilities represent the Meihekou Land Use Right and items other than the intangible assets in relation to research and development. For the Meihekou Land Use Right, we adopted the direct comparison method under the market approach. For the remaining items, we adopted the cost approach in assessing the value of these items by their respective replacement cost.

II. Profit-making Company

In contrast to the aforesaid companies, Beijing Stemexcel achieved a profit in the previous fiscal year. In assessing the market value of Beijing Stemexcel, we adopted the guideline public company method under the market approach by comparing Beijing Stemexcel with the comparable companies (the ‘‘Comparable Companies’’). We considered this method is appropriate as it has less reliance on unobservable and subjective assumptions.

In determining the price multiple, a list of comparable companies was identified. The selection criteria are listed below:

The companies derive most, if not all, of their revenues from the same industry of Beijing Stemexcel, i.e. contract research organisation which engages in the biotech or pharmaceutical business.

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APPENDIX I

The comparable companies have market capitalisation less than RMB10 billion.
The comparable companies are searchable in Bloomberg.
The comparable companies are publicly listed in Hong Kong or the PRC.
Sufficient data, including the price-to-earnings multiple (the ‘‘P/E Multiple’’) as at the Valuation Date, on the comparable companies are available.

As sourced from Bloomberg, an exhaustive list of comparable companies satisfying the above criteria was obtained on a best effort basis. The details of the comparable companies are listed below:

Bloomberg Ticker Company Name Company Description 300149 CH Quantum Hi-Tech Quantum Hi-Tech China Biological Co Ltd researches, Equity China Biological develops, produces and sells fructooligosaccharides Co Ltd (FOS) products. The company’s main products are fructooligosaccharides, galacto-oligosaccharide and complex oligosaccharides.
600721 CH Xinjiang Bai Hua Xinjiang Bai Hua Cun Company Ltd. is principally Equity Cun Co Ltd engaged in the provision of medical research and development services. The company mainly provides chemical synthesis, compound screening and determination, formulation research and safety evaluation, pharmacology and toxicology experiment, clinical new drug approval declaration, transformation of technological achievements, Phase I-IV clinical trials and related technologies consulting services related to drug research and development.
603127 CH Joinn Laboratories Joinn Laboratories (China) Co., Ltd. operates as a Equity China Co Ltd medicines development company. The company offers drug development, pharmaceutical analysis, pharmacologic testing, and other related services. It also provides pesticide and medical device safety evaluation services.
688202 CH Shanghai Shanghai Medicilon Inc. is mainly engaged in preEquity Medicilon Inc clinical research and development services for biomedicine. The company provides a full range of one-stop new drug development services for pharmaceutical companies and research institutions around the world that meet national and international reporting standards, including drug discovery, pharmaceutical research and preclinical research.

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VALUATION REPORT

APPENDIX I

Bloomberg Ticker

Company Name Company Description

1521 HK Frontage Holdings Equity Corp
Frontage Holdings Corporation is a contract research organization (CRO) providing integrated, scientificallydriven research, analytical and development services throughout the drug discovery and development process for pharmaceutical companies. Its offered s e r v i c e s i n c l u d e s d r u g m e t a b o l i s m a n d pharmacokinetics, safety and toxicology services, chemistry, manufacturing and control (CMC), agrochemical services, and associated services supporting clinical studies, which includes early stage clinical services and biometrics services.
1873 HK Viva Biotech Viva Biotech Holdings operates as a drug discovery Equity Holdings platform. The company provides target protein expression, structure researching, hit screening, drug candidate determination, and other services.

As the businesses of the comparable companies are located in different regions, they are thus exposed to different macroeconomic and market risks. Moreover, due to the fact that the comparable companies are often of significantly different size from Beijing Stemexcel. Larger companies generally have lower expected returns that translate into higher values. On the other hand, small companies are generally perceived as riskier in relation to business operation and financial performance, and therefore the expected returns are higher and resulting in lower multiples. Therefore, the base multiples were adjusted to reflect the difference in natures between the comparable companies and Beijing Stemexcel.

The adjusted P/E Multiples were calculated using the following formula:

Adjusted P/E Ratio = 1/((1/M) +θ)

where:

M = The base P/E Ratio
θ = Required adjustment in the equity discount rate for difference in size, country and specific risk

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VALUATION REPORT

APPENDIX I

After the aforesaid adjustment on the base P/E Multiples, the adjusted P/E Multiples of the comparable companies are listed as below:

Bloomberg Ticker Company Name P/E Multiple 300149 CH Equity Quantum Hi-Tech China Biological Co Ltd 47.63 600721 CH Equity Xinjiang Bai Hua Cun Co Ltd 73.44 603127 CH Equity Joinn Laboratories China Co Ltd 52.35 688202 CH Equity Shanghai Medicilon Inc 42.90 1521 HK Equity Frontage Holdings Corp 55.63 1873 HK Equity Viva Biotech Holdings 21.46 Median	Adjusted P/E Multiple 10.49 12.25 10.57 10.25 9.69 8.27
	10.37

Source: Bloomberg

As Beijing Stemexcel is a privately held company, we have applied a discount for lack of marketability (DLOM) of 15.71% to the above estimated market value to reflect the reduced level of marketability of a privately held company. The DLOM was assessed using an European put option method.

III. General and Limited Partnership

Huaxing Kangping Partnership and Huaxing Kangping represent the limited partnership and general partnership in the Fujian Pingtan Huaxing Kangping Pharmaceutical Industry Investment Partnership (the ‘‘Fund’’) respectively. As at the Valuation Date, the Fund held equity interests in various underlying companies in the PRC.

The market value of the net asset value of the Fund was developed through the application of the summation method under the cost approach. The summation method is typically adopted for a valuation subject when its value is primarily a factor of the values of the valuation subject’s holding assets and liabilities.

Under the summation method, each identifiable asset and liability of the Fund was being valued using the appropriate valuation approaches, and our opinion of value of the Fund was derived by adding component assets and deducting component liabilities. The Fund’s major assets was the equity investments. We had conducted research on each of the investments. If recent transaction(s) for any of these investments was available, the market value of the corresponding investment would be determined through the application of market approach. Otherwise, the relevant investment cost was prudently considered as the market value. Value of other assets and liabilities, namely cash, receivables and payables, were determined by cost approach based on the book values

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VALUATION REPORT

APPENDIX I

provided by the Company. Given their nature, it is unlikely that the book value of these items would derivate significantly from the market value. Hence, the book values were adopted as the replacement cost.

The net asset value of the Fund was then adopted in the valuation of the market value of Huaxing Kangping Partnership and Huaxing Kangping, which was developed through the application of the income approach known as binomial option pricing model.

The binomial option pricing method is based on the simplification that over a single period of a very short duration that the fund’s net asset value can only move from its current price to an upper and lower level with defined probability. By increasing the number of periods, a ‘tree’ is developed. This tree represents the possible paths that the future price of the fund’s net asset value can take within the periods.

The binomial option pricing model utilizes the binomial tree of the fund’s net asset value by incorporating in the terms and structures of the option. Since the binomial tree provides the possible future prices for each period in time as well as the respective probability, value of the payoff to Huaxing Kangping and Huaxing Kangpingcan Partnership then be determined. The following key assumptions in determining the market value of the equity interest have been made:

. The fund’s net asset follows a lognormal distribution that it cannot take a negative value and are bounded by zero;
. The fund will only be exited on its expiration date;
. The interest rate and the volatility are assumed to be constant;
. There are no riskless arbitrage opportunities; and
. There are no transaction costs or taxes.

The key inputs of the option pricing model are shown below:

Parameter	Input	Remarks
Remaining life of the Fund	5.43 years	As per the terms of the Fund
Hurdle return	8.00%	As per the terms of the Fund
Risk-free rate	2.90%	CNY China Sovereign Curve
Volatility	27.67%	Historical volatility of
		the comparables
Payoff split prior to achieving	LP: 100%;	As per the terms of the Fund
the hurdle return	GP: Nil
Payoff split after achieving	LP: 80%;	As per the terms of the Fund
the hurdle return	GP: 20%

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VALUATION REPORT

APPENDIX I

CALCULATION OF VALUATION RESULT

The calculation of the market value of the Target Companies as at the Valuation Date under the summation method is as follow:

Chonghui Investment 88.46% Equity Interest in CS Sciences 21.13% Equity Interest in Beijing Stemexcel 70.19% Equity Interest in Hainan Maifu 49.00% Equity Interest in Xi’an Tengyun 10.00% Equity Interest in Jiangsu Antai Market Value of the Net Asset Value of Chonghui Investment Tengwei Investment 17.02% Equity Interest in Shanghai LIDE 50.00% Equity Interest in Huaxing Kangping Partnership 33.00% Equity Interest in Huaxing Kangping 10.00% Equity Interest in Zhejiang Zhida 20.34% Equity Interest in Shenzhen Henghe Market Value of the Net Asset Value of Tengwei Investment	As at 31 December 2019 (RMB Million) 54.2 15.8 48.4 19.5 5.5
	143.4
	As at 31 December 2019 (RMB Million) 1.2 122.4 6.7 3.0 2.9
	136.2

VALUATION COMMENT

The conclusion of value is based on accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. Further, while the assumptions and other relevant factors are considered by us to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Target Companies, the Company and JLL.

We do not intend to express any opinion on matters which require legal or other specialized expertise or knowledge, beyond what is customarily employed by valuers. Our conclusions assume continuation of prudent management of the Target Companies over whatever period of time that is reasonable and necessary to maintain the character and integrity of the assets valued.

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APPENDIX I

VALUATION REPORT

We are instructed to provide our opinion of value as per the Valuation Date only. It is based on economic, market and other conditions as they exist on, and information made available to us as of, the valuation date and we assume no obligation to update or otherwise revise these materials for events in the time since then. In particular, it has come to our attention that since the Valuation Date, the outbreak of Novel Coronavirus disease (COVID19) has caused significant disruption to economic activities around the world. This disruption has increased the risk of the financial projections/assumptions, which were prepared in our valuation without the assumptions of a pandemic, not being achieved. It may also have a negative impact towards investment sentiment, and hence any form of required rate of return as well as liquidity of any asset. As of the report date, it is uncertain how long the disruption will last and to what extent it will affect the economy. As a result, it has caused volatility and uncertainty that values may change significantly and unexpectedly even over short periods. The period required to negotiate a transaction may also extend considerably beyond the normally expected period, which would also reflect the nature and size of the asset. Readers are reminded that we do not intend to provide an opinion of value as of any date after the Valuation Date in this report.

This report is issued subject to our Limiting Conditions as attached.

INDEPENDENCE DECLARATION

We confirm that to the best of our knowledge and belief, we are independent of the Company and the Target Companies, and have not contravened any independence requirements stipulated as per our professional memberships. Our fee is not contingent upon our conclusion of value.

CONCLUSION OF VALUE

Based on the results of our investigations and analyses, we are of the opinion that the market value of the net asset of Chonghui Investment and Tengwei Investment as at the Valuation Date are reasonably stated at the amount of RMB143.4 million and RMB136.2 million, respectively.

Yours faithfully, For and on behalf of

Jones Lang LaSalle Corporate Appraisal and Advisory Limited Simon M.K. Chan

Executive Director

Note: Mr. Simon M.K. Chan is a fellow (FCPA) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and CPA Australia. He is also fellow of the Royal Institution of Chartered Surveyors (FRICS) where he now serves on their North Asia Valuation Practice Group. He is an International Certified Valuation Specialist (ICVS) and a Chartered Valuer and Appraiser (Singapore). He oversees the business valuation services of JLL and has over 20 years of accounting, auditing, corporate advisory and valuation experiences. He has provided a wide range of valuation services to numerous listed and listing companies of different industries in the PRC, Hong Kong, Singapore and the United States.

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VALUATION REPORT

APPENDIX I

LIMITING CONDITIONS

In the preparation of this report, we relied on the accuracy, completeness and reasonableness of the financial information, forecast, assumptions and other data provided to us by the Company/Target Companies and/or its representatives. We did not carry out any work in the nature of an audit and neither are we required to express an audit or viability opinion. We take no responsibility for the accuracy of such information. Our report was used as part of the analysis of the Company/Target Companies in reaching their conclusion of value and due to the above reasons, the ultimate responsibility of the derived value of the valuation subject rests solely with the Company.
We have explained as part of our service engagement procedure that it is the director’s responsibility to ensure proper books of accounts are maintained, and the financial information and forecast give a true and fair view and have been prepared in accordance with the relevant standards and companies ordinance.
Public information and industry and statistical information have been obtained from sources we deem to be reputable; however, we make no representation as to the accuracy or completeness of such information, and have accepted the information without any verification.
The board of directors and the management of Company/Target Companies have reviewed this report and agreed and confirmed that the basis, assumptions, calculations and results are appropriate and reasonable.
JLL shall not be required to give testimony or attendance in court or to any government agency by reason of this exercise, with reference to the project described herein. Should there be any kind of subsequent services required, the corresponding expenses and time costs will be reimbursed from you. Such kind of additional work may incur without prior notification to you.
No opinion is intended to be expressed for matters which require legal or other specialised expertise, which is out of valuers’ capacity.
The use of and/or the validity of the report is subject to the terms of the agreement and the full settlement of the fees and all the expenses.
Our conclusions assume continuation of prudent and effective management policies over whatever period of time that is considered to be necessary in order to maintain the character and integrity of the valuation subject.
We assume that there are no hidden or unexpected conditions associated with the subject matter under review that might adversely affect the reported review result. Further, we assume no responsibility for changes in market conditions, government policy or other conditions after the Valuation Date. We cannot provide assurance on the achievability of the results forecasted by the Company/Target Companies because events and

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VALUATION REPORT

APPENDIX I

circumstances frequently do not occur as expected; difference between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans and assumptions of management.

This report has been prepared solely for internal use purpose. The report should not be otherwise referred to, in whole or in part, or quoted in any document, circular or statement in any manner, or distributed in whole or in part or copied to any third party without our prior written consent. Even with our prior written consent for such, we are not be liable to any third party except for our client for this report. Our client should remind of any third party who will receive this report and the client will need to undertake any consequences resulted from the use of this report by the third party. We shall not under any circumstances whatsoever be liable to any third party.
This report is confidential to the Company and the calculation of values expressed herein is valid only for the purpose stated in the agreement as at the Valuation Date. In accordance with our standard practice, we must state that this report and exercise is for the use only by the party to whom it is addressed to and no responsibility is accepted with respect to any third party for the whole or any part of its contents.
Where a distinct and definite representation has been made to us by parties interested in the valuation subject, we are entitled to rely on that representation without further investigation into the veracity of the representation.
The Company/Target Companies agrees to indemnify and hold us and our personnel harmless against and from any and all losses, claims, actions, damages, expenses or liabilities, including reasonable attorney’s fees, to which we may become subjects in connection with this engagement. Our maximum liability relating to services rendered under this engagement (regardless of form of action, whether in contract, negligence or otherwise) shall be limited to the fee paid to us for the portion of its services or work products giving rise to liability. In no event shall we be liable for consequential, special, incidental or punitive loss, damage or expense (including without limitation, lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.
This exercise is premised in part on the historical financial information and future forecast provided by the management of the Company/Target Companies and/or its representatives. We have assumed the accuracy and reasonableness of the information provided and relied to a considerable extent on such information in our calculation of value. Since projections relate to the future, there will usually be differences between projections and actual results and in some cases, those variances may be material. Accordingly, to the extent any of the above mentioned information requires adjustments, the resulting value may differ significantly.
This report and the conclusion of values arrived at herein are for the exclusive use of our client for the sole and specific purposes as noted herein. Furthermore, the report and conclusion of values are not intended by the author, and should not be construed by any reader, to be investment advice or as financing or transaction reference in any manner whatsoever. The conclusion of values represents the consideration based on the information furnished by the Company/Target Companies and other sources. Actual

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VALUATION REPORT

APPENDIX I

transactions involving the valuation subject might be concluded at a higher or lower value, depending upon the circumstances of the transaction and the knowledge and motivation of the buyers and sellers at that time.
The board of directors, management, staff, and representatives of the Company/Target Companies have confirmed to us that they are independent to JLL in this Valuation or calculation exercise. Should there be any conflict of interest or potential independence issue that may affect our independence in our work, the Company/Target Companies and/ or its representatives should inform us immediately and we may need to discontinue our work and we may charge our fee to the extent of our work performed or our manpower withheld or engaged.

– 79 –

LETTER FROM ERNST & YOUNG

APPENDIX II

Ernst & Young 安永會計師事務所 Tel 電話: +852 2846 9888 22/F, CITIC Tower 香港中環 Fax 傳真:+852 2868 4432 1 Tim Mei Avenue 添美道1號 ey.com Central, Hong Kong 中信大廈22樓

3 May 2020

To the Directors of Sihuan Pharmaceutical Holdings Group Ltd.

We have been engaged to report on the arithmetical accuracy of the calculations of the discounted cash flow forecasts (the ‘‘Forecasts’’) on which the valuations prepared by Jones Lang LaSalle Corporate Appraisal and Advisory Limited in respect of Fujian Pingtan Huaxing Kangping Pharmaceutical Industry Investment Partnership (Limited Partnership) and Huaxing Kangping Pharmaceutical Industry (Pingtan) Investment Management Co., Ltd. (the ‘‘Targets’’) as at 31 December 2019 is based. The valuations are set out in the announcement of Sihuan Pharmaceutical Holdings Group Ltd. (the ‘‘Company’’) dated 3 May 2020 (the ‘‘Announcement’’) in connection with the disposal of the Targets. The valuations based on the Forecasts are regarded by The Stock Exchange of Hong Kong Limited as a profit forecast under paragraph 14.61 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’).

DIRECTORS’ RESPONSIBILITIES

The directors of the Company (the ‘‘Directors’’) are solely responsible for the Forecasts. The Forecasts have been prepared using a set of bases and assumptions (the ‘‘Assumptions’’), the completeness, reasonableness and validity of which are the sole responsibility of the Directors. The Assumptions are set out in the section headed ‘‘Consideration’’ of the Announcement.

OUR INDEPENDENCE AND QUALITY CONTROL

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

REPORTING ACCOUNTANTS’ RESPONSIBILITIES

Our responsibility is to express an opinion on the arithmetical accuracy of the calculations of the Forecasts based on our work. The Forecasts do not involve the adoption of accounting policies.

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LETTER FROM ERNST & YOUNG

APPENDIX II

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised) Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by the HKICPA. This standard requires that we plan and perform our work to obtain reasonable assurance as to whether, so far as the arithmetical accuracy of the calculations are concerned, the Directors have properly compiled the Forecasts in accordance with the Assumptions adopted by the Directors. Our work consisted primarily of checking the arithmetical accuracy of the calculations of the Forecasts prepared based on the Assumptions made by the Directors. Our work is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing issued by the HKICPA. Accordingly, we do not express an audit opinion.

We are not reporting on the appropriateness and validity of the Assumptions on which the Forecasts are based and thus express no opinion whatsoever thereon. Our work does not constitute any valuations of the Targets. The Assumptions used in the preparation of the Forecasts include hypothetical assumptions about future events and management actions that may or may not occur. Even if the events and actions anticipated do occur, actual results are still likely to be different from the Forecasts and the variations may be material. Our work has been undertaken for the purpose of reporting solely to you under paragraph 14.62(2) of the Listing Rules and for no other purpose. We accept no responsibility to any other person in respect of our work, or arising out of or in connection with our work.

OPINION

Based on the foregoing, in our opinion, so far as the arithmetical accuracy of the calculations of the Forecasts is concerned, the Forecasts have been properly compiled in all material respects in accordance with the Assumptions adopted by the Directors.

Yours faithfully,

Ernst & Young Certified Public Accountants

Hong Kong

– 81 –

LETTER FROM THE BOARD IN RELATION TO THE PROFIT FORECAST

APPENDIX III

==> picture [76 x 101] intentionally omitted <==

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(incorporated in Bermuda with limited liability)

(Stock code: 0460)

3 May 2020

The Stock Exchange of Hong Kong Limited 8th Floor, Two Exchange Square 8 Connaught Place Central, Hong Kong

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION

We refer to the announcement of the Company dated 3 May 2020 (the ‘‘Announcement’’). Unless the context otherwise requires, terms defined in the Announcement shall have the same meanings in this letter when used herein.

We refer to the valuation report prepared by JLL, among which, the valuation of Huaxing Kangping and Huaxing Kangping Partnership (the ‘‘Huaxing Kangping Valuation’’) constitutes a profit forecast for the purpose of Rule 14.61 of the Listing Rules. We have reviewed the Huaxing Kangping Valuation prepared by JLL for which JLL is responsible for.

Pursuant to Rule 14.62 of the Listing Rules, we have engaged Ernst & Young, the auditors of the Company, to examine the calculations of the discounted cash flows on which the Huaxing Kangping Valuation was based in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised) Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by the Hong Kong Institute of Certified Public Accountants. The report from Ernst & Young is set out in Appendix I to the Announcement.

– 82 –

LETTER FROM THE BOARD IN RELATION TO THE PROFIT FORECAST

APPENDIX III

On the basis of the foregoing, in accordance with the requirements under Rule 14.62(3) of the Listing Rules, we confirm that the Huaxing Kangping Valuation has been made after due and careful enquiry.

By order of the Board Sihuan Pharmaceutical Holdings Group Ltd. Dr. Che Fengsheng Chairman and Executive Director

– 83 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete and in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

(i) Interests of Directors and chief executives of the Company

As at the Latest Practicable Date, the interest and short positions of the Directors and chief executive of the Company in the Shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 9 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers of the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

Long positions in the shares of the Company:

Approximate Total Number of Percentage of Name of Director Nature of Interest/Capacity Shares Shareholding Dr. Che Fengsheng Interest of Spouse 5,928,928,699 62.64% (L) 800,000 Shares (L) Shares (L) 0.08% (S) 7,847,661 Shares (S)

Trustee

3,379,917,225 Shares (L)

A concert party to an agreement (Note 1) 2,537,263,813 Shares (L)

Other interest (Note 2) 10,947,661 Shares (L) 7,847,661 Shares (S)

– 84 –

GENERAL INFORMATION

APPENDIX IV

			Approximate
		Total Number of	Percentage of
Name of Director	Nature of Interest/Capacity	Shares	Shareholding
Dr. Guo Weicheng	Beneficial owner	5,928,928,699	62.64% (L)
	11,350,000 Shares (L)	Shares (L)
	Founder of a discretionary
	trust who can influence how
	the trustee exercises his
	discretion
	1,580,884,399 Shares (L)
	A concert party to an
	agreement (Note 3)
	4,336,694,300 Shares (L)
Dr. Zhang	Interest of Spouse	5,928,928,699	62.64% (L)
Jionglong	59,000 Shares (L)	Shares (L)
	Founder of a discretionary
	trust who can influence how
	the trustee exercises his
	discretion
	255,582,886 Shares (L)
	A concert party to an
	agreement (Note 4)
	5,474,346,813 Shares (L)
	Interest in a controlled
	corporation (Note 5)
	198,940,000 Shares (L)

Notes:

(1) Under sections 317 and 318 of the SFO, Dr. Che Fengsheng is deemed to be interested in the 329,736,000 Shares, 1,262,498,399 Shares, 113,180,000 Shares, 377,267,528 Shares, 59,000 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Guo Weicheng, Successmax Global Limited, Smart Top Overseas Limited, Victory Faith International Limited, Dr. Zhang Jionglong, Keen Mate Limited and Mingyao Capital Limited, respectively.
(2) Since Dr. Che Fengsheng is one of the settlors of the trust for which Sihuan Management (PTC) Limited is a trustee, Dr. Che Fengsheng is deemed to be interest in the long position of 10,947,661 Shares and the short position of 7,847,661 Shares held by Sihuan Management (PTC) Limited.
(3) Under sections 317 and 318 of the SFO, Dr. Guo Weicheng is deemed to be interested in the 11,747,661 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 113,180,000 Shares, 377,267,528 Shares, 198,940,000 Shares, 255,582,886 Shares and 59,000 Shares held by Dr. Che Fengsheng,

– 85 –

GENERAL INFORMATION

APPENDIX IV

Network Victory Limited, Proper Process International Limited, Smart Top Overseas Limited, Victory Faith International Limited, Keen Mate Limited, Mingyao Capital Limited and Dr. Zhang Jionglong, respectively.

(4) Under sections 317 and 318 of the SFO, Dr. Zhang Jionglong is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 113,180,000 Shares, 377,267,528 Shares and 1,262,498,399 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Network Victory Limited, Proper Process International Limited, Smart Top Overseas Limited, Victory Faith International Limited, Successmax Global Holdings Limited, respectively.
(5) Dr. Zhang Jionglong is the beneficial owner of 100% of the issued share capital of Keen Mate Limited. As such, Dr. Zhang Jionglong is deemed to be interested in the 198,940,000 Shares held by Keen Mate Limited.
(6) The letter ‘‘L’’ denotes the Director’s long position in such Shares and the letter ‘‘S’’ denotes the Director’s short position in such Shares.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company held any interest or short position in the Shares, underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers of the Listing Rules, to be notified to the Company and the Stock Exchange.

(ii) Interests of substantial shareholders

As at the Latest Practicable Date, so far as is known to the Directors, the following persons (other than a Director or chief executive of the Company) had, or were deemed to have, interests or short positions in the Shares or underlying shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the registered required to be kept by the Company under section 336 of the SFO:

			Approximate
Name of		Total Number	Percentage of
Shareholder	Nature of Interest/Capacity	of Shares	Shareholding
Mr. Meng Xianhui	Interest in a controlled	5,928,928,699	62.64% (L)
	corporation (Note 1)	Shares (L)
	113,180,000 Shares (L)
	Founder of a discretionary trust
	who can influence how the
	trustee exercises his discretion
	377,267,528 Shares (L)

– 86 –

GENERAL INFORMATION

APPENDIX IV

			Approximate
Name of		Total Number	Percentage of
Shareholder	Nature of Interest/Capacity	of Shares	Shareholding
	A concert party to an agreement
	(Note 2)
	5,438,481,171 Shares (L)
Proper Process	Beneficial owner	5,928,928,699	62.64% (L)
International	2,882,469,225 Shares (L)	Shares (L)
Limited
	A concert party to an agreement
	(Note 3)
	3,046,459,474 Shares (L)
Network Victory	Beneficial owner	5,928,928,699	62.64% (L)
Limited	497,448,000 Shares (L)	Shares (L)
	A concert party to an agreement
	(Note 4)
	5,431,480,699 Shares (L)
Successmax Global	Beneficial owner	5,928,928,699	62.64% (L)
Holdings Limited	1,262,498,399 Shares (L)	Shares (L)
	A concert party to an agreement
	(Note 5)
	4,666,430,300 Shares (L)
Victory Faith	Beneficial owner	5,928,928,699	62.64% (L)
International	377,267,528 Shares (L)	Shares (L)
Limited
	A concert party to an agreement
	(Note 6)
	5,551,661,171 Shares (L)
Smart Top Overseas	Beneficial owner	5,928,928,699	62.64% (L)
Limited	113,180,000 Shares (L)	Shares (L)
	A concert party to an agreement
	(Note 7)
	5,815,748,699 Shares (L)

– 87 –

GENERAL INFORMATION

APPENDIX IV

			Approximate
Name of		Total Number	Percentage of
Shareholder	Nature of Interest/Capacity	of Shares	Shareholding
Mingyao Capital	Beneficial owner	5,928,928,699	62.64% (L)
Limited	255,582,886 Shares (L)	Shares (L)
	A concert party to an agreement
	(Note 8)
	5,673,345,813 Shares (L)
Keen Mate Limited	Beneficial owner	5,928,928,699	62.64% (L)
	198,940,000 Shares (L)	Shares (L)
	A concert party to an agreement
	(Note 9)
	5,729,988,699 Shares (L)
UBS Trustee	Trustee	5,928,928,699	62.64% (L)
(Cayman) Ltd.	5,928,928,699 Shares (L)	Shares (L)
UBS TC (Jersey) Ltd	Trustee	5,928,928,699	62.64% (L)
	5,928,928,699 Shares (L)	Shares (L)

Notes:

(1) Mr. Meng Xianhui is the beneficial owner of 100% of the issued share capital of Smart Top Overseas Limited. As such, Mr. Meng Xianhui is deemed to be interested in the 113,180,000 Shares held by Smart Top Overseas Limited.
(2) Under sections 317 and 318 of the SFO, Mr. Meng Xianhui is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 2,882,469,225 Shares, 497,448,000 Shares, 1,262,498,399 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Proper Process International Limited, Network Victory Limited, Successmax Global Holdings Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.
(3) Under section 317 and 318 of the SFO, Proper Process International Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 1,262,498,399 Shares, 113,180,000 Shares, 377,267,528 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Successmax Global Holdings Limited, Smart Top Overseas Limited, Victory Faith International Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.
(4) Under section 317 and 318 of the SFO, Network Victory Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 2,882,469,225 Shares, 1,262,498,399 Shares, 113,180,000 Shares, 377,267,528 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Proper Process International Limited, Successmax Global Holdings Limited, Smart Top Overseas Limited, Victory Faith International Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.

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GENERAL INFORMATION

APPENDIX IV

(5) Under section 317 and 318 of the SFO, Successmax Global Holdings Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 113,180,000 Shares, 377,267,528 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Proper Process International Limited, Smart Top Overseas Limited, Victory Faith International Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.
(6) Under section 317 and 318 of the SFO, Victory Faith International Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 1,262,498,399 Shares, 113,180,000 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Proper Process International Limited, Successmax Global Holdings Limited, Smart Top Overseas Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.
(7) Under section 317 and 318 of the SFO, Smart Top Overseas Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 1,262,498,399 Shares, 377,267,528 Shares, 198,940,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Proper Process International Limited, Successmax Global Holdings Limited, Victory Faith International Limited, Keen Mate Limited and Mingyao Capital Limited, respectively.
(8) Under section 317 and 318 of the SFO, Mingyao Capital Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 1,262,498,399 Shares, 113,180,000 Shares, 198,940,000 Shares and 377,267,528 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Proper Process International Limited, Successmax Global Holdings Limited, Smart Top Overseas Limited, Keen Mate Limited and Victory Faith International Limited, respectively.
(9) Under section 317 and 318 of the SFO, Keen Mate Limited is deemed to be interested in 11,747,661 Shares, 329,736,000 Shares, 59,000 Shares, 497,448,000 Shares, 2,882,469,225 Shares, 1,262,498,399 Shares, 377,267,528 Shares, 113,180,000 Shares and 255,582,886 Shares held by Dr. Che Fengsheng, Dr. Guo Weicheng, Dr. Zhang Jionglong, Network Victory Limited, Proper Process International Limited, Successmax Global Holdings Limited, Victory Faith International Limited, Smart Top Overseas Limited and Mingyao Capital Limited, respectively.
(10) The letter ‘‘L’’ denotes the shareholder’s long position in such Shares and the letter ‘‘S’’ denotes the shareholder’s short position in such Shares.

Save as disclosed above, as at the Latest Practicable Date, according to the register of interests required to be kept by the Company under section 336 of the SFO, the Company is not aware of any other persons who had any interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had a service contract or a proposed service contract with any member of the Group which is not expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation).

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GENERAL INFORMATION

APPENDIX IV

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2019, the date of which the latest published accounts of the Company were made up.

5. COMPETING BUSINESS INTEREST OF DIRECTORS

As at the Latest Practicable Date, none of the Directors, proposed Directors or their respective close associates (as if each of them were treated as a controlling shareholder under Rule 8.10 of the Listing Rules) had any competing interests in a business which competes or is likely to compete with the business of the Group.

6. EXPERTS

The following is the qualification of the experts who had given their opinion and advice which are contained in this circular:

Name Qualification JLL Royal Institute of Chartered Surveyors Regulated Firms EY Certified Public Accountants Somerley a corporation licensed to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO

Notes:

(1) As at the Latest Practicable Date, JLL, EY and Somerley had no shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
(2) Each of JLL, EY and Somerley has given and have not withdrawn its written consent to the issue of this circular with the inclusion of the Valuation Report, the Letter from Ernst & Young and the Letter from Somerley, respectively, and references to its name in the form and context in which they are included.
(3) As at the Latest Practicable Date, JLL, EY and Somerley did not have any direct or indirect interest in any assets which have been, since 31 December 2019 (being the date of which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to or were proposed to be acquired or disposed of by or lease to any member of the Group.
(4) The Valuation Report is given as of the date of this circular for incorporation herein.
(5) The Letter from Ernst & Young is given on 3 May 2020 for incorporation into the announcement of the Company dated 3 May 2020 and reproduced for incorporation into this circular.
(6) The Letter from Somerley is given as of the date of this circular for incorporation herein.

– 90 –

GENERAL INFORMATION

APPENDIX IV

Each of the above experts has given and has not withdrawn its written consent to the issue of this circular with a copy of its letter and/or the reference to its name (including its qualifications) and its advice included in this circular in the form and context in which it respectively appears.

To the best of the knowledge, information and belief of the Directors, having made all reasonable enquiries, all the above experts are third parties independent from the Group and its connected persons.

As at the Latest Practicable Date, none of the above experts has any equity interests in any member of the Group and has any rights (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any member of the Group.

7. DIRECTORS’ INTERESTS IN ASSETS AND CONTRACTS

As at the Latest Practicable Date, save for the Sale and Purchase Agreements, each of the Directors did not have any direct or indirect interest in any asset which had been acquired, disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 December 2019, the date to which the latest audited financial statements of the Group was made up; and was not beneficially interested in the share capital of any member of the Group and did not have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, save for the Sale and Purchase Agreements, there is no contract or arrangement subsisting at the date of this circular in which any of the Directors is materially interested and which is significant in relation to the business of the Group.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at least 14 days during normal business hours at the office of the Company at Room 4309, Office Tower, Convention Plaza, 1 Harbour Road, Wan Chai, Hong Kong, from the date of this circular up to and including 15 June 2020 (except Saturdays, Sundays and public holidays) and will be available for inspection at the SGM:

(i) the Sale and Purchase Agreements;
(ii) the letter from the Independent Board Committee, the text of which is set out in the section headed ‘‘Letter from the Independent Board Committee’’ of this circular;
(iii) the letter from Somerley, the text of which is set out in the section headed ‘‘Letter from Somerley’’ of this circular;
(iv) the Valuation Report, the text of which is set out in Appendix I to this circular;
(v) the letter of consent from each of the experts referred to under the section headed ‘‘6. EXPERTS’’ in this appendix; and
(vi) this circular.

– 91 –

NOTICE OF SGM

==> picture [76 x 100] intentionally omitted <==

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(incorporated in Bermuda with limited liability)

(Stock Code: 0460)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT the special general meeting (the ‘‘SGM’’) of Sihuan Pharmaceutical Holdings Group Ltd. (the ‘‘Company’’) will be held at Conference Room Mission 4+5, 4th Floor, Hilton Shenzhen Futian, Tower B, Great China International Finance Centre, 1003 Shennan Road, Futian, Shenzhen, the People’s Republic of China on Monday, 15 June 2020 at 10:30 a.m. for the purpose of considering and, if thought fit, passing (with or without amendments) the following resolutions:

ORDINARY RESOLUTIONS

‘‘THAT
(a) (i) the Sale and Purchase Agreement A (as defined in the circular of the Company dated 29 May 2020, hereinafter referred to as the ‘‘Circular’’) entered into between Sun Moral International (HK) Limited (耀忠國際(香港)有限公司) and CFS Development Holding Limited dated 3 May 2020 (a copy of which has been produced to the SGM and marked ‘‘A’’ and signed by a director of the Company for the purpose of identification); and (ii) the Sale and Purchase Agreement B (as defined in the Circular) entered into between Sun Moral International (HK) Limited (耀忠國際(香港)有限公司) and Weicheng Investment Holding Limited dated 3 May 2020 (a copy of which has been produced to the SGM and marked ‘‘B’’ and signed by a director of the Company for the purpose of identification), and the transactions contemplated under Sale and Purchase Agreements (as defined in the Circular) including, without limitation, the Disposal (as defined in the Circular) be and are hereby approved, confirmed and ratified; and
(b) any director of the Company be and are hereby authorised to do all such things and execute all such documents as the director may at his/her absolute discretion deem fit or appropriate to give effect to the Sale and Purchase Agreements (as defined in the Circular) and the implementation of all the transactions contemplated thereunder including, without limitation, the Disposal.’’

– 92 –

NOTICE OF SGM

2. ‘‘THAT

Subject to the Special Cash Dividend Conditions (as defined and set out in the Circular), a special cash dividend of RMB10.6 cents (equivalent to approximately HK11.6 cents) per share (the ‘‘Special Cash Dividend’’) be declared and paid to the shareholders of the Company whose names appear on the register of members of the Company on 24 June 2020, being the record date for determining the entitlements to the Special Cash Dividend, and any director of the Company be and is hereby authorized to take such action, do such things and execute such further documents as the director may at his/her absolute discretion consider necessary or desirable for the purpose of or in connection with the implementation of the payment of the Special Cash Dividend.’’

Yours faithfully, By Order of the Board Sihuan Pharmaceutical Holding Group Ltd. Dr. Che Fengsheng Chairman

29 May 2020

Notes:

(i) Ordinary resolution numbered 2. will be proposed to the shareholders of the Company for approval provided that ordinary resolution numbered 1. is passed by the shareholders of the Company.
(ii) A shareholder entitled to attend and vote at the SGM is entitled to appoint another person as his/her proxy to attend and vote instead of him/her; a proxy needs not be a shareholder of the Company.
(iii) In the case of joint holders, the vote of the senior who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the vote(s) of the other joint holder(s) and for this purpose seniority shall be determined as that one of the persons so present whose name stands first on the register of members in respect of such share shall alone be entitled to vote in respect thereof.
(iv) In order to be valid, a form of proxy must be deposited at the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong together with the power of attorney or other authority (if any) under which it is signed (or a certified copy thereof) not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. The completion and return of the form of proxy shall not preclude shareholders of the Company from attending and voting in person at the SGM (or any adjourned meeting thereof) if they so wish.
(v) The transfer books and register of members will be closed from Wednesday, 10 June 2020 to Monday, 15 June 2020, both days inclusive in order to determine the entitlement of shareholders to attend and vote at the SGM, during which period no share transfers can be registered. In order to qualify for attending and voting at the SGM, all transfers accompanied by the relevant share certificates must be lodged with the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Tuesday, 9 June 2020.
(vi) The transfer books and register of members will be closed from Monday, 22 June 2020 to Wednesday, 24 June 2020, both days inclusive in order to determine the entitlement of shareholders to receive the proposed Special Cash Dividend, during which period no share transfers can be registered. In order to qualify for the Special Cash Dividend, all transfers accompanied by the relevant share certificates must be lodged with the

– 93 –

NOTICE OF SGM

Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Friday, 19 June 2020 (if applicable).

As at the date of this notice, the executive directors of the Company are Dr. Che Fengsheng (Chairman), Dr. Guo Weicheng (Deputy Chairman and Chief Executive Officer), Dr. Zhang Jionglong, Mr. Choi Yiau Chong and Ms. Chen Yanling; the non-executive director of the Company is Mr. Kim Jin Ha; and the independent non-executive directors of the Company are Mr. Patrick Sun, Mr. Tsang Wah Kwong and Dr. Zhu Xun.

– 94 –

AI assistant

Sihuan Pharmaceutical Holdings Group Ltd. — Proxy Solicitation & Information Statement 2020

49228_rns_2020-05-29_d3b594d6-4f9d-4bd4-bbfb-b3e58aa2ce4b.pdf

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

DISCLOSEABLE AND CONNECTED TRANSACTION PROPOSED SPECIAL CASH DIVIDEND AND

NOTICE OF SPECIAL GENERAL MEETING

SOMERLEY CAPITAL LIMITED

‘‘PRC’’

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

(Stock Code: 0460)

DISCLOSEABLE AND CONNECTED TRANSACTION PROPOSED SPECIAL CASH DIVIDEND AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

THE SALE AND PURCHASE AGREEMENTS

Sale and Purchase Agreement A

Sale and Purchase Agreement B

Reorganisation and assets to be disposed of

LETTER FROM THE BOARD

Consideration

Conditions Precedent

Completion

Use of Proceeds

Transitional Services Agreements

Non-compete Confirmation

INFORMATION ON THE TARGET GROUP

CS Sciences

LETTER FROM THE BOARD

Hainan Maifu

Beijing Stemexcel

Xi’an Tengyun

Jiangsu Antai

Shanghai LIDE

Huaxing Kangping Partnership

Huaxing Kangping

Zhejiang Zhida

Shenzhen Henghe

FINANCIAL EFFECT OF THE DISPOSAL

REASONS FOR AND BENEFITS OF THE DISPOSAL

INFORMATION ON THE COMPANY, THE SELLER AND THE PURCHASERS

The Company

Seller

Purchaser A

Purchaser B

LISTING RULES IMPLICATIONS

PROPOSED SPECIAL CASH DIVIDEND

Special Cash Dividend Conditions

LETTER FROM THE BOARD

NOTICE OF SGM

RECOMMENDATION

CLOSURE OF REGISTER OF MEMBERS

FORM OF PROXY

VOTING BY POLL

LETTER FROM THE BOARD

Sihuan Pharmaceutical Holdings Group Ltd. 四環醫藥控股集團有限公司

DISCLOSEABLE AND CONNECTED TRANSACTION

SOMERLEY CAPITAL LIMITED

SOMERLEY CAPITAL LIMITED

DISCLOSEABLE AND CONNECTED TRANSACTION ON PROPOSED DISPOSAL

INTRODUCTION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Information on the Group

1.2 Financial performance of the Group

1.3 Financial position of the Group

LETTER FROM SOMERLEY

2. Information on the Target Group

2.1 Background information on the Target Group

2.2 Background information on the Target Companies

Chonghui Management

Hainan Tengwei

CS Sciences

Hainan Maifu

Beijing Stemexcel

Xi’an Tengyun

Jiangsu Antai

Shanghai LIDE

Huaxing Kangping Partnership

Huaxing Kangping

Zhejiang Zhida

Shenzhen Henghe

3. Reasons for and benefits of the Disposal

4. Principal terms of the Sale and Purchase Agreement

Sihuan Pharmaceutical Holdings Group Ltd. Proxy Solicitation & Information Statement 2020