SPT Energy Group Inc. - Proxy Solicitation & Information Statement 2013

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 you should take, you should consult a licensed securities dealer, a bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Traditional Chinese Medicine Co. Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank manager, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

(formerly known as “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司 ”) (Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

Financial adviser to China Traditional Chinese Medicine Co. Limited

Optima Capital Limited

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

A notice convening the extraordinary general meeting of China Traditional Chinese Medicine Co. Limited to be held at Conference Room, 1st Floor, No. 2 Rong Gui Qiao Xi Road, Shunde District, Foshan City, Guangdong Province, the PRC on Friday, 3 January 2014 at 2:00 p.m. is set out on pages 40 and 41 of this circular. Whether or not you intend to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of China Traditional Chinese Medicine Co. Limited at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the extraordinary general meeting or any adjournment of it, if you so wish.

14 December 2013

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Letter from Guotai Junan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Notice of the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40

– i –

DEFINITIONS

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

“Agreements”

together, the New Master Purchase Agreement and New Master Supply Agreement

“Annual Caps”

the respective annual caps of the value of the Purchases and the Sales contemplated under the Agreements proposed for the three financial years ending 31 December 2014, 2015 and 2016

“Board” the board of Directors
“CNPGC”
China National Pharmaceutical Group Corporation（中國醫藥集團總公司）, a state-owned enterprise established in the PRC
“CNPGC Group” CNPGC and its subsidiaries
“Company”
China Traditional Chinese Medicine Co. Limited（中國中藥有限公司）, a company incorporated in Hong Kong with limited liability, the issued Shares of which are listed on the Main Board of the Stock Exchange (stock code: 570)
“connected person(s)”

has the meaning ascribed to it under the Listing Rules

“Director(s)” director(s) of the Company

“EGM”

the extraordinary general meeting of the Company to be convened to consider and, if thought fit, approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements
“Existing Master Purchase Agreement”

the existing master purchase agreement dated 5 February 2013 entered into between the Company and CNPGC in respect of the purchase of the Materials by the Group from the CNPGC Group

“Existing Master Supply Agreement”

the existing master supply agreement dated 5 February 2013 entered into between the Company and CNPGC in respect of the sale of the Products by the Group to the CNPGC Group

“Group”

the Company and its subsidiaries

– 1 –

DEFINITIONS

“Guotai Junan”
Guotai Junan Capital Limited, a licensed corporation under the SFO registered to conduct Type 6 (advising on corporate finance) regulated activity as defined under the SFO, and the independent financial adviser appointed by the Independent Board Committee to advise the Independent Board Committee and the Independent Shareholders in relation to the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements
“Hong Kong”
the Hong Kong Special Administrative Region of the PRC
“Independent Board Committee” the committee of the Board comprising Mr. Fong Shuting and Mr. Yu Tze Shan Hailson, both are independent non-executive Directors, established for the purpose of giving a recommendation to the Independent Shareholders on the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements
“Independent Shareholders”
the Shareholders other than CNPGC and its associates
“Latest Practicable Date”
12 December 2013, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange
“Materials”
the TCM materials purchased by the Group from the CNPGC Group
“New Master Purchase Agreement”
the master purchase agreement dated 11 December 2013 entered into between the Company and CNPGC in respect of the Purchases
“New Master Supply Agreement”
the master supply agreement dated 11 December 2013 entered into between the Company and CNPGC in respect of the Sales
“PRC”
the People’s Republic of China, which for the purpose of this circular excludes Hong Kong, Macau Special Administrative Region and Taiwan
“Products”
various pharmaceutical products supplied by the Group to the CNPGC Group

– 2 –

DEFINITIONS

“Purchases”	the purchases of the Materials contemplated under the
	New Master Purchase Agreement
“Sales”	the sales of the Products contemplated under the New
	Master Supply Agreement
“SFO”	the Securities and Futures Ordinance (Cap 571 of the
	Laws of Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.1 each in the share capital
	of the Company
“Shareholder(s)”	the holder(s) of the issued Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“TCM”	traditional Chinese medicine
“Tongjitang Announcement”	the announcement of the Company dated 23 October
	2013 in relation to, among other things, completion of
	the acquisition of the Tongjitang Group by the
	Company and the continuing connected transactions
	between the Tongjitang Group and the CNPGC Group
“Tongjitang Group”	Tongjitang Chinese Medicines Company, a company
	incorporated in the Cayman Islands with limited
	liability, and its subsidiaries
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

* For identification purpose only

Unless the context requires otherwise, amounts denominated in RMB have been converted into HK$ at an exchange rate of RMB1: HK$1.27 for the purpose of illustration only. No representation is made that any amount in HK$ or RMB could have been or could be converted at the relevant dates at the above rate or at any other rates or at all.

– 3 –

LETTER FROM THE BOARD

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

(formerly known as “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司 ”) (Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

Executive Directors: Mr. WU Xian (Chairman) Mr. YANG Bin (Managing Director) Mr. WANG Xiaochun

Registered office: Rooms 2801-2805 China Insurance Group Building 141 Des Voeux Road Central Hong Kong

Non-executive Directors:

Mr. SHE Lulin Mr. LIU Cunzhou Mr. DONG Zenghe Mr. ZHAO Dongji

Independent non-executive Directors:

Mr. ZHOU Bajun Mr. XIE Rong Mr. FANG Shuting Mr. YU Tze Shan Hailson

14 December 2013

To the Shareholders

Dear Sir or Madam,

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

Reference is made to (i) the announcement and the circular of the Company dated 5 February 2013 and 7 March 2013 in relation to the purchases of the Materials and the sales of the Products contemplated under the Existing Master Purchase Agreement and the Existing Master Supply Agreement respectively; and (ii) the Tongjitang Announcement. As the term of each of the Existing Master Purchase Agreement and the Existing Master Supply Agreement and the respective annual cap will expire on 31 December 2013, on 11 December 2013, the Company entered into the Agreements to govern the terms of the Purchases and the Sales and to set the Annual Caps for the three financial years ending 31 December 2014, 2015 and 2016.

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LETTER FROM THE BOARD

Pursuant to the New Master Purchase Agreement, the value of the Purchases shall not exceed the Annual Caps of RMB35 million (equivalent to approximately HK$44.5 million), RMB39 million (equivalent to approximately HK$49.5 million) and RMB45 million (equivalent to approximately HK$57.2 million) for each of the three financial years ending 31 December 2014, 2015 and 2016 respectively.

Pursuant to the New Master Supply Agreement, the value of the Sales shall not exceed the Annual Caps of RMB500 million (equivalent to HK$635 million), RMB610 million (equivalent to HK$774.7 million) and RMB740 million (equivalent to HK$939.8 million) for each of the three financial years ending 31 December 2014, 2015 and 2016 respectively.

CNPGC is beneficially interested in 1,141,023,044 Shares as at the Latest Practicable Date, representing approximately 45.03% of the total issued share capital of the Company, and is the controlling Shareholder and a connected person of the Company as defined under the Listing Rules. The Purchases and the Sales constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements and the Annual Caps are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The purpose of this circular is to provide you with (i) details of the Agreements and the Annual Caps; (ii) the letter of recommendation from the Independent Board Committee to the Independent Shareholders in respect of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements; (iii) the letter of advice from Guotai Junan to the Independent Board Committee and the Independent Shareholders in respect of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements; and (iv) a notice of the EGM.

THE NEW MASTER PURCHASE AGREEMENT

Date:

11 December 2013

Parties:

(i) the Company; and
(ii) CNPGC.

CNPGC was beneficially interested in 1,141,023,044 Shares as at the Latest Practicable Date, representing approximately 45.03% of the total issued share capital of the Company, and is the controlling Shareholder and a connected person of the Company as defined under the Listing Rules.

– 5 –

LETTER FROM THE BOARD

Terms:

Pursuant to the New Master Purchase Agreement, the Group conditionally agreed to purchase the Materials supplied by the CNPGC Group during the period from 1 January 2014 to 31 December 2016. The terms of the Purchases including the prices of the Materials, the discounts granted by the CNPGC Group to the Group, the credit period and payment terms will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available from independent third parties for similar products. In particular, (i) the prices will be determined based on the market prices of the relevant Materials prevailing at the time of the Purchases. In this regard, the Group will make reference to prices of the relevant Materials quoted by independent suppliers in the market which are in the approved suppliers list of the Group and with which the Group has a stable business relationship; (ii) the discounts, if any, will be granted depending on the volume of Materials purchased and the payment terms. Higher discounts are normally granted for bulk purchases or for cash payment on delivery; (iii) the credit period and payment terms will be determined taking into account the credit history and financial position of the Group which normally range from 3 to 6 months; and (iv) the delivery terms will be determined with reference to prevailing market practices and the costs of delivery are normally borne by the CNPGC Group.

The Materials:

The Materials to be supplied by the CNPGC Group to the Group are major TCM materials used to manufacture pharmaceutical products of the Group, including but not limited to calculus bovis（牛黃）, musk（麝香）, jiangbanxia（姜半夏）and cangerzi（蒼耳子）.

Annual Caps:

Pursuant to the New Master Purchase Agreement, the value of the Purchases shall not exceed the Annual Caps as set out below:

		Equivalent to
Financial year ending	RMB’000	HK$’000
31 December 2014	35,000	44,450
31 December 2015	39,000	49,530
31 December 2016	45,000	57,150

For each of the two years ended 31 December 2011 and 2012, the purchase of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group amounted to approximately RMB24.1 million (equivalent to approximately HK$30.6 million) and RMB14.7 million (equivalent to approximately HK$18.7 million) respectively. The decrease in the purchases of the Materials in 2012 was mainly due to the decrease in the purchase volume for one of the Materials, musk, which is used to produce Da Huo Luo pills（大活絡丸）. The Group suspended the production of this product until September 2012 in order to clear up the existing stock and thus less musk was purchased from the CNPGC Group in 2012. In addition, there was an overall decline in the market prices of TCM materials including the Materials in 2012.

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LETTER FROM THE BOARD

On 5 February 2013, the Company and CNPGC had entered into the Existing Master Purchase Agreement pursuant to which the value of the purchases of the Materials by the Group shall not exceed an annual cap of RMB50.0 million (equivalent to HK$63.5 million) for the year ending 31 December 2013. For the ten months ended 31 October 2013, the purchase of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group amounted to approximately RMB17.7 million (equivalent to approximately HK$22.5 million). The Company expects that the actual purchase amount of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group for the year ending 31 December 2013 will reach approximately RMB20.0 million (equivalent to approximately HK$25.7 million) subject to the then circumstances.

The Annual Caps for the Purchases are determined after taking into account (i) the historical quantity of the Materials purchased from the CNPGC Group; (ii) the expected increase in the use of the Materials to cater for the production needs of the Group; and (iii) the expected increase in sales of TCM driven by the medical reform proposal in the PRC. According to 《中醫藥事務發展「十二五」規劃》 (the “Twelfth Five-Year Plan for Chinese Medicine Industry Development”*) published by the State Administration of Traditional Chinese Medicine of the PRC, the gross industry value of TCM is expected to grow at a compound annual growth rate of approximately 12% from 2010 to 2015 and reach RMB559.0 billion in 2015. The Group is expected to benefit from the government policy in supporting the TCM industry and the expected increase in sales in turn creates increased demand for the Materials from the Group.

For the purpose of determining the Annual Cap for the Purchases in 2014, the Company has considered (i) the expected increase in the purchase of a type of Materials which is used in the production of various products of the Group, including Bao He Pills （保和丸）, from the CNPGC Group from approximately RMB0.6 million (equivalent to approximately HK$0.8 million) for the ten months ended 31 October 2013 to approximately RMB8.0 million (equivalent to approximately HK$10.2 million) in 2014; (ii) a 30% growth over the expected purchase amount of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group in 2013 which is in line with the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012; (iii) the potential purchase of the Materials by the Tongjitang Group which was acquired by the Group in 23 October 2013; and (iv) the fluctuation in the market prices of the Materials in recent years. In addition, a year-on-year increase of the Annual Cap for the Purchases in 2015 and 2016 of approximately 11.4% and 15.4% respectively was used after taking into account (i) the growth in the business of the Group in recent years and the expected growth in the coming years; (ii) the potential increase in the market prices of the Materials in the coming years; and (iii) the compound annual growth rate of approximately 12% as set out in the Twelfth Five-Year Plan for Chinese Medicine Industry Development. The Directors considered that the year-on-year increase of the Annual Cap for the Purchases in 2015 and 2016 of approximately 11.4% and 15.4% respectively is close to the compound annual growth rate of approximately 12% as set out in the Twelfth Five-Year Plan for Chinese Medicine Industry Development.

– 7 –

LETTER FROM THE BOARD

Conditions precedent:

The New Master Purchase Agreement is conditional upon the fulfilment of the following conditions:–

(i) the passing of the resolution(s) by the Independent Shareholders at a general meeting for approving the New Master Purchase Agreement and the transactions contemplated thereunder and the Annual Caps for the Purchases as required under the Listing Rules;
(ii) the board of directors and/or shareholders of CNPGC having approved the New Master Purchase Agreement in accordance with its articles of association (if applicable); and
(iii) other regulatory approval (if any) applicable to the Company and CNPGC having been obtained.

None of the above conditions can be waived pursuant to the New Master Purchase Agreement.

THE NEW MASTER SUPPLY AGREEMENT

Date:

11 December 2013

Parties:

(i) the Company; and
(ii) CNPGC.

Terms:

Pursuant to the New Master Supply Agreement, the Group conditionally agreed to sell the Products to the CNPGC Group during the period from 1 January 2014 to 31 December 2016. The terms of the Sales will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available to independent third parties for similar Products. In particular, (i) the prices will be determined based on the standard price range of the relevant Products set by the Group in accordance with its pricing policy. In general, the standard price range is set by the Group at the beginning of the year taking into account the maximum retail prices of the Products, if any, set by the relevant government body in the PRC, the historical sales prices of the Products and the expected demand for the Products for the year. Such price range is applicable in general to the customers of the Group; (ii) the discounts, if any, will be granted depending on the volume of the Sales and payment terms. Higher discounts are normally granted for bulk purchases or for cash payment on delivery; (iii) the credit period and payment terms will be determined taking into account the credit history and financial position of the CNPGC Group which

– 8 –

LETTER FROM THE BOARD

normally range from 3 to 6 months; and (iv) the delivery terms will be determined with reference to prevailing market practices and the costs of delivery are normally borne by the Group.

The Products:

The Products to be supplied by the Group to the CNPGC Group are major products manufactured by the Group, including but not limited to Nifedipine Sustained-release tablet (Sheng Tong Ping) （硝苯地平舒緩釋片（聖通平））, Yu Ping Feng Granule （玉屏風顆粒）, Qiye Shenan Tablet（七葉神安片）, Bi Yan Kang Tablet（鼻炎康片）, VC Yingqiao Tablet（維C銀翹片）, Cefodizime Sodium for injection (Gaode)（注射用頭孢地嗪鈉（高德））, Group A Streptococcus for injection (Sha Pei Lin)（注射用A群鏈球菌（沙培林））, Xianling Gubao Capsule and Tablet （仙靈骨葆膠囊/片劑）, Jingshu Granules（頸舒顆粒）, Zaoren Anshen Capsules（棗仁安神膠囊）, Moisturizing and Anti-Itching Capsules（潤燥止癢膠囊）and Fengshi Gutong Capsules（風濕骨痛膠囊）.

Annual Caps:

Pursuant to the New Master Supply Agreement, the value of the Sales shall not exceed the Annual Caps set out below:

		Equivalent to
Financial year ending	RMB’000	HK$’000
31 December 2014	500,000	635,000
31 December 2015	610,000	774,700
31 December 2016	740,000	939,800

For each of the two years ended 31 December 2011 and 2012, the sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group amounted to approximately RMB67.5 million (equivalent to approximately HK$85.7 million) and RMB81.3 million (equivalent to approximately HK$103.3 million) respectively. On 5 February 2013, the Company and CNPGC had entered into the Existing Master Supply Agreement pursuant to which the value of the sales of the Products by the Group shall not exceed an annual cap of RMB300 million (equivalent to HK$381 million) for the year ending 31 December 2013. For the ten months ended 31 October 2013, the sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group amounted to approximately RMB91.8 million (equivalent to approximately HK$116.6 million).

– 9 –

LETTER FROM THE BOARD

during the one-year period commencing on 1 January 2013. For the ten months ended 31 October 2013, the sales of the Products by the Tongjitang Group to the CNPGC Group amounted to approximately RMB138.7 million (equivalent to approximately HK$176.1 million). The Company expects that the actual sales amount of the Products by the Group (including the Tongjitang Group) to the CNPGC Group in 2013 will be around RMB300.0 million (equivalent to approximately HK$381.0 million), being the aggregate sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group of about RMB110 million (equivalent to approximately HK$139.7 million) under the existing annual cap and sales by the Tongjitang Group to the CNPGC Group of about RMB190.0 million (equivalent to approximately HK$241.3 million). Based on the experience of the management of the Group, it is expected that the retail demand for pharmaceutical products in autumn and winter will be higher and thus the sale of Products by the Group to the CNPGC Group in November 2012 and December 2013 are expected to increase correspondingly.

For the purpose of determining the Annual Caps for the Sales in 2014, the Company has considered (i) the historical sales of the Products by the Group to the CNPGC Group in 2013; (ii) the recent trend of consolidation in the healthcare industry in the PRC such as consolidation of pharmaceutical distributors, as a result of which only few large remaining companies are capable to cover nationwide market in the PRC; (iii) the anticipated gradual increase in the sales volume of the Products driven by the medical reform proposal in the PRC; (iv) the expected increase in the co-operation with the CNPGC Group to distribute the Products with its extensive sales and distribution network in the PRC given the recent trend of consolidation in the healthcare industry in the PRC; (v) the expected increase in the sales of the Products to hospitals and retail drug stores attributable to the sales network of the CNPGC Group; and (vi) the potential growth of the Group’s business which is expected to be brought about as a result of the acquisition of the Tongjitang Group. In addition, a year-on-year increase of the Annual Caps for the Sales in 2015 and 2016 of approximately 22.0% and 21.3% respectively was estimated after taking into account the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012.

Conditions precedent:

The New Master Supply Agreement is conditional upon the fulfilment of the following conditions:

(i) the passing of the resolution(s) by the Independent Shareholders at a general meeting for approving the New Master Supply Agreement and the transactions contemplated thereunder and the Annual Caps for the Sales as required under the Listing Rules;
(ii) the board of directors and/or shareholders of CNPGC having approved the New Master Supply Agreement in accordance with its articles of association (if applicable); and
(iii) other regulatory approval (if any) applicable to the Company and CNPGC having been obtained.

– 10 –

LETTER FROM THE BOARD

None of the above conditions can be waived pursuant to the New Master Supply Agreement.

REASONS FOR THE AGREEMENTS

The principal activity of the Company is investment holding and the principal activities of its principal subsidiaries are the manufacture and sale of Chinese medicine and pharmaceutical products in the PRC.

Following the close of the conditional voluntary general offer made by CNPGC through its indirect wholly-owned subsidiary for the Shares on 28 February 2013, CNPGC is looking to strengthen its position by expanding and integrating the healthcare value chain, including but not limited to the manufacturing and selling of pharmaceutical and healthcare products. CNPGC hopes to expand its presence in the manufacturing and selling of TCM products through the acquisition of Shares and increase the Company’s sales through its expertise in financial management, operation management, strategy and human resources and information management. The Agreements were entered into for the purpose of enabling the Group to continue the business relationship with the CNPGC Group in compliance with the Listing Rules as well as to capture the opportunities that may be brought about by the CNPGC Group to the Group. CNPGC is one of the largest state-owned pharmaceutical and healthcare groups administered directly by the State-owned Assets Supervision and Administration Commission of the State Council. Its core businesses are pharmaceutical distribution, pharmaceutical scientific research and manufacture of medical and biotech products. Members of the CNPGC Group have been the suppliers of the Materials and customers of the Products of the Group since 1998. The CNPGC Group is a reliable business partner of the Group which has a strong supply capacity as well as a well-established distribution network. The New Master Purchase Agreement enables the Group to source stable and quality Materials from the CNPGC Group while the New Master Supply Agreement enables the Group to tap into a larger market and approach a much wider clientele base with the support of the extensive sales and distribution network of the CNPGC Group in the PRC. The Directors noted that the healthcare industry in the PRC has been undergoing consolidation in which smaller pharmaceutical company has been consolidated into larger pharmaceutical company in the PRC. As CNPGC is one of the largest pharmaceutical companies in the PRC, the Directors considered that the aforesaid consolidation will enhance the role of the CNPGC Group as a business partner of the Group to distribute the Products to hospitals and retail pharmacies.

Based on the above, the Directors (including the independent non-executive Directors after considering the advice of Guotai Junan) are of the view that the Agreements were entered into in the ordinary course of business and on normal commercial terms which are fair and reasonable, and in the interests of the Company and the Shareholders as a whole.

LISTING RULES IMPLICATIONS

– 11 –

LETTER FROM THE BOARD

of the Company pursuant to Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements and the Annual Caps are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The following Directors hold the following positions in the CNPGC Group or its associates:

(i) Mr. Wu Xian is the director, general manager and deputy secretary of the Party Committee of 中國藥材公司 (“China National Corp. of Traditional & Herbal Medicine”[*] );
(ii) Mr. She Lulin is currently a non-executive director and the chairman of Sinopharm Group Co. Ltd., the vice chairman, general manager and deputy secretary of the Party Committee of CNPGC, and the chairman and legal representative of Sinopharm Industrial Investment Co. Ltd.;
(iii) Mr. Liu Cunzhou is currently the chief expert of CNPGC;
(iv) Mr. Dong Zenghe is currently the deputy general manager of CNPGC and the chairman of the board of China National Corp. of Traditional & Herbal Medicine;
(v) Mr. Zhao Dongji is currently the chief investment officer and manager of Investment Management Department of China National Corp. of Traditional & Herbal Medicine;
(vi) Mr. Zhou Bajun is currently an independent non-executive director of Sinopharm Group Co. Ltd.; and
(vii) Mr. Xie Rong is currently an independent non-executive director of Sinopharm Group Co. Ltd.

The above Directors are regarded as having a material interest in the Agreements by virtue of their position held in the CNPGC Group or its associates. Each of them had abstained from voting in the Board meeting for approving the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

The EGM will be convened by the Company at which ordinary resolutions will be proposed to seek approval from the Independent Shareholders for the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements by way of poll. CNPGC and its associates, who were interested in 1,141,023,044 Shares as at the Latest Practicable Date (representing approximately 45.03% of the total issued share capital of the Company), shall abstain from voting on the relevant resolutions at the EGM. To the best knowledge of the Directors, save as disclosed above, no other Shareholder has a material interest in the Agreements and the transactions contemplated under the respective

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LETTER FROM THE BOARD

Agreements. Accordingly, no other Shareholder will be required to abstain from voting at the EGM in respect of the ordinary resolutions relating to the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

The Independent Board Committee has been established to advise the Independent Shareholders on the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements. The Independent Board Committee consists of Mr. Fang Shuting and Mr. Yu Tze Shan Hailson, both are independent non-executive Directors. The other independent non-executive Directors, namely Mr. Zhou Bajun and Mr. Xie Rong, are deemed to have a material interest in the Agreements as they are both also independent non-executive directors of Sinopharm Group Co. Ltd (a subsidiary of CNPGC). The Independent Board Committee has approved the appointment of Guotai Junan as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

EGM

The EGM will be convened to consider and, if thought fit, approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements. A notice convening the EGM to be held at Conference Room, 1st Floor, No. 2 Rong Gui Qiao Xi Road, Shunde District, Foshan City, Guangdong Province, the PRC on Friday, 3 January 2014 at 2:00 p.m. is set out on pages 40 and 41 of this circular.

A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment of it, if you so wish.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 15 of this circular which contains its recommendation to the Independent Shareholders; and (ii) the letter of advice from Guotai Junan set out on pages 16 to 34 of this circular containing its advice to the Independent Board Committee and the Independent Shareholders on the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

The Independent Board Committee, having considered the terms of the Agreements and the principal factors and reasons considered by, and the advice of, Guotai Junan as set out in the letter from Guotai Junan, considers that (i) the terms of the Agreements (including the Annual Caps) are on normal and commercial terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the interests of the Company and the Shareholders as a whole; and (ii) the Annual Caps and fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, the Independent

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LETTER FROM THE BOARD

Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

ADDITIONAL INFORMATION

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

By order of the Board China Traditional Chinese Medicine Co. Limited Wu Xian Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

(formerly known as “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司 ”) (Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

14 December 2013

To the Independent Shareholders

Dear Sir or Madam,

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 14 December 2013 (the “Circular”), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter will have the same meanings as defined in the Circular.

We have been appointed by the Board as the Independent Board Committee to consider and to give recommendation to the Independent Shareholders on the Agreements and the Annual Caps. We wish to draw your attention to the letter from the Board set out on pages 4 to 14 of the Circular and the letter from Guotai Junan set out on pages 16 to 34 of the Circular.

Having considered the terms of the Agreements and the principal factors and reasons considered by, and the advice of, Guotai Junan as set out in the letter from Guotai Junan, we consider (i) the terms of the Agreements (including the Annual Caps) are on normal commercial terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the interests of the Company and the Shareholders as a whole; and (ii) the Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

Yours faithfully,

Independent Board Committee Mr. FANG Shuting Mr. YU Tze Shan Hailson

Independent non-executive Directors

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LETTER FROM GUOTAI JUNAN

Set out below is the full text of the letter of advice received from Guotai Junan to the Independent Board Committee and the Independent Shareholders which has been prepared for the purpose of inclusion in this circular.

27/F, Low Block Grand Millennium Plaza 181 Queen’s Road Central Hong Kong

14 December 2013

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the New Master Purchase Agreement and the New Master Supply Agreement (collectively, the “Agreements”) and the renewed annual caps for each of the financial years ending 31 December 2014, 2015 and 2016 (the “Annual Caps”). As the term of each of the Existing Master Purchase Agreement and the Existing Master Supply Agreement and the respective annual cap will expire on 31 December 2013, on 11 December 2013, the Company entered into the Agreements to govern the terms of the Purchases and the Sales and to set the Annual Caps for the three financial years ending 31 December 2014, 2015 and 2016. Details of the Agreements are set out in the letter from the Board (the “Letter from the Board”) as contained in the circular of the Company dated 14 December 2013 (the “Circular”), of which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

CNPGC is beneficially interested in 1,141,023,044 Shares as at the Latest Practicable Date, representing approximately 45.03% of the total issued share capital of the Company, and is the controlling Shareholder and a connected person of the Company as defined under the Listing Rules. Accordingly, the Purchases and the Sales (the “Continuing Connected Transactions”) contemplated under the Agreements will constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements and the Annual Caps are subject to the reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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LETTER FROM GUOTAI JUNAN

CNPGC and its associates, who were interested in 1,141,023,044 Shares as at the Latest Practicable Date (representing approximately 45.03% of the total issued share capital of the Company), shall abstain from voting at the EGM on the relevant resolutions to approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

The following Directors hold the following positions in the CNPGC Group or its associates:

(i) Mr. Wu Xian is the director, general manager and deputy secretary of the Party Committee of 中國藥材公司 (“China National Corp. of Traditional & Herbal Medicine”*);
(ii) Mr. She Lulin is currently a non-executive director and the chairman of Sinopharm Group Co. Ltd., the vice chairman, general manager and deputy secretary of the Party Committee of CNPGC, and the chairman and legal representative of Sinopharm Industrial Investment Co. Ltd.;
(iii) Mr. Liu Cunzhou is currently the chief expert of CNPGC;
(iv) Mr. Dong Zenghe is currently the deputy general manager of CNPGC and the chairman of the board of China National Corp. of Traditional & Herbal Medicine;
(v) Mr. Zhao Dongji is currently the chief investment officer and manager of Investment Management Department of China National Corp. of Traditional & Herbal Medicine;
(vi) Mr. Zhou Bajun is currently an independent non-executive director of Sinopharm Group Co. Ltd.; and
(vii) Mr. Xie Rong is currently an independent non-executive director of Sinopharm Group Co. Ltd.

The Independent Board Committee has been established to consider the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements. The Independent Board Committee consists of Mr. Fang Shuting and Mr. Yu Tze Shan Hailson, both are independent non-executive Directors. The other independent non-executive Directors, namely Mr. Zhou Bajun and Mr. Xie Rong, are deemed to have a material interest in the Agreements as they are both independent non-executive directors of Sinopharm Group Co. Ltd (a subsidiary of CNPGC). We, Guotai Junan Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to (i) whether the terms (including

* For identification purpose only.

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LETTER FROM GUOTAI JUNAN

the Annual Caps) of the Agreements are on normal commercial terms, in the ordinary and usual course of business of the Company, and fair and reasonable so far as the Independent Shareholders are concerned; and (ii) whether the entering into of the Agreements is in the interests of the Company and the Shareholders as a whole.

Apart from normal professional fees for our services to the Company in connection with the engagement described above, no arrangement exists whereby we will receive any fees and benefits from the Group, CNPGC or, where applicable, any of their respective associates. We are independent from and not connected with the Group, CNPGC or, where applicable, any of their respective substantial shareholders, directors or chief executive, or any of their respective associates pursuant to Rule 13.84 of the Listing Rules, and are accordingly qualified to give independent advice to the Independent Board Committee and the Independent Shareholders regarding the Continuing Connected Transactions.

BASIS AND ASSUMPTIONS OF OUR OPINION

In formulating our opinion, we have relied on the statements, information, opinions and representations expressed to us by the executive Directors and the management of the Company. We have assumed that all such statements, information, opinions and representations expressed to us are true, accurate and complete in all material aspects at the time they were made and up to the Latest Practicable Date. We have also assumed that all the opinions and representations have been reasonably made by the executive Directors and the management of the Company after due and careful enquiry. We have also sought and obtained confirmation from the executive Directors and the management that no material facts have been omitted from the information supplied and opinions expressed to us. We have relied on such information and consider that the information we have received is sufficient for us to reach an informed view and have no reason to believe that any material information has been withheld, nor doubt the truthfulness or accuracy of the information provided. We have not, however, conducted any independent investigation into the business and affairs of the Group, nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Agreements and the Annual Caps are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below:

1. Background to, reasons for and benefit of entering into the Agreements

CNPGC is one of the largest state-owned pharmaceutical and healthcare groups administered directly by the State-owned Assets Supervision and Administration Commission of the State Council. Its core businesses are pharmaceutical distribution, pharmaceutical scientific research and manufacture of medical and biotech products. Members of the

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LETTER FROM GUOTAI JUNAN

CNPGC Group have been the suppliers of the Materials and customers of the Products of the Group since 1998. As discussed with the executive Directors, CNPGC Group is a reliable business partner which has a strong supply capacity as well as a well-established distribution network. Following the close of the conditional voluntary general offer made by CNPGC through its indirect wholly-owned subsidiary for the Shares on 28 February 2013, CNPGC is looking to strengthen its position by expanding and integrating the healthcare value chain, including but not limited to the manufacturing and selling of pharmaceutical and healthcare products. CNPGC hopes to expand its presence in the manufacturing and selling of TCM products through the acquisition of Shares and increase the Company’s sales through its expertise in financial management, operation management, strategy and human resources and information management. The Directors noted that the healthcare industry in the PRC has been undergoing consolidation in which smaller pharmaceutical company has been consolidated into larger pharmaceutical company in the PRC. As CNPGC is one of the largest pharmaceutical companies in the PRC, the Directors considered that the aforesaid consolidation will enhance the role of the CNPGC Group as a business partner of the Group to distribute the Products to hospitals and retail pharmacies. Accordingly, the Company and CNPGC entered into the Existing Master Purchase Agreement and the Existing Master Supply Agreement on 5 February 2013 in respect of the purchase of the Materials by the Group from the CNPGC Group and the sale of the Products by the Group to the CNPGC Group respectively.

The term of each of the Existing Master Purchase Agreement and the Existing Master Supply Agreement and their respective annual cap will expire on 31 December 2013. Since the Continuing Connected Transactions shall continue, the Directors propose to seek Independent Shareholders’ approval to renew the Continuing Connected Transactions for a term up to 31 December 2016 in order to comply with the continuing connected transaction requirements under the Hong Kong Listing Rules.

Based on the above, the Directors are of the view that the Agreements were entered into in the ordinary course of business and on normal commercial terms which are fair and reasonable, and in the interests of the Company and the Shareholders as a whole.

Having considered that:

the Group has established business relationship with the CNPGC Group;
the Sales and the Purchases are recurring transactions of the Group and the entering into of the Agreements will enable the Group to continue its business with the CNPGC Group;
the Continuing Connected Transactions are in line with the existing business activities of the Group;
the well-established distribution network of CNPGC Group in the PRC will enable the Group to further expand its market share and strengthen its presence in the PRC market;

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LETTER FROM GUOTAI JUNAN

the New Master Purchase Agreement can help the Group ensuring stable supply of quality Materials from the CNPGC Group; and
the transactions contemplated under the respective Agreements shall be conducted on an arm’s length basis and on terms that are fair and reasonable to the Company,

we concur with the view of the executive Directors that the entering into of the Agreements is in the ordinary and usual course of business of the Company and is in the interests of the Company and the Shareholders as a whole.

2. Major terms of the Agreements

2.1 The New Master Purchase Agreement

Pursuant to the New Master Purchase Agreement, the Group conditionally agreed to purchase the Materials supplied by the CNPGC Group during the period from 1 January 2014 to 31 December 2016. The New Master Purchase Agreement will be conditional upon, among other things, the approval of the Independent Shareholders at the EGM. The terms of the Purchases including the prices of the Materials, the discounts granted by the CNPGC Group to the Group, the credit period and payments terms will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available from independent third parties for similar Materials. As stated in the Letter from the Board, in particular, (i) the prices will be determined based on the market prices of the relevant Materials prevailing at the time of the Purchases. In this regard, the Group will make reference to prices of the relevant Materials quoted by independent suppliers in the market which are in the approved suppliers list of the Group and with which the Group has a stable business relationship; (ii) the discounts, if any, will be granted depending on the volume of Materials purchased and the payment terms. Higher discounts are normally granted for bulk purchases or for cash payment on delivery; (iii) the credit period and payment terms will be determined taking into account the credit history and financial position of the Group which normally range from 3 to 6 months; and (iv) the delivery terms will be determined with reference to prevailing market practices and the costs of delivery are normally borne by the CNPGC Group.

Pursuant to the New Master Purchase Agreement, the Materials to be supplied by the CNPGC Group to the Group are major TCM materials used to manufacture pharmaceutical products of the Group, including but not limited to calculus bovis（牛黄）, musk（麝香）, jiangbanxia（姜半夏）and cangerzi（蒼耳子）as raw materials for the production of its pharmaceutical products from the CNPGC Group.

In connection with the purchase of Materials from the CNPGC Group, we have been provided with and have reviewed four samples of invoices issued by the CNPGC Group and three samples of invoices issued by other independent suppliers to the Group in respect of purchases of the Materials in 2013, of which the comparable transactions were related to the particular types of Materials, namely calculus bovis（牛黄）, musk（麝香）, jiangbanxia（姜半夏）and cangerzi（蒼耳子）, conducted during the ten

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LETTER FROM GUOTAI JUNAN

months ended 31 October 2013. We are advised by the Company that these samples are typical transactions of the relevant kind. On this basis and given that the samples obtained included major Materials, we consider that we have reviewed fair and representative samples. We note that the purchase prices of the particular types of Materials supplied by the CNPGC Group were comparable to the market prices charged by independent third parties for the same types of Materials. In respect of price of artificial musk, we were not able to compare the price that charged by independent suppliers because, as advised by the Company, artificial musk is a material exclusively supplied by the CNPGC Group and there is no purchase from other suppliers. No price discount is noted in the samples obtained. It is also noted that the credit term of purchases from the CNPGC Group is similar to the credit term of purchases from the various independent suppliers as shown in the samples obtained.

2.2 The New Master Supply Agreement

Pursuant to the New Master Supply Agreement, the Group conditionally agreed to sell the Products to the CNPGC Group during the period from 1 January 2014 to 31 December 2016. The New Master Supply Agreement will be conditional upon, among other things, the approval of the Independent Shareholders at the EGM. The terms of the Sales will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available to independent third parties for similar Products. As stated in the Letter from the Board, in particular, (i) the prices will be determined based on the standard price range of the relevant Products set by the Group in accordance with its pricing policy. In general, the standard price range is set by the Group at the beginning of the year taking into account the maximum retail prices of the Products, if any, set by the relevant government body in the PRC, the historical sale prices of the Products and the expected demand of the Products for the year. Such price range is applicable in general for the customers of the Group; (ii) the discounts, if any, will be granted depending on the volume of the Sales and payment terms. Higher discounts are normally granted for bulk purchases or for cash payment on delivery; (iii) the credit period and payment terms will be determined taking into account the credit history and financial position of the CNPGC Group which normally range from 3 to 6 months; and (iv) the delivery terms will be determined with reference to prevailing market practices and the costs of delivery are normally borne by the Group.

Pursuant to the New Master Supply Agreement, the Products to be supplied by the Group to the CNPGC Group are major products manufactured by the Group, including but not limited to Nifedipine Sustained-release tablet (Sheng Tong Ping)（硝苯地平舒緩釋片（聖通平））, Yu Ping Feng Granule（玉屏風顆粒）, Qiye Shenan Tablet（七葉神安片）, Bi Yan Kang Tablet（鼻炎康片）, VC Yingqiao Tablet（維C銀翹片）, Cefodizime Sodium for injection (Gaode) （注射用頭孢地嗪鈉（高德））, Group A Streptococcus for injection (Sha Pei Lin)（注射用A群鏈球菌（沙培林））, Xianling Gubao Capsules and Tablets（仙靈骨葆膠囊和片劑）, Jingshu Granules（頸舒顆粒）, Moisturizing and Anti-Itching Capsules（潤燥止癢膠囊）, Zaoren Anshen Capsules（棗仁安神膠囊）and Fengshi Gutong Capsules（風濕骨痛膠囊）.

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LETTER FROM GUOTAI JUNAN

In connection with the supply of Products to CNPGC Group, we have been provided with and have reviewed one sample of invoice issued by the Company to the CNPGC Group and two samples of invoices issued by the Company to other independent customers in respect of sales of the Products in 2013, of which the comparable transactions were related to the particular types of Products, namely Bi Yan Kang Tablet （鼻炎康片）, Yu Ping Feng Granule （玉屏風顆粒）, Nifedipine Sustained-release tablet (Sheng Tong Ping) and（硝苯地平舒緩釋片（聖通平））, conducted during the ten months ended 31 October 2013. We are advised by the Company that these samples are typical transactions of the relevant kind. On this basis and given that the samples obtained included major Products, we consider that we have reviewed fair and representative samples. The sample of invoice issued by the Company to the CNPGC Group includes the sales of a variety of Products and the transaction value is relatively material as compared to the transaction value as evidenced by the individual invoices of sales to independent customers. We have also been provided with and have reviewed three samples of invoices issued by Tongjitang Group to the CNPGC Group and four samples of invoices issued by Tongjitang Group to other independent customers in respect of sales of the Products in 2013, of which the transactions were related to the particular types of Products, namely Xianling Gubao Capsules and Tablets （仙靈骨葆膠囊和片劑）, Moisturizing and Anti-Itching Capsules （潤燥止癢膠囊） and Zaoren Anshen Capsules（棗仁安神膠囊）, conducted during the ten months ended 31 October 2013. We are advised by the Company that these samples are typical transactions of the relevant kind. On this basis and given that the samples obtained included major Products, we consider that we have reviewed fair and representative samples. We note that the sales prices of the Products sold to the CNPGC Group were comparable to the market prices charged to independent third parties for the same type of Products. It is also noted that the price discount and the credit term of sales to the CNPGC Group are within the range of the price discount and credit term of sales to the various independent customers as shown in the samples obtained.

Given that the pricing policy of the Sales and the Purchases was and will continue to be determined with reference to the prevailing market terms and on terms no less favourable to the Group than those made available by/to independent third parties, we are of the view that the terms of the New Master Purchase Agreement and the New Master Supply Agreement are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM GUOTAI JUNAN

3. Basis of the Annual Caps

3.1 Annual Caps in respect of the Purchases

As stated in the Letter from the Board, (i) the historical transaction amount of Purchases for each of the two years ended 31 December 2012 and the ten months ended 31 October 2013 and (ii) the Annual Caps of the Purchases under the New Master Purchase Agreement are as follow:

Historical transaction amounts

			The ten
			months ended
	Year ended 31 December		31 October
	2011	2012	2013
	RMB’million	RMB’million	RMB’million
Purchase of the Materials
by the Group (excluding
the Tongjitang Group)	24.1	14.7	17.7
Annual Caps
Financial year ending
			Equivalent to
		RMB’000	HK$’000
31 December 2014		35,000	44,450
31 December 2015		39,000	49,530
31 December 2016		45,000	57,150

As set out in the Letter from the Board, the Annual Caps for Purchases are determined taking into account (i) the historical quantity of the Materials purchased from the CNPGC Group; (ii) the expected increase in the use of the Materials to cater for the production needs of the Group; (iii) and the expected increase in sales of TCM driven by the medical reform proposal in the PRC. According to the 《中醫藥事務發展「十二五」規劃》 (the “Twelfth Five-Year Plan for Chinese Medicine Industry Development”) published by the State Administration of Traditional Chinese Medicine of the PRC, the gross industry value of TCM is expected to grow at a compound annual growth rate of approximately 12% from 2010 to 2015 and reach RMB559.0 billion in 2015. The Group is expected to benefit from the government policy in supporting the TCM industry and the expected increase in sales in turn creates increased demand for the Materials from the Group.

As noted from the Letter from the Board, for each of the two years ended 31 December 2011 and 2012 and the ten months ended 31 October 2013, the purchase of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group amounted to approximately RMB24.1 million (equivalent to approximately HK$30.6

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LETTER FROM GUOTAI JUNAN

million), RMB14.7 million (equivalent to approximately HK$18.7 million) and RMB17.7 million (equivalent to approximately HK$22.5 million) respectively. As discussed with the management of the Group, the decrease in the purchases of the Materials in 2012 was mainly because of the decrease in purchase volume of one of the Materials, musk（麝香）. Musk（麝香）is one of the major types of Materials that is used to be purchased from the CNPGC Group and is mainly used in the production of the product “Da Huo Luo pills（大活絡丸）”. The Group suspended the production of Da Huo Luo pills（大活絡丸）until September 2012 in order to clear up the existing stock and thus less musk（麝香）was purchased from the CNPGC Group in 2012. The Group resumed production of Da Huo Luo pills（大活絡丸）in September 2012. In addition, there was an overall decline in the market prices of TCM materials including the Materials in 2012. As a result, the total amount of Purchases in 2012 decreased substantially. On 5 February 2013, the Company and CNPGC had entered into the Existing Master Purchase Agreement pursuant to which the value of the Purchases by the Group shall not exceed an annual cap of RMB50.0 million (equivalent to HK$63.5 million) for the year ending 31 December 2013. For the ten months ended 31 October 2013, the purchase of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group amounted to approximately RMB17.7 million (equivalent to approximately HK$22.5 million). The increase was mainly because there are increase in market demand of the Group’s products, including Da Huo Luo pills （大活絡丸）. In addition, because of production need, the Group substantially increased purchases of artificial musk from the CNPGC Group. According to national policy in China, artificial musk is a material exclusively supplied by the CNPGC Group as a national policy. The Company expects that the actual purchase amount of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group for the year ending 31 December 2013 will reach approximately RMB20.0 million (equivalent to approximately HK$25.7 million) subject to the then circumstances.

It is noted that the Annual Cap for the Purchases in 2014 of RMB35.0 million represented an increase of about RMB17.3 million and RMB15.0 million as compared to the historical transaction amount (excluding the Tongjitang Group) for the ten months ended 31 October 2013 of RMB17.7 million and the estimated purchase amount for the year ending 31 December 2013 of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group of approximately RMB20.0 million, respectively. As noted from the Letter from the Board, for the purpose of determining the Annual Cap for the Purchases in 2014, the Company has considered (i) the expected increase in the purchase of a type of Materials, which is used in the production of various products of the Group, including Bao He Pills（保和丸）, from the CNPGC Group from approximately RMB0.6 million (equivalent to approximately HK$0.8 million) for the ten months ended 31 October 2013 to approximately RMB8.0 million (equivalent to approximately HK$10.2 million) in 2014; (ii) a 30% growth over the expected purchase amount of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group in 2013 which is in line with the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012; (iii) the potential purchase of the Materials by the Tongjitang Group which was acquired by the Group in 23 October 2013; and (iv) the fluctuation in the market prices of the Materials in recent years. In addition, a year-on-year increase of the Annual Cap for the Purchases in 2015 and 2016 of approximately 11.4% and 15.4% respectively was

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used after taking into account (i) the growth in the business of the Group in recent years and the expected growth in the coming years; (ii) the potential increase in the market prices of the Materials in the coming years; and (iii) the compound annual growth rate of approximately 12% as set out in the Twelfth Five-Year Plan for Chinese Medicine Industry Development. The Directors considered that the year-on-year increase of the Annual Cap for the Purchases in 2015 and 2016 of approximately 11.4% and 15.4% respectively is close to the compound annual growth rate of approximately 12% as set out in the Twelfth Five-Year Plan for Chinese Medicine Industry Development.

We have further discussed with the management of the Company the basis and assumptions underlying the determination of the Annual Caps of the Purchases and have assessed the fairness and reasonableness of the Annual Caps of the Purchases based on the following factors:

i. Supply and production capacity of the CNPGC Group

It is noted that, 中國藥材公司 (“China National Corp. of Traditional & Herbal Medicine”*) is a member of the CNPGC Group and is one of the major suppliers of TCM materials in the PRC. It is principally engaged in the production, operation, research and development of TCM. It has about 28 production sites and partners. It also engages in the farming of a wide range of herbal plants involving about 80 species in accordance with《中藥材生產質量管理規範》(the national TCM production quality standard). Given the strong production capacity and standardised product quality, the management believes that the CNPGC Group is able to provide a stable supply of Materials and to meet the Group’s increasing demand for Materials. Furthermore, in the event that there is a shortage of supply of a particular kind of Materials in the market, the Group would be able to seek further sourcing from the CNPGC Group.

ii. Potential increase in purchase of Materials from the CNPGC Group following Sinopharm becoming a controlling Shareholder

As set out in the Letter from the Board, following the close of the conditional voluntary general offer made by CNPGC through its indirect wholly-owned subsidiary for the Shares on 28 February 2013, CNPGC is looking to strengthen its position by expanding and integrating the healthcare value chain, including but not limited to the manufacturing and selling of pharmaceutical and healthcare products. CNPGC hopes to expand its presence in the manufacturing and selling of TCM products through the acquisition of Shares and increase the Company’s sales through its expertise in financial management, operation management, strategy and human resources and information management. In light of this, the management of the Company considers that the New Master Purchase Agreement would enable the Group to capture the opportunities that may be brought about by the CNPGC Group to the Group and the TCM manufacturing business of the Group, coupled with the strong TCM materials supply capacity of the CNPGC Group, may create synergy effect in terms of value chain management.

* For identification purpose only.

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LETTER FROM GUOTAI JUNAN

iii. Business growth of the Group

The Group’s demand for the Materials largely depends on the business scale and business growth of the Group. According to the 2012 annual report of the Company, the cost of inventories of the Group in 2012 and 2011 amounted to approximately HK$575.5 million and HK$468.9 million respectively. As advised by the management of the Group, cost of purchases of TCM materials of the Group in 2012 and 2011 amounted to approximately RMB221 million and RMB180 million respectively (equivalent to approximately HK$271.2 million and HK$223.2 million respectively), representing about 47.1% and 47.6% of the cost of inventories of the Group in the respective years. As the Group continues to grow in business scale in the future, the Group would demand for more Materials.

Apart from organic growth of business, it is possible that the Group would also aim to achieve growth by potential merger and acquisitions. On 24 May 2013, the Company published an announcement in relation to, amongst other thing, the acquisition of the Tongjitang Group. As stated in the Letter from the Board, the management of the Company has taken into account the potential purchase of the Materials by the Tongjitang Group which was acquired by the Group in 23 October 2013 when determining the Annual Cap for the Purchases in 2014. As noted from the circular of the Company dated 19 September 2013, the Tongjitang Group is a leading pharmaceutical enterprise in the PRC with an emphasis on orthopaedics traditional Chinese medicine. The Tongjitang Group’s flagship product, namely 仙靈骨葆膠囊/片劑 (Xianling Gubao Capsules and Tablets*), is approved by China Food and Drug Administration for the treatment of osteoporosis and is a solid sales driver. For the year ended 31 December 2012, the Tongjitang Group recorded revenue of approximately HK$1,267.4 million and profit after tax of approximately HK$169.5 million. As the Tongjitang Group has a long and successful history of operations and has established reputable products in the pharmaceutical market and well-established distribution network in the PRC, the Company considers that the acquisition represents an opportunity for the Group to enlarge its product coverage and would allow the Group to further penetrate into the traditional Chinese medicine market in the PRC.

iv. The opportunities brought about by the growth in the TCM industry as a whole

According to the Twelfth-five Years Plan for Chinese Medicine Industry Development published by the State Administration of Traditional Chinese Medicine of the PRC, during the last five years plan regime, the gross industry value of TCM increased from RMB119.2 billion in 2005 to RMB317.2 billion in 2010, representing a compound annual growth rate of approximately 22%. The authority expects the gross industry value of TCM would continue to grow and reach RMB559.0 billion in 2015 representing a compound annual growth rate of approximately 12%. In the Twelfth-five Years Plan for Chinese Medicine Industry Development, the PRC government sets the directions of policies for the years 2011 to 2015, which include, among others, increasing TCM services coverage

* For identification purpose only.

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LETTER FROM GUOTAI JUNAN

within the country, further technological innovation of TCM, and enhancing the quality and standard of TCM and professional TCM personnel. In light of this, the management of the Group also expects a continuous growth in business and thus demand for the Materials in the coming year.

According to National Development and Reform Commission of China（中華人民共和國國家發展和改革委員會）, the overall industry output of Chinese medicines （中成藥）, medicines developed by using the raw materials of TCMs in various intake forms, and Chinese herbs（中藥飲片）, TCMs which are processed according to TCM theory and generally need to be cooked by consumers before consumption, increased by approximately 17.7% from approximately RMB438.1 billion in 2011 to approximately RMB515.6 billion in 2012. According to estimates by industry experts from the China Association of Traditional Chinese Medicine（中國中藥協會）, the industry output of Chinese medicines, Chinese herbs and related Chinese healthcare product is likely to exceed RMB1,000 billion by 2015. On 9 July 2013, National Health and Family Planning Commission of China issued the “Notice regarding Fully Exploiting Advantage of the Characteristics of TCM in the Pilot Schemes of Comprehensive Reforms of Public Hospitals at County Level” （關於在縣級公立醫院綜合改革試點工作中充分發揮中醫藥特色優勢的通知）, which encourages prescribing Chinese medicines to patients covered by medical insurance, extends the coverage of Basic Medical Insurance to qualified Chinese medical diagnosis and treatment and TCM products (including Chinese herbal slice, Chinese medicines and preparations) and raises the reimbursement level of TCM under the New Rural Cooperative Medical System. The Management expected that the Group will benefit from government policies of developing Chinese medicine industry. Furthermore, on 15 March 2013, the Ministry of Health of China issued the 2012 National Essential Drugs List, which contains three parts, namely chemical and bio-drugs, TCM and TCM decoction pieces, 317 of which are chemical and bio-drugs and 203 of which are TCM, 520 drugs in total. Apart from the issue of the 2012 National Essential Drugs List, there are other policies enhancing the development of the TCM industry, such as further optimising the mechanism of essential drugs tenders and purchase, and the way how health care institutions use these essential drugs. The Management considered the introduction of the 2012 National Essential Drugs List is favorable to the Group’s market sales in essential drugs in the future. Based on the above, it seems to us that the TCM industry as a whole would benefit from the government policy and the market demand for TCM products and services would be stimulated. In light of this, the management of the Group also expects a continuous growth in business and thus demand for the Materials in the coming year.

Based on the discussion above, we find the management’s aforesaid assumption of a 30% growth over the expected purchase amount of the Materials by the Group (excluding the Tongjitang Group) from the CNPGC Group in 2013 reasonable. Furthermore, we are advised by the management of the Company that the Group’s Purchase forecast is with reference to the Group’s sales forecast of each of the Products for the coming years and the potential increase of unit price of the Materials. As such, we have also reviewed and discussed with the management of the Company on the sales forecast of each of the

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LETTER FROM GUOTAI JUNAN

Products by the Group and the Tongjitang Group to the CNPGC Group for the coming three financial years ending 31 December 2014, 2015 and 2016, details of which were discussed in the paragraph headed “iv. Completion of acquisition of the Tongjitang Group” under section “3.2 Annual Caps in respect of the Sales” below.

Based on the above, we also consider that the Annual Caps in respect of the Purchases to be fair and reasonable. In particular, the year-on-year increase of the Annual Cap for the Purchases in 2015 and 2016 of approximately 11.4% and 15.4% respectively was in line with the growth in the business of the Group in recent years and the compound annual growth rate of approximately 12% as set out in the Twelfth Five-Year Plan for Chinese Medicine Industry Development, we consider that the increment of Annual Caps of Purchases to be reasonable.

3.2 Annual Caps in respect of the Sales

As stated in the Letter from the Board, (i) the historical transaction amount of Sales for each of the two years ended 31 December 2012 and the ten months ended 31 October 2013 and (ii) the Annual Caps of the Sales under the New Master Supply Agreement are as follow:

Historical transaction amounts

			The ten
			months ended
	Year ended 31 December		31 October
	2011	2012	2013
	RMB’million	RMB’million	RMB’million
Sales of the Products by
the Group (excluding the
Tongjitang Group)	67.5	81.3	91.8
Annual Caps
Financial year ending
			Equivalent to
		RMB’000	HK$’000
31 December 2014		500,000	635,000
31 December 2015		610,000	774,700
31 December 2016		740,000	939,800

It is noted that the Annual Cap for the Sales in 2014 of RMB500.0 million represented an increase of about RMB408.2 million and RMB200.0 million as compared to the historical transaction amount (excluding the Tongjitang Group) for the ten months ended 31 October 2013 of RMB91.8 million and the estimated sales amount for the year ending 31 December 2013 of the Products by the Group (including the Tongjitang Group) to the CNPGC Group of approximately RMB300.0 million,

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LETTER FROM GUOTAI JUNAN

respectively. As set out in the Letter from the Board, for the purpose of determining the Annual Caps for the Sales in 2014, the Company has considered (i) the historical sales of the Products by the Group to the CNPGC Group in 2013; (ii) the recent trend of consolidation in the healthcare industry in the PRC such as consolidation of pharmaceutical distributors, as a result of which only few large remaining companies are capable to cover nationwide market in the PRC; (iii) the anticipated gradual increase in the sales volume of the Products driven by the medical reform proposal in the PRC; (iv) the expected increase in the co-operation with the CNPGC Group to distribute the Products with its extensive sales and distribution network in the PRC given the recent trend of consolidation in the healthcare industry in the PRC; (v) the expected increase in the sales of the Products to hospitals and retail drug stores attributable to the sales network of the CNPGC Group; and (vi) the potential growth of the Group’s business which is expected to be brought about as a result of the acquisition of the Tongjitang Group. In addition, a year-on-year increase of the Annual Caps for the Sales in 2015 and 2016 of approximately 22.0% and 21.3% respectively was estimated after taking into account the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012.

For each of the two years ended 31 December 2011 and 2012, the sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group amounted to approximately RMB67.5 million (equivalent to approximately HK$85.7 million) and RMB81.3 million (equivalent to approximately HK$103.3 million) respectively. On 5 February 2013, the Company and CNPGC had entered into the Existing Master Supply Agreement pursuant to which the value of the Sales by the Group shall not exceed an annual cap of RMB300 million (equivalent to HK$381 million) for the year ending 31 December 2013. For the ten months ended 31 October 2013, the sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group amounted to approximately RMB91.8 million (equivalent to approximately HK$116.6 million).

As set out in the Tongjitang Announcement, the sales of the Products by the Tongjitang Group to the CNPGC Group amounted to RMB73.0 million (equivalent to approximately HK$91.8 million) and RMB122.6 million (equivalent to approximately HK$154.2 million), respectively, for the two years ended 31 December 2011 and 2012. Prior to completion of the acquisition of the Tongjitang Group by the Company, the Tongjitang Group had entered into a number of distribution agreements with various members of the CNPGC Group, pursuant to which the Tongjitang Group shall supply some of the Products to the CNPGC Group for distribution in various regions of the PRC with an aggregate value of not less than approximately RMB153.0 million (equivalent to approximately HK$192.47 million) during the one-year period commencing on 1 January 2013. For the ten months ended 31 October 2013, the sales of the Products by the Tongjitang Group to the CNPGC Group amounted to approximately RMB138.7 million (equivalent to approximately HK$176.1 million). Based on the actual amount of transactions up to 31 October 2013, the Company expects that the actual sales amount of the Products by the Group (including the Tongjitang Group) to the CNPGC Group in 2013 will be around RMB300.0 million (equivalent to approximately HK$381.0 million), being the aggregate sales of the Products by the Group (excluding the Tongjitang Group) to the CNPGC Group of about RMB110 million (equivalent to approximately HK$139.7 million) under the existing

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LETTER FROM GUOTAI JUNAN

annual cap and sales by the Tongjitang Group to the CNPGC Group of about RMB190.0 million (equivalent to approximately HK$241.3 million). Based on the experience of the management of the Group, it is expected that the retail demand for pharmaceutical products in autumn and winter will be higher and thus the sale of Products by the Group to the CNPGC Group in November and December 2013 are expected to increase accordingly.

We have further discussed with the management of the Company the basis and assumptions underlying the determination of the Annual Caps of the Sales and have assessed the fairness and reasonableness of the Annual Caps of the Sales based on the following factors:

i. Sales network of the CNPGC Group

The management of the Group is advised by CNPGC that Sinopharm Group Co. Ltd., a company listed on the Stock Exchange (stock code: 1099) is controlled by CNPGC and is the largest pharmaceutical distribution network in the PRC. As at 30 June 2013, Sinopharm Group Co. Ltd. had an extensive distribution network formed by 51 distribution centers covering 30 provinces, municipalities and autonomous regions in the PRC through acquisitions and establishments. The Sinopharm Group’s direct customers included 10,692 hospitals (only referring to hospitals with ranking and including 1,332 of the class-three hospitals which are the largest and most highly-ranked hospitals), accounting for approximately 77% of all hospitals in the PRC (and approximately 94% of all the class-three hospitals); 83,439 small end-customers (including primary health services institutions); 56,731 retail pharmacies; and 7,064 other customers (such as pharmaceutical distributors). As Sinopharm has become a controlling Shareholder, the management of the Company expects that the Group may be able to tap into the strong sales network of the CNPGC Group (including Sinopharm Group Co. Ltd. which is controlled by CNPGC) to approach a much wider clientele. As set out in the Letter from the Board, following the close of the conditional voluntary general offer made by CNPGC through its indirect wholly-owned subsidiary for the Shares on 28 February 2013, CNPGC is looking to strengthen its position by expanding and integrating the healthcare value chain, including but not limited to the manufacturing and selling of pharmaceutical and healthcare products. CNPGC hopes to expand its presence in the manufacturing and selling of TCM products through the acquisition of Shares and increase the Company’s sales through its expertise in financial management, operation management, strategy and human resources and information management. In light of this, the management of the Company believes that there would be increased business opportunities brought about by the CNPGC Group, leading to a substantial increase in sales to the CNPGC Group in 2013.

ii. Growth drivers of the business of the Group

As discussed in the paragraph headed “iii. Business growth of the Group” and “iv. The opportunities brought about by the growth in the TCM industry as a whole” under the section headed “3.1 Annual Caps in respect of the Purchases” above, the growth drivers of the Group include organic growth of business,

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LETTER FROM GUOTAI JUNAN

possible merger and acquisitions in the future, and growth of the TCM industry as a whole. Along with the business growth, the Group will increase its production and sales, which may result in the increase in the Sales to the CNPGC Group. In particular, as stated in the Letter from the Board, according to the Twelfth Five-Year Plan for Chinese Medicine Industry Development published by the State Administration of Traditional Chinese Medicine of the PRC, the gross industry value of TCM is expected to grow at a compound annual growth rate of approximately 12% from 2010 to 2015 and reach RMB559.0 billion in 2015. The Group is expected to benefit from the government policy in supporting the TCM industry and the expected increase in sales in turn creates increased demand for the Products from the CNPGC Group.

iii. The recent trend of consolidation in the healthcare industry in the PRC

As set out in the Letter from the Board, the Directors noted that the healthcare industry in the PRC has been undergoing consolidation in which smaller pharmaceutical company has been consolidated into larger pharmaceutical company in the PRC. As CNPGC is one of the largest pharmaceutical companies in the PRC, the Directors considered that the aforesaid consolidation will enhance the role of the CNPGC Group as a business partner of the Group to distribute the Products to hospitals and retail pharmacies.

We have been advised by the management of the Company that the further streamlined and calibrated industry standards, such as the revised edition of “Good Supply Practices for Pharmaceutical Products” (GSP) which officially became effective on 1 June 2013 and required for substantial improvement in the quality on the management of pharmaceutical operations, has further raised the entry barrier for the pharmaceutical manufacturing and distribution industry, and had brought challenge to pharmaceutical distribution enterprises, especially to small and mid-sized enterprises (SME) in the industry, resulting in some unqualified SMEs being eliminated standardize the operating environments, and promote consolidation within the industry. However, leading pharmaceutical enterprises, such as the CNPGC Group, would have more advantages in the aspect of meeting the requirements of the further streamlined and calibrated industry standards. Furthermore, as discussed in the paragraph headed “i. Sales network of the CNPGC Group”, Sinopharm Group Co. Ltd., the largest pharmaceutical distribution network in the PRC controlled by CNPGC, had an extensive distribution network formed by 51 distribution centers covering 30 provinces, municipalities and autonomous regions in the PRC through acquisitions and establishments. The management of the Group is advised by CNPGC that the CNPGC Group would continue to expand of distribution network through new set-ups and acquisitions of companies and business.

As set out in the annual report of Sinopharm Group Co. Ltd. for the year ended 31 December 2012, Sinopharm Group Co. Ltd. recorded a revenue of approximately RMB135,786.84 million, representing an increase of 32.83% as compared with approximately RMB102,224.81 million for the twelve months ended 31 December 2011. The increase in revenue of the Sinopharm Group was

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LETTER FROM GUOTAI JUNAN

primarily due to substantial increase in revenue from the pharmaceutical distribution and retail pharmacy by enlarging its distribution network through acquisitions and establishments. In light of this, the Directors considered that the effect of the consolidation will enhance the role of the CNPGC Group as a business partner of the Group to distribute the Products to hospitals and retail pharmacies.

iv. Completion of acquisition of the Tongjitang Group

In respect of the potential growth brought about by the Tongjitang Group, we understand that the acquisition of the Tongjitang Group has completed on 23 October 2013. As noted from the announcement of the Company dated 24 May 2013, Tongjitang Group is a leading pharmaceutical enterprise in the PRC with an emphasis on orthopaedics traditional Chinese medicine. Tongjitang Group’s flagship product, namely 仙靈骨葆膠囊/片劑 (Xianling Gubao Capsules and Tablets), is approved by China Food and Drug Administration for the treatment of osteoporosis and is a solid sales driver. Furthermore, five of the Target Group’s exclusive products are included in both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance, namely Xianling Gubao Capsules and Tablets （仙靈骨葆膠囊/片劑）, Jingshu Granules （頸舒顆粒）, Moisturizing and Anti-Itching Capsules（潤燥止癢膠囊）, Zaoren Anshen Capsules （棗仁安神膠囊） and Fengshi Gutong Capsules （風濕骨痛膠囊）. The National Essential Drugs List is issued by the Ministry of Health of the PRC and contains a list of essential drugs required to be stocked up and used by public medical and health care institutions and to be sold by retail drug stores. Vast majority of patients will be fully reimbursed for medicines listed in the National Essential Drugs List. The National Drugs List for Basic Medical Insurance comprises a list of drugs that are reimbursable under the PRC social medical insurance. It is expected that the Tongjitang Group will continue to capitalise on the growth in demand of these products in both the prescription and the over-the-counter markets. As stated in the Letter of the Board, as set out in the Tongjitang Announcement, the sales of the Products by the Tongjitang Group to the CNPGC Group amounted to RMB73.0 million (equivalent to approximately HK$91.8 million) and RMB122.6 million (equivalent to approximately HK$154.2 million), respectively, for the two years ended 31 December 2011 and 2012. Prior to completion of the acquisition of the Tongjitang Group by the Company, the Tongjitang Group had entered into a number of distribution agreements with various members of the CNPGC Group, pursuant to which the Tongjitang Group shall supply some of the Products to the CNPGC Group for distribution in various regions of the PRC with an aggregate value of not less than approximately RMB153.0 million (equivalent to approximately HK$192.47 million) during the one-year period commencing on 1 January 2013. For the ten months ended 31 October 2013, the sales of those Products by the Tongjitang Group to the CNPGC Group amounted to approximately RMB138.7 million (equivalent to approximately HK$176.1 million). As mentioned above, based on the transaction amount, up to 31 October 2013, the management estimated that sales by the Tongjitang Group to the CNPGC Group in 2013 would be about RMB190.0

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LETTER FROM GUOTAI JUNAN

million. As a result, it is expected that the completion of acquisition of the Tongjitang Group would increase the scale of sales of the Group and that the Annual Caps for the Sales needs to be increased.

In assessing the fairness and reasonableness of the Proposed Annual Caps, we have also reviewed and discussed with the management of the Company on the sales forecast of each of the Products by the Group and Tongjitang Group to the CNPGC Group for the coming three financial years ending 31 December 2014, 2015 and 2016. We were given to understand that the sales forecast had been prepared after taking into account the factors above. In particular, according to the sales forecast, management of the Company anticipated strong business growth in 2014 with an estimated annual growth of approximately 65.8% based on the estimated sales amount of the Products by the Group (including the Tongjitang Group) to the CNPGC Group of approximately RMB300.0 million for the year ending 31 December 2013. Therefore, a larger annual cap for 2014 has been proposed. In this regard, we have reviewed the circular of the Company dated 19 September 2013 in relation to, among other things, the acquisition of the Tongjitang Group, we noted that the revenue of the Group in 2012 and 2011 amounted to approximately HK$1,268.1 million and HK$1,015.9 million respectively, representing an annual growth of approximately 24.8%; and the revenue of the Tongjitang Group in 2012 and 2011 amounted to approximately HK$1,267.4 million and HK$912.2 million respectively, representing an annual growth of approximately 38.9%. Based on the sales forecast, we also noted that the estimated annual growth rates by the Company on the sales of the Products by the Group (including the Tongjitang Group) to the CNPGC Group for the two financial years ending 31 December 2015 and 2016 will be approximately 21.9% and 22.4%, respectively, which was in line with the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012.

Based on the above, we also consider that the Annual Caps for the Sales to be fair and reasonable. In particular, the year-on-year increase of the Annual Cap for the Sales in 2015 and 2016 of approximately 22.0% and 21.3% respectively was in line with the compound annual growth rate of the Group’s turnover of approximately 30% during 2008 to 2012, we consider that the increment of Annual Caps of Sales to be reasonable.

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LETTER FROM GUOTAI JUNAN

RECOMMENDATION

Having considered the above principal factors and reasons, we consider (i) the terms of the Agreements (including the Annual Caps) are on normal commercial terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the interests of the Company and the Shareholders as a whole; and (ii) the Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, we advise the Independent Shareholders to vote in favour, and the Independent Director to recommend the Independent Shareholders to vote in favour, of the ordinary resolutions to be proposed at the EGM to approve the Agreements (including the Annual Caps).

Yours faithfully, For and on behalf of Guotai Junan Capital Limited Wilson Lo

Managing Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(i) Directors’ and chief executives’ interests and short positions in shares, underlying shares and debentures of the Company or any associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors or chief executive of the Company and/or their associates in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules (the “ Model Code ”), to be notified to the Company and the Stock Exchange were as follows:

			Approximate
			percentage of the
Name of	Capacity/ Nature of		issued share capital of
Directors	Interest	Number of Shares	the Company
			(Note 4)
Mr. Wang	Interest in controlled	334,000,000	13.18%
Xiaochun	corporation	(Long Position)
(“Mr. Wang”)		(Note 1)
Mr. Yang Bin	Interest in controlled	267,511,621	10.56%
(“Mr. Yang”)	corporation	(Long Position)
		(Note 2)
	Interest in controlled	71,037,863	2.80%
	corporation	(Short Position)
		(Note 3)
	Beneficial owner	66,488,379	2.62%
		(Long Position)

Notes:

The 334,000,000 Shares are held by Hanmax Investment Limited which is wholly owned by Mr. Wang.

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GENERAL INFORMATION

APPENDIX

The 267,511,621 Shares are held by Profit Channel Development Limited which is wholly owned by Mr. Yang.
Profit Channel Development Limited (a company wholly owned by Mr. Yang) pledged 71,037,863 Shares to CNPGC as security in connection to the Company’s bank borrowing to finance the Company’s acquisition of the Tongjitang Group.
Based on 2,533,899,186 Shares in issue as at the Latest Practicable Date.

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

(ii) Substantial shareholders’ interests and short positions in shares and underlying shares of the Company

			Approximate
			percentage of the
			issued share
	Capacity/ Nature of	Number of	capital of the
Name	Interest	Shares	Company
			(Note 5)
CNPGC	Interest in controlled	1,141,023,044	45.03%
	corporation	(Long Position)
		(Note 1)
	Security Interest	71,037,863	2.80%
		(Long Position)
		(Note 2)
Mr. Wang	Interest in controlled	334,000,000	13.18%
	corporation	(Long Position)
		(Note 3)
Mr. Yang	Interest in controlled	267,511,621	10.56%
	corporation	(Long Position)
		(Note 4)
	Interest in controlled	71,037,863	2.80%
	corporation	(Short Position)
		(Note 2)
	Beneficial owner	66,488,379	2.62%
		(Long Position)

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GENERAL INFORMATION

APPENDIX

Notes:

The 1,016,023,044 Shares are held by Sinopharm Group Hong Kong Co. Limited which is indirectly wholly owned by CNPGC. The remaining 125,000,000 Shares are held by 華寶信託有限責任公司 (Hwabao Trust Co., Ltd) for the benefit of 上海國藥股權投資基金合夥企業（有限合夥） (Shanghai Sinopharm Equity Investment Fund Partnership (Limited Partnership)) which is managed by an entity deemed to be controlled by CNPGC.
Profit Channel Development Limited (a company wholly owned by Mr. Yang) pledged 71,037,863 Shares to CNPGC as security in connection to the Company’s bank borrowing to finance the Company’s acquisition of the Tongjitang Group.
The 334,000,000 Shares are held by Hanmax Investment Limited which is wholly owned by Mr. Wang.
The 267,511,621 Shares are held by Profit Channel Development Limited which is wholly owned by Mr. Yang.
Based on 2,533,899,186 Shares in issue as at the Latest Practicable Date.

So far as is known to the Directors, as at the Latest Practicable Date, no other persons (other than the Directors, the chief executive and substantial Shareholders disclosed above) had any interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of the Part XV of the SFO or was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any member of the Group.

3. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates was considered to have interests in businesses apart from the Group’s businesses which compete, or are likely to compete, either directly or indirectly, with the businesses of the Group pursuant to Rule 8.10 of the Listing Rules.

4. DIRECTORS’ SERVICE CONTRACTS

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

5. EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice which is contained or referred to in this circular:

Guotai Junan a corporation licensed to carry out type 6 (advising on corporate finance) regulated activity under the SFO

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GENERAL INFORMATION

APPENDIX

Guotai Junan has given and has not withdrawn its written consent to the issue of this circular with inclusion of its letter and references to its name in the form and context in which they are included.

As at the Latest Practicable Date, Guotai Junan was not beneficially interested in the share capital of any member of the Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group. In addition, Guotai Junan did not have any interest, either directly or indirectly, in any assets which have been, since 31 December 2012 (the date to which the latest published audited consolidated financial statements of the Company were made up), acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

6. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2012 (the date to which the latest published audited consolidated financial statements of the Company were made up).

7. DIRECTORS’ INTERESTS IN ASSETS OF THE GROUP

As at the Latest Practicable Date, none of the Directors had any direct or indirect material interest in any assets which have been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2012 (the date to which the latest published audited consolidated financial statements of the Company were made up).

8. DIRECTORS’ INTERESTS IN CONTRACTS OR ARRANGEMENTS

As at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement subsisting at the Latest Practicable Date which was significant in relation to the business of the Group.

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours from 9:00 a.m. to 5:00 p.m. (other than Saturdays, Sundays and public holidays) at the registered office of the Company in Hong Kong up to and including the date of the EGM:

(a) the memorandum of association of the Company;
(b) the New Master Purchase Agreement;
(c) the New Master Supply Agreement;
(d) the letter from the Independent Board Committee, the text of which is set out on page 15 of this circular;

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GENERAL INFORMATION

APPENDIX

(e) the letter of advice from Guotai Junan to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 16 to 34 of this circular; and
(f) the written consent as referred to in the paragraph headed “Expert and Consent” in this appendix.

10. MISCELLANEOUS

The English version of this circular and the accompanying form of proxy shall prevail over the Chinese text for the purpose of interpretation.

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NOTICE OF THE EXTRAORDINARY GENERAL MEETING

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

(formerly known as “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司 ”) (Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of China Traditional Chinese Medicine Co. Limited (the “ Company ”) will be held at Conference Room, 1st Floor, No. 2 Rong Gui Qiao Xi Road, Shunde District, Foshan City, Guangdong Province, the PRC on Friday, 3 January 2014 at 2:00 p.m. for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT :
(a) the New Master Purchase Agreement (as defined in the circular (the “Circular”) to the shareholders of the Company dated 14 December 2013) and the transactions contemplated thereunder be and are hereby approved;
(b) the annual caps in relation to the transactions contemplated under the New Master Purchase Agreement for the three financial years ending 31 December 2014, 2015 and 2016 be and are hereby approved; and
(c) any one director of the Company be and is hereby authorised to do all such acts or things, as he may in his absolute discretion consider necessary or desirable, to give effect to the New Master Purchase Agreement and the transactions contemplated thereunder.”
“ THAT :
(a) the New Master Supply Agreement (as defined in the Circular) and the transactions contemplated thereunder be and are hereby approved;
(b) the annual caps in relation to the transactions contemplated under the Master Supply Agreement for the three financial years ending 31 December 2014, 2015 and 2016 be and are hereby approved; and

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NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(c) any one director of the Company be and is hereby authorised to do all such acts or things, as he may in his absolute discretion consider necessary or desirable, to give effect to the New Master Supply Agreement and the transactions contemplated thereunder.”

By order of the Board China Traditional Chinese Medicine Co. Limited Wu Xian Chairman

14 December 2013

Notes:

Any member of the Company entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company.
A form of proxy for the meeting is enclosed. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority, shall be deposited at the Company’s registered office at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting.

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AI assistant

SPT Energy Group Inc. — Proxy Solicitation & Information Statement 2013

49801_rns_2013-12-13_9e7546d5-23a0-4f79-821d-81bc0e934a46.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

Financial adviser to China Traditional Chinese Medicine Co. Limited

Optima Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

THE NEW MASTER PURCHASE AGREEMENT

Date:

Parties:

Terms:

The Materials:

Annual Caps:

LETTER FROM THE BOARD

Conditions precedent:

THE NEW MASTER SUPPLY AGREEMENT

Date:

Parties:

Terms:

LETTER FROM THE BOARD

The Products:

Annual Caps:

LETTER FROM THE BOARD

Conditions precedent:

REASONS FOR THE AGREEMENTS

LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

EGM

RECOMMENDATION

ADDITIONAL INFORMATION

CHINA TRADITIONAL CHINESE MEDICINE CO. LIMITED 中國中藥有限公司

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

LETTER FROM GUOTAI JUNAN

RENEWAL OF EXISTING ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM GUOTAI JUNAN

BASIS AND ASSUMPTIONS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background to, reasons for and benefit of entering into the Agreements

LETTER FROM GUOTAI JUNAN

2. Major terms of the Agreements

2.1 The New Master Purchase Agreement

2.2 The New Master Supply Agreement

3. Basis of the Annual Caps

3.1 Annual Caps in respect of the Purchases

i. Supply and production capacity of the CNPGC Group

ii. Potential increase in purchase of Materials from the CNPGC Group following Sinopharm becoming a controlling Shareholder

LETTER FROM GUOTAI JUNAN

iii. Business growth of the Group

iv. The opportunities brought about by the growth in the TCM industry as a whole

3.2 Annual Caps in respect of the Sales

i. Sales network of the CNPGC Group

ii. Growth drivers of the business of the Group

LETTER FROM GUOTAI JUNAN

iii. The recent trend of consolidation in the healthcare industry in the PRC

iv. Completion of acquisition of the Tongjitang Group

RECOMMENDATION

1. RESPONSIBILITY STATEMENT

2. DISCLOSURE OF INTERESTS

(i) Directors’ and chief executives’ interests and short positions in shares, underlying shares and debentures of the Company or any associated corporations

APPENDIX

(ii) Substantial shareholders’ interests and short positions in shares and underlying shares of the Company

3. COMPETING INTERESTS

4. DIRECTORS’ SERVICE CONTRACTS

5. EXPERT AND CONSENT

6. MATERIAL ADVERSE CHANGE

7. DIRECTORS’ INTERESTS IN ASSETS OF THE GROUP

8. DIRECTORS’ INTERESTS IN CONTRACTS OR ARRANGEMENTS

9. DOCUMENTS AVAILABLE FOR INSPECTION

APPENDIX

SPT Energy Group Inc. Proxy Solicitation & Information Statement 2013