Sinco Pharmaceuticals Holdings Limited - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Sino Biopharmaceutical Limited中國生物製藥有限公司 you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or the transfer was effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims 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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SINO BIOPHARMACEUTICAL LIMITED 中國生物製藥有限公司

(Incorporated in the Cayman Islands with limited liability) Website: www.sino-biopharm.com (Stock code: 1177)

MAJOR TRANSACTION

FORMATION OF A JOINT VENTURE COMPANY

A letter from the board of directors of Sino Biopharmaceutical Limited 中國生物製藥有限公司 is set out on pages 4 to 10 of this circular. A notice convening an extraordinary general meeting of Sino Biopharmaceutical Limited 中國生物製藥有限公司 to be held at 11:00 a.m. on Thursday, 12 October, 2006 at 7th Floor, Board Room, The Dynasty Club Ltd., South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong is set out on pages 106 to 107 of this circular. Whether or not you are able to attend the meeting, please complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the meeting or any adjourned meeting if you so wish.

25 September, 2006

		Page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		4
APPENDIX I	FINANCIAL INFORMATION OF THE GROUP. . . . . . . . . . . . . . . . . . . . . .	11
APPENDIX II	GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	98
NOTICE OF EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		106

DEFINITIONS

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

“associate(s)”	has the meaning ascribed to it in the Listing Rules
“Board”	the board of Directors of the Company
“Company”	Sino Biopharmaceutical Limited (中國生物製藥有限公司), a
	company incorporated in the Cayman Islands with limited liability,
	whose issued Shares are listed on the Main Board of the Stock
	Exchange
“Completion”	completion of the Agreement
“connected person(s)”	has the meaning ascribed to it in the Listing Rules
“CTC”	Chia Tai Coal Chemical Limited (正大煤化有限公司), a company
	incorporated in Hong Kong with limited liability and owned as to
	80% by Mr. Tse Ping and 20% by an independent third party
	unrelated to the Company, its subsidiaries and its connected
	persons
“CTRC”	Chia Tai Refined Chemical Industry Limited (正大精化工有限
	公司), a company incorporated in Hong Kong with limited liability
	which is a wholly-owned subsidiary of the Company and a party
	to the JV Agreement
“Director(s)”	director(s) of the Company
“EGM”	an extraordinary general meeting to be held on Thursday,
	12 October, 2006 to consider and, if thought fit, to approve the
	JV Agreement
“Enlarged Group”	the Group as enlarged by the formation of the JV Company upon
	Completion
“Group”	the Company, its subsidiaries and jointly-controlled entity
“Hong Kong”	Hong Kong Special Administrative Region of the PRC
“JV Agreement”	the joint venture agreement dated 30 August, 2006 entered into
	between CTRC and the other JV Parties for the establishment of
	the JV Company

DEFINITIONS

“JV Company”	the equity joint venture company to be established in the PRC
	pursuant to the JV Agreement, with the proposed name of陝西新
	興能源化工有限公司(Shaanxi Xinxing Energy Chemical Industry
	Limited)
“JV Parties”	CTRC, SCC, SPI and SNC
“Latest Practicable Date”	21 September, 2006, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information
	included in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“MTO”	means coal into methanol to low carbon olefin. MTO technology
	is key to the process of refining coal into olefin products
“PRC”	the People’s Republic of China which, for the purpose of this
	circular, excludes Hong Kong, the Macau Special Administrative
	Region and Taiwan
“SCC”	陝西煤業化工集團有限責任公司(Shaanxi Coal Chemical
	Industry Limited), a company established in the PRC and a party
	to the JV Agreement
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.025 each in the issued share capital of
	the Company
“Shareholder(s)”	holder(s) of Share(s)
“SNC”	陝西新興煤化工科技發展有限責任公司(Shaanxi New Coal
	Chemical Science and Technology Development Co., Ltd.), a
	company established in the PRC and a party to the JV Agreement
“SPI”	陝西省投資（集團）有限公司(Shaanxi Province Investment Group
	Limited ), a company established in the PRC and a party to the
	JV Agreement
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“subsidiary”	has the meaning ascribed to it under the Companies Ordinance
	(Chapter 32 of the Laws of Hong Kong) and “subsidiaries” shall
	be construed accordingly

DEFINITIONS

“HK$” Hong Kong dollars, the lawful currency of Hong Kong “RMB” Renminbi, the lawful currency of the PRC “%” per cent.

Notes:

For the purpose of illustration in this circular, figures in Renminbi are translated into Hong Kong dollars at the approximate exchange rate of HK$0.96 to RMB1.
The English translation of Chinese names is included for information purpose only and should not be regarded as their official English translation.

LETTER FROM THE BOARD

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SINO BIOPHARMACEUTICAL LIMITED 中國生物製藥有限公司

(Incorporated in the Cayman Islands with limited liability)

Website: www.sino-biopharm.com

(Stock code: 1177)

Executive Directors: Mr. Tse Ping Mr. Tao Huiqi Mr. Wang Jinyu Mr. He Huiyu Ms. Cheng Cheung Ling Ms. Zhao Yanping Mr. Tse Hsin Mr. Zhang Baowen

Independent non-executive Directors: Mr. Lu Zhengfei Mr. Li Dakui Ms. Li Jun

Registered office: Century Yard, Cricket Square Hutchins Drive P.O. Box 2681 GT George Town, Grand Cayman British West Indies

Head office and principal place of business in Hong Kong: Unit 09, 41st Floor Office Tower, Convention Plaza 1 Harbour Road, Wanchai Hong Kong

25 September, 2006

To the Shareholders

Dear Sirs,

MAJOR TRANSACTION

FORMATION OF A JOINT VENTURE COMPANY

A. INTRODUCTION

The Company announced on 4 September, 2006 that it had, on 30 August, 2006, through its wholly-owned subsidiary, CTRC, entered into the JV Agreement with SCC, SPI and SNC for the establishment of the JV Company, which will principally be engaged in the refining of coal into olefin products (i.e. ethylene and propylene) in Yulin City, Shaanxi Province, PRC. This refining process involves the utilisation of MTO technology.

The JV Agreement constitutes a major transaction for the Company under the Listing Rules and is subject to the approval of the Shareholders at a general meeting. The purpose of this circular is, among

LETTER FROM THE BOARD

other things, to provide further details of the JV Agreement and financial information of the Group and give Shareholders notice convening the EGM at which an ordinary resolution will be proposed to approve the terms of the JV Agreement.

B. THE JV AGREEMENT

Date: 30 August, 2006

Parties:

(1) CTRC, an investment holding company incorporated in Hong Kong with limited liability and a subsidiary of the Company;
(2) SCC, a limited liability company incorporated in the PRC. It is owned by the Shaanxi provincial government and is principally engaged in coal mine refinery, processing of coal and sales of coal;
(3) SPI, a limited liability company incorporated in the PRC. It is owned by the Shaanxi provincial government and is principally engaged in investment holding and related management; and
(4) SNC, a limited liability company incorporated in the PRC. SNC is owned as to 51% by SPI, 20% by SCC and 29% by CTC. Mr. Tse Ping, the chairman and substantial shareholder of the Company (with an approximately 47.7% shareholding interest in the Company) owns an approximately 80% shareholding interest in CTC. It is principally engaged in the research and development of technologies involving the refinery of coal.

Save as disclosed above, to the best of the Directors’ knowledge, information and belief and after making all reasonable enquiries, each of the JV Parties and its ultimate beneficial owners (other than the Company and Mr. Tse Ping) are third parties independent of the Company, its subsidiaries and its connected persons, are not connected persons of the Company nor associates of Mr. Tse Ping and do not have any shareholding interest in the Company.

Principal terms:

Purpose of the JV Company

Pursuant to the terms and conditions of the JV Agreement, the JV Parties have agreed to set up the JV Company in Yulin City, Shaanxi Province, PRC. The JV Company, which is expected to commence operations in the first quarter of 2007, will focus on utilising MTO technology to refine coal into olefin products in Yulin City, Shaanxi Province, PRC. The preparation process involves the conversion of coal into ethylene and propylene which are two of the most important raw materials used for the production of petrochemical products.

LETTER FROM THE BOARD

Total investment amount, registered capital and capital contribution

Upon establishment, the JV Company will be owned as to 43% by CTRC, 36% by SCC, 16% by SPI and 5% by SNC. Upon completion, the JV Company will be treated as a jointly-controlled entity of the Group and will be accounted for in the books of the Company by proportionate consolidation.

The total investment amount of the JV Company will be RMB5,000,000,000 (approximately HK$4,800.0 million) and its registered capital will be RMB1,750,000,000 (approximately HK$1,680.0 million) which will be contributed as to RMB752,500,000 (approximately HK$722.4 million) by CTRC, RMB630,000,000 (approximately HK$604.8 million) by SCC, RMB280,000,000 (approximately HK$268.8 million) by SPI and RMB87,500,000 (approximately HK$84.0 million) by SNC, in proportion to their respective equity interests in the JV Company. CTRC’s contribution to the registered capital of the JV Company shall be funded through the Group’s internal resources.

The JV Parties have agreed that the difference between the total investment amount and the registered capital will be financed, where required, by the JV Company’s corporate borrowings, project finance or other financing arrangements. The Group is not committed to provide any guarantee for these financing arrangements nor does it have any capital commitment in connection with the establishment of the JV Company in addition to the obligation to contribute its share of the registered capital. The Company will comply with the Listing Rules if it provides any guarantee for such financing arrangements.

Each of the JV Parties will contribute its share of the registered capital in cash. Pursuant to the JV Agreement, each of the JV Parties is required to contribute 15% of its share of the registered capital to the JV Company within one month from the date of the issuance of the business licence of the JV Company and to contribute the remaining amount in full within two years from that date.

Term of the JV Company

The JV Company shall have a term of 50 years from the date of the issuance of its business licence. Upon approval by all directors of the JV Company, the JV Company may apply to the relevant governmental body to extend the term of the business licence.

Board composition

The board of directors of the JV Company will comprise nine directors. CTRC and SCC shall be entitled to appoint four and three directors, respectively, and each of SPI and SNC shall be entitled to appoint one director.

Profit and loss sharing

Each of the JV Parties will be entitled to share the profits or will bear the losses of the JV Company in proportion to their respective equity interests in the JV Company.

LETTER FROM THE BOARD

Transfer of interests in JV Company

None of the JV Parties may transfer its equity interests in the JV Company without the prior consent from the other JV Parties. If any of the JV Parties wishes to sell its equity interests in the JV Company to another JV Party or a third party, the other JV Parties have the right of pre-emption to purchase such equity interests on no less favorable terms.

Conditions precedent

The JV Agreement will not come into effect until the following conditions have been fulfilled:

(a) all necessary approvals, processes, and/or authorizations for the implementation of the transactions contemplated under the JV Agreement having been obtained by the JV Parties, including in the case of CTRC, having obtained the approval of the Shareholders; and
(b) the approval(s) from the Ministry of Commerce of the PRC or its delegated authority in relation to the transactions contemplated under the JV Agreement having been obtained.

There is no provision in the JV Agreement which specifies the latest time for the fulfillment of the above conditions. The Directors currently expect that completion of the JV Agreement will take place within six months from the date of the JV Agreement. As the establishment of the JV Company is subject to shareholders’ approval at the EGM, the Company is unable to proceed with any registration formalities until it has received such approval. As such, none of the conditions precedents have been fulfilled as at the date of this circular.

Should any of the conditions not be fulfilled and completion of the JV Agreement not take place, the JV Agreement will not be effective and the Company will not have any liability or obligation thereunder except the payment of its proportionate share of the expenses relating to the formation of the JV Company.

C. REASONS FOR THE JOINT VENTURE

The Group is an integrated pharmaceutical enterprise. Applying advanced biotechnology and modernized Chinese medicinal technology, the Group researches, develops, manufactures and markets a vast array of health enhancing biopharmaceuticals, modernized Chinese medicines and chemical medicines.

Apart from manufacturing medicines administered to patients directly, the Group also manufactures raw materials for the production of chemical medicines. The raw material manufacturing process for chemical medicines is similar to the manufacturing process used for refining coal into olefin chemical products. Given the Group’s familiarity with the manufacturing process in producing raw material for chemical medicines combined with the experience of the JV Company’s MTO technicians and engineers, the Group is comfortable and confident that it will benefit from the high growth coal olefin industry.

While the Group intends to continue to focus on the development of its pharmaceutical business, the Group also wishes to diversify its business in areas with relatively high potential. As the prices of petroleum continue to rise, the Board is of the view that the Group’s participation as a major equity owner in the JV Company will allow the Group to invest in, and benefit from, the relatively high growth and high yield coal olefin industry in the PRC.

LETTER FROM THE BOARD

The JV Company will focus on refining coal into olefin chemical products such as ethylene and propylene. Both ethylene and propylene are basic organic chemical materials in the petrochemical industry which are traditionally refined from petroleum. Ethylene is mainly utilized in the production of various major organic chemical products including polyethylene, polyvinyl chloride, ethane and vinyl acetate. Propylene is another major organic petrochemical raw material and is mainly utilized in the production of polypropylene, phenol, acetone and butanols. These raw materials are widely used in textile industry, plastic industry, construction materials and pharmaceutical industry.

The process which will be used by the JV Company will utilise MTO technology. This is significant in terms of providing an alternative source to petroleum as the primary raw material used is coal instead of petroleum or naphtha, thereby substantially cutting down on the volume of petroleum required to produce olefin chemical products. This is especially crucial in the PRC as the PRC has a rich coal reserve but scarce petroleum and natural gas reserves.

The JV Company has the expertise and the production management personnel who have successful experience in putting the MTO industrialisation test equipment to trial. SNC, the Group’s joint venture partner is well experienced in the processing of coal into olefin and related management. In addition, SNC has managed to industrialise the world’s first ever 10,000-ton type MTO test equipment. The successful operation of this equipment will allow the JV Company establish an industrial facility with a capacity of 200,000 tons. SNC is also dedicated to the research and development of coal olefin technologies and the JV Company will be able to benefit from new technologies and products..

Save for the cashflow effect arising from the utilization of internal funds to finance the capital contribution to the JV Company, the Directors do not expect the formation of the JV Company itself would have any material adverse financial impact on the assets and liabilities of the Group.

The terms of the JV Agreement have been agreed after arm’s length negotiations between the respective JV Parties. The Directors (including the independent non-executive Directors) consider that the JV Agreement is on normal commercial terms and is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

D. FINANCIAL EFFECTS OF THE TRANSACTION ON THE GROUP

The formation of the JV Company will have minimal immediate effect on the Group’s earnings, after taking into account the short-term earnings effect of the JV Company and the foregone interest income associated with the contribution of registered capital to be financed by the Group’s internal resources.

Pursuant to the JV Agreement, the Company is required to contribute 15% of its share of registered capital to the JV Company (approximately HK$108.4 million) within one month from the date of the issuance of the business licence of the JV Company and to contribute the remaining amount in full (approximately HK$614.0 million) within two years from that date. It is agreed that the difference between the total investment amount and the registered capital will be financed, where required, by the JV Company’s corporate borrowings, project finance or other financing arrangements. The Group is not committed to provide any guarantee for these financing arrangements nor does it have any capital commitment in connection with the establishment of the JV Company in addition to the obligation to contribute its share of the registered capital.

LETTER FROM THE BOARD

As at 30 June 2006, the unaudited consolidated net tangible assets of the Group was HK$1,882,210,000 which was calculated by deducting the intangible assets (HK$8,927,000) and goodwill (HK$41,973,000) from the unaudited consolidated net assets of the Group (HK$1,933,110,000) as at 30 June, 2006. Following the Completion, the unaudited adjusted consolidated net tangible assets of the Enlarged Group will remain unchanged as the increase in the net asset value of the Group (HK$722,400,000) by increasing in the net asset value of the JV Company shared by the Group under the proportionate consolidation accounting method would be offset by the corresponding decrease in the net asset value of the Group (HK$722,400,000) by cash payment and consideration payable recorded by the Company.

No accountants’ report on the JV Company has been prepared as the JV Company has yet to be established. The formation of the JV Company has no immediate impact on the net assets, net tangible assets, assets and liabilities of the Group.

E. EGM

The JV Agreement constitutes a major transaction for the Company under the Listing Rules and is subject to the approval of the Shareholders at a general meeting.

A notice of the EGM to be held at 11:00 a.m. on Thursday, 12 October, 2006 at 7th Floor, Board Room, The Dynasty Club Ltd., South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong at which an ordinary resolution will be proposed to approve, among other things, the JV Agreement pursuant to the terms thereunder is set out on pages 106 to 107 of this circular.

A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s principal place of business in Hong Kong at Unit 09, 41st Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong, as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

Pursuant to Rule 2.15 of the Listing Rules, any shareholder that has a material interest in the transaction shall abstain from voting on the resolution approving the transaction at a general meeting. Mr. Tse Ping has an interest in 1,080,488,908 shares (or approximately 47.7% shareholding interest) of which approximately 2% is held directly by Mr. Tse Ping and the remaining 45.7% is held through controlled corporations, Remarkable Industries Limited and Validated Profits Limited which hold 343,906,560 shares (or approximately 15.2% shareholding interest) and 691,582,348 shares (or approximately 30.5% shareholding interest), respectively. Since Mr. Tse Ping also has a shareholding interest in a company (CTC) which has a 29% interest in SNC, being one of the other JV Parties, he, Remarkable Industries Limited and Validated Profits Limited are considered to have a material interest in the transaction and are therefore required to abstain from voting at the EGM. Mr. Tse Ping, Remarkable Industries Limited and Validated Profits Limited are entitled to exercise control over the voting rights in respect of their shares. Voting at the EGM shall be taken by way of poll in accordance with Rule 13.39(4)(d) of the Listing Rules.

LETTER FROM THE BOARD

A poll may be demanded by:

(a) the chairman of the meeting; or
(b) at least three shareholders present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy for the time being entitled to vote at the meeting; or
(c) any shareholder or shareholders present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to attend and vote at the meeting; or
(d) a shareholder or shareholders present in person or in case of a shareholder being a corporation by its duly authorized representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid equal to not less than one-tenth of the total sum paid up on all shares conferring that right; or
(e) any of the Directors who individually or collectively (including the chairman of the relevant meeting of the Company) hold proxies in respect of shares representing 5% or more of the total voting rights at a particular meeting of the Company, and if on a show of hands such meeting votes in the opposite manner to that instructed in those proxies, such Directors shall have the right to demand a poll. If a poll is required under these circumstances, the chairman of the meeting should disclose to the meeting of the Company the total number of votes represented by all proxies held by Directors indicating an opposite vote to the votes cast at the meeting on a show of hands.

To the Directors’ knowledge and belief, apart from Mr. Tse Ping and his associates, Remarkable Industries Limited and Validated Profits Limited, none of the Shareholders has a material interest in the subject transaction and is required to abstain from voting at such general meeting for the approval of the transaction.

F. RECOMMENDATION

Having regard to the information described above, the Directors are of the opinion that the transactions contemplated under the JV Agreement is in the interest of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the relevant resolution to approve the same at the EGM.

G. ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the appendices to this circular.

Yours faithfully, For and on behalf of the Board

SINO BIOPHARMACEUTICAL LIMITED Tse Ping

Chairman

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited and restated financial results of the Group for each of the three financial years ended 31 December, 2005 as derived from the 2005 annual report and unaudited financial results of the Group for the six months ended 30 June, 2006 as extracted from the 2006 interim report respectively.

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED INCOME STATEMENT	CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June, 2006 HK$000 Notes (Unaudited)		For the year ended 31 December, 2005 2004 2003 HK$000 HK$’000 HK$’000 (Audited) (Restated) (Restated) 756,073 664,296 456,089 (139,418) (133,163) (105,872) 616,655 531,133 350,217 28,599 7,063 8,154 (310,609) (253,390) (176,167) (110,866) (101,885) (79,396) (42,224) (33,382) (18,593) (2,729) (1,050) (843) 178,826 148,489 83,372 (66,315) – – 112,511 148,489 83,372 (18,311) (15,407) (11,625) 94,200 133,082 71,747 152,213 152,129 78,209 1,406,191 – – 1,558,404 152,129 78,209 1,652,604 285,211 149,956 1,532,929 168,485 81,636 119,675 116,726 68,320 1,652,604 285,211 149,956
CONTINUING OPERATIONS REVENUE 2 Cost of sales Gross profit Other income and gains 3 Selling and distribution costs Administrative expenses Other expenses Finance costs 4 PROFIT BEFORE TAX AND BEFORE FAIR VALUE ADJUSTMENT FOR DERIVATIVE FINANCIAL INSTRUMENT Fair value adjustment for derivative financial instrument PROFIT BEFORE TAX AND AFTER FAIR VALUE ADJUSTMENT FOR DERIVATIVE FINANCIAL INSTRUMENT 5 Tax 6 PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS DISCONTINUED OPERATION 7 Profit for the year from a discontinued operation Gain on disposal of subsidiaries Total profit for the year from a discontinued operation PROFIT FOR THE YEAR Attributable to: Equity holders of the parent Minority interests	330,818 (68,019) 262,799 37,053 (153,672) (53,320) (16,526) (409) 75,925 – 75,925 (4,214) 71,711 – – – 71,711 57,437 14,274 71,711	756,073 (139,418) 616,655 28,599 (310,609) (110,866) (42,224) (2,729) 178,826 (66,315) 112,511 (18,311) 94,200 152,213 1,406,191 1,558,404 1,652,604 1,532,929 119,675 1,652,604	664,296 (133,163) 531,133 7,063 (253,390) (101,885) (33,382) (1,050) 148,489 – 148,489 (15,407) 133,082 152,129 – 152,129 285,211 168,485 116,726 285,211

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

As at 30 June, 2006 HK$000 Notes (Unaudited)	As at 30 June, 2006 HK$000 Notes (Unaudited)	As 2005 HK$000 (Audited)	at 31 December, 2004 2003 HK$’000 HK$’000 (Restated) (Restated)	at 31 December, 2004 2003 HK$’000 HK$’000 (Restated) (Restated)
NON-CURRENT ASSETS Property, plant and equipment Prepaid land lease payments Goodwill Deferred development cost Other intangible assets Interest in a jointly-controlled entity Available-for-sale equity investments Deferred tax assets Total non-current assets CURRENT ASSETS Inventories Trade receivables 8 Prepayments, deposits and other receivables Due from a related company Cash and cash equivalents 9 Total current assets CURRENT LIABILITIES Trade payables 10 Other payables and accruals Tax payable Due to a related company Bank and other borrowings 11 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	201,074 7,329 41,973 – 8,927 – 34,193 3,647 297,143 47,361 107,089 29,672 1,190 1,742,906 1,928,218 38,164 180,013 4,771 110 66,789 289,847 1,638,371 1,935,514	198,662 7,438 41,948 – 3,802 – 29,820 3,647 285,317 44,339 102,013 11,446 1,094 1,696,013 1,854,905 20,559 133,688 7,146 1,181 – 162,574 1,692,331 1,977,648	287,250 24,717 41,900 – 15,813 – 29,820 7,964 407,464 61,057 106,193 30,466 871 344,484 543,071 17,236 201,253 14,167 5,151 – 237,807 305,264 712,728	198,790 7,790 47,287 11,024 3,784 – 30,018 –
				298,693
				59,232 62,163 9,934 – 357,222
				488,551
				21,509 180,276 9,244 4,502 –
				215,531
				273,020
				571,713

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

As at 30 June, 2006 HK$’000 Notes (Unaudited)	As at 30 June, 2006 HK$’000 Notes (Unaudited)	As at 31 December, 2005 2004 2003 HK$’000 HK$’000 HK$’000 (Audited) (Restated) (Restated)	As at 31 December, 2005 2004 2003 HK$’000 HK$’000 HK$’000 (Audited) (Restated) (Restated)	As at 31 December, 2005 2004 2003 HK$’000 HK$’000 HK$’000 (Audited) (Restated) (Restated)
NON-CURRENT LIABILITIES Convertible bonds Deferred tax liabilities Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent Issued capital 12 Reserves Proposed final dividend Minority interests Total equity	– 2,404 2,404 1,933,110 56,599 1,782,364 – 1,838,963 94,147 1,933,110	– 2,404 2,404 1,975,244 56,599 1,762,689 33,959 1,853,247 121,997 1,975,244	42,900 2,038 44,938 667,790 34,428 366,562 55,084 456,074 211,716 667,790	78,000 –
				78,000
				493,713

				33,200 272,140 33,200
				338,540 155,173
				493,713

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

1. BASIS OF PREPARATION

This condensed consolidated financial information has been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Hong Kong Accounting Standard 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants.

This condensed consolidated financial information should be read in conjunction with the 2005 annual financial statements.

The accounting policies and methods of computation used in the preparation of this condensed consolidated financial information are consistent with those used in the annual financial statements for the year ended 31 December, 2005.

Due to the adoption of new HKFRSs in 2005, the accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain prior year and opening balance adjustments have been made and certain comparative amounts have been reclassified and restated to conform with the current year’s presentation and accounting treatment.

2. REVENUE

Revenue represents the net involved value of goods sold, after allowance for sales returns and discounts as well as dividend income. All significant intra-group transactions have been eliminated on consolidation.

Segment Information

Business segments

The following tables present revenue, profit and certain asset, liability and expenditure information for the Group’s business segments for the six months ended 30 June, 2006 and 2005.

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Six months ended 30 June, 2006		Continuing operations	Continuing operations	Continuing operations	Discontinued operation Biopharmaceutical Total medicines HK$’000 HK$’000	Discontinued operation Biopharmaceutical Total medicines HK$’000 HK$’000	Consolidated HK$’000
	Modernised medicines and chemical medicines HK$’000	Investment HK$’000	Others HK$’000	Eliminations HK$’000
Segment revenue: Sales to external customers Dividend income Segment results Interest and dividend income and unallocated gains Unallocated expenses Finance costs Profit before tax Tax Profit for the period Assets and liabilities Segment assets Other unallocated assets Total assets Segment liabilities Other unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation Capital expenditure Other non-cash expenses	324,272 – 324,272 57,466 577,657 243,793 10,102 15,253 66	– 5,712 5,712 (16,176) 1,631,211 21,307 655 1,540 –	834 – 834 (1,899) 12,846 2,107 364 4 –	– – – – – – – – –	325,106 5,712 330,818 39,391 37,053 (110) (409) 75,925 (4,214) 71,711 2,221,714 3,647 2,225,361 267,207 2,404 269,611 11,121 16,797 66	– – – – – – – – – – – – – – – – – – –	325,106 5,712
							330,818

							39,391 37,053 (110) (409)

							75,925 (4,214)
							71,711

							2,221,714 3,647
							2,225,361

							267,207 2,404
							269,611

							11,121

							16,797

							66

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Six months ended 30 June, 2005		Continuing operations	Continuing operations	Continuing operations	Discontinued operation Biopharmaceutical Total medicines HK$’000 HK$’000	Discontinued operation Biopharmaceutical Total medicines HK$’000 HK$’000
	Modernised medicines and chemical medicines HK$’000	Investment HK$’000	Others HK$’000	Eliminations HK$’000
Segment revenue: Sales to external customers 354,398 Dividend income – 354,398 Segment results 87,947 Interest and dividend income and unallocated gains Unallocated expenses Finance costs Profit before tax Tax Profit for the period Assets and liabilities Segment assets 574,307 Other unallocated assets Total assets Segment liabilities 253,333 Other unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation 7,897 Capital expenditure 13,421 Other non-cash expenses 204		– 7,520 7,520 (11,881) 200,262 35,291 586 – –	1,880 – 1,880 (443) 3,202 2,227 154 – –	– – – – – – – – –	356,278 7,520 363,798 75,623 3,686 – (644) 78,665 (10,058) 68,607 777,771 7,964 785,735 290,851 2,527 293,378 8,637 13,421 204	301,545 – 301,545 113,355 3,765 – (753) 116,367 (16,300) 100,067 328,681 – 328,681 152,894 – 152,894 5,102 37,752 4,216

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. OTHER REVENUE AND GAINS

	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)
Continuing operations Bank interest income Government grant Sale of scrap materials Gain on disposal of fixed assets Others Discontinued operation Bank interest income Sale of scrap materials Others Total FINANCE COSTS	36,595 2,432 – 613 2 60 106 202 350 379 37,053 3,686 – 681 – 57 – 3,027 – 3,765 37,053 7,451 For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)	2,432 613 60 202 379
		3,686
		681 57 3,027
		3,765
		7,451

Interest on bank loans wholly repayable within one year Interest on debt component of convertible bonds Total interest Attributable to continuing operations reported in the consolidated income statement Attributable to a discontinued operation	409 – 409 409 – 409	1,277 120
		1,397

		644 753
		1,397

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. PROFIT BEFORE TAX FROM CONTINUING OPERATIONS

Profit before tax was determined after charging the following:

	For the six months ended	For the six months ended
	30 June,
	2006	2005
	HK$’000	HK$’000
	(Unaudited)	(Unaudited)
Depreciation	10,232	7,808
Amortization of prepaid land lease payments	200	119
Amortization of intangible assets	689	257
Amortization of goodwill	–	453
Staff cost	59,437	59,398

6. TAX

	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)
Provision for the period Mainland China income tax Tax attributable to a jointly-controlled entity Total tax charge for the period	1,549 2,665 4,214	6,690 3,368
		10,058

No Hong Kong profits tax has been provided for the six months ended 30 June, 2006 as there was no assessable profit arising in or derived from Hong Kong during the period (2005: Nil).

PRC income tax is provided at the rates applicable to enterprises in the PRC on the income for statutory reporting purposes, adjusted for income and expenses items which are not assessable or deductible for income tax purposes based on existing PRC income tax regulations, practices and interpretation thereof.

Pursuant to the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws, joint venture companies are subject to the statutory income tax rate of 33% (30% state income taxes plus 3% local income taxes) unless the enterprise is qualified as a “High and New Technology Enterprise” or “Advanced Technology Enterprise” or is located in specially designated regions or cities for which more favorable effective tax rates apply. The Group’s principal operating subsidiaries are qualified as “High and New Technology Enterprise” to which a preferential tax rate of 15% applies and are entitled to an income tax exemption for two years commencing from the first profitable year (after deducting losses carried forward), and a 50% reduction for the succeeding three years. If these Foreign Investment Enterprises are qualified as “Advanced Technology Enterprises”, they can extend three more years for 50% tax reduction. The Group’s principal operating subsidiaries and a jointly-controlled entity are qualified as “High and New Technology Enterprise” and “Advanced Technology Enterprises”.

As of 30 June, 2006, JCTT and Beijing Tide are subject to an income tax rate of 15% and 12% respectively (2005: 15% and 12%).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. DISCONTINUED OPERATION

	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)
Profit for the period from a discontinued operation	– –	100,067
		100,067

On 2 July, 2005, the Company entered into the Sale and Purchase Agreement with Bausch & Lomb Incorporated in relation to the disposal of the Company’s entire equity interests in Sino Concept Technology Limited, the sole assets of which are the 55% equity interests in the registered capital of each of Shandong Chia Tai Freda Pharmaceutical Co., Ltd. and Shandong Chia Tai Freda New Packaging Resources Co., Ltd. (hereinafter referred to as the “Sino Concept group”) at a consideration of US$200,000,000 (equivalent to approximately HK$1,560 million). The Sino Concept group was principally engaged in the research, development, production and sale in Mainland China of a series of biopharmaceutical products for the medical treatment of ophthalmic conditions and osteoarthritis and for external use to treat skin diseases and is a separate business segment that is part of the Mainland China operation of the Group. The disposal of the Sino Concept group was completed on 26 September, 2005.

The results of the Sino Concept group is presented below:

	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)	For the six months ended 30 June, 2006 2005 HK$’000 HK$’000 (Unaudited) (Unaudited)
Revenue Expenses Finance costs Profit from a discontinued operation Profit before tax from a discontinued operation Tax related to pre-tax profit Profit for the period from a discontinued operation	– – – – – – –	305,310 (188,190) (753)
		116,367
		116,367 (16,300)
		100,067

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. TRADE RECEIVABLES

The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit term is generally up to 90 days. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management.

An aged analysis of the Group’s trade receivables as at the balance sheet dates, based on invoice date and net of provisions, is as follows:

	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)
Current to 90 days 91 days to 180 days Over 180 days CASH AND CASH EQUIVALENTS	101,280 94,947 3,776 5,266 2,033 1,800 107,089 102,013 30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)	94,947 5,266 1,800
		102,013

Cash and bank balances Time deposits	202,896 1,540,010 1,742,906	223,532 1,472,481
		1,696,013

9. CASH AND CASH EQUIVALENTS

10. TRADE PAYABLES

An aged analysis of the Group’s trade payables as at the balance sheet dates, based on invoice date, is as follows:

	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)
Current to 90 days 91 days to 180 days Over 180 days	34,527 1,099 2,538 38,164	18,944 790 825
		20,559

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. BANK AND OTHER BORROWINGS

	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)	30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)
Interest-bearing bank loans repayable within one year: – secured – unsecured SHARE CAPITAL	– – 66,789 – 66,789 – 30 June, 31 December, 2006 2005 HK$’000 HK$’000 (Unaudited) (Audited)	– –
		–

Authorised: 4,000,000,000 ordinary shares of HK$0.025 each (2005: 4,000,000,000 ordinary shares of HK$0.025 each) Issued and fully paid: 2,263,968,736 ordinary shares of HK$0.025 each (2005: 2,263,968,736 ordinary shares of HK$0.025 each)	100,000 56,599	100,000

		56,599

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED FINANCIAL INFORMATION OF THE GROUP

The following financial information includes the financial statements of the Group for the financial years ended 31 December, 2004 and 2005 together with the notes thereto as extracted from the annual report of the Company for the year ended 31 December, 2005.

CONSOLIDATED INCOME STATEMENT

Notes	For the year ended 31 December, 2005 2004 HK$’000 HK$’000 (Restated) 756,073 664,296 (139,418) (133,163) 616,655 531,133 28,599 7,063 (310,609) (253,390) (110,866) (101,885) (42,224) (33,382) (2,729) (1,050) 178,826 148,489 (66,315) – 112,511 148,489 (18,311) (15,407) 94,200 133,082
CONTINUING OPERATIONS REVENUE 5 Cost of sales Gross profit Other income and gains 5 Selling and distribution costs Administrative expenses Other expenses Finance costs 7a PROFIT BEFORE TAX AND BEFORE FAIR VALUE ADJUSTMENT FOR DERIVATIVE FINANCIAL INSTRUMENT Fair value adjustment for derivative financial instrument 7b PROFIT BEFORE TAX AND AFTER FAIR VALUE ADJUSTMENT FOR DERIVATIVE FINANCIAL INSTRUMENT Tax 10 PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS	756,073 (139,418) 616,655 28,599 (310,609) (110,866) (42,224) (2,729) 178,826 (66,315) 112,511 (18,311) 94,200

Notes

For the year ended
31 December,
2005
2004
HK$’000
HK$’000
(Restated)
756,073
664,296
(139,418)
(133,163)
616,655
531,133
28,599
7,063
(310,609)
(253,390)
(110,866)
(101,885)
(42,224)
(33,382)
(2,729)
(1,050)
178,826
148,489
(66,315)
–
112,511
148,489
(18,311)
(15,407)
94,200
133,082

CONTINUING OPERATIONS
REVENUE
5
Cost of sales
Gross profit
Other income and gains
5
Selling and distribution costs
Administrative expenses
Other expenses
Finance costs
7a
PROFIT BEFORE TAX AND BEFORE
FAIR VALUE ADJUSTMENT FOR
DERIVATIVE FINANCIAL INSTRUMENT
Fair value adjustment for derivative financial
instrument
7b
PROFIT BEFORE TAX AND AFTER
FAIR VALUE ADJUSTMENT FOR
DERIVATIVE FINANCIAL INSTRUMENT
Tax
10
PROFIT FOR THE YEAR FROM
CONTINUING OPERATIONS

756,073
(139,418)
616,655
28,599
(310,609)
(110,866)
(42,224)
(2,729)
178,826
(66,315)
112,511
(18,311)
94,200

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED INCOME STATEMENT (Continued)

CONSOLIDATED INCOME STATEMENT (Continued)
Notes	For the year ended 31 December, 2005 2004 HK$’000 HK$’000 (Restated)
DISCONTINUED OPERATION Profit for the year from a discontinued operation 12 Gain on disposal of subsidiaries 12 Total profit for the year from a discontinued operation PROFIT FOR THE YEAR Attributable to: Equity holders of the parent 14 Minority interests DIVIDENDS 13 Interim Proposed final EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT 14 Basic – For profit for the year – For profit from continuing operations Diluted – For profit for the year – For profit from continuing operations	152,213 1,406,191 1,558,404 1,652,604 1,532,929 119,675 1,652,604 216,592 33,959 250,551 HK69.39 cents HK1.93 cents HK69.39 cents HK1.93 cents	152,129 –
		152,129
		285,211

		168,485 116,726
		285,211

		54,102 55,084
		109,186

		HK8.43 cents

		HK4.26 cents

		HK7.75 cents

		HK3.92 cents

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

Notes	As at 31 2005 HK$’000	December, 2004 HK$’000 (Restated)
NON-CURRENT ASSETS Property, plant and equipment 15 Prepaid land lease payments 16 Goodwill 17 Other intangible assets 18 Interest in a jointly-controlled entity 20 Available-for-sale equity investments 21 Deferred tax assets 29 Total non-current assets CURRENT ASSETS Inventories 22 Trade receivables 23 Prepayments, deposits and other receivables 24 Due from a related company 37 Cash and cash equivalents 25 Total current assets CURRENT LIABILITIES Trade payables 26 Other payables and accruals 27 Tax payable Due to a related company 37 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	198,662 7,438 41,948 3,802 – 29,820 3,647 285,317 44,339 102,013 11,446 1,094 1,696,013 1,854,905 20,559 133,688 7,146 1,181 162,574 1,692,331 1,977,648	287,250 24,717 41,900 15,813 – 29,820 7,964
		407,464
		61,057 106,193 30,466 871 344,484
		543,071
		17,236 201,253 14,167 5,151
		237,807
		305,264
		712,728

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET (Continued)

CONSOLIDATED BALANCE SHEET (Continued)
Notes	As at 31 2005 HK$’000	December, 2004 HK$’000 (Restated)
TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible bonds 28 Deferred tax liabilities 29 Total non-current liabilities Net assets EQUITY Equity attributable to equity holders of the parent Issued capital 30 Reserves 32(a) Proposed final dividend 13 Minority interests Total equity	1,977,648 – 2,404 2,404 1,975,244 56,599 1,762,689 33,959 1,853,247 121,997 1,975,244	712,728
		42,900 2,038
		44,938
		667,790

		34,428 366,562 55,084
		456,074 211,716
		667,790

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December, 2005

			Attributable to equity	holders of the parent	holders of the parent			Total equity HK$’000 496,334 (2,620)
Issued share capital HK$’000 (note 30) 33,200 – 33,200 – – – – – – 1,228 – – – – – 34,428	Share premium account HK$’000 (note 30) 97,718 – 97,718 – – – – – – 33,763 – – – – – 131,481	Capital reserve HK$’000 28,924 – 28,924 – – – – – – – – – – – – 28,924	Asset revaluation Contributed reserve surplus HK$’000 HK$’000 7,101 52,605 (1,446) – 5,655 52,605 – – – – – – – – – – – – – – – – – – 894 – – – – – 6,549 52,605	Reserve funds HK$’000 (note 32(a)) 20,853 – 20,853 (335) (335) – (335) – – – – – – – 57,462 77,980	Exchange fluctuation reserve HK$’000 (980) – (980) 801 801 – 801 – – – – – – – – (179)	Retained profits HK$’000 67,365 – 67,365 – – 168,485 168,485 – – – (55,084) (54,102) – – (57,462) 69,202	Proposed final dividend HK$’000 (note 13) 33,200 – 33,200 – – – – – (33,200) – 55,084 – – – – 55,084
								493,714 466
								466 285,211
								285,677 (61,922) (33,200) 34,991 – (54,102) 1,371 1,261 –
								667,790

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)

Year ended 31 December, 2005

			Attributable to equity	holders of the parent	holders of the parent			Total equity HK$’000 670,561 (2,771) (49,685)
Issued share capital HK$’000 (note 30) 34,428 – – 34,428 – – – – – – – 20,666 1,505 – – – – – 56,599	Share premium account HK$’000 (note 30) 131,481 – – 131,481 – – – – – – – (7,346) 157,711 – – – – – 281,846*	Capital reserve HK$’000 28,924 – – 28,924 – – – – – – – – – – – – – (11,404) 17,520*	Asset revaluation Contributed reserve surplus HK$’000 HK$’000 8,072 52,605 (1,523) – – – 6,549 52,605 – – – – – – – – – – – – – – – – – – – (30,186) – – – – 2,219 – (807) – 7,961 22,419	Reserve funds HK$’000 (note 32(a)) 77,638 342 – 77,980 2,314 2,314 – 2,314 – – – – – – – – – (12,409) 67,885*	Exchange fluctuation reserve HK$’000 (309) 130 – (179) 8,536 8,536 – 8,536 – – – – – – – – – (2,516) 5,841*	Retained profits HK$’000 69,674 (472) (49,685) 19,517 – – 1,532,929 1,532,929 – – – – – (73,207) (113,199) (33,959) – 27,136 1,359,217*	Proposed final dividend HK$’000 (note 13) 55,084 – – 55,084 – – – – – – (55,084) – – – – 33,959 – – 33,959
								618,105 10,850
								10,850 1,652,604
								1,663,454 (104,667) (106,226) (55,084) 13,320 159,216 (103,393) (113,199) – 3,718 –
								1,975,244

* These reserve accounts comprise the consolidated reserve of HK$1,762,689,000 (2004: HK$366,562,000) in the consolidated balance sheet.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 December, 2005

Notes	2005 HK$’000	2004 HK$’000 (Restated) 148,489 166,662 1,348 – (4,789) (10,727) 26,090 282 5,388 1,323 (805) 2,203 (712) 334,752 (1,865) (44,030) (19,490) (673) (3,757) 22,640 648 288,225 (33,003) 255,222 4,789 10,727 (113,219) (18,253) 206 (2,311) 659 – – (117,402)
CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax: From continuing operations From a discontinued operation 12 Adjustments for: Finance costs 7a Fair value adjustment to embedded derivative of convertible bonds 7b Interest income 5 Dividend income from an unlisted investment 5 Depreciation 15 Recognition of prepaid land lease payments 16 Goodwill amortisation 17 Amortisation of patents and licenses 18 Gain on disposal of a subsidiary 33 (Gain)/Loss on disposal of fixed assets Deficit/(reversal of a deficit) on revaluation of buildings Operating profit before working capital changes Increase in inventories Increase in trade receivables Increase in prepayments, deposits and other receivables Increase in due from a related company Increase/(decrease) in trade payables Increase in other payables and accruals Increase/(decrease) in due to a related company Cash generated from operations Mainland China profits tax paid Net cash inflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received 5 Dividend received from an unlisted investment 5 Purchases of items of property, plant and equipment 15 Increase in prepaid land lease payments 16 Proceeds from disposal of items of property, plant and equipment Additions to other intangible assets 18 Proceeds from disposal of subsidiaries 33 Proceeds from disposal of a discontinued operation 12 Expenses in relation to the disposal of a discontinued operation 12 Net cash inflow/(outflow) from investing activities	112,511 177,349 3,461 66,315 (21,358) (7,520) 29,384 727 – 1,595 – (88) 122 362,498 (14,207) (90,348) (19,960) (357) 11,886 62,198 (2,308) 309,402 (45,673) 263,729 21,358 7,520 (70,497) (233) 3,389 (6,576) – 1,514,910 (20,291) 1,449,580

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT (Continued)

Year ended 31 December, 2005

Year ended 31 December, 2005
Notes	2005 HK$’000	2004 HK$’000 (Restated) (117,402) (1,348) (87,302) (61,922) – (150,572) (12,752) 357,222 14 344,484 198,491 145,993 344,484
Net cash inflow/(outflow) from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Interest paid Dividends paid Dividends paid to minority shareholders Proceeds from issue of shares 30 Net cash outflow from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 25 Time deposits with original maturity of less than three months when acquired 25	1,449,580 (3,138) (271,676) (104,667) 13,320 (366,161) 1,347,148 344,484 4,381 1,696,013 223,532 1,472,481 1,696,013

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

BALANCE SHEET

31 December, 2005

Notes	2005 HK$’000	2004 HK$’000 (Restated)
NON-CURRENT ASSETS Property, plant and equipment 15 Investments in subsidiaries 19 Total non-current assets CURRENT ASSETS Due from subsidiaries 19 Prepayments, deposits and other receivables 24 Cash and cash equivalents 25 Total current assets CURRENT LIABILITIES Due to subsidiaries 19 Other payables and accruals 27 Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible bonds 28 Total non-current liabilities Net assets EQUITY Issued capital 30 Reserves 32(b) Proposed final dividend 13 Total equity	2,405 101,513 103,918 84,406 2,483 1,502,262 1,589,151 8,337 4,384 – 12,721 1,576,430 1,680,348 – – 1,680,348 56,599 1,589,790 33,959 1,680,348	3,266 131,300
		134,566
		82,606 2,063 62,223
		146,892
		18,551 4,957 26
		23,534
		123,358
		257,924
		42,900
		42,900
		215,024

		34,428 125,512 55,084
		215,024

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

31 December, 2005

1. CORPORATE INFORMATION

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 2 February 2000 under the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. The Company’s shares were listed on The Growth Enterprise Market (the “GEM”) of the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 29 September 2000. On approval by the Stock Exchange, the Company’s shares were withdrawn from the GEM and were listed on the main board on 8 December 2003.

The head office and principal place of business of the Company in Hong Kong is located at Unit 9, 41st Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong.

During the year, the Group continued to be principally engaged in the research and development, production and sale of a series of biopharmaceutical products for the medical treatment of ophthalmic diseases and a series of modernised Chinese medicines and chemical medicines for the treatment of hepatitis; and the investment in sinoforeign equity joint ventures, whose principal activities are the manufacture, distribution and sale of pharmaceutical products.

In September 2005, the Group disposed of its wholly-owned subsidiary, Sino Concept Technology Limited and its subsidiaries, hence the Group’s manufacture, distribution and sale of biopharmaceutical medicine products activities were ceased upon the disposal.

2.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for periodic remeasurement of buildings as further explained in note 15. These financial statements are presented in Hong Kong dollars and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December, 2005. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 14	Segment Reporting
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 20	Accounting for Government Grants and Disclosure of Government Assistance
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 31	Interests in Joint Ventures
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 38	Intangible Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 39 Amendment	Transition and Initial Recognition of Financial Assets and Financial Liabilities
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations
HKFRS 5	Non-current Assets Held for Sale and Discontinued Operations

The adoption of HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 20, 27, 33, 36, 37 and 38 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures.

HKAS 21 had no material impact on the Group. As permitted by the transitional provisions of HKAS 21, goodwill arising in a business combination prior to 1 January 2005 and fair value adjustments arising on that acquisition are deemed to be in the currency of the Company. In respect of acquisitions subsequent to 1 January 2005, any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of the assets and liabilities are treated as assets and liabilities of the foreign operation and are translated at the closing rate in accordance with HKAS 21.

HKAS 24 has expanded the definition of related parties and affected the Group’s related party disclosures.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 17 – Leases

In the prior years, land and buildings held for own use were stated at valuation.

Upon the adoption of HKAS 17, the Group’s leasehold interests in land and buildings is separated into leasehold land and buildings. The Group’s leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land lease payments, while buildings continue to be classified as part of property, plant and equipment. Prepaid land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term.

Under the new accounting policy adopted by the Group, prepaid land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term. This change in the Group’s accounting policy is retrospectively applied and the comparative amounts for the year ended 31 December, 2004 in the consolidated balance sheet have been restated to reflect the reclassification of the leasehold land to prepaid land lease premium. The effect on the Group’s financial statements is summarized in note 2.4.

(b) HKAS 31 – Interest in Joint Ventures

Under HKAS 31, the Group’s interest in a jointly-controlled entity can be stated in the consolidated balance sheet by using the proportionate consolidation method for the Group’s share of assets, liabilities, income and expense of a jointly-controlled entity on a line by line basis in the financial statements of the Group. The Group can also adopt equity accounting method for its share of profit and net assets in the jointly-controlled entity, as adopted in the prior years.

With the adoption from 1 January, 2005 by the Group for the proportionate consolidation method as allowed by HKAS 31 “Interest in Joint Ventures”, the presentation of the comparative amount as at 31 December, 2004 in the financial statements have been restated. The impact on adoption of the proportionate consolidation method on the Group’s financial statements is summarised in note 2.4.

(c) HKAS 32 and HKAS 39 – Financial Instruments

(i) Equity securities

In the prior years, the Group classified its investments in equity securities, which were held for non-trading purposes, as long term investments, and were stated at cost less any impairment losses.

Upon the adoption of HKAS 32 and HKAS 39, these securities are classified as available-for-sale investment. After initial recognition, available-for-sale investment is measured at fair value with gains or losses being recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the profit or loss account. When the fair value of unlisted equity securities cannot be reliably measured because (i) the variability in the range of reasonable fair value estimates is significant for that investment, or (ii) the probabilities of the various estimated within the range cannot be reasonably assessed and used in estimating the fair value, such securities are stated at cost.

There is no impact on the Group’s overall financial statements as investments in equity security have continued to be stated at cost less impairment losses. See note 2.4(a) for the impact on the Group’s financial statements.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Convertible bonds

In the prior years, convertible bonds were stated at amortised cost. Upon the adoption of HKAS 39, convertible bonds are bifurcated into a debt component and an embedded derivative component. The effects of the above changes are summarised in note 2.4 to the financial statements.

(d) HKFRS 2 – Share-based Payment

In the prior years, no recognition and measurement of share-based payment transactions in which employees (including directors) were granted share options over shares in the Company were required until such options were exercised by employees, at which time the share capital and share premium were credited with the proceeds received.

Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments (“equity-settled transactions”), the cost of the equity-settled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted.

The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to equity for employee share options. The revised accounting policy for share-based payment transactions is described in more detail in note 2.5 “Summary of significant accounting policies” below.

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to (i) options granted to employees on or before 7 November, 2002; and (ii) options granted to employees after 7 November, 2002 but which had not vested before 1 January, 2005.

As disclosed in note 31, the Group did not have any share options which were granted during the period from 7 November, 2002 to 31 December 2004 but had not yet vested as at 1 January, 2005, the adoption of HKFRS 2 has had no impact on the retained profits as at 31 December, 2003 and at 31 December, 2004.

Due to the adoption of the above transitional provisions and the full exercise of share options during the year, there is no impact on the Group’s income statement for the current year nor retained profits as at 31 December, 2005.

(e) HKFRS 3 – Business Combinations and HKAS 36 – Impairment of Assets

In the prior years, goodwill and negative goodwill arising on acquisitions prior to 1 January, 2001 were eliminated against the consolidated retained profits and credited to the consolidated capital reserve, respectively, in the year of acquisition and were not recognised in the income statement until disposal or impairment of the acquired businesses.

Goodwill arising on acquisitions on or after 1 January, 2001 was capitalised and amortised on the straight-line basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment.

The adoption of HKFRS 3 and HKAS 36 has resulted in the Group ceasing annual goodwill amortisation and commencing testing for impairment at the cash-generating unit level annually (or more frequently if events or changes in circumstances indicate that the carrying value may be impaired).

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The transitional provisions of HKFRS 3 have required the Group to eliminate at 1 January, 2005 the carrying amounts of accumulated amortisation with a corresponding adjustment to the cost of goodwill and to derecognise at 1 January, 2005 the carrying amounts of negative goodwill (including that remaining in the consolidated capital reserve) against retained profits. Goodwill previously eliminated against the retained profits remains eliminated against the retained profits and is not recognised in the income statement when all or part of the business to which the goodwill relates is disposed of or when a cashgenerating unit to which the goodwill relates becomes impaired.

The effects of the above changes are summarised in note 2.4 to the financial statements. In accordance with the transitional provisions of HKFRS 3, comparative amounts have not been restated.

(f) HKFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

The Group has applied HKFRS 5 prospectively in accordance with the transitional provisions of HKFRS 5, which has resulted in a change in accounting policy on the recognition of a discontinued operation. Under the previous SSAP 33 “Discontinuing Operations”, the Group would recognise a discontinued operation at the earlier of:

the date the Group entered into a binding sale agreement; and
the date the board of directors had approved and announced a formal disposal plan.

HKFRS 5 requires a component of the Group to be classified as discontinued when the criteria to be classified as held for sale have been met or when that component of the Group has been disposed of. An item is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Such a component represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. The principal impact of this change in accounting policy is that a discontinued operation is recognised by the Group at a later point than it would be under SSAP 33 due to the stricter criteria in HKFRS 5.

2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January, 2006:

HKAS 1 Amendment Capital Disclosures HKAS 39 Amendment The Fair Value Option HKFRS 7 Financial Instruments: Disclosures HK(IFRIC)-Int 4 Determining whether an Arrangement contains a Lease

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January, 2007. The revised standard will affect the disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for annual periods beginning on or after 1 January, 2007.

Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group’s financial statements in the period of initial application.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

(a) Effect on the consolidated balance sheet

At 1 January, 2005

Effect of adopting

Effect of adopting
HKASs 32# HKAS 31# and 39 Proportionate Change in consolidation classification HKAS 17# of a jointly- of available- HKAS 39 Effect of new policies Prepaid land controlled for-sale equity Convertible (Increase/(decrease)) lease payments entity investments bonds** HK$’000 HK$’000 HK$’000 HK$’000	Total HK$’000
Assets Property, plant and equipment (29,036) 38,937 – – Prepaid land lease payments 24,717 – – – Goodwill – 39,889 – – Interest in a jointly-controlled entity – (124,164) – – Inventories – 2,045 – – Trade receivables – 8,266 – – Available-for-sale equity investments – – 29,820 – Long term investments – – (29,820) – Prepayments, deposits and other receivables 1,059 1,398 – – Due from a related company – 871 – – Cash and cash equivalents – 68,270 – – Liabilities/equity Trade payables – 199 – – Other payables and accruals – 30,838 – – Tax payable – 4,462 – – Deferred tax liabilities (489) – – – Due to a related company – 13 – – Debt component of convertible bonds – – – (3,380) Embedded derivative component of convertible bonds – – – 53,065 Asset revaluation reserve (1,523) – – – Retained profits – – – (49,685) Minority interests (1,248) – – –	9,901 24,717 39,889 (124,164) 2,045 8,266 29,820 (29,820) 2,457 871 68,270
	32,252

	199 30,838 4,462 (489) 13 (3,380) 53,065 (1,523) (49,685) (1,248)
	32,252

Adjustments taken effect prospectively from 1 January, 2005
Adjustments/presentation taken effect retrospectively

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(a) Effect on the consolidated balance sheet (Continued)

At 31 December, 2005

Effect of adopting HKASs 32# HKAS 31# and 39 Proportionate Change in consolidation classification HKFRS 3 HKAS 17# of a jointly- of available- HKAS 39 Discontinuation Effect of new policies Prepaid land controlled for-sale equity Convertible of amortisation (Increase/(decrease)) lease payments entity investments bonds of goodwill* HK$’000 HK$’000 HK$’000 HK$’000 HK$’000	Total HK$’000
Assets Property, plant and equipment (10,952) 44,889 – – – Prepaid land lease payments 7,438 – – – – Goodwill – 35,427 – – 5,388 Interests in a jointly-controlled entity – (124,273) – – – Due from holding company – 961 – – – Inventories – 4,138 – – – Trade receivables – 9,103 – – – Available-for-sale equity investments – – 29,820 – – Long term investments – – (29,820) – – Prepayments, deposits and other receivables 254 1,617 – – – Due from a related company – 1,094 – – – Cash and cash equivalents – 72,886 – – – Liabilities/equity Trade payables – 261 – – – Other payables and accruals – 43,131 – – – Tax payable – 2,450 – – – Deferred tax liabilities (489) – – – – Share premium account – – – 116,322 – Asset revaluation reserve (1,523) – – – – Retained profits – – – (116,322) 5,388 Minority interests (1,248) – – – –	33,937 7,438 40,815 (124,273) 961 4,138 9,103 29,820 (29,820) 1,871 1,094 72,886
	47,970

	261 43,131 2,450 (489) 116,322 (1,523) (110,934) (1,248)
	47,970

Adjustments taken effect prospectively from 1 January, 2005
Adjustments/presentation taken effect retrospectively

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Effect on the balances of equity at 1 January, 2004 and at 1 January, 2005

Effect of adopting HKAS 31 Proportionate consolidation HKAS 17 of a jointly– Effect of new policies Prepaid land controlled (Increase/(decrease)) lease payments entity HK$’000 HK$’000	Effect of adopting	Effect of adopting	HKAS 39 Convertible bonds HK$’000	Total HK$’000 (1,446) (1,174) (2,620) (1,523) 342 130 (50,157) (1,248) (52,456)
		HKAS 31 Proportionate consolidation of a jointly– controlled entity HK$’000
1 January, 2004 Asset revaluation reserve Minority interests 1 January, 2005 Asset revaluation reserve Reserve funds Exchange fluctuation reserve Retained profits Minority interests	(1,446) (1,174) (2,620) (1,523) – – – (1,248) (2,771)	– – – – 342 130 (472) – –	– – – – – – (49,685) – (49,685)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Effect on the consolidated income statement for the years ended 31 December, 2005 and 2004

Effect of adopting HKAS 31 Proportionate HKFRS 3 Consolidation HKAS 39 Discontinuation of a jointly- Convertible of amortisation Effect of new policies controlled entity bonds of goodwill HK$’000 HK$’000 HK$’000	Effect of adopting HKAS 31 Proportionate HKFRS 3 Consolidation HKAS 39 Discontinuation of a jointly- Convertible of amortisation Effect of new policies controlled entity bonds of goodwill HK$’000 HK$’000 HK$’000	Effect of adopting HKAS 31 Proportionate HKFRS 3 Consolidation HKAS 39 Discontinuation of a jointly- Convertible of amortisation Effect of new policies controlled entity bonds of goodwill HK$’000 HK$’000 HK$’000	Effect of adopting HKAS 31 Proportionate HKFRS 3 Consolidation HKAS 39 Discontinuation of a jointly- Convertible of amortisation Effect of new policies controlled entity bonds of goodwill HK$’000 HK$’000 HK$’000	Total HK$’000 112,742 (12,021) 1,182 (27,298) (17,917) (1,876) (2,110) (66,315) (58,412) (72,025) – – 98,074 (8,439) 890 (22,549) (9,675) (1,731) (1,585) (54,985) – – –
Year ended 31 December, 2005 Increase in sales Increase in cost of sales Increase in other income and gains Increase in selling and distribution costs Increase in administrative expenses Increase in other expenses Decrease/(increase) in finance costs Decrease/(increase) in fair value adjustment Decrease in share of profit of a jointly-controlled entity Total increase/(decrease) in profit Increase/(decrease) in basic earnings per share Increase/(decrease) in diluted earnings per share Year ended 31 December, 2004 Increase in sales Increase in cost of sales Increase in other income and gains Increase in selling and distribution costs Increase in administrative expenses Increase in other expenses Increase in finance costs Decrease in share of profits of a jointly-controlled entity Total increase in profit Increase/(decrease) in basic earnings per share Increase/(decrease) in diluted earnings per share	112,742 (12,021) 1,182 (27,298) (12,529) (1,876) (1,788) – (58,412) – – – 98,074 (8,439) 890 (22,549) (9,675) (1,731) (1,585) (54,985) – – –	– – – – – – (322) (66,315) – (66,637) HK(3) cents – – – – – – – – – – – –	– – – – (5,388) – – – – (5,388) HK(0.27) cents – – – – – – – – – – – –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities. The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable.

The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture entity and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture is treated as:

(a) a subsidiary, if the Group has unilateral control, directly or indirectly, over the joint venture;
(b) a jointly-controlled entity, if the Group does not have unilateral control, but has joint control, directly or indirectly, over the joint venture;
(c) an associate, if the Group does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture’s registered capital and is in a position to exercise significant influence over the joint venture; or
(d) an equity investment accounted for in accordance with HKAS 39, if the Group holds, directly or indirectly, less than 20% of the joint venture’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture.

Jointly-controlled entities

A jointly-controlled entity is a joint venture that is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity.

The Group’s interests in its jointly-controlled entities are accounted for by proportionate consolidation, which involves recognising its share of the jointly-controlled entities’ assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Goodwill

Goodwill arising on the acquisition of subsidiaries and jointly-controlled entities represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition.

Goodwill on acquisitions for which the agreement date is on or after 1 January, 2005

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with HKAS 14 “Segment Reporting”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cashgenerating units) is less than the carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

An impairment loss recognised for goodwill is not reversed in a subsequent period.

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s or cashgenerating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in the prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Related parties

A party is considered to be related to the Group if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Group or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d); or
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Changes in the values of property, plant and equipment are dealt with as movements in the asset revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on an individual asset basis, the excess of the deficit is charged to the income statement. Any subsequent revaluation surplus is credited to the income statement to the extent of the deficit previously charged. On disposal of a revalued asset, the relevant portion of the asset revaluation reserve realised in respect of previous valuations is transferred to retained profits as a movement in reserves.

Depreciation is calculated on the straight-line basis to write off the cost or valuation of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Buildings	4% – 5%
Leasehold improvements	5% – 20%
Plant and machinery	5% – 9%
Motor vehicles	9% – 18%
Furniture and fixtures	18%

Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents factory buildings, plant and machinery and other assets under construction or installation, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction, installation and testing during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Intangible assets (other than goodwill)

The useful lives of intangible assets are assessed to be finite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date.

Patents and licences

Purchased patents and licences are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives of not exceeding 10 years.

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred.

Deferred development costs

Deferred development costs are stated at cost less any impairment losses and are amortised using the straight-line basis over the commercial lives of the underlying products not exceeding five years, commencing from the date when the products are put into commercial production.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessee, rentals payable under the operating leases net of any incentives received from the lessor are charged to the income statement on the straight-line basis over the lease terms.

Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Investments and other financial assets

Applicable to the year ended 31 December, 2004:

The Group classified its equity investments, other than subsidiaries and jointly-controlled entities, as long term investments.

Long term investments

Long term investments are non-trading investments in unlisted equity securities intended to be held on a long term basis.

Unlisted securities are stated at cost less any impairment losses, on an individual basis. An impairment loss is recognised only if the carrying amount exceeds its recoverable amount. An impairment loss is charged to the income statement in the period in which it arises.

Investments and other financial assets

Applicable to the year ended 31 December, 2005:

Financial assets in the scope of HKAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets in listed and unlisted equity securities that are designated as available for sale or are not classified in any of the other two categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

When the fair value of unlisted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Fair value

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and option pricing models.

Impairment of financial assets (applicable to the year ended 31 December, 2005)

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the income statement.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Derecognition of financial assets (applicable to the year ended 31 December, 2005)

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay in full without material delay to a third party under a “pass-through” arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Convertible bonds

Convertible bonds are bifurcated into a debt component and an embedded derivative component.

The debt component is initially recognised at fair value, determined by discounting the future contractual cash flows at the prevailing market interest rate for a similar non-convertible borrowing. The debt component is subsequently measured at amortised cost using the effective interest rate method until extinguished on conversion or redemption.

The embedded derivative is initially recognised at fair value determined with reference to the net proceeds from the issuance of the convertible bonds and the fair value of debt component at initial recognition. The embedded derivative is subsequently measured at fair value with reference to the market value of the share price of the Company, after taking into account the fair value of the debt component. Changes in fair value of the embedded derivative component in the convertible bonds are charged/credited to the income statement, net of income tax effects, for the period.

Derecognition of financial liabilities (applicable to the year ended 31 December, 2005)

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries and interests in a jointly-controlled entity, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised except:

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and interests in jointly-controlled entities, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset; and
(c) dividend income, when the shareholders’ right to receive payment has been established.

Employee benefits

Share-based payment transactions

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a binomial model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (“market conditions”), if applicable.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense recognised for equitysettled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

The Group has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only to equity-settled awards granted after 7 November, 2002 that had not vested on 1 January, 2005 and to those granted on or after 1 January, 2005.

Pension scheme

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all of its employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in a central pension scheme operated by the local municipal government. This subsidiaries are required to contribute 20-23% of their payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.

Share option scheme

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Share options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding share options.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised.

All other borrowing costs are recognised as expenses when incurred.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Interim dividends are simultaneously proposed and declared, because the Company’s memorandum and articles of association grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared.

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates ruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are included in a separate component of equity the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

For the purpose of the consolidated cash flow statement, the cash flows of subsidiaries in Mainland China are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of subsidiaries in which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:

Recognition of deferred tax assets

The Group recognised deferred tax assets which resulted from the deductible temporary differences of subsidiaries level. The Group considers that the deferred tax assets are recognised to the extent that it is probable that subsidiaries will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary differences. The carrying amount of deferred tax assets at 31 December, 2005 was HK$3,647,000 (2004: HK$7,964,000). More details are given in note 29.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of goodwill

The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December, 2005 was HK$41,948,000 (2004: HK$41,900,000). More details are given in note 17.

Presentation of convertible bonds

Convertible bonds of the Group are presented into the debt component and the embedded derivative component of the convertible bonds upon the adoption of HKAS 39 in the current year. This requires an initial recognition of the debt component and the embedded derivative at fair value.

The debt component at fair value is determined by discounting the future contractual cash flows at the prevailing market interest rate for a similar non-convertible borrowing. The debt component is subsequently measured at amortised cost using the effective interest rate method until extinguished on conversion or redemption. The embedded derivative initially recognised at fair value is determined with reference to the net proceeds from the issuance of the convertible bonds and the fair value of debt component at initial recognition. The embedded derivative is subsequently measured at fair value with reference to the market value of the share price of the Company, after taking into account the fair value of the debt component. The carrying amount of convertible bonds at 31 December, 2005 was nil (2004: HK$42,900,000). More details are given in note 28.

4. SEGMENT INFORMATION

Segment information is presented by way of the Group’s primary segment reporting basis, by business segment. In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. No further geographical segment information is presented as over 90% of the Group’s customers and operations are based in Mainland China, and over 90% of the Group’s assets are located in Mainland China.

The Group’s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. During the year, the directors reviewed the segment information disclosures, and information on biopharmaceutical, modernised Chinese and chemical medicines were further analysed.

Summary details of the business segments are as follows:

(a) the biopharmaceutical medicines segment comprises the manufacture, sale and distribution of the biopharmaceutical medicine products;
(b) the modernised Chinese medicines and chemical medicines segment comprises the manufacture, sale and distribution of the modernised Chinese medicine products; and chemical medicine products; and
(c) the investment segment is engaged in long term investment.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Business segments

The following tables present revenue, profit and certain asset, liability and expenditure information for the Group’s business segments for the years ended 31 December, 2005 and 2004.

Year ended 31 December, 2005		Continuing operations	Continuing operations	Continuing operations	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000
	Modernised Chinese medicines HK$’000	Investment HK$’000	Others HK$’000	eliminations HK$’000
Segment revenue: Sales to external customers Dividend income Total Segment results Interest and unallocated gains Unallocated expenses Fair value adjustment to embedded derivative of convertible bonds Finance costs Profit before tax Tax Profit for the year Assets and liabilities Segment assets Other unallocated assets Total assets Segment liabilities Other unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation Capital expenditure Other non-cash expenses	744,378 – 744,378 190,963 551,947 145,981 19,011 34,439 2,166	– 7,520 7,520 7,686 1,579,514 8,398 1,185 322 2	4,175 – 4,175 (896) 5,114 1,049 672 1,385 –	– – – – – – – – –	748,553 7,520 756,073 197,753 28,599 (44,797) (66,315) (2,729) 112,511 (18,311) 94,200 2,136,575 3,647 2,140,222 155,428 9,550 164,978 20,868 36,146 2,168	479,838 – 479,838 173,650 4,431 – – (732) 177,349 (25,136) 152,213 – – – – – – 10,838 41,160 145	1,228,391 7,520
							1,235,911

							371,403 33,030 (44,797) (66,315) (3,461)
							289,860 (43,447)
							246,413

							2,136,575 3,647
							2,140,222

							155,428 9,550
							164,978

							31,706

							77,306

							2,313

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Year ended 31 December, 2004		Continuing operations	Continuing operations	Continuing operations	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000	Discontinued operation Biopharma- ceutical Total medicines Consolidated HK$’000 HK$’000 HK$’000
	Modernised Chinese medicines HK$’000	Investment HK$’000	Others HK$’000	eliminations HK$’000
Segment revenue: Sales to external customers Dividend income Total Segment results Interest and unallocated gains Unallocated expenses Finance costs Profit before tax Tax Profit for the year Assets and liabilities Segment assets Other unallocated assets Elimination Total assets Segment liabilities Other unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation Capital expenditure Other non-cash expenses	653,569 – 653,569 172,524 478,794 116,106 18,926 47,524 1,754	– 10,727 10,727 4,030 137,914 55,547 1,142 1,231 –	– – – – 2,595 1,177 280 227 –	– – – – – – – – –	653,569 10,727 664,296 176,554 7,063 (34,078) (1,050) 148,489 (15,407) 133,082 619,303 2,490 4,987 626,780 172,830 10,659 183,489 20,348 48,982 1,754	484,161 – 484,161 162,786 4,174 – (298) 166,662 (14,533) 152,129 328,742 – (4,987) 323,755 99,256 – 99,256 12,735 55,218 456	1,137,730 10,727
							1,148,457

							339,340 11,237 (34,078) (1,348)
							315,151 (29,940)
							285,211

							948,045 2,490 –
							950,535

							272,086 10,659
							282,745

							33,083

							104,200

							2,210

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, after allowances for returns and trade discounts, and dividend income from an unlisted investment.

An analysis of revenue, other income and gains is as follows:

Notes	2005 HK$’000	2004 HK$’000 (Restated)
Revenue Sale of goods Dividend income Attributable to continuing operations reported in the consolidated income statement Attributable to a discontinued operation 12 Other income Bank interest income Government grants Sale of scrap materials Others Attributable to continuing operations Attributable to a discontinued operation Gains Gain on disposal of property, plant and equipment Gain on disposal of a subsidiary 33 Reversal of a revaluation deficit Attributable to continuing operations Attributable to a discontinued operation Total other income and gains Attributable to continuing operations reported in the consolidated income statement Attributable to a discontinued operation	1,228,391 7,520 1,235,911 756,073 479,838 1,235,911 21,358 6,671 1,930 2,867 32,826 28,395 4,431 32,826 204 – – 204 204 – 204 28,599 4,431 33,030	1,137,730 10,727
		1,148,457

		664,296 484,161
		1,148,457

		4,789 1,226 1,078 2,627
		9,720

		7,063 2,657
		9,720

		– 805 712
		1,517

		– 1,517
		1,517

		7,063 4,174
		11,237

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging /(crediting):

Notes	2005 HK$’000	2004 HK$’000 (Restated) 133,613 14,649 311 30,896 179,469 5,388 5,388 5,111 5,111 600 87,349 6,706 94,055 732 (690)
Attributable to continuing operations reported in the consolidated income statement: Cost of sales Depreciation 15 & 16 Amortisation of intangible assets 18 Research and development costs Goodwill: 17 Amortisation for the year Minimum lease payments under operating leases: Land and buildings Auditors’ remuneration Employee benefits expense (including directors’ remuneration_(note 8)_): Wages and salaries Pension scheme contributions* Provision for bad and doubtful debts Foreign exchange differences, net	139,418 20,153 715 46,661 206,947 – – 2,931 2,931 937 136,942 17,370 154,312 1,134 (1,164)

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes	2005 HK$’000	2004 HK$’000 (Restated)
Attributable to a discontinued operation: Cost of sales Depreciation 15 & 16 Amortisation of intangible assets 18 Research and development costs Minimum lease payments under operating leases: Land and buildings Employee benefits expense (including directors’ remuneration_(note 8)_): Wages and salaries Pension scheme contributions* Provision for bad and doubtful debts Foreign exchange differences, net Notes:	80,126 9,958 880 5,668 96,632 4,583 41,396 11,447 52,843 – (119)	61,589 11,723 1,012 6,392
		80,716
		5,997
		59,198 7,402
		66,600
		400 (188)

The amortisation of patents and licences and deferred development costs for the year are included in “Cost of sales” and “Other expenses” on the face of the consolidated income statement.
** During the year, certain of the subsidiaries in Mainland China were members of a pension contribution scheme managed by the respective local governments. Contributions made during the year were based on 20% – 23% (2004: 20% – 23%) of the employees’ salaries and were charged to the consolidated income statement as they became payable.

For Hong Kong employees eligible for the MPF Scheme, the Group contributed 5% of the employees’ salaries for the year ended 31 December, 2005 (2004: 5%).

7. a) FINANCE COSTS

Notes	Group 2005 2004 HK$’000 HK$’000	Group 2005 2004 HK$’000 HK$’000
Interest on bank loans wholly repaid during the year Interest on the debt component of convertible bonds 28 Total interest Attributable to continuing operations reported in the consolidated income statement Attributable to a discontinued operation 12	2,996 465 3,461 2,729 732 3,461	604 744
		1,348

		1,050 298
		1,348

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

b) FAIR VALUE ADJUSTMENT FOR DERIVATIVE FINANCIAL INSTRUMENT

This solely represented the changes in the fair value to the embedded derivative component of the convertible bonds, which is charged to the consolidated income statement for the current year as a result of the first year adoption of HKAS 39. As the adoption of HKAS 39 is applied prospectively from 1 January, 2005, the fair value of the embedded derivative component was determined by reference to the respective market value of the Company’s share price as at 1 January, 2005 and the date of conversion of the convertible bonds on 13 April, 2005. The fair value adjustment to the embedded derivative of convertible bonds was one-off and non-cash in nature and the Company’s convertible bonds were fully converted into the Company’s shares by April 2005.

8. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance, is as follows:

	Group 2005 2004 HK$’000 HK$’000	Group 2005 2004 HK$’000 HK$’000
Fees Other emoluments: Salaries, allowances and benefits in kind Employee share option benefits Pension scheme contributions Discretionary bonuses	288 7,013 – 74 10,897 17,984 18,272	173
		3,138 – 33 2,866
		6,037
		6,210

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

	2005 HK$’000	2004 HK$’000
Ms. Zheng Qun, Grace Mr. Lu Zhengfei Mr. Li Dakui Ms. Li Jun Mr. Hu Ximing	110 16 65 97 – 288	108 – 17 – 48
		173

Mr. Hu Ximing was resigned as an independent non-executive director on 13 January, 2005.

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Executive directors and a non-executive director

	Fees HK$’000	Salaries, allowances Employee Pension and benefits Discretionary share option scheme Total in kind bonuses benefits contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000	Salaries, allowances Employee Pension and benefits Discretionary share option scheme Total in kind bonuses benefits contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000	Salaries, allowances Employee Pension and benefits Discretionary share option scheme Total in kind bonuses benefits contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000	Salaries, allowances Employee Pension and benefits Discretionary share option scheme Total in kind bonuses benefits contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000	Salaries, allowances Employee Pension and benefits Discretionary share option scheme Total in kind bonuses benefits contributions remuneration HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
2005 Executive directors: Mr. Tse Ping Mr. Tao Huiqi Mr. Wang Jinyu Mr. He Huiyu Ms. Cheng Cheung Ling Ms. Zhao Yanping Mr. Tse Hsin Non-executive director: Ms. Josephine Price 2004 Executive directors: Mr. Tse Ping Mr. Tao Huiqi Mr. Wang Jinyu Non-executive director: Ms. Josephine Price	– – – – – – – – – – – – – – – –	3,000 384 276 1,008 900 600 845 7,013 – 7,013 2,520 354 264 3,138 – 3,138	5,000 534 – – 425 4,300 638 10,897 – 10,897 2,300 566 – 2,866 – 2,866	– – – – – – – – – – – – – – – –	12 10 12 – 12 16 12 74 – 74 12 9 12 33 – 33	8,012 928 288 108 1,337 4,916 1,495
						17,984
						–
						17,984

						4,832 929 276
						6,037
						–
						6,037

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

No share options were granted to the directors for the current and prior years in respect of their services to the Group

During the year, all share options were exercised by the directors. The details of these benefits in kind are disclosed under the paragraph “Share Option Scheme” in the Report of the Directors and note 31 to the financial statements.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included five (2004: one) directors, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining four non-director, highest paid employees for the prior year are as follows:

	Group 2005 2004 HK$’000 HK$’000	Group 2005 2004 HK$’000 HK$’000
Salaries, allowances and benefits in kind Performance related bonuses Employee share option benefits Pension scheme contributions Discretionary bonuses	– – – – – –	1,692 – – 42 3,022
		4,756

The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows:

	Number of employees
	2005	2004
Nil to HK$1,500,000	–	4

10. TAX

No provision for Hong Kong profits tax has been made as the Group had no assessable profits derived from or earned in Hong Kong during the current and prior years. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates based on existing legislation, interpretations and practices in respect thereof.

	2005 HK$’000	2004 HK$’000 (Restated)
Group: Current – Mainland China income tax Deferred tax_(note 29)_ Tax attributable to a jointly-controlled entity Total tax charge for the year	11,708 (1,152) 10,556 7,755 18,311	10,464 (2,495
		7,969 7,438
		15,407

Pursuant to the Income Tax Law of Mainland China concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the “Income Tax Laws”), joint venture companies are subject to the statutory corporate income tax rate of 33% (comprising 30% state income tax plus 3% local income tax) unless the enterprise is qualified as a “High and New Technology Enterprise” for which more favourable effective corporate income tax rates apply. The Group’s principal operating subsidiaries qualify as “High and New Technology Enterprises” for which a preferential corporate income tax rate of 15% applies.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Jiangsu Chia Tai-Tianqing Pharmaceutical Co., Ltd. (“JCTT”), one of the Group’s principal operating subsidiaries, is exempt from corporate income tax for the two years commencing from its first year with assessable profits after deducting tax losses brought forward, and is entitled to a 50% exemption from the full corporate income tax rate for the succeeding three years (the “Tax Exemption”). The Tax Exemption expired on 31 December, 2002. As JCTT qualifies as an “Advanced Technology Enterprise”, it is entitled to extend the period of a reduced corporate income tax rate for another three years on expiry of the Tax Exemption, provided that the minimum corporate income tax rate is not lower than 10%. Consequently, JCTT is subject to a corporate income tax rate of 10% in 2005.

Shandong Chia Tai Freda Pharmaceutical Co., Ltd. (“CTF”), another principal operating subsidiary of the Group, is also entitled to the Tax Exemption. The Tax Exemption expired on 31 December, 2001. As CTF qualifies as an “Advanced Technology Enterprise”, it is entitled to extend the period of the reduced corporate income tax rate for another three years on expiry of the Tax Exemption, provided that the minimum corporate income tax rate is not lower than 10%. Consequently, CTF was subject to a corporate income tax rate of 10% since 2002. The preferential tax rate for “Advanced Technology Enterprise” expired on 31 December, 2004 and CTF is subject to a corporate income tax rate of 15% in 2005.

Shandong Chia Tai Freda New Packaging Resources Co., Ltd. (“CTFP”), another operating subsidiary of the Group is also entitled to the Tax Exemption. CTFP is entitled to the 50% exemption for its corporate income tax rate and therefore, CTFP’s corporate income tax rate was 7.5% for the year ended 31 December, 2005. The Tax Exemption will expire on 31 December, 2006.

Nanjing Chia Tai Tianqing Pharmaceutical Co., Ltd. (“NJCTT”), another principal operating subsidiary of the Group, is also entitled to the Tax Exemption. NJCTT is entitled to the preferential corporate income tax rate of 15% as it is located in the Nanjing technology development area.

Beijing Tide Pharmaceutical Co., Ltd. (“Beijing Tide”), a jointly-controlled entity of the Group, is also entitled to the Tax Exemption. Beijing Tide’s statutory corporate income tax rate is 24%. As Beijing Tide is also entitled to 50% reduction in its corporate income tax, its corporate income tax rate was 12% for the year ended 31 December, 2004. The Tax Exemption expired on 31 December, 2004. As Beijing Tide qualifies as an “Advanced Technology Enterprise”, it is entitled to extend the period of a reduced corporate income tax rate for another three years on expiry of the Tax Exemption, provided that the minimum corporate income tax rate is not lower than 10%. Consequently, Beijing Tide is subject to a corporate income tax rate of 12% from 2005 to 2007.

A reconciliation of the tax expense applicable to profit before tax using the statutory rate for the country in which the Company and its subsidiaries and jointly-controlled entity are domiciled to the tax expense at the effective tax rates is as follows:

Group	2005 HK$’000 1,696,051 559,697 (305,289) (212,057) 32,481 786 (32,171) 43,447 (25,136) 18,311
Profit before tax (including profit from a discontinued operation) Tax at the statutory tax rate of 33% Less: Preferential tax rate reduction Income not subject to tax Expenses not deductible for tax Tax losses of subsidiaries Tax exemptions/deductions Tax charge at the Group’s effective rate Tax charge attributable to a discontinued operation_(note 12)_ Tax charge attributable to continuing operations reported in the consolidated income statement

Group

2005
HK$’000
1,696,051
559,697
(305,289)
(212,057)
32,481
786
(32,171)
43,447
(25,136)
18,311

Profit before tax (including profit from a discontinued operation)
Tax at the statutory tax rate of 33%
Less: Preferential tax rate reduction
Income not subject to tax
Expenses not deductible for tax
Tax losses of subsidiaries
Tax exemptions/deductions
Tax charge at the Group’s effective rate
Tax charge attributable to a discontinued operation_(note 12)_
Tax charge attributable to continuing operations
reported in the consolidated income statement

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Group	2004 HK$’000 (Restated)
Profit before tax (including profit from a discontinued operation) Tax at the statutory tax rate of 33% Less: Preferential tax rate reduction by 18% Income not subject to tax Expenses not deductible for tax Tax losses of subsidiaries Tax exemptions/deductions Tax charge at the Group’s effective rate Tax charge attributable to a discontinued operation_(note 12)_ Tax charge attributable to continuing operations reported in the consolidated income statement	315,151

	104,000 (56,727 (1,609) 7,247 6,441 (29,412)
	29,940 (14,533)
	15,407

11. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

The net profit from ordinary activities attributable to equity holders of the parent for the year ended 31 December, 2005 dealt with in the financial statements of the Company, was HK$1,614,149,000 after the fair value adjustment to embedded derivative of convertible bonds of HK$66,315,000 (note 7(b)) (2004: HK$74,897,000) (note 32(b)).

12. DISCONTINUED OPERATION

	2005 HK$’000	2004 HK$’000
Profit of the year from a discontinued operation Gain on disposal of subsidiaries	152,213 1,406,191 1,558,404	152,129 –
		152,129

On 2 July, 2005, the Company entered into the Sale and Purchase Agreement with Bausch & Lomb Incorporated (“Bausch & Lomb”) in relation to the disposal of the Company’s entire equity interests in Sino Concept Technology Limited (“Sino Concept”), the sole assets of which are the 55% equity interests in the registered capital of each of Shandong Chia Tai Freda Pharmaceutical Co., Ltd. (“CTF”) and Shandong Chia Tai Freda New Packaging Resources Co., Ltd. (“CTFP”) (hereinafter referred to as the “Sino Concept group” or the “disposed subsidiaries”) at a consideration of US$ 200,000,000 (equivalent to approximately HK$1,560 million). The Sino Concept group was principally engaged in the research, development, production and sale in Mainland China of a series of biopharmaceutical products for the medical treatment of ophthalmic conditions and osteoarthritis and for external use to treat skin diseases and is a separate business segment that is part of the Mainland China operation of the Group.

The directors considered that the disposal represents a good opportunity for the Company to realise its investment in Sino Concept group at a satisfactory price and are of the view that the terms of the Sale and Purchase Agreement are fair and reasonable and in the interests of the shareholders as a whole. The Group has decided to cease its manufacture, distribution and sales business although it is profit – making because the Group expects to explore appropriate investment opportunities in the future and additional general working capital for the Group and, if the directors so determine, finance the payment of any special dividend which may be declared. The disposal of the Sino Concept group was completed on 26 September, 2005. Details of the disposed subsidiaries were set out in the Company’s announcements dated on 6 July, 2005 and 26 July, 2005.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The results of the Sino Concept group is presented below:

For the nine For the year months ended ended 26 September, 31 December, 2005 2004 HK$’000 HK$’000 Revenue 479,838 484,161 Expenses (301,757) (317,201) Finance costs (732) (298) Profit of the discontinued operation 177,349 166,662 Profit before tax from a discontinued operation 177,349 166,662 Tax related to pre-tax profit (25,136) (14,533) Profit for the year from a discontinued operation 152,213 152,129	For the nine For the year months ended ended 26 September, 31 December, 2005 2004 HK$’000 HK$’000 Revenue 479,838 484,161 Expenses (301,757) (317,201) Finance costs (732) (298) Profit of the discontinued operation 177,349 166,662 Profit before tax from a discontinued operation 177,349 166,662 Tax related to pre-tax profit (25,136) (14,533) Profit for the year from a discontinued operation 152,213 152,129
Revenue Expenses Finance costs Profit of the discontinued operation Profit before tax from a discontinued operation Tax related to pre-tax profit Profit for the year from a discontinued operation	479,838 (301,757) (732) 177,349 177,349 (25,136) 152,213

For the nine
For the year
months ended
ended
26 September,
31 December,
2005
2004
HK$’000
HK$’000
Revenue
479,838
484,161
Expenses
(301,757)
(317,201)
Finance costs
(732)
(298)
Profit of the discontinued operation
177,349
166,662
Profit before tax from a discontinued operation
177,349
166,662
Tax related to pre-tax profit
(25,136)
(14,533)
Profit for the year from a discontinued operation
152,213
152,129

Revenue
Expenses
Finance costs
Profit of the discontinued operation
Profit before tax from a discontinued operation
Tax related to pre-tax profit
Profit for the year from a discontinued operation

479,838
(301,757)
(732)
177,349
177,349
(25,136)
152,213

Net assets of the disposed subsidiaries on the completion date were as follows:

Notes	2005 HK$’000 136,161 18,124 17,329 5,469 45,090 30,925 94,528 134 38,175 (8,563) (129,763) (5,948) (1,662) (255) (106,226) 133,518 20,291 1,406,191 1,560,000 1,560,000
Net assets disposed of: Property, plant and equipment 15 Prepaid land lease payments 16 Other intangible assets 18 Deferred tax assets 29 Cash and cash equivalents Inventories Trade receivables Due from a related party Prepayments, deposits and other receivables Trade payables Other payables and accruals Tax payable Due to a related party Deferred tax liabilities 29 Minority interests Expenses in relation to the disposal Gain on disposal of subsidiaries Satisfied by: Cash consideration

Notes

2005
HK$’000
136,161
18,124
17,329
5,469
45,090
30,925
94,528
134
38,175
(8,563)
(129,763)
(5,948)
(1,662)
(255)
(106,226)
133,518
20,291
1,406,191
1,560,000
1,560,000

Net assets disposed of:
Property, plant and equipment
15
Prepaid land lease payments
16
Other intangible assets
18
Deferred tax assets
29
Cash and cash equivalents
Inventories
Trade receivables
Due from a related party
Prepayments, deposits and other receivables
Trade payables
Other payables and accruals
Tax payable
Due to a related party
Deferred tax liabilities
29
Minority interests
Expenses in relation to the disposal
Gain on disposal of subsidiaries
Satisfied by:
Cash consideration

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An analysis of the net inflow of cash and cash equivalents in respect of the disposed subsidiaries is as follows:

	2005 HK$’000
Cash consideration Cash and cash equivalents disposed of Net inflow of cash and cash equivalents in respect of the disposed subsidiaries	1,560,000 (45,090)
	1,514,910

The net cash flows incurred by the disposed subsidiaries are as follows:

	2005 HK$’000	2004 HK$’000
Operating activities Investing activities Financing activities Net cash outflow/(inflow) Earnings per share: Basic, from the discontinued operation Diluted, from the discontinued operation	119,933 (40,269) (145,519) (65,855) HK67.46 cents HK67.46 cents	142,922 (53,705) (68,544)
		20,673

		HK4.17 cents

		HK3.83 cents

The calculations of basic and diluted earnings per share from the discontinued operation are based on:

	2005	2005	2004 (Restated)	2004 (Restated)
Net profit attributable to ordinary equity holders of the parent from the discontinued operation Weighted average number of ordinary shares in issue during the year used in the basic earnings per share calculation Weighted average number of ordinary shares used in the diluted earnings per share calculation DIVIDENDS	HK$1,490,285,000 2,209,126,245 2,209,126,245 2005 HK$’000		HK$83,442,000 1,999,669,184 2,178,364,926

				2004 HK$’000
Interim – HK0.05 (HK$0.0433 after consideration of bonus share issue) (2004: HK$0.04 (HK$0.0267 after consideration of bonus share issue)) per ordinary share – paid out from profit after tax – paid out from contributed surplus Special dividend – HK$0.05 (2004: nil) per ordinary share Proposed final – HK0.015 (2004: HK$0.04 (HK$0.0267 after consideration of bonus share issue)) per ordinary share		73,207 30,186 113,199 33,959 250,551		54,102 – – 55,084
				109,186

The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT

The calculation of basic earnings per share amounts is based on the net profit for the year attributable to ordinary equity holders of the parent for the year of HK$1,532,929,000 (2004: HK$168,485,000), and the weighted average number of 2,209,126,245 (2004: 1,999,669,184 as restated) ordinary shares in issue during the year, as adjusted to reflect the exercises of share options, bonus issues and conversion of convertible bonds during the year. Had the fair value adjustment of HK$66,315,000 to the embedded derivative of the convertible bonds been excluded from the net profit for the year attributable to ordinary equity holders of the parent, the basic earnings per share for the current year would have been HK72.39 cents.

The calculation of diluted earnings per share amounts is based on the net profit for the year attributable to ordinary equity holders of the parent, adjusted to reflect the interest on the convertible bonds, as applicable in 2004 (see below). The weighted average number of ordinary shares used in the calculation is the ordinary shares in issue during the prior year, as used in the basic earnings per share calculation and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares. Had the fair value adjustment of HK$66,315,000 to the embedded derivative of the convertible bonds been excluded from the net profit for the year attributable to ordinary equity holders of the parent, the diluted earnings per share for the current year would have been HK72.39 cents.

The calculations of basic and diluted earnings per share (after the fair value adjustment to embedded derivative of convertible bonds) are based on:

	2005 HK$’000	2004 HK$’000 (Restated)
Earnings Net profit attributable to ordinary equity holders of the parent, used in the basic earnings per share calculation: (after the fair value adjustment to embedded derivative of convertible bonds as set out in note 7(b)) From continuing operations (after fair value adjustment to embedded derivative of convertible bonds) From a discontinued operation Interest on convertible bonds used in the diluted earnings per share calculation Net profit attributable to ordinary equity holders of the parent after interest on convertible bonds Attributable to: Continuing operations Discontinued operation	42,644 1,490,285 1,532,929 – 1,532,929 42,644 1,490,285 1,532,929	85,043 83,442
		168,485
		354
		168,839

		85,397 83,442
		168,839

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

	Number 2005	of shares 2004 (Restated)
Shares Weighted average number of ordinary shares in issue during the year used in the basic earnings per share calculation Effect of dilution – weighted average number of ordinary shares: Share options Convertible bonds	2,209,126,245 – – 2,209,126,245	1,999,669,184 88,379,953 90,315,789
		2,178,364,926

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. PROPERTY, PLANT AND EQUIPMENT

Group

	Buildings HK$’000	Land Leasehold use rights improvements HK$’000 HK$’000	Land Leasehold use rights improvements HK$’000 HK$’000	Plant and machinery HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Total HK$’000
31 December, 2005 Cost or valuation: As previously reported Adoption of HKAS 17 Adoption of HKAS 31 Restated at beginning of year Additions Surplus on revaluation Disposal of a discontinued operation_(note 12) Disposals Transfers Exchange realignmen At 31 December, 2005 Analysis of cost or valuation: At cost At valuation Accumulated depreciation: As previously reported Adoption of HKAS 17 Adoption of HKAS 31 Restated at beginning of year Provided during the year – Attributable to continuing operations – Attributable to a discontinued operation Written back on revaluation Disposal of a discontinued operation(note 12)_ Disposals Exchange realignment At 31 December, 2005 Net book value: At 31 December, 2005 At 31 December, 2004	73,193 – 1,465 74,658 3,063 2,532 (45,466) (2,598) 50,451 1,862 84,502 – 84,502 84,502 – – 202 202 3,825 1,135 (1,685) (2,894) (1,092) 509 – 84,502 74,456	24,797 (29,036) 4,239 – – – – – – – – – – – – – – – – – – – – – – – –	23,574 – – 23,574 47 – (12,950) – – 334 11,005 11,005 – 11,005 12,971 – – 12,971 62 2,641 – (8,567) – 191 7,298 3,707 10,603	114,930 – – 114,930 11,149 – (92,236) (3,959) 76,126 2,449 108,459 108,459 – 108,459 50,305 – – 50,305 9,218 5,021 – (26,223) (2,563) 1,173 36,931 71,528 64,625	20,198 – 1,012 21,210 2,504 – (6,351) (513) 135 387 17,372 17,372 – 17,372 9,369 – 390 9,759 2,831 551 – (4,319) (252) 208 8,778 8,594 11,451	28,652 – 5,651 34,303 6,272 – (11,801) (583) 2,867 702 31,760 31,760 – 31,760 12,820 – 4,457 17,277 3,947 153 – (5,170) (445) 405 16,167 15,593 17,026	77,470 – 31,619 109,089 47,462 – (14,530) – (129,579) 2,296 14,738 14,738 – 14,738 – – – – – – – – – – – 14,738 109,089	362,814 (29,036) 43,986
								377,764 70,497 2,532 (183,334) (7,653) – 8,030
								267,836

								183,334 84,502
								267,836

								85,465 – 5,049
								90,514 19,883 9,501 (1,685) (47,173) (4,352) 2,486
								69,174
								198,662

								287,250

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Group

	Buildings HK$’000	Land Leasehold use rights improvements HK$’000 HK$’000	Land Leasehold use rights improvements HK$’000 HK$’000	Plant and machinery HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Motor Furniture Construction vehicles and fixtures in progress HK$’000 HK$’000 HK$’000	Total HK$’000
31 December, 2004 Cost or valuation: As previously reported Adoption of HKAS 17 Adoption of HKAS 31 Restated at beginning of year Additions Surplus on revaluation Disposal of a subsidiary (note 33) Disposals Transfers Exchange realignment At 31 December, 2004 Analysis of cost or valuation: At cost At valuation Accumulated depreciation: As previously reported Adoption of HKAS 17 Adoption of HKAS 31 At beginning of year Provided during the year – Attributable to continuing operations – Attributable to a discontinued operation Written back on revaluation Disposal of a subsidiary (note 33) Disposals Exchange realignment At 31 December, 2004 Net book value: At 31 December, 2004 At 31 December, 2003	60,050 – 1,462 61,512 541 2,429 – (2,625) 12,681 120 74,658 1,465 73,193 74,658 – – 135 135 2,697 618 (1,156) – (2,119) 27 202 74,456 61,377	6,100 (10,410) 4,310 – – – – – – – – – – – – – – – – – – – – – – – –	23,009 – – 23,009 540 – – – – 25 23,574 23,574 – 23,574 10,103 – – 10,103 52 2,810 – – – 6 12,971 10,603 12,906	106,074 – – 106,074 7,033 – – (4,774) 6,409 188 114,930 114,930 – 114,930 40,945 – – 40,945 5,952 6,562 – – (3,218) 64 50,305 64,625 65,129	17,368 – 729 18,097 3,316 – – (269) 56 10 21,210 21,210 – 21,210 6,412 – 236 6,648 2,577 722 – – (194) 6 9,759 11,451 11,449	24,176 – 5,402 29,578 7,221 – (302) (2,288) 35 59 34,303 34,303 – 34,303 11,052 – 4,244 15,296 3,089 1,011 – (122) (2,016) 19 17,277 17,026 14,282	29,686 – 3,961 33,647 94,568 – – – (19,181) 55 109,089 109,089 – 109,089 – – – – – – – – – – – 109,089 33,647	266,463 (10,410) 15,864
								271,917 113,219 2,429 (302) (9,956) – 457
								377,764

								304,571 73,193
								377,764

								68,512 – 4,615
								73,127 14,367 11,723 (1,156) (122) (7,547) 122
								90,514
								287,250

								198,790

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Company

	Motor vehicles HK$’000	Furniture and fixtures HK$’000	Total HK$’000 5,017 321 (4) 9 5,343 1,751 1,185 (2) 4 2,938 2,405 3,266
31 December, 2005 Cost: At beginning of year Additions Disposal Exchange realignment At 31 December, 2005 Accumulated depreciation: At beginning of year Provided during the year Disposal Exchange realignment At 31 December, 2005 Net book value: At 31 December, 2005 At 31 December, 2004	3,408 – – 6 3,414 1,250 802 – 3 2,055 1,359 2,158	1,609 321 (4) 3 1,929 501 383 (2) 1 883 1,046 1,108

The Group’s buildings are all situated in the PRC and are held under long term leases.

The Group’s buildings of all subsidiaries as at 31 December, 2005 were revalued as at that date by DTZ Debenham Tie Leung Limited, independent professionally qualified valuers at an aggregate open market value of HK$84,502,000 (2004: HK$73,194,000) based on their existing use. The Group’s share in the jointly-controlled entity’s buildings amounted to HK$11,414,000 (2004: HK$1,262,000) were revalued as at the balance sheet date. The revaluation resulted in a surplus of HK$7,281,000 (2004: HK$4,033,000) and a deficit of HK$3,064,000 (2004: HK$448,000). The Group has credited HK$2,576,000 (2004: HK$1,755,000) to the revaluation reserve and charged HK$122,000 (2004: a credit of HK$712,000) to the income statement, respectively, in the current year.

Had the buildings been carried at historical cost less accumulated depreciation, their carrying values would have been approximately HK$68,422,000 (2004: HK$67,391,000).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. PREPAID LAND LEASE PAYMENTS

Group
2005
2004
HK$’000
HK$’000
(Restated)
–
–
29,036
10,410
(3,260)
(2,620)
25,776
7,790
233
18,253
(270)
(282)
(457)
–
(18,124)
–
534
15
7,692
25,776
(254)
(1,059)
7,438
24,717

Carrying amount at 1 January
As previously reported
Effect of adopting HKAS 17_(note 2.2(a))
Effect of adopting HKAS 17(note 2.2(a))
As restated
Additions during the year
Recognised during the year
– Attributable to continuing operations
– Attributable to a discontinued operation
Disposal of subsidiaries(note 12)_
Exchange realignment
Carrying amount at 31 December
Current portion included in prepayments, deposits and other receivables
Non-current portion

–
29,036
(3,260)
25,776
233
(270)
(457)
(18,124)
534
7,692
(254)
7,438

The prepaid land lease payments for land use rights are held under a long term lease and are for land situated in Mainland China.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. GOODWILL

Group

2005
HK$’000
8,245
44,618
(10,963)
41,900
(6,234)
(4,729)
10,963
–
41,900
41,900
–
–
48
41,948
41,948
–
41,948

31 December, 2005
At 1 January, 2005:
Cost as previously reported
Effect of adopting HKAS 31_(note 2.2(b))
Effect of adopting HKFRS 3(note 2.2(e))
Cost as restated
Accumulated amortisation as previously reported
Effect of adopting HKAS 31(note 2.2(b))
Effect of adopting HKFRS 3(note 2.2(e))_
Accumulated amortisation as restated
Net carrying amount
Cost at 1 January, 2005
Attributable to a discontinued operation
Impairment during the year
Exchange realignment
Cost and carrying amount at 31 December, 2005
At 31 December, 2005
Cost
Accumulated impairment
Net carrying amount

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Group

Group

2004
HK$’000
(Restated)
8,245
44,618
52,863
(5,308)
(267)
(5,388)
–
–
(10,963)
41,900
52,863
(10,963)
41,900

31 December, 2004
At 1 January, 2004:
Cost as previously reported
Effect on adopting HKAS 31_(note 2.2 (b))
Cost as restated
Accumulated amortization as previously reported
Effect on adopting HKAS 31(note 2.2 (b))_
Amortisation provided during the year
Impairment during the year
Exchange realignment
Accumulated amortisation as restated
Net carrying amount
At 31 December, 2004:
Cost
Accumulated amortisation
Net carrying amount

In 2004, goodwill not previously eliminated against the consolidated reserves was amortised on the straight-line basis over the estimated useful lives of 8 and 10 years.

Impairment testing of goodwill

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amount of Beijing Tide is determined from a value in use calculation using each flow forecasts based on financial budgets. The key assumptions for the value in use calculation are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. The directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to Beijing Tide. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecasts derived from the most recent financial budgets approved by the directors for 2006 and extrapolates cash flows for the following nine years based on an estimated average industry growth rate. The rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount the forecast cash flows from Beijing Tide is based on the prevailing bank’s borrowing rate offered by major financial institutions in Mainland China.

Based on the above, the directors consider that there is no impairment loss for goodwill.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. OTHER INTANGIBLE ASSETS

Group

	Patents and licences HK$’000	Deferred development costs HK$’000	Total HK$’000 17,784 6,576 403 (19,909) 4,854 1,971 715 880 66 (2,580) 1,052 3,802 15,456 2,311 – 17 17,784 648 311 1,012 1,971 15,813
31 December, 2005: Cost At beginning of the year Additions Exchange realignment Disposal of subsidiaries_(note 12) At 31 December, 2005 Accumulated amortisation At beginning of the year Provided during the year – Attributable to continuing operations – Attributable to a discontinued operation Exchange realignment Disposal of subsidiaries(note 12)_ At 31 December, 2005 Net carrying amount 31 December, 2004 Cost At beginning of the year Additions Transfer Exchange realignment At 31 December, 2004 Accumulated amortisation At beginning of the year Provided during the year – Attributable to continuing operations – Attributable to a discontinued operation At 31 December, 2004 Net carrying amount	10,503 3,843 258 (9,750) 4,854 1,971 715 880 66 (2,580) 1,052 3,802 4,432 1,371 4,700 – 10,503 648 311 1,012 1,971 8,532	7,281 2,733 145 (10,159) – – – – – – – – 11,024 940 (4,700) 17 7,281 – – – – 7,281

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. INTERESTS IN SUBSIDIARIES

	Company 2005 2004 HK$’000 HK$’000	Company 2005 2004 HK$’000 HK$’000
Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Impairment during the year	101,513 84,406 (8,337) 177,582 – 177,582	131,300 82,606 (18,551)
		195,355 –
		195,355

The amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed terms of repayment. The carrying amount of these amounts due from/(to) approximates to the fair values.

Particulars of the subsidiaries are as follows:

			Percentage	Percentage
	Place of		of	equity
	incorporation/		attributable
	registration and	Paid-up/	to the	Company
Company name	operations	registered capital	Direct	Indirect	Principal activities
Beijing Chia Tai Green	Mainland China	US$1,000,000	–	75	Research and
Continent Pharmaceutical					development of
Co., Ltd.					pharmaceutical
					products
Champion First Investments	British Virgin	US$2	100	–	Investment holding
Limited	Islands/	Ordinary
	Mainland China
Chia Tai Healthcare (Holdings)	British Virgin	US$50,000	100	–	Investment holding
Limited	Islands/	Ordinary
	Mainland China
Chia Tai Pharmaceutical	British Virgin	US$3	100	–	Investment holding
(Lianyungang) Company	Islands/	Ordinary
Limited	Mainland China
China Biotech & Drug	Hong Kong	HK$100	–	51	Research and
Development Limited		Ordinary			development of
					pharmaceutical
					products
Jiangsu Chia Tai-Tianqing	Mainland China	Rmb99,000,000	–	60	Development,
Pharmaceutical Co., Ltd.					manufacture and
(“JCTT”)					distribution of
					pharmaceutical
					products

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

			Percentage	Percentage
	Place of		of	equity
	incorporation/		attributable
	registration and	Paid-up/	to the	Company
Company name	operations	registered capital	Direct	Indirect	Principal activities
Magnificent Technology	British Virgin	US$1	–	60	Investment holding
Limited (“Magnificent”)	Islands/	Ordinary
	Hong Kong
Nanjing Chia Tai Tianqing	Mainland China	US$5,050,000	–	51	Manufacture and sale
Pharmaceutical Co., Ltd.					of pharmaceutical
					products
Sino Biopharmaceutical	British Virgin	US$50,000	100	–	Investment holding
(Beijing) Limited	Islands/	Ordinary
	Mainland China
Talent Forward Limited	British Virgin	US$50,000	100	–	Investment holding
	Islands/	Ordinary
	Mainland China

On 2 July, 2005 the Company entered into an agreement with Bausch & Lomb to dispose of its entire equity interests in Sino Concept, which in turn owned 55% equity interests in each of Shandong Chia Tai Freda Pharmaceutical Co., Ltd. (“CTF”) and Shandong Chia Tai Freda New Packaging Resources Co., Ltd. (the “Sino Concept group”), for a total cash consideration of US$200 million (equivalent to approximately HK$1,560 million). The disposal and transfer of ownership of interests in the Sino Concept group were completed in September 2005. Further details of the disposal are in note 12 to the financial statements.

In January 2005, the Company disposed and transferred its entire equity interests in its wholly-owned subsidiary, Ace Elite Investments Limited (“ACE”), to a director based on the net asset value of ACE for a nil consideration which gave rise to a net gain on the disposal of HK$6,000 as ACE had net liabilities of HK$6,000 on the disposal date. The disposal and transfer of ownership interests in ACE was completed during 2005.

In December 2005, the Company disposed and transferred its entire equity interests in its wholly-owned subsidiary, Magnificent, to JCTT, based on the net value for a nil consideration as Magnificent had net liabilities of HK$16,000. With the completion of transfer of the ownership interest from the Company to JCTT, Magnificent becomes a wholly-owned subsidiary of JCTT and an indirect subsidiary of the Company.

20. INTEREST IN A JOINTLY-CONTROLLED ENTITY

	Group 2005 2004 HK$’000 HK$’000	Group 2005 2004 HK$’000 HK$’000
As previously reported Share of net assets Goodwill on acquisition Effect of adopting HKAS 31_(note 2.2(b))_ As restated	– – – –	84,275 39,889 (124,164)
		–

The interest in a jointly-controlled entity, Beijing Tide is indirectly held by the Company, in which the Group holds 35% equity interests therein. In the prior years, the Group had equity accounted for its share of profit and net assets in Beijing Tide. With the adoption of HKAS31 which effect from 1 January, 2005, proportionate consolidation was adopted and accordingly, 2004 amounts were restated.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The following table illustrates the summarised financial information of the Group’s jointly-controlled entity:

	2005 HK$’000
Share of the jointly-controlled entity’s assets and liabilities: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of the jointly-controlled entity’s results: Turnover Other revenue Total revenue Total expenses Tax Profit after tax AVAILABLE-FOR-SALE EQUITY INVESTMENTS
Unlisted equity investments, at cost Provision for impairment	29,820 – 29,820

21. AVAILABLE-FOR-SALE EQUITY INVESTMENTS

The amount represented:

(i) the Group’s 5% equity investments in Chia Tai Qingchunbao Pharmaceutical Co., Ltd., which is engaged in the manufacture, distribution and sale of pharmaceutical products primarily from natural herbal ingredients in Mainland China; and
(ii) the Group’s 15% equity investments in Jiangsu QingJiang Pharmaceutical Co. Ltd., which was newly acquired in December 2005.

The unlisted equity investments are stated at cost less any impairment losses, rather than at fair value. The directors considered that the fair value of unlisted equity investments cannot be reliably measured because (i) the variability in the range of reasonable fair value estimates is significant for that investment or (ii) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating the fair value. Accordingly, such equity investments are stated at cost less any impairment losses.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. INVENTORIES

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)
Raw materials Work in progress Finished goods Spare parts and consumables	13,043 10,056 20,993 247 44,339	21,039 11,687 27,707 624
		61,057

23. TRADE RECEIVABLES

The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally up to 90 days. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

An aged analysis of the Group’s trade receivables as at the balance sheet date, based on the invoice date and net of provisions, is as follows:

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)
Current to 90 days 91 days to 180 days Over 180 days	94,947 5,266 1,800 102,013	90,001 14,216 1,976
		106,193

Trade receivables approximate to their fair values due to their relatively short maturity terms.

24. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)	Company 2005 2004 HK$’000 HK$’000	Company 2005 2004 HK$’000 HK$’000
Prepayments Other receivables Prepaid expenses Current portion of prepaid land lease payments	1,565 8,646 981 254 11,446	19,190 9,169 1,048 1,059 30,466	175 1,683 625 – 2,483	– 1,769 294 –
				2,063

Prepayments, other receivables and prepaid expenses approximate to their fair values due to their relatively short maturity terms.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. CASH AND CASH EQUIVALENTS

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)	Company 2005 2004 HK$’000 HK$’000	Company 2005 2004 HK$’000 HK$’000
Cash and bank balances Time deposits Cash and cash equivalents	223,532 1,472,481 1,696,013	198,491 145,993 344,484	131,816 1,370,446 1,502,262	2,028 60,195
				62,223

At the balance sheet date, the cash and bank balances of the Group denominated in Renminbi (“RMB”) amounted to HK$299,005,000 (2004: HK$260,269,000 as restated). The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short term time deposit rates. The carrying amounts of the cash and cash equivalents approximate to their fair values.

26. TRADE PAYABLES

An aged analysis of the Group’s trade payables as at the balance sheet date, based on the invoice date, is as follows:

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)
Current to 90 days 91 days to 180 days Over 180 days	18,944 790 825 20,559	16,217 349 670
		17,236

Trade payables are non-interest-bearing and are normally settled on 90-day terms. The trade payables approximate to their fair values due to their relatively short maturity term.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. OTHER PAYABLES AND ACCRUALS

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)	Company 2005 2004 HK$’000 HK$’000	Company 2005 2004 HK$’000 HK$’000
Advances from customers Accrued payroll and bonuses Other payables Accrued expenses Housing fund Staff welfare and bonus fund Tax payable other than profit tax	1,285 28,821 60,005 21,696 372 10,088 11,421 133,688	13,099 27,686 55,283 48,839 702 40,121 15,523 201,253	– 2,959 196 1,167 – 11 51 4,384	– 782 960 3,204 – 11 –
				4,957

Other payables are non-interest-bearing and have an average term of three months. Other payables and accruals approximate to their fair values due to their relatively short maturity term.

28. CONVERTIBLE BONDS

On 14 August, 2002, the Company entered into subscription agreements (the “Subscription Agreements”) with Jian Kang Ltd. (“Jian Kang”) and Super Demand Investments Limited (“Super Demand”), respectively. Pursuant to the Subscription Agreements, the Company agreed to issue to Jian Kang (the “2002 Convertible Bond”) and Super Demand (the “2003 Convertible Bond”) convertible bonds for principal amount of US$6,000,000 (equivalent to approximately HK$46,800,000) and US$4,000,000 (equivalent to approximately HK$31,200,000), respectively.

The 2002 Convertible Bond was issued for gross cash proceeds of approximately HK$46,800,000 on 22 October, 2002 and bears interest at 1% per annum which is payable every three months in arrears. The 2002 Convertible Bond will mature on the fourth anniversary of the date of the convertible bond instrument, if not previously converted by the bondholders. The 2002 Convertible Bond is convertible into shares of the Company at any time after the date falling six months from the date of the convertible bond instrument and ending on the maturity date of the 2002 Convertible Bonds (both dates inclusive) at an initial conversion price of HK$2.85 per share, subject to adjustment. Based on the initial conversion price, a total of 16,421,053 new shares would be issued upon the full conversion of the 2002 Convertible Bonds.

On 30 December, 2002, the Company and Super Demand agreed to defer the issuance of the 2003 Convertible Bond to 31 March, 2003 or such other date as both parties agree in writing. The 2003 Convertible Bond was issued for gross cash proceeds of approximately HK$31,200,000 on 31 March, 2003, and bears interest at 1% per annum which is payable every three months in arrears. The 2003 Convertible Bond will mature on the fourth anniversary of the date of the convertible bond instrument, if not previously converted by the bondholders. The 2003 Convertible Bond is convertible into shares of the Company at any time after the date falling six months from the date of the convertible bond instrument and ending on the maturity date of the 2003 Convertible Bonds (both dates inclusive) at an initial conversion price of HK$2.85 per share, subject to adjustment. Based on the initial conversion price, a total of 10,947,368 new shares would be issued upon the full conversion of the 2003 Convertible Bonds.

Pursuant to the shareholders’ approval on 27 April, 2004 for the subdivision of each issued and un-issued shares of HK$0.10 each of the Company into four subdivided shares of HK$0.025 each, the conversion price of the 2002 Convertible Bond and the 2003 Convertible Bond issued by the Company has been adjusted from HK$2.85 per share to HK$0.7125 per subdivided share accordingly.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

On 24 November, 2004, Jian Kang exercised the conversion rights attached to the 2002 Convertible Bond in accordance with the terms and conditions contained in the instrument in the amount of US$4,500,000 (equivalent to approximately HK$35,100,000) of the principal amount outstanding, and was converted into 49,109,684 shares of the Company at a conversion price of HK$0.7125 per share, representing an increase in share capital of HK$1,228,000 and share premium of HK$33,763,000.

On 28 December, 2004, Super Demand transferred its entire bonds of US$4,000,000 (equivalent to approximately HK$31,200,000) to Jian Kang and on 13 April, 2005, Jian Kang had exercised all its convertible bonds (2002 Convertible Bond and 2003 Convertible Bond) of US$5,500,000 (equivalent to approximately HK$42,900,000) at a conversion price of HK$0.7125 per share, representing an increase in share capital of HK$1,505,700 and share premium of HK$157,711,000.

Upon the adoption of HKAS 39, the convertible bonds shall be classified as a debt component and the conversion option as an embedded derivative component, both as liabilities at the balance sheet dates. The effective annual interest rates of the debt component of 2002 Convertible Bonds and 2003 Convertible Bonds are 2.95% and 3.61%, respectively. Interest expenses on the bonds were calculated using the effective interest method by applying the effective annual interest rates of 2.95% and 3.61% to the debt component, which are the market fair value interest rates.

HKAS 39 is applied prospectively, resulting in opening adjustments on 1 January, 2005. The accumulated impact on the consolidated financial statements is presented in note 2.4 (a) and (b).

The movements of the debt component and the embedded derivative component of the convertible bonds upon the adoption of HKAS 39 are as follows:

	Company 2005 2004 Embedded Embedded Debt derivative Debt derivative component component component component HK$’000 HK$’000 HK$’000 HK$’000	Company 2005 2004 Embedded Embedded Debt derivative Debt derivative component component component component HK$’000 HK$’000 HK$’000 HK$’000	Company 2005 2004 Embedded Embedded Debt derivative Debt derivative component component component component HK$’000 HK$’000 HK$’000 HK$’000	Company 2005 2004 Embedded Embedded Debt derivative Debt derivative component component component component HK$’000 HK$’000 HK$’000 HK$’000
At 1 January As previously reported Opening adjustments As restated Conversion into ordinary shares Interest accrued Payment of interest Fair value adjustment on embedded derivative component At 31 December	42,900 (3,380) 39,520 (39,843) 465 (142) – –	– 53,065 53,065 (119,380) – – 66,315 –	78,000 – 78,000 (35,100) 744 (744) – 42,900	– –
				– – – – –
				–

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. DEFERRED TAX

The movements in deferred tax liabilities and assets during the year are as follows:

Deferred tax liabilities

Group	2005 Revaluation of properties HK$’000 2,527 (489) 2,038 – (255) 621 2,404
At 1 January, 2005: As previously reported Effect of adopting HKAS 17_(note 2.2(a)) As restated Charged to the income statement(note 10) Reversal upon discontinued operation(note 12)_ Credited to equity Gross deferred tax liabilities At 31 December, 2005

Deferred tax assets

Group	Accruals HK$’000	Provision for other receivables HK$’000	Provision for trade Fixed assets receivables depreciation HK$’000 HK$’000	Provision for trade Fixed assets receivables depreciation HK$’000 HK$’000	2005 Total HK$’000 7,964 1,152 (5,469) 3,647
At 1 January, 2005 Credited to the income statement (note 10) Reversal upon discontinued operation_(note 12)_ Gross deferred tax assets At 31 December, 2005	5,971 835 (3,993) 2,813	– 99 – 99	539 218 (22) 735	1,454 – (1,454) –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax liabilities

Group	2004 Revaluation of properties HK$’000
At 1 January, 2004 Credited to equity Attributable to continuing operations Attributable to a discontinued operation Gross deferred tax liabilities At 31 December, 2004 Deferred tax assets	–
	1,779 259
	2,038

Group	Accruals HK$’000	Provision for other receivables HK$’000	Provision for trade Fixed assets receivables depreciation HK$’000 HK$’000	Provision for trade Fixed assets receivables depreciation HK$’000 HK$’000	2004 Total HK$’000
At 1 January, 2004 Credited to the income statement Attributable to continuing operations_(note 10)_ Attributable to a discontinued operation Gross deferred tax assets At 31 December, 2004 SHARE CAPITAL Shares	– 1,978 3,993 5,971	– – – –	– – 517 – 22 1,454 539 1,454 2005 HK$’000		– 2,495 5,469
					7,964

					2004 HK$’000
Authorised: 4,000,000,000 ordinary shares of HK$0.025 each (2004: 4,000,000,000 ordinary shares of HK$0.025 each) Issued and fully paid: 2,263,968,736 ordinary shares of HK$0.025 each (2004: 1,377,109,684 ordinary shares of HK$0.025 each)				100,000 56,599	100,000

					34,428

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

During the year, the movements in share capital were as follows:

(a) On 11 April, 2005, 71,760,000 ordinary shares of HK$0.025 each were issued on the exercise of the share options. On 29 April, 2005, 240,000 ordinary shares of HK$0.025 each were issued on the exercise of the remaining balance of the share options.
(b) On 13 April, 2005, 60,202,807 ordinary shares of HK$0.025 each were issued on the exercise of the conversion rights of convertible bonds held by Jian Kang.
(c) As a result of the resolution passed by the Company’s shareholders’ meeting on 13 May, 2005, the issue of a bonus share for every two existing shares of the Company held by members on the register of members on 31 May, 2005 resulted in the issue of 754,656,245 ordinary shares of HK$0.025 each.

A summary of the transactions during the year with reference to the above movements in the Company’s issued ordinary share capital is as follows:

	Number of shares in issue	Issued share capital HK$’000	Share premium account HK$’000	Total HK$’000
At 1 January, 2005 Share options exercised (a) Convertible bonds converted (b)(note 32(a)) Bonus shares issued (c) At 31 December, 2005	1,377,109,684 72,000,000 60,202,807 754,656,245 886,859,052 2,263,968,736	34,428 1,800 1,505 18,866 22,171 56,599	131,481 11,520 157,711 (18,866) 150,365 281,846	165,909 13,320 159,216 –
				172,536
				338,445

Share options

Details of the Company’s share option scheme and the share options issued under the scheme are included in note 31 to the financial statements.

31. SHARE OPTION SCHEME

(a) The Existing Scheme

The Company operates a share option scheme (the “Existing Scheme”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The Existing Scheme became effective on 19 September, 2000. On 26 April, 2002, the Existing Scheme was terminated and replaced by a new share option scheme, as detailed below under the heading “The New Scheme”. Upon the termination of the Existing Scheme, no further share options will be granted pursuant to the Existing Scheme, however the Existing Scheme will, in all other respects, remain in force to the extent necessary to give effect to the exercise of the outstanding share options previously granted pursuant thereto. The outstanding share options will continue to be valid and exercisable in accordance with the rules of the Existing Scheme.

Eligible participants of the Existing Scheme included employees or executive directors of the Company or any of its subsidiaries. The directors of the Company are authorised to invite, at their discretion, eligible participants to take up options to subscribe for shares of the Company (the “Shares”). Unless otherwise cancelled or amended, the Existing Scheme will remain in force for a period of 10 years commencing on 19 September, 2000.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The maximum number of unexercised share options currently permitted to be granted under the Existing Scheme is an amount equivalent, upon their exercise, to 10% of the Shares in issue for a period of 10 consecutive years. The maximum number of shares issuable under share options to each eligible participant in the Existing Scheme within any 12-month period, is limited to 10% of the Shares in issue at any time. No option may be granted to any eligible participants which, if exercised in full, would result in such eligible participants becoming entitled to subscribe for such number of Shares as, and when aggregated with the total number of Shares already issued and remaining issuable to him or her under the Existing Scheme, would exceed 25% of the aggregate number of Shares for the time being issued and are issuable under the Existing Scheme.

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors of the Company, which may commence from the date immediately following the date of grant and ending on such date as the directors of the Company may determine but in any event not exceeding 10 years from the date of grant of such share options.

The exercise price of the share options is determinable by the directors, but may not be less than the higher of (i) the Stock Exchange closing price of the Company’s shares on the date of the offer of the share options as stated in the daily quotation sheet of the Stock Exchange; and (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer as stated in the daily quotation sheets of the Stock Exchange.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

Pursuant to Clause 9.6 of the Rules of the Existing Scheme, if there is any alteration in the capital structure of the Company while any option remains exercisable, whether by way of capitalization of profits or reserves, rights issued, consolidation, subdivision or reduction in the share capital of the Company (other than an issue of Shares as consideration in respect of a transaction to which the Company is a party) or otherwise, such corresponding alterations (if any) shall be made in:

(a) the number of Shares (without fractional entitlements) subject to the option so far as unexercised; and/or
(b) the Subscription Price; and/or
(c) the method of exercise of the Option.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The following share options were outstanding under the Scheme during the year:

Name or category of participant			Number of s	hare options		Adjusted exercise At 31 price December, Date of grant Exercise period of share 2005 of share options of share options options*** HK$	Price of the Company’s shares Immediately At grant* before the At exercise date of exercise date of options date options HK$ HK$ HK$	Benefit from share option HK$’000
	At 1 January, 2005	Granted during the year	Exercised during the year	Expired during the year	Forfeited during the year
Directors Tse Ping Wang Jinyu Tao Huiqi Tse Hsin Other employees In aggregate	18,000,000 2,400,000 2,400,000 13,440,000 36,240,000 35,760,000 72,000,000	– – – – – – –	(18,000,000) (2,400,000) (2,400,000) (13,440,000) (36,240,000) (35,760,000) (72,000,000)	– – – – – – –	– – – – – – –	– 2 January 2001 3 January 2003 to 0.185 1 January 2007 – 2 January 2001 3 January 2003 to 0.185 1 January 2007 – 2 January 2001 3 January 2003 to 0.185 1 January 2007 – 2 January 2001 3 January 2003 to 0.185 1 January 2007 – – 2 January 2001 3 January 2003 to 0.185 1 January 2007 –	0.74 2.9 2.9 0.74 2.9 2.9 0.74 2.9 2.9 0.74 2.9 2.9 0.74 2.9 2.9/2.75	48,870 6,516 6,516 36,490
								98,392

The vesting period of the share options is from the date of the grant until the commencement of the exercise period.
** Pursuant to the Rules of the Existing Scheme, the exercise price per share option has been altered subsequent to the approved subdivision of shares by shareholders.
*** The price of the Company’s shares disclosed as at the date of the grant of the share options is the Stock Exchange closing price on the trading day immediately prior to the date of the grant of the options. The price of the Company’s shares disclosed immediately before the exercise date of the share options is the weighted average of the Stock Exchange closing prices immediately before the dates on which the options were exercised over all of the exercises of options within the disclosure line.

As disclosed in note 2.2(d), the benefit from the exercise of employee share options during the year has no impact on the Group’s income statement for the current year nor retained profits as at 31 December, 2005.

The 72,000,000 share options exercised during the year resulted in the issue of 72,000,000 ordinary shares of the Group and new share capital of HK$1,800,000 and share premium of HK$11,520,000, as further detailed in note 30 to the financial statements.

At the balance sheet date, the Company had no share options outstanding under the Scheme.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b)

The New Scheme

Following the amendments to Chapter 23 of the GEM Listing Rules which came into effect on 1 October, 2001, no share options may be granted under the Existing Scheme unless such grant is made in compliance with the amended rules. To enable the Company to reward and provide incentives to eligible participants who may contribute to the success of the Group’s operations, a new share option scheme (the “New Scheme”) was adopted by the Company on 26 April, 2002 and at the same time the Existing Scheme was terminated. The New Scheme remains in force for ten years commencing from 26 April, 2002. On approval by the Stock Exchange for listing of the Company’s shares on the main board, the Company adopted a proposed share option scheme (the “Proposed Scheme”) and terminated the New Scheme pursuant to an ordinary resolution passed by the shareholders of the Company on 24 November, 2003. No share options were granted under the New Scheme since 26 April, 2002.

(c) The Proposed Scheme (hereafter to be known as the “2003 Scheme”)

The Proposed Scheme (hereafter to be known as the “2003 Scheme”) became effective on 8 December, 2003 upon the listing of the Company’s shares on the Main Board, unless otherwise cancelled or amended, the 2003 Scheme remains in force for 10 years from that date.

The maximum number of shares which may be allotted to and issued upon the exercise of all outstanding share options granted and yet to be exercised under the 2003 Scheme and any other share option schemes of the Company must not in aggregate exceed 30% of the relevant class of shares of the Company in issue at any time.

The total number of shares which may be allotted to and issued upon the exercise of all options to be granted under the 2003 Scheme and any other share option schemes of the Company must not in aggregate exceed 10% of the relevant class of shares of the Company in issue as at the date of adoption of the 2003 Scheme, unless shareholders’ approval of the Company has been obtained.

The total number of shares issued and to be issued upon exercise of options granted under the 2003 Scheme and any other share option schemes of the Company to each participant, including cancelled, exercised and outstanding option, in any 12-month period up to the date of grant, shall not exceed 1% of the issued share capital of the Company. Any further grant of share options in excess of such limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive, or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. Where any grant of share options to a substantial shareholder of the Company or an independent non-executive director of the Company, or any of their respective associates, would result in the total number of Shares issued and to be issued upon exercise of share options already granted and to be granted to such person under the 2003 Scheme and any other share option schemes of the Company (including option exercised, cancelled and outstanding) in any 12-month period up to and including the date of such grant (a) representing in aggregate over 0.1% of the Shares in issue; and (b) having an aggregate value (based on the closing price of the Shares at the date of each grant) in excess of HK$5 million, such further grant of options must be approved by the shareholders in a general meeting.

Any change in the terms of the share options granted to a substantial shareholder of the Company or any independent non-executive director, or any of their respective associates must be approved by the shareholders in a general meeting.

The offer of a grant of share options may be accepted within 30 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. A share option may be exercised in accordance with the terms of the 2003 Scheme at any time during a period to be determined on the date of offer of grant of share option and notified by the directors to each grantee. The exercise period may commence once the offer of the grant is accepted by the grantee within the prescribed time from the date of its offer and shall end in any event not later than 10 years from the date of grant of the share option. Unless otherwise determined by the directors and provided in the offer of the grant of options to a grantee, there is no minimum period required under the 2003 Scheme for the holding of a share option before it can be exercised.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The exercise price of the Shares under the 2003 Scheme shall be a price determined by the board of directors but shall not be less than the highest of (i) the closing price of the Shares on the date of the offer of the grant; (ii) the average closing price of the Shares for the five business days immediately preceding the date of the offer of grant; and (iii) the nominal value of the Shares.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

Pursuant to Clause 10 of the Rules of the 2003 Scheme regarding the alteration in the capital structure of the Company and the approval of the shareholders for the subdivision of the every issued and un-issued shares of HK$0.10 each into four shares of HK$0.025 each, the outstanding share options and the exercise price have been adjusted under the 2003 Scheme accordingly.

No share options were granted under the 2003 Scheme during the year.

32. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity.

The Group’s contributed surplus represents the difference between the nominal value of the shares and the share premium account of the former Group holding companies acquired pursuant to the Group reorganisation as stated in the Company’s prospectus dated 22 September, 2000, over the nominal value of the Company’s shares issued in exchange therefor.

On 13 April, 2005, Jian Kang exercised the conversion rights attached to the 2002 and 2003 convertible bonds in the amount of US$5,500,000 (equivalent to approximately HK$42,900,000) of the principal amount outstanding and were contained in the instrument in the amount converted into 60,202,807 shares of the Company at a conversion price of HK$0.025 per share, representing an increase in share capital of HK$1,505,000 and share premium account of HK$157,711,000 (see note 30).

Pursuant to the relevant laws and regulations for foreign investment enterprises incorporated under the Law of the Mainland China on Joint Venture Using Chinese and Foreign Investment and the articles of association of the Group’s Mainland China joint ventures, profits of the Group’s Mainland China joint ventures as determined in accordance with the accounting rules and regulations in the Mainland China are available for distribution in the form of cash dividends to the joint venture partners after the joint ventures have: (1) satisfied all tax liabilities; (2) provided for losses in previous years; and (3) made any required appropriations to the statutory reserve funds, including the general reserve fund, enterprise expansion fund and staff welfare and bonus fund. According to the articles of association of the respective Mainland China joint ventures of the Group, the appropriation to the statutory reserve funds are at the discretion of the board of directors of the respective joint ventures. The basis of appropriation of the general reserve fund and the enterprise expansion fund is 5% of the statutory annual net profit after tax of the respective Mainland China joint ventures. The appropriation to staff welfare and bonus fund is based on nil to 10% of the statutory annual net profit after tax of the respective Mainland China joint ventures and has been reclassified as expense on consolidation as it is a liability to the employees.

The general reserve fund can be used either to offset accumulated losses or be capitalised as equity. The enterprise expansion fund can be used to expand the joint venture’s production and operation and subject to the approval of the relevant government authorities, can be utilised for increasing the capital of the joint venture. The staff welfare and bonus fund is recorded and reported as a current liability of the joint ventures and can be utilised for making special bonuses or collective welfare to the employees of the joint venture.

The capital reserve is non-distributable and arose from the capitalisation of the statutory reserve funds as paid-up capital upon approval for increasing the registered capital of the Mainland China joint ventures.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Company

Notes	Retained Share profits/ premium Contributed (accumulated account surplus losses) HK$’000 HK$’000 HK$’000	Retained Share profits/ premium Contributed (accumulated account surplus losses) HK$’000 HK$’000 HK$’000	Retained Share profits/ premium Contributed (accumulated account surplus losses) HK$’000 HK$’000 HK$’000	Total HK$’000 126,038 74,897 (54,102) 33,763 (55,084) 125,512 125,512 (49,685) 75,827 11,520 157,711 (18,866) 1,614,149 (103,393) (113,199) (33,959) 1,589,790
Balance at 1 January, 2004 Net profit for the year 11 Interim 2004 dividend Issue of shares on exercise of convertible bonds Proposed final 2004 dividend 13 At 31 December, 2004 At 31 December, 2004 and 1 January, 2005 As previously reported Effect of adopting HKAS 39 2.4(b) As restated Issue of shares on exercise of share options 31 Issue of shares on exercise of convertible bonds 30 Issue of bonus shares 30 Net profit for the year 11 Interim 2005 dividend 13 Special dividend 13 Proposed final 2005 dividend 13 At 31 December, 2005	97,718 – – 33,763 – 131,481 131,481 – 131,481 11,520 157,711 (18,866) – – – – 281,846	107,299 – – – – 107,299 107,299 – 107,299 – – – – (30,186) – – 77,113	(78,979) 74,897 (54,102) – (55,084) (113,268) (113,268) (49,685) (162,953) – – – 1,614,149 (73,207) (113,199) (33,959) 1,230,831

33. DISPOSAL OF A SUBSIDIARY

Notes	2005 HK$’000	2004 HK$’000 180 40 16 (516) 134 (146) 805 659 659
Net assets disposed of: Property, plant and equipment 15 Inventories Prepayments, deposits and other receivables Trade payables Other payables and accruals Gain on disposal of a subsidiary 5 Satisfied by: Cash	– – – – – – – – –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows:

	2005 HK$’000	2004 HK$’000
Cash consideration Cash and bank balances disposed of Net inflow of cash and cash equivalents in respect of the disposal of a subsidiary	– – –	659 –
		659

34. CONTINGENT LIABILITIES

At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows:

	Group		Company	Company
	2005	2004	2005	2004
	HK$’000	HK$’000	HK$’000	HK$’000
Trade debtors factored with recourse	4,970	–	–	–

35. OPERATING LEASE ARRANGEMENTS

As lessee

The Group leases certain of its office properties and land use right under operating lease arrangements. Leases for office equipment are for terms ranging between two and five years, and for land use right are for terms ranging from one to fifty years.

At the balance sheet date, the Group and the Company had total future minimum lease payments under noncancellable operating leases falling due as follows:

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)	Company 2005 2004 HK$’000 HK$’000	Company 2005 2004 HK$’000 HK$’000
Within one year In the second to fifth years, inclusive After five years	2,221 3,367 23,182 28,770	2,768 3,087 23,515 29,370	1,172 806 – 1,978	1,605 342 –
				1,947

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36. COMMITMENTS

In addition to the operating lease commitments detailed in note 35 above, the Group had the following capital commitments at the balance sheet date:

	Group 2005 2004 HK$’000 HK$’000 (Restated)	Group 2005 2004 HK$’000 HK$’000 (Restated)
Contracted, but not provided for: Plant and machinery Intangible assets (product technology) Authorised, but not contracted for: Plant and machinery	2,614 – 2,614 20,994	19,623 3,914
		23,537

		27,263

In addition, the Company’s share of the jointly-controlled entity’s capital commitments, which are not included in the above, is as follows:


	2005	2004
	HK$’000	HK$’000
Contracted, but not provided for:
Plant and machinery	223	9,573

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

37. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions detailed elsewhere in these financial statements, the Group had the following transactions with related parties during the years:


	2005	2004
	HK$’000	HK$’000
Sales of products to:
– a Chinese joint venture partner of a subsidiary_(note a)_	1,341	290
– a related party with a common shareholder of
a subsidiary_(note a)_	773	689
Purchases of raw materials from:
– a related party with a common shareholder of
a subsidiary_(note b)_	17,264	18,704
Purchases of raw materials from:
– a Chinese joint venture partner of a subsidiary_(note b)_	2,178	1,780
– a company indirectly owned by a director_(note b)_	5	40
Service revenue from
– a company indirectly owned by a director_(note c)_	869	–
Operating lease rentals payable to:
– a fellow subsidiary of a subsidiary’s Chinese joint
venture partner_(note d)_	3,635	4,756
– a Chinese joint venture partner of a subsidiary_(note d)_	565	561
– a company beneficially owned by a director_(note d)_	684	684
Research and development expenses to
– a fellow subsidiary of a subsidiary’s Chinese joint
venture partner_(note e)_	1,439	941

Notes:

(a) Sales of products to the Chinese joint venture partner of the subsidiary, Chinese joint venture of a jointly-controlled entity and a related party with a common shareholder of a subsidiary were conducted with reference to the market prices.
(b) Purchases of raw materials were conducted with reference to the market prices.
(c) Service revenue were conducted with reference to the market prices.
(d) Lease rentals were based on tenancy agreements entered into between the Group and each of the related parties with reference to the market prices.
(e) Research and development expenses were based on the terms of the agreements entered into with the related party.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b)

Other transactions with related parties:

(i) In January 2005, the Company disposed and transferred its entire equity interests in its whollyowned subsidiary, Ace Elite Investments Limited (“ACE”) to a director based on its net liabilities of HK$6,000 on the disposal date for a nil consideration and resulted in a gain on disposal of HK$6,000. With the completion of the transfer of ownership interests to the director in January 2005, ACE ceased to be the subsidiary of the Group.

(c) Outstanding balances with related parties:

(i) As disclosed in the consolidated balance sheet, the Group had trade payables to its Chinese joint venture partner of HK$1,181,280 (2004: HK$5,151,000 as restated) and trade receivables from its Chinese joint venture partner of HK$1,094,026 (2004: HK$871,000 as restated). These trade payables and receivables are unsecured, interest-free and on normal trade terms for repayment.

38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments, other than derivatives, comprise convertible bonds, cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

It is, and has been, throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are credit risk, significant concentrations of credit risk, interest rate risk, currency risk, liquidity and funding risk, and net fair value risk. The board reviews and agrees policies for managing each of these risks and they are summarised below.

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a loss to the Group. The Group has adopted the policy of only dealing with creditworthy counterparties and has a stringent procedure in extending credit terms to customers and in monitoring its credit risk.

The credit policy outlines clearly the guidelines on extending credit terms to customers, including monitoring the credit control process and use of related industry’s practices as reference. This includes assessing and valuation of customers’ credit reliability and periodic review of their financial status to determine credit limits to be granted. Customers may be required to provide security in terms of cash or immovable assets.

The carrying amount of financial assets recorded in the financial statements, net of any provision for bad and doubtful debts, represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral or other security obtained.

Significant concentrations of credit risk

Concentrations of credit risk exist when changes in economic, industry or geographical factors similarly affect a group of counterparties whose aggregate credit exposure is significant in relation to the Group’s total credit exposure.

The directors consider credit risk to be low as the major customers are large and medium corporations with a good credit track records.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Interest rate risk

Interest rate risk arises from the potential changes in interest rates that may have adverse effects in the Group’s results for the current reporting year and in the future years.

The directors consider that the Group is not significantly exposed to interest rate risk and no hedging or other alternatives have been implemented.

Currency risk

Foreign exchange risk arises from the change in foreign exchange rates that may have an adverse effect on the Group in the current reporting year and in the future years. Most of the assets and liabilities of the Group were denominated in Renminbi and Hong Kong dollars. In the Mainland China, foreign investment enterprises are authorized to convert Renminbi to foreign currency in respect of current account items (including payment of dividend and profit to foreign joint venture partner).

The directors consider that the Group is not significantly exposed to foreign currency risk and no hedging or other alternatives have been implemented.

Liquidity and funding risk

The Group’s liquidity remained strong as at balance sheet date. During the year, the Group’s primary source of funds was cash derived from operating activities and investment income. The directors consider that the Group is not exposed to liquidity and funding risk.

Net fair value

The carrying amounts of cash and bank balances, trade and other receivables and payables, provisions and other liabilities approximate to their respective fair values due to their relatively short maturity terms.

It is not practicable within the constraint of cost to reliably determine the fair value of amounts of receivables and payables to related companies as these balances are on normal trade terms.

39. POST BALANCE SHEET EVENT

Subsequent to the balance sheet date, on 11 April, 2006, the directors of the Company proposed a final dividend of HK$0.015 per share which has been classified as a separate allocation of retained profits within the reserve section of the financial statements (notes 13 and 32).

40 COMPARATIVE AMOUNTS

As further explained in notes 2.2 and 2.4 to the financial statements, due to the adoption of new HKFRSs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain prior year and opening balance adjustments have been made and certain comparative amounts have been reclassified and restated to conform with the current year’s presentation and accounting treatment.

41. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 11 April, 2006.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. INDEBTEDNESS

As at 31 July, 2006, the Group had unsecured bills payable of approximately HK$19,200,000 (or RMB20,000,000) and outstanding borrowings of approximately HK$73,147,000 which comprised an unsecured short term bank loan of approximately HK$66,907,000 (or US$8,577,787) and an unsecured entrusted short term loan via a bank from a fellow subsidiary of approximately HK$6,240,000 (or RMB6,500,000).

Save as disclosed above, the Group did not have any outstanding indebtedness, loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase or finance lease commitments, guarantees or other material contingent liabilities as at 31 July, 2006.

4. WORKING CAPITAL

Taking into account the Group’s existing cash and bank balances and internal resources available and estimated cash outflow for the formation of the JV Company, the Directors are of the opinion that the Group will following the formation of the JV Company have sufficient working capital for its present requirements.

5. MANAGEMENT DISCUSSION AND ANALYSIS

INDUSTRY OVERVIEW

For China’s pharmaceutical industry, 2006 is a year of consolidation, adjustment and standardization. “High medical fees leading to difficulty in obtaining medical treatment” has become a key concern of the Chinese people and the Government. As the medical reform advances, laws and regulations are fine-tuned and regulatory efforts are stepped up. That plus the Government’s continuous effort to suppress prices and clamp down on replica medicines by applying effectively the medicine approval system and pricing method, vicious competition created by replica medicines in the market has been suppressed. The intensifying price and product competition in the market have seen sales increased. The phenomenon favors companies with strong advantages giving them larger shares of the market and has led to more severe polarization in the industry. The development will benefit large pharmaceutical companies with proven advantages, and ultimately help to rationalize profit attribution along the value chain. The future better-regulated pharmaceutical industry in China will be brand-focused and will grow through mergers and acquisitions. Companies with prominent brands, sound technologies, abundant resources, outstanding management and scale advantages will emerge as winners after the adjustment and standardization concluded.

BUSINESS REVIEW

To cope with the current industry adjustments and policy changes, the management is actively adjusting the Group’s strategies based on thorough study of the possible impacts that regulations may have on its operations. Boasting unique products, strong R&D capabilities, brand supremacy, an extensive sales network, patented products and state-of-art technologies, the Group will strengthen promotion of its corporate and product brands. It will reinforce internal governance to lower operation costs and adjust its product R&D structure to focus on main product development. To

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

boost sales, it will conduct more academic promotions for main products and products with great potentials, reinforce development of third-tier end markets (village and town hospitals, public health hospitals, public health centers, public health clinics, private clinics) and retail markets. Leveraging JCTT’s “People’s Safe Medicine Enterprise” in “Safe Medicine for Everyone” status, won at an event jointly organized by Health Times magazine, China Health magazine, Health Digest magazine and People’s Health magazine in 2005, the Group has been actively promoting its brands. At the same time, taking into account and pinpointing the characteristics of different products, the Group has sought to exploit new sales channels, such as setting up a non-prescription medicine (OTC) team to target the retail market and embarking on direct sales via TV channels, to increase revenue, enlarge market share and lower sales costs for health care medicine. All those policies were introduced in the second quarter.

On 29 July, 2006, the Group’s Tianqingganmei (Magnesium Isoglycyrrhizinate raw materials and injections) won the gold medal in “The Third Chinese International Patented and Famous Brands Exhibition” organized by State Intellectual Property Office of the PRC. The Group holds a patent certificate of independent intellectual property right to Tianqingganmei which was introduced to the market in November 2005. It is the world’s first Magnesium Isoglycyrrhizinate with chemical compound patent protection that was independently developed by JCTT. Because of the product’s unique structure which gives it multiple medical functions and outstanding pharmacokinetics and liver targeting advantages, it has become the most popular product among hepatitis medicines.

For the six months ended 30 June, 2006, the Group recorded revenue from continuing operations of approximately HK$330.82 million, approximately 9.1% lower than in the corresponding period last year, the second quarter showed approximately 27.8% more than the first quarter. Profit attributable to the Group from continuing operations amounted to approximately HK$57.44 million, representing an increase of approximately 20.4% from that in the same period last year, and the second quarter showed approximately 8% more than the first quarter. Basic earnings per share from continuing operations were approximately HK2.54 cents, approximately 14.4% more than last year and the second quarter showed approximately 8.2% more than the first quarter. New products accounted for approximately 17.2% of the Group’s total turnover. As at 30 June, 2006, the Group had cash equivalent and bank balance of approximately HK$1,742.91 million, an increase of approximately 606.8% from the level in the same period last year.

LIQUIDITY AND FINANCIAL RESOURCES

The Group’s liquidity remains strong. The Group’s primary source of funds was cash derived from operating activities and disposal of Sino Concept Technology Limited. As at 30 June, 2006, the Group’s bank balance and cash in hand was approximately HK$1,742.91 million (31 December, 2005: approximately HK$1,696.01 million).

CAPITAL STRUCTURE

As at 30 June, 2006, the Group had a short term loan of approximately HK$66.79 million (31 December, 2005: Nil).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CHARGE ON ASSETS

The Group did not have any charges on assets as at 30 June, 2006 (31 December, 2005: Nil).

CONTINGENT LIABILITIES

As at 30 June, 2006, neither the Group, nor the Company had any significant contingent liabilities (31 December, 2005: HK$4,970,000).

ASSETS AND GEARING RATIO

As at 30 June, 2006, total assets of the Group amounted to approximately HK$2,225.36 million (31 December, 2005: approximately HK$2,140.22 million) whereas total liabilities amounted to approximately HK$289.85 million (31 December, 2005: approximately HK$164.98 million). The gearing ratio (total liabilities over total assets) was approximately 13.0% (31 December, 2005: approximately 7.7%).

EMPLOYEE AND REMUNERATION POLICIES

The Group remunerates its employees based on their performance, experience and the prevailing market rates. Other employee benefits include mandatory provident fund, insurance and medical coverage, subsidized training programmes as well as a share option scheme.

Total staff costs (including Directors’ remuneration) for the six months ended 30 June, 2006 were HK$59,437,000 (30 June, 2005: HK$100,378,000).

EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES

Most of the assets and liabilities of the Group were denominated in Renminbi, US dollars and HK dollars. In the PRC, foreign investment enterprises are authorized to convert Renminbi to foreign currency in respect of current account items (including payment of dividend and profit to the foreign joint venture partner). The exchange rate of HK dollars and US dollars is pledged under the fixed linked system over a long period of time. The Directors consider that the Group is not significantly exposed to foreign currency risk and no hedging or other alternatives have been implemented.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

OUTLOOK AND PROSPECT

Although the change in regulatory policy on the pharmaceutical industry in the PRC and industry restructuring are expected to continue for some time yet, the Group believes that the players in the industry are presented with both challenges and opportunities. The intrinsic factors that have been driving growth in demand for medicines in the PRC persist. These factors include the country’s growing and aging population, and increase in consumption of medicine per capita. Also, the ever improving living standard, increased government investment in the “Industrial Back Feeding Agriculture Policy” (commencing in 2006, the Government has doubled its investment in “Industrial Back Feeding Agriculture Policy” from RMB20 to RMB40), the accelerated construction of medicine delivery and monitory networks for rural areas, and continuous urbanization of villages have all been driving growth of the pharmaceutical industry.

The aim of industry regulation and restructuring is to encourage industry standardization and hasten consolidation of the industry. The Group has ample capital and extensive experience in effecting mergers and acquisitions, restructuring, management and in boosting results. The negotiation for M&A and restructuring possibilities will constitute a key driver to the Group’s profit growth.

At the same time, the Group will seek to further exploit the potential among its enterprises. It has tremendous advantages in its blockbuster drugs including “Ganlixin”, “Tianqingfuxin”, “Kaishi” and “Spring”. Capitalizing on its products’ reputable image among medical practitioners and patients, well-developed market shares and sales channels, the Group will seek to secure more new sales channels. The Group has the support of products with independent intellectual property right and the advanced technologies such as “Kaishi”, “Kaifen”, “Tianqingganmei” and “Adefovir Dipivoxil”. It also operates the largest R&D unit and manufacturing facility for licorice-based hepatitis drug, producing the “Ganlixin”, “Tianqingganping” and “Tianqingganmei” series. The Group is confident of delivering outstanding results in the pharmaceutical market laden with both challenges and opportunities.

The Group reported outstanding sales and profit with CAGR at 28% and 34% respectively in the past 5 years. In addition, the Group has been among the top 50 enterprises in the PRC’s pharmaceutical industry in terms of profitability in the past 3 years. The Group was also included among the “Best under a billion in the Asia Pacific region in 2005” by Forbes Asia, named a “Hong Kong Outstanding Enterprises 2005” by the Economic Digest, the “Red Herring Small Cap 100” list of the Red Herring Magazine and was among the “Chinese Outstanding Enterprise Achievement Prize” by Capital Magazine. These awards are testaments to the excellent work of the Group’s management team and the Group’s impressive results.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Looking ahead, the Group will pursue business on dual tracks. It will continue to focus on specialty treatment areas and develop relevant product series and specialty brands. Its hepatitis medicine and cardio-cerebral medicine lines have been successful, and it has been actively developing analgesic medicines, oncology medicines, and respiratory system and antidiabetic drugs, etc. To accelerate business development, the Group will also continue to launch blockbuster drugs to address market needs, and apply its abundant capital reserves on restructuring and pursuing mergers and acquisitions with potential, thereby create better returns for shareholders. Moreover, to capture the opportunity of world-wide energy crisis, the Group will continue to explore opportunities to invest and develop in the energy chemical industry of coal olefin. In view of the current high prices of petroleum, the Group believes that the participation in this industry would become another growth driver for the Group helping it to create long term returns to shareholders.

6. MATERIAL ADVERSE CHANGES

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December, 2005, the date to which the latest published audited financial statements of the Group was made up.

GENERAL INFORMATION

APPENDIX II

A. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

B. DISCLOSURE OF INTERESTS

(i) Save as disclosed below, as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which would have to be notified to the Company and the Stock Exchange pursuant to the provisions under Divisions 7 and 8 of Part XV of the SFO (including the interests and short positions which he would be deemed or taken to have under Sections 344 and 345 of the SFO) or the Model Code for Securities Transactions by Directors of Listed Companies, or which would have to be, pursuant to Section 352 of the SFO, entered in the register referred to therein:

Long positions in ordinary shares of the Company

			Number of	shares held, capacity and nature of interest	shares held, capacity and nature of interest	shares held, capacity and nature of interest	shares held, capacity and nature of interest
								Percentage
								of the
		Capacity/	Directly	Through				Company’s
Name of		Nature	beneficial	controlled		Through		issued share
director	Notes	of Interest	owned	corporations		spouse	Total	capital (%)
Mr. Tse Ping	(1)	Beneficial owner	45,000,000	1,035,488,908		–	1,080,488,908	47.73
Ms. Cheng Cheung	(2)	Interest of spouse	–	–	1,080,488,908		1,080,488,908	47.73
Ling
Mr. Tao Huiqi		Beneficial owner	6,000,000	–		–	6,000,000	0.27
Ms. Zhao Yanping		Beneficial owner	636,000	–		–	636,000	0.03
Mr. Tse Hsin		Beneficial owner	25,800,000	–		–	25,800,000	1.14
Mr. Zhang Baowen		Beneficial owner	1,200,000	–		–	1,200,000	0.05

Notes:

(1) Mr. Tse Ping held 1,035,488,908 shares through Remarkable Industries Limited and Validated Profits Limited. The entire issued share capital in of these companies is owned by Mr. Tse Ping.
(2) Ms. Cheng Cheung Ling is the spouse of Mr. Tse Ping and is therefore deemed to be interested in the same shares in which Mr. Tse Ping has an interest.

GENERAL INFORMATION

APPENDIX II

Long position in shares of an associated corporation of the Company

	Name of
Name of	associated		Number of	% of
Director	corporation	Capacity	shares	shareholding
Mr. Tse Hsin	江蘇正大天晴藥	Beneficial	173,250	0.18%
	業股份有限公司	owner
	(Jiangsu Chia
	Tai-Tianqing)
	Pharmaceutical
	Co., Ltd.)
	(“JCTT”)(1)
	南京正大天晴製藥	Beneficial	39,592	0.78%
	有限公司	owner
	(Nanjing Chia Tai
	Tianqing
	Pharmaceutical
	Co., Ltd.) (“NJCTT”)	(2)
Mr. Zhang	JCTT	Beneficial	173,250	0.18%
Baowen		owner
	NTCTT	Beneficial	39,592	0.78%
		owner
	連雲港天壹醫藥	Beneficial	18,624	1.92%
	有限公司	owner
	(Lianyungang
	Tianyi Medicine
	Co., Ltd.)(3)

Notes:

(1) JCTT is owned as to 60% by a wholly-owned subsidiary of the Company.

(2) NJCTT is owned as to 51% by JCTT.

(3) Lianyungang Tianyi Medicine Co., Ltd. is owned as to 60% by a wholly-owned subsidiary of the Company.

GENERAL INFORMATION

APPENDIX II

(ii) Save as disclosed below, the Directors or chief executive of the Company are not aware of any other person who (not being a Director or the chief executive of the Company), as at the Latest Practicable Date, had an interest or short position in the Shares or the underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who was interested, directly or indirectly, in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

Long position in shares and/or underlying shares

				Approximately
			Number of	percentage
		Capacity/	shares and/or	of issued
		Nature	underlying shares	share capital
Name	Notes	of interest	of the Company	of the Company (%)
Validated Profits Limited	(1)	Beneficial owner	691,582,348	30.55
Remarkable Industries	(1)	Beneficial owner	343,906,560	15.19
Limited
The Goldman Sachs	(2)	Interest of a	215,828,000	9.53
Group, Inc.		controlled
		corporation
Conspicuous Group		Beneficial owner	142,431,091	6.29
Limited
Chia Tai Development	(3)	Interest of a	142,431,091	6.29
Investment Company		controlled
Limited		corporation
Mr. Dhanin Chearavanont	(4)	Interest of a	142,431,091	6.29
		controlled
		corporation

Notes:

(1) Each of Validated Profits Limited and Remarkable Industries Limited is an investment holding company wholly-owned by Mr. Tse Ping who is also the sole director of each of these companies and a Director.
(2) The 215,828,000 shares were held by Goldman Sachs (Asia) Finance. Based on the disclosure of interests filings received by the Company, Goldman Sachs (Asia) Finance is a controlled corporation of Goldman Sachs (Asia) Finance Holdings L.L.C., which in turn is a controlled corporation. The Goldman Sachs Group, Inc., all of which are deemed under the SFO to be interested in the same shares.
(3) Chia Tai Development Investment Company Limited (“CT Development”) has declared an interest in the same 142,431,091 shares in which Conspicuous Group Limited has declared an interest, by virtue of its shareholding in Conspicuous Group Limited.
(4) Mr. Dhanin Chearavanont has declared an interest in the same 142,431,091 shares in which CT Development has declared an interest, by virtue of his shareholding in CT Development.

100

GENERAL INFORMATION

APPENDIX II

C. COMPETING INTEREST

The following Director is considered to have interests in a business which competes or is likely to complete, either directly or indirectly, with the business of the Group, as defined in the Listing Rules.

Mr. Tse Ping owns controlling interests in Xian C.P. Pharmaceutical Co., Ltd. (“CT Xian”), Ankang Chia Tai Pharmaceutical Co., Ltd. (“CT Ankang”), Hainan Tigerlily Pharmaceutical Co., Ltd. (“HTPC”), ABH Nature’s Products Inc. (“ABH”) and Jiangsu Chia Tai Fenghai Pharmaceutical Company Limited (“CT Fenghai”) and Yancheng Suhai Pharmaceutical Company Limited (“YSPC”).

CT Xian is a medicine producing enterprise principally engaged in the production and distribution of anti-cancer medicines, gastrointestinal medicines, gynaecological medicines and dermatitis medicine for psoriasis. Mr. Tse Ping owns an indirect interest of 60% in CT Xian through Chia Tai Pharmaceutical (Xian) Co., Ltd (正大製藥（西安）有限公司 ) whose sole asset and business is its holding of shares in CT Xian.

CT Ankang is principally engaged in the production and distribution of a medicine reducing bloodfat level, gynaecomastia medicines, medicines for treating cardiovascular disease and other chemical medicines. CT Ankang acquired a PRC pharmaceutical company which has one product for the treatment of cardiovascular disease namely, Puerain injections, which may compete with an existing product namely, Spring, (Puerain glucose injections) produced by the Group. Mr. Tse Ping owns an indirect interest of 30% in CT Ankang through Chia Tai Pharmaceutical (Ankang) Co., Ltd. whose sole asset and business is its holding of shares in CT Ankang.

HTPC is a trading company engaged in the import and export of medicines, including vitamins, anti-biotics and gastro medicines from Europe, the United States, Korea and other countries. Mr. Tse Ping owns an indirect interest of 95% in HTPC through Peacever Pharmaceutical Products Company Limited (天福藥業有限公司 ) whose sole asset and business is its holding of shares in HTPC.

ABH is principally engaged in the re-processing of natural medicines and vitamins in the United States. Mr. Tse Ping owns an indirect interest of 40% in ABH through Hong Kong Natural Products Company Limited whose sole asset and business is its holding of shares in ABH.

CT Fenghai is principally engaged in the production and distribution of raw material and preparation of antibiotics and synthetic drugs. CT Fenghai is indirectly owned as to 51% by Mr. Tse Ping and 2.47% by Mr. Zhang Baowen.

YSPC is principally engaged in the production and distribution of antibiotics and raw materials. YSPC is indirectly owned as to 51% by Mr. Tse Ping and 2.47% by Mr. Zhang Baowen.

There is no law or regulation or agreement which prohibits or restricts the entry of the above enterprises into any business which may compete directly or indirectly with the Group. Mr. Tse Ping entered into a deed of non-competition undertaking in favour of the Company on 9 September, 2003 (the “Undertaking”) pursuant to which Mr. Tse has undertaken to the Company that, for so long as (i) Mr. Tse Ping, together with his associates, shall remain beneficially interested, directly or indirectly, in shares with at least 30% of the voting rights of the Company; and (ii) the shares of the Company shall remain

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traded on the Main Board of the Stock Exchange, neither Mr. Tse Ping nor any of the companies or other entities more than 50% of the issued shares of which or equity of other nature carrying voting rights of which are directly or indirectly owned by Mr. Tse Ping, or in respect of which Mr. Tse Ping is entitled to control the board of directors or management body of similar nature will, within the PRC (including Hong Kong), carry on, or become engaged or otherwise become interested in, any business which falls within the definition of “Restricted Business”, which is defined to mean:–

(i) the research and development, production and sale of biopharmaceutical products for the medical treatment of ophthalmia and osteoarthritis, biopharmaceutical products for external use for the medical treatment of skin disease, modernized Chinese medicines, chemical medicines and modern health-care products or the medical treatment of hepatitis and angiopathy of cardio-cerebral; and
(ii) the research and development of new medicines and modern health-care products for the medical treatment of cardiovascular and respiratory disease.

To date, none of the above enterprises carries on or has become engaged or otherwise become interested in any “Restricted Business”. Although CT Xian produces and distributes dermatitis medicine, the Group does not consider that CT Xian competes with the business of the Group as the Group has, since its disposal of Sino Concept Technology Limited, ceased to produce or distribute dermatitis medicine. Further, CT Xian had already been producing and distributing dermatitis medicine before the incorporation of the Company.

Apart from the information disclosed above, none of the Directors have interests in businesses which compete or is likely to compete with the business of the Group.

D. INTEREST IN CONTRACTS

Save as disclosed below, as at the Latest Practicable Date, none of the Directors had any material interest in any contract or arrangement which is significant in relation to the business of the Group:

Pursuant to a lease agreement between Ledo Properties Limited, a company in which Mr. Tse Ping (the Chairman of the Company) and his wife Ms. Cheng Cheung Ling, each owns 50% shareholdings, and the Company dated 8 September 2000 and a supplemental lease agreement dated 1 June, 2004, Ledo Properties Limited has agreed to lease to the Company an office premises situated at Unit F (also known as Unit 09), 41st Floor, Office Tower, Convention Plaza, No. 1 Harbour Road, Wanchai, Hong Kong. The premises has a saleable area of 1,547 sq.ft. and is leased to the Company on normal commercial terms for a fixed term of two years from 1 June, 2006 to 31 May, 2008. The total annual rental amounts to HK$780,000 with monthly rental of HK$65,000. All monthly rentals are exclusive of rates and management fees. The Company is required to pay a monthly management fee of HK$9,486.

102

GENERAL INFORMATION

APPENDIX II

Pursuant to a master supply agreement between 江蘇正大豐海製藥有限公司 (Jiangsu Fenghai Pharmaceutical Co. Ltd.) and 連雲港天壹醫藥有限公司 (Lianyuangang Tianyi Medicine Co., Ltd.) dated 18 September, 2006, 連雲港天壹醫藥有限公司 (Lianyungang Tianyi Medicine Co., Ltd.) has agreed to purchase anti-bacterial and anti-inflammatory medicines and cardio-cerebral medicines from 江蘇正大豐海製藥有限公司 (Jiangsu Fenghai Pharmaceutical Co. Ltd.), a company owned as to 51% by a company beneficially owned by Mr. Tse Ping. The term of this agreement is from 18 September, 2006 to 31 December, 2007. The proposed caps under the agreement for the three and a half month period from 18 September, 2006 to 31 December, 2006 and for the financial year ending 31 December, 2007 will not exceed RMB750,000 and RMB1,800,000, respectively.
Mr. Tse Ping owns an approximately 80% shareholding interest in CTC, which holds a 29% equity interest in SNC, a JV Party under the JV Agreement.

E. INTEREST IN ASSETS

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which has been acquired or disposed of by or leased to any member of the Group since 31 December, 2005 (the date to which the latest published audited consolidated financial statements of the Group were made up to) or proposed to be so acquired, disposed of or leased to any member of the Group.

F. SERVICE CONTRACTS

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

G. MATERIAL LITIGATION

As at the Latest Practicable Date, no member of the Group was engaged in any litigation or claim of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against any member of the Group.

H. MATERIAL CONTRACTS

Apart from those disclosed below, the Company has not entered into any material contracts, not being contracts entered into in the ordinary course of business, which were entered into by the Group within the two years immediately preceding the Latest Practicable Date:

(i) the joint venture agreement and the articles of association both dated 27 May, 2005 entered into by Chia Tai Pharmaceutical (Lianyungang) Company Limited, a wholly-owned subsidiary of the Company (“CTL”), 連雲港潤資諮詢中心 (Lianyungang Runzi Consultation Centre) (“LRCC”) and 江蘇聚信投資管理有限公司 (Jiangsu Juxin Investment Management Corporation Limited) (“Jiangsu Juxin”) regarding the setting up of 連雲港天壹醫藥有限公司 (Lianyungang Tianyi Medicine Co., Ltd.). Jiangsu Juxin is owned as to approximately 51% by 江蘇省農墾集團有限公司 (Jiangsu State Agribusiness Group Corporation Limited)

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APPENDIX II

which holds a 33.5% equity interest in JCTT. Hence Jiangsu Juxin is a connected person of the Company within the meaning of the Listing Rules. 連雲港天壹醫藥有限公司 (Lianyungang Tianyi Medicine Co, Ltd.) is held as to 60% by CTL, 24% by LRCC and 16% by Jiangsu Juxin. The total registered capital of 連雲港天壹醫藥有限公司 (Lianyungang Tianyi Medicine Co, Ltd.) is approximately HK$7,566,000 which was contributed as to approximately HK$4,543,500 by CTL, HK$1,804,800 by LRCC and HK$1,203,200 by Jiangsu Juxin.

Under the terms of the joint venture agreement, the joint venture company would be engaged in the wholesale distribution of modernized Chinese medicines, chemical medicines and modern health-care products produced by the Group;

(ii) the sale and purchase agreement dated 2 July, 2005 entered into between the Company and Bausch & Lomb Incorporated (“Bausch & Lomb”), an independent third party unrelated to the Group. Under the terms of the sale and purchase agreement, the Company sold the entire issued share capital of Sino Concept Technology Limited to Bausch & Lomb for a consideration of US$200,000,000. Upon completion of the sale and purchase, Sino Concept Technology Limited ceased to be a subsidiary of the Company; and
(iii) the JV Agreement.

I. GENERAL

(i) As at the Latest Practicable Date, none of the Directors was materially interested in any subsisting contract or arrangement which is significant to the business of the Group.
(ii) As at the Latest Practicable Date, none of the Directors had any direct or indirect interests in any assets which had been acquired or disposed of by or leased to any member of the Group since 31 December, 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up, or proposed to be so acquired, disposed of or leased.
(iii) The secretary of the Company is Ms. Leung Sau Fung, Fanny. Ms. Leung is an associate member of both The Institute of Chartered Secretaries and Administrators and The Hong Kong Institute of Company Secretaries.
(iv) The qualified accountant of the Company is Ms. Yu Chau Ling. Ms. Yu is a fellow member and an associate member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants, respectively.
(v) The Company’s registered office is at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, George Town, Grand Cayman, British West Indies.

The principal place of business of the Company in Hong Kong is Unit 09, 41st Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong.

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GENERAL INFORMATION

APPENDIX II

(vi) The branch share registrar and transfer office of the Company in Hong Kong is Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(vii) The English text of this circular shall prevail over the Chinese text.

J. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at Unit 09, 41st Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong up to and including 12 October, 2006:

(i) the memorandum and articles of association of the Company;
(ii) the contracts referred to under the paragraph headed “Material Contracts” in this appendix; and
(iii) the audited consolidated accounts of the Group for each of the two years ended 31 December, 2005.

105

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [71 x 54] intentionally omitted <==

SINO BIOPHARMACEUTICAL LIMITED 中國生物製藥有限公司

(Incorporated in the Cayman Islands with limited liability)

Website: www.sino-biopharm.com (Stock code: 1177)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Sino Biopharmaceutical Limited 中國生物製藥有限公司 (the “ Company ”) will be held at 11:00 a.m. on Thursday, 12 October, 2006 at 7th Floor, Board Room, The Dynasty Club Ltd., South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution:

ORDINARY RESOLUTION

“ THAT :

(a) the joint venture agreement dated 30 August, 2006 (the “ JV Agreement ”) entered into between Chia Tai Refined Chemical Industry Limited （正大精化工有限公司）(a whollyowned subsidiary of the Company), 陝西煤業化工集團有限責任公司 (Shaanxi Coal Chemical Industry Limited), 陝西省投資（集團）有限公司 (Shaanxi Province Investment Group Limited) and 陝西新興煤化工科技發展有限責任公司 (Shaanxi New Coal Chemical Science and Technology Development Co., Ltd. (collectively, the “ JV Parties ”) (a copy of which marked “A” is tabled at the meeting and initialled by the chairman of the meeting for identification purpose) pursuant to which the parties thereto have agreed to establish a joint venture company to be named 陝西新興能源化工有限公司 (Shaanxi Xinxing Energy Chemical Industry Limited), further particulars of which are set out in the circular of the Company dated 25 September, 2006, (a copy of which marked “B” is tabled at the meeting and initialled by the chairman of the meeting for identification purpose) and the transactions contemplated under the JV Agreement and the implementation thereof be and are hereby approved, ratified and confirmed; and
(b) any one director of the Company, or any two directors of the Company, if the affixation of the common seal is necessary, be and is/are hereby authorized for and on behalf of the Company to execute all such other documents, instructions and agreements and to do all such acts and things deemed by him/them to be incidental to, ancillary to, or in connection with the matters contemplated in the JV Agreement.”

By Order of the Board Leung Sau Fung, Fanny Company Secretary

Hong Kong, 25 September, 2006

106

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

A shareholder entitled to attend and vote at the meeting convened by the above notice is entitled to appoint proxies to attend and vote in his stead. A proxy need not be a shareholder of the Company.
In order to be valid, the form of proxy must be deposited at the principal place of business of the Company at Unit 09, 41st Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong together with a power of attorney or other authority, if any, under which it is signed or a certified copy of that power of attorney or authority not less than 48 hours before the time appointed for the holding of the meeting.
Pursuant to Article 66 of the Articles of Association of the Company, a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:
(a) by the chairman of the meeting; or
(b) by at least three shareholders present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy for the time being entitled to vote at the meeting; or
(c) by any shareholder or shareholders present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to attend and vote at the meeting; or
(d) by a shareholder or shareholders present in person or in case of a shareholder being a corporation by its duly authorized representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on an aggregate sum has been paid equal to not less than one-tenth of the total sum paid up on all shares conferring that right; or
(e) by any of the Directors who individually or collectively (including the chairman of the relevant meeting of the Company) hold proxies in respect of shares representing 5% or more of the total voting rights at a particular meeting of the Company, and if on a show of hands such meeting votes in the opposite manner to that instructed in those proxies, such Directors shall have the right to demand a poll. If a poll is required under these circumstances, the chairman of the meeting should disclose to the meeting of the Company the total number of votes represented by all proxies held by Directors indicating an opposite vote to the votes cast at the meeting on a show of hands.

107

AI assistant

Sinco Pharmaceuticals Holdings Limited — Proxy Solicitation & Information Statement 2006

51056_rns_2006-09-25_8dfffb81-bcda-45af-a0bc-611b9ad36cf2.pdf

SINO BIOPHARMACEUTICAL LIMITED 中國生物製藥有限公司

MAJOR TRANSACTION

FORMATION OF A JOINT VENTURE COMPANY

CONTENTS

DEFINITIONS

DEFINITIONS

SINO BIOPHARMACEUTICAL LIMITED 中國生物製藥有限公司

MAJOR TRANSACTION

FORMATION OF A JOINT VENTURE COMPANY

A. INTRODUCTION

B. THE JV AGREEMENT

Parties:

Principal terms:

Purpose of the JV Company

Term of the JV Company

Board composition

Profit and loss sharing

LETTER FROM THE BOARD

Transfer of interests in JV Company

Conditions precedent

C. REASONS FOR THE JOINT VENTURE

LETTER FROM THE BOARD

D. FINANCIAL EFFECTS OF THE TRANSACTION ON THE GROUP

LETTER FROM THE BOARD

E. EGM

LETTER FROM THE BOARD

F. RECOMMENDATION

G. ADDITIONAL INFORMATION

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED BALANCE SHEET

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1. BASIS OF PREPARATION

2. REVENUE

Segment Information

Business segments

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

3. OTHER REVENUE AND GAINS

5. PROFIT BEFORE TAX FROM CONTINUING OPERATIONS

6. TAX

7. DISCONTINUED OPERATION

8. TRADE RECEIVABLES

9. CASH AND CASH EQUIVALENTS

10. TRADE PAYABLES

11. BANK AND OTHER BORROWINGS

2. AUDITED FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED INCOME STATEMENT (Continued)

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEET (Continued)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED CASH FLOW STATEMENT (Continued)

BALANCE SHEET

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

2.1 BASIS OF PREPARATION

Basis of consolidation

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

(a) HKAS 17 – Leases

(b) HKAS 31 – Interest in Joint Ventures

(c) HKAS 32 and HKAS 39 – Financial Instruments

(i) Equity securities

(ii) Convertible bonds

(d) HKFRS 2 – Share-based Payment

(e) HKFRS 3 – Business Combinations and HKAS 36 – Impairment of Assets

(f) HKFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

2.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

(a) Effect on the consolidated balance sheet

At 1 January, 2005

Effect of adopting

Sinco Pharmaceuticals Holdings Limited Proxy Solicitation & Information Statement 2006