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 Winteam Pharmaceutical Group 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.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of Winteam Pharmaceutical Group Limited.

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(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF ENTIRE ISSUED SHARE CAPITAL OF TONGJITANG CHINESE MEDICINES COMPANY INVOLVING ISSUE OF NEW SHARES

AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE (II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE (III) PROPOSED CHANGE OF COMPANY NAME AND (IV) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser to Winteam Pharmaceutical Group Limited

Optima Capital Limited

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

A notice convening the extraordinary general meeting of Winteam Pharmaceutical Group 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 Tuesday, 15 October 2013 at 3:30 p.m. is set out on pages EGM-1 and EGM-2 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 Winteam Pharmaceutical Group 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.

19 September 2013

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .	34
Letter from Guotai Junan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Appendices
I – Financial information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
II – Financial information of the Target Group. . . . . . . . . . . . . . . . . . . . . .	II-1
III – Unaudited Pro forma financial information of the Enlarged Group . .	III-1
IV – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
Notice of the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

“Acquisition”
the acquisition of the Hanmax Sale Shares and the Fosun Sale Shares by the Company from Hanmax and Fosun respectively pursuant to the Acquisition Agreement
“Acquisition Agreement”
the agreement dated 23 May 2013 entered into among the Company, Mr. Wang, Hanmax and Fosun in relation to the Acquisition
“Announcement”
the Company’s announcement dated 24 May 2013 in relation to, among other things, the Acquisition, the Yang Subscription and the change of Company name
“Applicable Exchange Rate”
the central parity rate for the exchange of HK$ into RMB published by the People’s Bank of China (or its successor) or its authorised agency which is displayed on the third Business Day prior to Completion
“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Board”
the board of Directors
“Business Day(s)”
any day(s) other than a Saturday, Sunday or other day on which commercial banks in the PRC, Hong Kong and British Virgin Islands are required or authorised by law or executive order to be closed or on which a tropical cyclone warning no. 8 or above or a “black” rainstorm warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m. Hong Kong time
“CNPGC”
China National Pharmaceutical Group Corporation（中國醫藥集團總公司）, a state-owned enterprise established in the PRC and the ultimate holding company of Sinopharm
“CNPGC Group”
CNPGC and its subsidiaries
“Company”

Winteam Pharmaceutical Group Limited （盈天醫藥集團有限公司）, 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)

– 1 –

DEFINITIONS

“Competing Businesses” development, manufacturing, production and marketing of traditional Chinese medicine
“Completion” completion of the Acquisition pursuant to the Acquisition Agreement
“connected person(s)” has the meaning ascribed to it under the Listing Rules
“Consideration Shares” the 334,000,000 new Shares to be allotted and issued to Hanmax (or its nominee(s)) as part of the Hanmax Consideration
“controlling shareholder(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 and held to consider and, if thought fit, approve, among other things, the Acquisition Agreement, the Yang Subscription Agreement and the transactions contemplated thereunder, and the change of Company name

“Enlarged Group” the Group assuming Completion has taken place
“Fosun” Fosun Industrial Co., Limited, a company incorporated in Hong Kong with limited liability
“Fosun Consideration” the consideration for the Fosun Sale Shares payable by the Company to Fosun pursuant to the Acquisition Agreement
“Fosun Sale Shares” 16,050,000 ordinary shares of the Target Company owned by Fosun, representing 32.1% of the issued share capital of the Target Company
“Group” the Company and its subsidiaries
“Guangdong Medi-World” 廣東環球製藥有限公司 (Guangdong Medi-World Pharmaceutical Company Limited*), a company established in the PRC and an indirect wholly-owned subsidiary of the Company

“Guizhou LLF” 貴州老來福藥業有限公司 (Guizhou Longlife Pharmaceutical Co., Ltd.*), a company established in the PRC with limited liability and indirectly wholly owned by the Target Company

– 2 –

DEFINITIONS

“Guizhou Zhongtai” 貴州中泰生物科技有限公司 (Guizhou Zhongtai Biological Technology Company Limited*), a company established in the PRC with limited liability
“Guotai Junan” Guotai Junan Capital Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition and the Yang Subscription
“Hanmax” Hanmax Investment Limited, a company incorporated in the British Virgin Islands with limited liability and wholly owned by Mr. Wang
“Hanmax Consideration” the consideration for the Hanmax Sale Shares payable by the Company to Hanmax pursuant to the Acquisition Agreement
“Hanmax Sale Shares” 33,950,000 ordinary shares of the Target Company owned by Hanmax, representing 67.9% of the issued share capital of the Target Company
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Huixian” 貴州匯賢投資管理有限公司 (Guizhou Huixian Investment Management Co., Ltd.*), a company established in the PRC with limited liability
“Huixian Debt” the debt in the amount of RMB274.4 million (equivalent to approximately HK$345.2 million) owed by Huixian to Unisources
“Independent Board Committee”
the committee of the Board comprising all the independent non-executive Directors, established for the purpose of giving a recommendation to the Independent Shareholders on the Acquisition and the Yang Subscription
“Independent Shareholders” Shareholders other than Mr. Yang and his associates
“Issue Price”
HK$3.10 per Share, being the issue price of the Yang Shares
“Jincili”
貴州金刺梨科技開發有限公司 (Guizhou Jincili Technology Development Co., Ltd.*), a company established in the PRC with limited liability and indirectly wholly owned by the Target Company

– 3 –

DEFINITIONS

“Jingfang” 安徽精方藥業股份有限公司 (Anhui Jingfang Pharmaceutical Co., Ltd.*), a company established in the PRC with limited liability and indirectly wholly owned by the Target Company
“Last Trading Day” 10 May 2013, being the last trading day of the Shares prior to the signing of the Acquisition Agreement and the Yang Subscription Agreement
“Latest Practicable Date” 16 September 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
“Long Stop Date” the latest date for Completion, being 31 August 2013 and which has been extended to 31 December 2013 pursuant to the Acquisition Agreement
“Mr. Wang” Mr. Wang Xiaochun, the founder of the Target Group and the beneficial owner of the entire issued share capital of Hanmax
“Mr. Yang” Mr. Yang Bin, an executive Director and the managing director of the Company
“Placing” the placing of the Placing Shares by the placing agents pursuant to the Placing Agreement
“Placing Agreement” the agreement dated 23 May 2013 entered into among the Company and three placing agents in relation to the Placing
“Placing Shares” the 225,000,000 new Shares allotted and issued by the Company pursuant to the Placing Agreement
“PRC” The People’s Republic of China, which for the purpose of this circular excludes Hong Kong, Macau Special Administrative Region and Taiwan
“Pulante” 青海普蘭特藥業有限公司 (Qinghai Pulante Pharmaceutical Co., Ltd.*), a company established in the PRC with limited liability and indirectly wholly owned by the Target Company
“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

– 4 –

DEFINITIONS

“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)
“Sinopharm” Sinopharm Group Hongkong Co., Limited（國藥集團香港有限公司）, a company incorporated in Hong Kong with limited liability and the controlling Shareholder
“Sinopharm Fund” 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)*), a limited partnership established under the PRC laws and managed by its general partner which is an associate of Sinopharm
“Sinopharm Fund Trustee”
華寶信託有限責任公司 (Hwabao Trust Co., Ltd*), a limited liability company established under the PRC laws, which acts as the trustee of Sinopharm Fund pursuant to the terms and conditions of the Trust Agreement
“Sinopharm Shares”
the 125,000,000 new Shares to be allotted and issued to Sinopharm Fund Trustee pursuant to the Sinopharm Subscription Agreement
“Sinopharm Subscription”
the subscription of the Sinopharm Shares by Sinopharm Fund Trustee pursuant to the Sinopharm Subscription Agreement
“Sinopharm Subscription Agreement”
the agreement dated 23 May 2013 entered into between the Company and Sinopharm Fund Trustee in relation to the Sinopharm Subscription
“Stock Exchange”
The Stock Exchange of Hong Kong Limited
“substantial shareholder(s)”
has the meaning ascribed to it under the Listing Rules
“Target Company”
Tongjitang Chinese Medicines Company, a company incorporated in the Cayman Islands with limited liability
“Target Group”
the Target Company and its subsidiaries
“Tongjitang Pharmaceutical”
貴州同濟堂製藥有限公司 (Guizhou Tongjitang Pharmaceutical Co., Ltd.*), a company established in the PRC with limited liability and indirectly wholly owned by the Target Company

– 5 –

DEFINITIONS

“Total Consideration”
the aggregate of the Hanmax Consideration and the Fosun Consideration
“Trust Agreement”
華寶•境外市場投資2號系列三期QDII單一資金信托 (Hwabao – Overseas Investment Series 2 No. 3 QDII Single Money Trust*), a trust agreement between Sinopharm Fund Trustee and Sinopharm Fund under which Sinopharm Fund Trustee shall, acting in its capacity as the trustee of Sinopharm Fund and solely for the benefit and in the interest of Sinopharm Fund, conditionally subscribe and hold the Sinopharm Shares on trust for Sinopharm Fund
“Unisources”
Unisources Enterprises Limited, a company incorporated in the British Virgin Islands with limited liability and an indirect wholly-owned subsidiary of the Target Company
“Unisources Debt”
the debt to be owed by Hanmax to Unisources in an amount equal to the HK$ equivalent of approximately RMB274.4 million (equivalent to approximately HK$345.2 million) which arises as a result of Hanmax assuming the Huixian Debt upon Completion
“Vendors”
collectively, Hanmax and Fosun
“Yang Shares”
the 66,488,379 new Shares to be allotted and issued to Mr. Yang pursuant to the Yang Subscription Agreement
“Yang Subscription”
the subscription of the Yang Shares by Mr. Yang pursuant to the Yang Subscription Agreement
“Yang Subscription Agreement”
the agreement dated 23 May 2013 entered into between the Company and Mr. Yang in relation to the Yang Subscription
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“RMB” Renminbi, the lawful currency of the PRC
“%” per cent.

* For identification purposes only

For illustration purpose in this circular, amounts in RMB have been translated into HK$ at the rate of RMB1 = HK$1.258.

– 6 –

LETTER FROM THE BOARD

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(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

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

Non-Executive Directors:

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

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

19 September 2013

To the Shareholders

Dear Sir or Madam,

(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF ENTIRE ISSUED SHARE CAPITAL OF TONGJITANG CHINESE MEDICINES COMPANY INVOLVING ISSUE OF NEW SHARES

AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE (II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE AND (III) PROPOSED CHANGE OF COMPANY NAME

INTRODUCTION

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LETTER FROM THE BOARD

the Fosun Consideration. The Hanmax Consideration is equal to 67.9% of the Total Consideration and is payable by the Company partly by way of allotment and issue of 334,000,000 Consideration Shares to Hanmax (or any nominee(s) as it may direct), partly by the Company assuming the Unisources Debt, and partly in cash. The Fosun Consideration is equal to 32.1% of the Total Consideration and is payable by the Company to Fosun in cash. The cash portion of the Hanmax Consideration and the Fosun Consideration are expected to be financed by the proceeds from the Placing, the Sinopharm Subscription and the Yang Subscription, the proceeds from disposal of interest in Guizhou Zhongtai and debt financing.

As one or more of the applicable percentage ratios (as defined under the Listing Rules) exceed 100%, the Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules. Since it is proposed that Mr. Wang will be appointed as a Director, the Acquisition also constitutes a connected transaction of the Company under Rule 14A.13(1)(b)(i) of the Listing Rules. The Acquisition is therefore subject to the reporting, announcement and independent shareholders’ approval requirements under the Listing Rules.

On 23 May 2013, the Company also entered into the Yang Subscription Agreement with Mr. Yang pursuant to which the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for, 66,488,379 Yang Shares at the Issue Price of HK$3.10 per Yang Share. The Company intends to apply the proceeds from the Yang Subscription to finance part of the Total Consideration.

Mr. Yang is a Director and Profit Channel Development Limited, a company wholly owned by Mr. Yang, is a substantial Shareholder. Accordingly, Mr. Yang is a connected person of the Company and the Yang Subscription constitutes a connected transaction of the Company which is subject to the independent shareholders’ approval requirements of the Listing Rules.

The Board also proposed to change the name of the Company from “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司” to “China Traditional Chinese Medicine Co. Limited 中國中藥有限公司”. The change of Company name is subject to (i) the approval by the Shareholders by way of a special resolution at the EGM; and (ii) the issuance of certificate of change of name by the Registrar of Companies in Hong Kong. The EGM will be convened by the Company at which ordinary resolutions will be proposed to seek approval from the Independent Shareholders by way of poll for the Acquisition and the Yang Subscription, including the grant of the specific mandate for the issue of the Consideration Shares and the Yang Shares. A special resolution will also be proposed at the EGM to seek approval from the Shareholders by way of poll for the proposed change of Company name.

The purpose of this circular is to provide you with, among other things, (i) details of the Acquisition Agreement; (ii) details of the Yang Subscription Agreement; (iii) details of the change of Company name; (iv) financial information of the Group, the Target Group and the Enlarged Group; (v) the recommendation of the Independent Board Committee regarding the Acquisition and the Yang Subscription; (vi) the advice from Guotai Junan to the

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LETTER FROM THE BOARD

Independent Board Committee and the Independent Shareholders regarding the Acquisition and the Yang Subscription; (vii) other information as required under the Listing Rules; and (viii) the notice of the EGM.

THE ACQUISITION AGREEMENT

Date

23 May 2013

Parties

(i) the Company, as purchaser;
(ii) Mr. Wang, the beneficial owner of the entire issued share capital of Hanmax;
(iii) Hanmax, as vendor of the Hanmax Sale Shares; and
(iv) Fosun, as vendor of the Fosun Sale Shares.

Mr. Wang and the Vendors were introduced to the Company by CNPGC in March 2013. The Company, on its own, then proceeded with discussions with Mr. Wang and the Vendors about the potential Acquisition. The Target Group has distribution arrangements with CNPGC Group on arm’s length basis under which CNPGC Group distributes certain products for the Target Group. Fosun and its associates also have business relationship with CNPGC Group on arm’s length basis in their ordinary course of business. Mr. Wang and Hanmax do not have any business relationship with CNPGC Group.

Hanmax is a company incorporated in the British Virgin Islands with limited liability and wholly owned by Mr. Wang. Hanmax is the legal and beneficial owner of the Hanmax Sale Shares. It does not have any subsidiary other than the members of the Target Group.

Fosun is a company incorporated in Hong Kong with limited liability and the legal and beneficial owner of the Fosun Sale Shares. Fosun does not have any subsidiary. As at the Latest Practicable Date, CNPGC holds a 51% interest in Sinopharm Industrial Investment Co., Ltd.. Shanghai Qishen Investment Co., Ltd, a wholly-owned subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., holds the remaining 49% interest in Sinopharm Industrial Investment Co., Ltd.. Shanghai Fosun Pharmaceutical (Group) Co., Ltd. also wholly owns Fosun. Fosun is not an associate of CNPGC.

Hanmax is principally engaged in investment holding and Fosun is principally engaged in investment management business.

Save as disclosed above and to the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, Hanmax, Mr. Wang, Fosun and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons.

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LETTER FROM THE BOARD

Assets to be acquired

Pursuant to the Acquisition Agreement, the Company conditionally agreed to acquire, and Hanmax and Fosun conditionally agreed to sell, the Hanmax Sale Shares and the Fosun Sale Shares respectively for the Total Consideration. The Hanmax Sale Shares and the Fosun Sale Shares represent 67.9% and 32.1% equity interests in the Target Company respectively. Collectively, the Hanmax Sale Shares and the Fosun Sale Shares represent the entire issued share capital of the Target Company. The Target Group is a leading specialty pharmaceutical company focusing on the development, manufacturing and marketing of modernized traditional Chinese medicines in the PRC. For further information of the Target Group, please refer to the paragraph headed “Information on the Target Group” below.

Total Consideration

The Total Consideration consists of the Hanmax Consideration and the Fosun Consideration and is equal to the HK$ equivalent of RMB2,640 million (equivalent to approximately HK$3,321.1 million) based on the Applicable Exchange Rate, but in any event not less than HK$3,200 million and not more than HK$3,400 million. The range of the Total Consideration was set such that fluctuations in the exchange rate would not result in a significant change in the HK$ equivalent of the Total Consideration.

The Hanmax Consideration (ranging from approximately HK$2,172.8 million to approximately HK$2,308.6 million) is equal to 67.9% of the Total Consideration and will be satisfied in the following manner: (i) HK$935.2 million by way of allotment and issue of 334,000,000 Consideration Shares, credited as fully paid, by the Company to Hanmax (or any nominee(s) as it may direct) at Completion;

(ii) the HK$ equivalent of approximately RMB274.4 million (equivalent to approximately HK$345.2 million) based on the Applicable Exchange Rate, by way of the Company assuming the Unisources Debt at Completion; and
(iii) the remaining balance of the Hanmax Consideration (ranging from approximately HK$892.4 million to approximately HK$1,028.2 million assuming the amount as referred to in (ii) above is approximately HK$345.2 million) in cash payable by the Company to Hanmax at Completion.

The principal amount of the Unisources Debt is equal to the HK$ equivalent of the principal amount of the Huixian Debt, i.e. approximately RMB274.4 million (equivalent to approximately HK$345.2 million) based on the Applicable Exchange Rate. The Unisources Debt will become due within 180 days of the date of Completion and interest-free. The relevant legal documents regarding the assumption of the Unisources Debt is expected to be executed at Completion in accordance with the terms and conditions of Acquisition Agreement. As the Unisources Debt to be assumed by the Company upon Completion will be eliminated in the consolidated financial statements of the Company, the Directors consider that the terms of the Unisources Debt would not have material adverse financial effects on the Enlarged Group.

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LETTER FROM THE BOARD

The Fosun Consideration is equal to 32.1% of the Total Consideration (ranging from approximately HK$1,027.2 million to approximately HK$1,091.4 million) and will be payable in cash by the Company to Fosun at Completion.

The Total Consideration was determined after arm’s length negotiations among the Company, Mr. Wang, Hanmax and Fosun, having taken into account, among other things, (i) the profitability of the Target Group; (ii) the price-to-earnings ratio of approximately 19.1 times implied by the Total Consideration based on the unaudited net profit of the Target Group for the year ended 31 December 2012, which falls within the range of the price-to-earnings ratios of 19 comparable companies engaged in the pharmaceutical industry in the PRC, listed on the Main Board of the Stock Exchange and recognised profit for the most recent financial year (the “Comparable Companies”) from approximately 9.4 to 42.8 times with an average of approximately 21.9 times as extracted from Bloomberg on 25 April 2013 (the Comparable Companies identified based on the above criteria were exhaustive); (iii) the well-established brand name and customer base of the Target Group; (iv) the synergetic effect to be realised as a result of the consolidation of the Target Group; and (v) the potential growth and prospects of the Target Group. In determining the Total Consideration, the Company has primarily made reference to the price-to-earnings ratio of the Target Group which the Company considers to be an appropriate reference for evaluating the market value of a pharmaceutical company. Although the Target Company is unlisted, taking into account the advantages of the Acquisition as detailed in the paragraph headed “Reasons for and Benefits of the Acquisition” below, the Company considers that it is fair and reasonable to use the average of the price-to-earnings ratios of the Comparable Companies for determining the Total Consideration. As the Acquisition is not intended to be an acquisition of assets and taking into account of the business nature of the Target Group, the Directors are of the view that it is not appropriate to determine the Total Consideration with reference to a price-to-book ratio analysis. As such, the Company did not take into consideration of the price-to-book ratio of the Target Group when determining the Total Consideration.

The total cash portion of the Hanmax Consideration and the Fosun Consideration (ranging from approximately HK$1,919.6 million to approximately HK$2,119.6 million assuming the amount of the Unisources Debt to be assumed is approximately HK$345.2 million) are expected to be financed as follows:

(i) approximately HK$690.5 million from the Placing;
(ii) approximately HK$385.0 million from the Sinopharm Subscription;
(iii) approximately HK$205.7 million from the Yang Subscription;
(iv) approximately HK$126.1 million from the net proceeds from the disposal of interest in Guizhou Zhongtai (if completed, failing which such amount will be financed by bank borrowings); and
(v) the remaining balance from bank borrowings (ranging from approximately HK$512.3 million to approximately HK$712.3 million).

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LETTER FROM THE BOARD

The Directors have primarily considered the cost, time and flexibility of various financing methods to finance the Acquisition. The Company has obtained a non-legally binding offer letter from a state-owned commercial bank in the PRC pursuant to which the bank conditionally agreed to extend a loan of up to HK$900.0 million to the Company for the purpose of funding the Acquisition. The term of the loan will be three years from the date of the formal loan agreement and the principal amount will be repayable at maturity. The loan will be guaranteed and carry an interest rate of Hong Kong Interbank Offered Rate plus 2% per annum. The terms of such loan are expected to be finalised and the formal contract is expected to be signed before Completion. The Company does not foresee any difficulty in obtaining sufficient bank borrowings to fund the Acquisition.

As at the Latest Practicable Date, apart from the Yang Subscription and the potential bank borrowings of up to HK$900 million as described above, the Company has no intention to conduct other debt or equity fund raising.

Consideration Shares

As at the Latest Practicable Date, the Company has 2,133,410,807 Shares in issue. Assuming that there is no change in the issued share capital of the Company other than the allotment and issue of the Yang Shares and the Consideration Shares since the Latest Practicable Date up to the date of Completion, the 334,000,000 Consideration Shares represent approximately:

(i) 15.66% of the existing issued share capital of the Company;
(ii) 13.54% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares; and
(iii) 13.18% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares and the Consideration Shares.

The aggregate nominal value of the Consideration Shares will be HK$33,400,000. The Consideration Shares shall rank pari passu in all respects among themselves and with all other Shares in issue as at the date of their allotment and issue.

The Consideration Shares will be allotted and issued under a specific mandate to be sought for approval from the Independent Shareholders at the EGM. Application has been made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

The Consideration Shares will be subject to a lock-up period of 24 months from the date of Completion.

The issue price of the Consideration Shares is HK$2.80 per Consideration Share and represents:

(i) a discount of approximately 8.20% to the closing price of HK$3.05 per Share as quoted on the Stock Exchange on the Latest Practicable Date;

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LETTER FROM THE BOARD

(ii) a discount of approximately 26.9% to the closing price of HK$3.83 per Share as quoted on the Stock Exchange on the Last Trading Day;
(iii) a discount of approximately 26.3% to the average of the closing prices as quoted on the Stock Exchange for the last five consecutive full trading days up to and including the Last Trading Day of approximately HK$3.80 per Share;
(iv) a discount of approximately 18.1% to the average of the closing prices as quoted on the Stock Exchange for the last 30 consecutive full trading days up to and including the Last Trading Day of approximately HK$3.42 per Share;
(v) a premium of approximately 14.8% over the average of the closing prices as quoted on the Stock Exchange for the last 90 consecutive full trading days up to and including the Last Trading Day of approximately HK$2.44 per Share; and
(vi) a premium of approximately 229.4% over the unaudited consolidated net asset value of the Group attributable to the Shareholders as at 30 June 2013 of approximately HK$0.85 per Share (based on 2,133,410,807 Shares in issue).

The issue price of the Consideration Shares was determined after arm’s length negotiations amongst the Company, Mr. Wang and Hanmax with reference to, among other things, the recent market price of the Shares, the lock-up period of 24 months of the Consideration Shares and the audited consolidated net asset value of the Group attributable to the Shareholders as at 31 December 2012 of approximately HK$0.57 per Share. Notwithstanding that the issue price of the Consideration Shares is lower than the issue price of the Placing Shares, the Sinopharm Shares and the Yang Shares, the Directors consider that the issue price of the Consideration Shares is fair and reasonable after taking into account the reasons for and benefits of the Acquisition and the lock-up period of the Consideration Shares.

Conditions precedent

Completion is conditional upon the fulfilment or waiver (as the case may be) of the following conditions:

(i) the Company having obtained all necessary approvals and consents for the Acquisition and all related fund-raising exercises from the Stock Exchange and/or other regulatory authorities in Hong Kong, including but not limited to the approval for the issue of the circular in relation to the Acquisition by the Stock Exchange;
(ii) the granting of the approval for listing of, and permission to deal in, the Consideration Shares by the Listing Committee of the Stock Exchange;
(iii) the necessary resolutions approving the Acquisition and the related fund-raising exercises having been passed by the Independent Shareholders at the EGM;

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(iv) all representations, warranties and undertakings collectively or individually given or made by Mr. Wang, Hanmax and Fosun as set out in the Acquisition Agreement remaining true and accurate in all material respects as at the date of Completion;
(v) Mr. Wang, Hanmax and Fosun having duly performed and observed all of the obligations, undertakings, covenants and agreements required to be performed and observed by them on or prior to Completion;
(vi) Mr. Wang, Hanmax, Fosun and members of the Target Group having obtained and having duly produced to the Company copies of all requisite board and/or shareholders’ approvals or consents in accordance with applicable laws for the execution, delivery and performance of the Acquisition Agreement and the transactions contemplated thereunder;
(vii) all necessary approvals, authorisations and consents which may be required by any of Mr. Wang, Hanmax, Fosun and any members of the Target Group from any governmental or regulatory authorities, or under any existing contractual arrangements, for the consummation of the transactions contemplated under the Acquisition Agreement having been obtained; and all necessary notifications, filings or registration requirements which may be required to comply with by any of Mr. Wang, Hanmax, Fosun and any members of the Target Group for the consummation of the transactions contemplated under the Acquisition Agreement having been completed, except for any such approvals, authorisations, notifications, filings or registrations which would not have a material adverse effect on the ability to consummate the transactions contemplated under the Acquisition Agreement or on the operations of the Target Company;
(viii) none of the governmental authority and other person (a) has brought or threatened to bring any judicial, arbitral, or administrative proceeding against any of the Company, Mr. Wang, Hanmax, Fosun, the Target Company or any members of the Target Group in order to restrict, prohibit or oppose to the Acquisition, the relevant financing transactions or the consummation of any other transactions contemplated in the Acquisition Agreement; and (b) has proposed or has taken action to restrict, affect or postpone the consummation of the transactions or the operation of any members of the Target Group as contemplated in the Acquisition Agreement;
(ix) since the date of signing of the Acquisition Agreement (a) there being no material adverse change in the business, operation, assets, financial position, revenue, condition or prospects of the Target Group; and (b) there being no material adverse change in laws, regulations or policies in any place of operation of any members of the Target Group which may result in material adverse impact on the Target Group;
(x) Mr. Wang and Hanmax having provided evidence to the satisfaction of the Company regarding their appointment of processing agent;

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(xi) the Company having obtained a certificate of continuity of the Target Company showing valid existence of the Target Company as at the date of Completion and the due registration of the Target Company with the Cayman Islands Registrar of Companies;
(xii) the Company having obtained the completion certificates signed by each of Mr. Wang and an executive director of Fosun;
(xiii) the Company having obtained the financial reports of the Target Company audited by the Company’s auditor for the 2012 financial year (including such auditor’s unqualified audit opinion);
(xiv) Hanmax, Unisources and Huixian having executed a document in form and substance reasonably satisfactory to the Company under which Hanmax assumes the Huixian Debt; and
(xv) the Company having obtained the directors appointment and authorisation certificates signed by each of Hanmax and Fosun.

The Company may at any time waive any of the above conditions (except the conditions referred to in (i), (ii), (iii) and (ix) above) by written notice to Mr. Wang, Hanmax and Fosun. The Company does not intend to waive such conditions, but may consider waiving certain condition(s) only if such waiver would not have any material adverse consequences depending on the circumstances at the time of Completion.

Completion is also conditional upon the fulfilment or waiver (as the case may be) of the following conditions:

(xvi) all general representations, warranties and undertakings given or made by the Company to Hanmax and Fosun as set out in the Acquisition Agreement remaining true and accurate in all material respects as at the date of Completion;
(xvii) all specific representations, warranties and undertakings given or made by the Company to Mr. Wang as set out in the Acquisition Agreement remaining true and accurate in all material respects as at the date of Completion;

(xviii) the Company having maintained its listing status;

(xix) the Company having obtained all necessary approvals and consents for the Acquisition from the Stock Exchange and/or other regulatory authorities in Hong Kong, including but not limited to the approval for the issue of the circular in relation to the Acquisition by the Stock Exchange; and the granting of the approval for listing of, and permission to deal in, the Placing Shares by the Listing Committee of the Stock Exchange;
(xx) the Company having duly performed and observed the covenants and obligations required to be performed and observed by it in all material respects on or prior to Completion;

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(xxi) since the date of signing of the Acquisition Agreement (a) there being no material adverse change in, or circumstances which might be expected to result in a material adverse change in, the business, operation, assets, financial position (including any significant increase in the provisions), revenue, condition or prospects of the Company; and (b) there being no material adverse change in laws, regulations or policies in any place of operation of any members of the Group which may result in material adverse impact on the Group;
(xxii) the Yang Subscription having been completed; and
(xxiii) Hanmax and Fosun having obtained the completion certificates signed by an executive director of the Company.

Hanmax and Fosun may, at any time and acting jointly, waive any of the conditions referred to in (xvi), (xx) and (xxiii) above by written notice to the Company. Mr. Wang may at any time waive any of the conditions referred to in (xvii), (xviii), (xxi) and (xxii) above by written notice to the Company. Hanmax, Fosun and Mr. Wang do not intend to waive such conditions, but may consider waiving certain condition(s) only if such waiver would not have any material adverse consequences depending on the circumstances at the time of Completion.

As at the Latest Practicable Date, conditions referred to in (i), (xiii), (xiv) and (xix) above have been fulfilled.

If Completion does not take place on or before the Long Stop Date, the Acquisition Agreement shall lapse and be of no further effect and no party to the Acquisition Agreement shall have any claim against or liability to the other parties, save for the case that Completion does not take place by such date as a result of the condition referred to in (vii) above not having been fulfilled, in which case the Long Stop Date will be extended to 31 December 2013.

Termination

At any time prior to Completion, the Acquisition Agreement or any of the rights and obligations as set out in the Acquisition Agreement may be terminated:

(i) by the Company, if any of Mr. Wang, Hanmax and Fosun breaches any of the warranties and representations as set out in the Acquisition Agreement, or in the event that any breaches to any other undertakings in the Acquisition Agreement may not be rectified or has not been rectified by any of Mr. Wang, Hanmax and Fosun within 30 days of receipt of notice by the Company;
(ii) jointly by Mr. Wang, Hanmax and Fosun, if the Company breaches any of the warranties and representations as set out in the Acquisition Agreement, or in the event that any breaches to any other undertakings in the Acquisition Agreement may not be rectified or has not been rectified by the Company within 30 days of receipt of notice by Mr. Wang, Hanmax and Fosun;

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(iii) in the event that Completion does not take place on or before the Long Stop Date. However, if any necessary approvals from any governmental authorities have not yet been obtained by the Long Stop Date, then the Long Stop Date would be postponed to 31 December 2013; or
(iv) by written consent between all the parties to the Acquisition Agreement on or before the date of the Completion.

Completion

The Company shall serve a written notice to Mr. Wang, Hanmax and Fosun to request for Completion within five Business Days of the date on which all of the conditions precedent as set out above have been fulfilled or waived (as the case may be). Completion shall then take place on the fifth Business Days following the issue of such written notice.

Upon Completion, the Target Company will become a wholly-owned subsidiary of the Company and the financial results, assets and liabilities of the Target Group will be consolidated into the financial statements of the Group.

Undertakings from Mr. Wang, Hanmax and Fosun

Each of Mr. Wang, Hanmax and Fosun has undertaken to the Company that they shall not, for the period of two years after the date of Completion, directly or indirectly recruit, solicit or instigate, or attempt to recruit, solicit or instigate any persons who have been customers, distributors or agents of any members of the Target Group during the 12 months prior to the date of Completion to change, reduce or terminate their business relationship with any members of the Target Group.

Mr. Wang has further undertaken to the Company that, for so long as Mr. Wang is interested, directly or indirectly, in more than 5% of the Shares, he shall not, without the prior written approval of the Company (i) directly or indirectly engage in activities in the Competing Businesses or is interested, directly or indirectly, in any person engaging in any Competing Businesses; (ii) directly or indirectly be employed by any person which is engaged in the Competing Businesses; and (iii) provide to any person any technology, or business or professional opinion relating to the Competing Businesses to assist any such person to directly or indirectly engage in the Competing Businesses provided that the foregoing does not restrict Mr. Wang from owning, directly or indirectly, (a) any equity securities of the Company or (b) 5% or less of the equity securities of any other listed companies.

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INFORMATION ON THE TARGET GROUP

The Target Company is an investment holding company incorporated in the Cayman Islands with limited liability. Through its operating subsidiaries in the PRC, the Target Company is engaged in the development, manufacturing and marketing of modernized traditional Chinese medicines with emphasis on orthopaedics under the famous brand name “Tongjitang”, a well-established brand in the PRC dating back to 1888. “Tongjitang” was recognised in 1994 as one of the “Top 100-Year-Old Brands of China”. The Target Company became the first traditional Chinese medicine company listed on the New York Stock Exchange by initial public offering in 2007 and was subsequently privatised by Hanmax and Fosun in 2011.

The principal operating subsidiaries of the Target Company include Tongjitang Pharmaceutical, Guizhou LLF, Jingfang and Pulante. The corporate structure of the Target Group is as follows:

==> picture [282 x 262] intentionally omitted <==

----- Start of picture text -----

Target Company
100%
Tongjitang Pharmaceutical (Hong Kong) Limited
100%
Unisources
100%
Tongjitang Pharmaceutical
100% 100% 100%
Guizhou LLF Pulante Jincili
0.87% 99.13%
Jingfang
----- End of picture text -----

The principal operating subsidiaries of the Target Company are engaged in the business of developing, producing, marketing and distributing medicines, including traditional Chinese medicines, western medicines and nutritional products.

The Target Group manufactures and markets modernized traditional Chinese medicines and western medicines. The Target Group has obtained approvals from China Food and Drug Administration for all of its products. Its principal exclusive products, namely 仙靈骨葆膠囊（片） (Xianling Gubao Capsules and Tablets), 潤燥止癢膠囊 (Moisturizing and Anti-Itching Capsules), 棗仁安神膠囊 (Zaoren Anshen Capsules), 頸舒顆粒 (Jingshu Granules) and 風濕骨痛膠囊 (Fengshi Gutong Capsules*), are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance. The National Essential Drugs List is issued by the Ministry of Health of the PRC and contains a list of

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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.

The Target Group is also actively developing a number of new medicines and formulations that were primarily acquired from third parties, as well as through joint research and development with universities and research institutions. The Target Group will obtain approvals from China Food and Drug Administration for its new products before they can be manufactured, marketed and sold.

As at 30 April 2013, the Target Group had capital commitments contracted for of approximately HK$132.3 million and capital commitments authorised but not contracted for of approximately HK$25.8 million in relation to (i) the upgrades of certain workshops and setting up of a new production base of the Target Group; and (ii) the project to improve the production process in order to meet the requirements of the new version of Good Manufacturing Practice. The aforesaid capital commitments are expected to be financed by the internal resources of the Enlarged Group.

A summary of the audited consolidated financial information of the Target Group for each of the two years ended 31 December 2011 and 2012 and the four months ended 30 April 2013 prepared in accordance with the Hong Kong Financial Reporting Standards (as extracted from the accountants’ report on the Target Group as set out in Appendix II to this circular) is set out below:

			For the four
	For the year ended		months ended
	31 December		30 April
	2011	2012	2013
	(audited)	(audited)	(audited)
	HK$’000	HK$’000	HK$’000
Turnover	912,249	1,267,446	389,696
Gross profit	500,173	764,154	242,341
Profit before tax	60,903	206,759	43,470
Profit after tax	45,370	169,466	34,392
			As at
			30 April 2013
			(audited)
			HK$’000
Net assets			1,079,392

Please refer to the accountants’ report on the Target Group as set out in Appendix II to this circular for further details of the audited financial information of the Target Group.

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FINANCIAL EFFECTS OF THE ACQUISITION

Upon Completion, the assets, liabilities and results of the Target Group will be consolidated into the financial statements of the Group. In view of the profitable track record of the Target Group, the Directors are of the view that the earnings of the Group will be enhanced as a result of the Acquisition.

As illustrated in the unaudited pro forma consolidated statement of financial position of the Enlarged Group as set out in Appendix III to this circular, assuming the Acquisition and the Yang Subscription had been completed on 30 June 2013, the Group’s net asset value attributable to the equity shareholders of the Company would be increased by approximately HK$1,130.1 million to approximately HK$2,940.9 million from approximately HK$1,810.8 million. In addition, the total assets would be increased by approximately HK$1,604.9 million and the total liabilities would be increased by approximately HK$474.8 million.

Although the aggregate of cash and cash equivalents and deposit with banks as shown in the unaudited pro forma consolidated statement of financial position of the Enlarged Group as set out in Appendix III to this circular would be decreased to a negative balance of approximately HK$831.6 million, the Directors expect that the Enlarged Group will record a positive cash balance when taking into account the net proceeds of approximately HK$385.0 million from the Sinopharm Subscription (which was completed on 9 July 2013), the net proceeds of approximately HK$126.1 million from the disposal of interest in Guizhou Zhongtai (which is expected to be completed in the fourth quarter of 2013) and the potential borrowings from banks to the Company to fund the cash portion of the Total Consideration. The Company has obtained an offer letter from a state-owned commercial bank in the PRC pursuant to which the bank conditionally agreed to extend a loan of up to HK$900.0 million to the Company for the purpose of funding the Acquisition. Based on the above, the Directors are of the view that the Enlarged Group will have sufficient working capital and the Acquisition will not have material impact on the Enlarged Group’s working capital position.

As illustrated in the unaudited pro forma consolidated statement of financial position of the Enlarged Group as set out in Appendix III to this circular, goodwill of approximately HK$2,241.7 million will be recognized as a result of the Acquisition. Such amount represents the excess of the aggregate of the fair value of the Total Consideration over the net fair value of the Target Group’s identifiable assets and liabilities measured at the date of Completion. The Directors are of the view that the goodwill of approximately HK$2,241.7 million is solely derived from applicable accounting standards which would not have any future impact on the cash flow of the Enlarged Group. Such goodwill is an intangible asset recognised as a result of the Acquisition, representing the future economic benefits arising from other assets of the Target Group that are not individually identified and separately recognised, which may include the well-established brand name, customer base and extensive distribution network, and relationship with existing stakeholders.

For the purpose of the preparation of the unaudited pro forma financial information of the Enlarged Group, the Company had conducted assessment of impairment loss on goodwill with reference to the principles in Hong Kong Accounting Standard 36 “Impairment of Assets”, including but not limited to assessment on cashflows of the Target Group,

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assessment on the profit forecast of the Target Group, recent economic and legal environment in which the Target Group operates and the carrying amount of the assets of the Target Group. In addition, the Total Consideration was determined after arm’s length negotiations, having taken into account, among other things:

(i) the profitability and proven track records of the Target Group;
(ii) the price-to-earnings ratio of approximately 19.1 times implied by the Total Consideration based on the unaudited net profit of the Target Group for the year ended 31 December 2012, which falls within the range of the price-to-earnings ratios of the Comparable Companies from approximately 9.4 to 42.8 times with an average of approximately 21.9 times;
(iii) the well-established brand name of the Target Group;
(iv) the broad customer base and extensive distribution network of the Target Group built up from its long history of operations and establishment of reputable products in the pharmaceutical market in the PRC including third-party distributors who resell products of the Target Group to over 15,000 hospitals and primary healthcare institutions and to over 45,000 retail pharmacies in the PRC;
(v) the synergetic effect to the Group’s existing business given that five of the Target Group’s exclusive products have been included in both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance and are expected to record significant growth in demand to be realised as a result of the consolidation of the Target Group; and
(vi) the potential growth and prospects of the Target Group, among other things, of combined sales force of more than 4,000 staff which is expected to enhance the competitiveness in marketing of products of the Enlarged Group.

The Directors also consider that it is common that the fair values of pharmaceutical companies are higher than their net asset values. The Comparable Companies were trading at price-to-book ratios ranging from approximately 0.8 to approximately 6.3 times with an average of approximately 3.1 times. The price-to-book ratio implied by the maximum Total Consideration of HK$3,400 million and the audited equity attributable to shareholders of the Target Company as at 30 April 2013 of approximately HK$1,079.4 million was approximately 3.1 times, equivalent to the average of the price-to-book ratios of the Comparable Companies.

Based on the Company’s assessment in accordance with applicable accounting standards, basis of determining the Total Consideration and assessment on the Comparable Companies, the Directors consider that there is no indication of impairment on the goodwill upon Completion and the fair value of the Total Consideration of approximately HK$3,321.1 million approximates the fair value of the Target Group. The Company will adopt accounting policies and principal assumptions in assessing any impairment of goodwill in its first set of financial statements after Completion in accordance with the Company’s accounting policy on impairment of assets and applicable accounting standards. The Company’s auditor will

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perform required procedures in connection with the impairment of goodwill according to Hong Kong Standards of Auditing for the purpose of forming an opinion on the financial statements of the Group as a whole.

As disclosed in note 5(b) to the pro forma financial information, the amount of goodwill of the Enlarged Group and fair value of the identifiable assets and liabilities are subject to change. The actual amount of goodwill will be determined with reference to, among other things, (i) the fair value of the identifiable assets (including intangible assets) and liabilities of the Target Group as at the date of Completion; (ii) the financial position of the Target Group on the date of Completion; and (iii) closing price of the Shares on the Stock Exchange on the date of Completion. In addition, the actual amount of depreciation and amortization, and the related tax on the assets of the Target Group may also be different depending on the actual fair value adjustments to the identifiable assets of the Target Group. Therefore, the actual amounts of goodwill and other assets and liabilities of the Target Group may be different from those disclosed in the unaudited pro forma financial information in Appendix III to this circular.

REASONS FOR AND BENEFITS OF THE ACQUISITION

The principal business activities of the Group are the manufacture and sale of traditional Chinese medicine and pharmaceutical products in the PRC with focuses on respiratory system drugs, nasal preparations, cerebro-cardiovascular drugs, and rheumatic diseases and bone injury drugs.

The Target Group is a leading pharmaceutical enterprise in the PRC with an emphasis on orthopaedics traditional Chinese medicine. The Target Group’s flagship product, namely 仙靈骨葆 (Xianling Gubao*), is approved by China Food and Drug Administration for the treatment of osteoporosis and is a solid sales driver. The Acquisition will allow the Group to gain instant access to the orthopaedics traditional Chinese medicine in both the prescription and the over-the-counter markets and take advantage of the high growth potential of the Target Group.

In 2009, the National Essential Drugs List for the year covered over 300 types of medicines, included two products exclusively produced by the Target Group at that time, namely 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules). Since then, the demand of 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) had recorded significant increase in both the prescription and the over-the-counter markets. In March 2013, the Ministry of Health of the PRC released the 2012 National Essential Drugs List, which covered 520 types of medicines, including three additional products exclusively produced by the Target Group, namely 棗仁安神膠囊 (Zaoren Anshen Capsules), 潤燥止癢膠囊 (Moisturizing and Anti-Itching Capsules) and 風濕骨痛膠囊 (Fengshi Gutong Capsules). As a result, the Target Group exclusively produces a total of five products that are on the 2012 National Essential Drugs List. It is expected that the Target Group will continue to capitalise on the growth in demand of these products in both the prescription and the over-the-counter markets as the Target Group did for 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules*) when they were initially included to the 2009 National Essential Drugs List.

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The Group currently owns the brands of “Dezhong”, “Foshan” and “Feng Liao Xing”. With the addition of “Tongjitang”, a brand which has more than 100 years of history, the brand portfolio of the Group will be enriched, resulting in an enhanced market position and brand recognition of the Group. The Group will also be able to strengthen its presence and increase its market share in the traditional Chinese medicine market.

The Group has a total of 327 products, 53 of which are on the 2012 National Essential Drugs List. With the addition of the products manufactured by the Target Group, it is expected that the product portfolio of the Group will be boosted to over 500 products after the Acquisition. As described above, 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. Together with the Group’s exclusive products, namely 玉屏風顆粒 (Yu Ping Feng Granule) and 鼻炎康片(Bi Yan Kang Tablet), the Group will own a total of seven exclusive products which are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance after the Acquisition and become the pharmaceutical enterprise which produces the most number of exclusive products on the 2012 National Essential Drugs List in the PRC, allowing it to capitalise on the growth opportunities of the Chinese medicine market brought about by the recent reforms in the pharmaceutical industry in the PRC.

Both the Group and the Target Group are principally engaged in the development, manufacturing and marketing of traditional Chinese medicines. As the Target Group has a long and successful history of operations and has established reputable products in the pharmaceutical market and extensive distribution networks in the PRC, the Board considers that the Acquisition would allow the Group to further penetrate into the traditional Chinese medicine market in the PRC. The Group expects to realise synergetic effect as a result of the consolidation of the Target Group since the Acquisition is principally consistent with the business development strategy of the Group. This will be achieved, among others, through (i) optimisation of capacity as the Enlarged Group will become the pharmaceutical enterprise to produce the most number of exclusive products on the 2012 National Essential Drugs List in the PRC; (ii) internal cost savings from the transferable skills of the management from the Target Group and expanded portfolio and coverage which may enhance the Enlarged Group’s financial and operating performance; and (iii) extended management expertise and additional negotiating power for both customer and supplier relationship. Further, the Group will be able to take advantage of the extensive sales force and marketing and distribution network of the Target Group. After the Acquisition, the Enlarged Group will possess a combined sales force of more than 4,000 staff and enjoy a competitive edge in marketing its products.

After the Acquisition, the debt level of the Enlarged Group is expected to increase as a result of the addition of potential bank borrowings to finance the Acquisition. The gearing ratio (calculated as bank loans divided by the equity attributable to equity shareholders of the Company) of the Enlarged Group based on the pro forma financial information of the Enlarged Group as set out in Appendix III to this circular and taking into account the potential bank loan of HK$900 million and the net proceeds from the Sinopharm Subscription of approximately HK$385.0 million is expected to increase from approximately 0.27 to 0.47. There are certain business risks common to the pharmaceutical industry in the PRC which may have a material adverse effect on the business, financial condition, results

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of operations and prospects of the Target Group, including but not limited to (i) changes in government policies and regulation in relation to government price controls or other restrictions on pharmaceutical products in the PRC; (ii) undesirable results from research and development efforts in the production of commercially successful pharmaceutical products; (iii) changes in treatment of diseases and customer preferences in the pharmaceutical industry; and (iv) the existence of counterfeit pharmaceutical products in the PRC pharmaceutical market. However, given that the business risks relating to the pharmaceutical industry in the PRC of the Target Group are common to all pharmaceutical manufacturing companies in the PRC (including the Group), the Directors consider that the Acquisition would not pose additional significant business risks to the Group.

The issue of the Consideration Shares and the Yang Shares will result in dilution to shareholding interest of the Independent Shareholders in the Company. Taking into account (i) the reasons for and benefits of the Acquisition; (ii) the size of the funding requirements for the Acquisition; and (iii) the continuing support from the controlling/substantial Shareholder that can build up investors’ confidence in the Enlarged Group, the Directors consider that such dilution effect on the shareholding interests of the existing public Shareholders is in the interests of the Company and the Shareholders as a whole.

Based on the above, the Directors are of the view that the Acquisition Agreement is entered into on normal commercial terms which are fair and reasonable, and the Acquisition is in the interests of the Company and the Shareholders as a whole.

FUTURE OPERATIONS OF THE ENLARGED GROUP

After Completion, both the operations of the Target Group and the existing operations of the Group will be financed by bank facilities and internal resources of the Enlarged Group.

It is proposed that, after the Acquisition, Mr. Wang will be appointed as a Director. Mr. Justin Chen has been appointed as the chief financial officer of the Company with effect from 1 July 2013. For further information of Mr. Wang and Mr. Justin Chen, please refer to the paragraph headed “Proposed Appointment of Directors and Senior Management” below. The Company expects that after Completion, the business of the Target Group will be managed by its existing management team under the supervision of the Board, and has no current intention to hire or allocate additional management or staff for the management and operation of the Target Group.

After Completion, the Enlarged Group will focus on the business of developing, producing, marketing and distributing traditional Chinese medicine products. The Board will allocate its resources to develop this core business. As at the Latest Practicable Date, apart from the disposal of interest in Guizhou Zhongtai as announced on 26 August 2013, there was no agreement, arrangement and understanding (concluded or otherwise) about any disposal, scaling-down and/or termination of the Group’s existing businesses.

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As at the Latest Practicable Date, save for the acquisition of a piece of land located in Foshan, the PRC as announced on 14 August 2013, the Group had no agreement, arrangement, understanding, intention or negotiation with any party (concluded or otherwise) about any investments other than the Acquisition.

The Target Group had entered into a number of distribution agreements (the “Distribution Agreements”) with CNPGC Group, whereby CNPGC Group distributes various products of the Target Group in various regions of the PRC for a term of one year ending 31 December 2013. The prices for such products are specified under the Distribution Agreements and were determined in accordance with the pricing policy of the Target Group with reference to, among other things, the market price of such products. For the three years ended 31 December 2010, 2011 and 2012, the sales of products by the Target Group to CNPGC Group amounted to approximately RMB43.6 million (equivalent to approximately HK$50.0 million), RMB73.0 million (equivalent to approximately HK$88.2 million) and RMB122.6 million (equivalent to approximately HK$150.7 million) respectively.

The Company is informed by the Target Group that, in each case, the Distribution Agreements were entered into in its ordinary and usual course of business and that the terms were determined with reference to normal commercial terms and on an arm’s length basis between the Target Group and CNPGC Group.

Upon Completion, the transactions contemplated under the Distribution Agreements will constitute continuing connected transactions for the Company under the Listing Rules. Further details of the Distribution Agreements will be disclosed in an announcement to be made by the Company in accordance with Rule 14A.41 of the Listing Rules upon Completion.

PROPOSED APPOINTMENT OF DIRECTORS AND SENIOR MANAGEMENT

Executive Director

The Board proposes to appoint Mr. Wang as an executive Director with effect from the date of Completion.

Mr. Wang, aged 45, is the chairman of the board of directors and the chief executive officer of the Target Company. He has been a director of Tongjitang Pharmaceutical (Hong Kong) Limited (a subsidiary of the Target Company) since 2008, a director of Unisources since 2005 and the chairman of the board of directors and the president of Tongjitang Pharmaceutical since 1997. Mr. Wang received his bachelor’s degree in law from the Southwest University of Political Science and Law in China in 1989.

Independent non-executive Director

The Company also intends to appoint an additional independent non-executive Director in compliance with Rule 3.10A of the Listing Rules. It is expected that the independent non-executive Director will also be appointed as a member of the Audit Committee, the

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Remuneration Committee and/or the Nomination Committee, where appropriate. The Company is identifying suitable candidates for the role of independent non-executive Director.

The Company will comply with the relevant requirements of the Listing Rules and will make further announcement(s), as and when appropriate, in relation to the proposed appointment of executive Director and independent non-executive Director.

Senior management

Mr. Justin Chen, aged 48, was a director of the Target Company from 2006 to 2011 and a chief operating officer of the Target Company since 2006. In 2001, Mr. Justin Chen joined China Haidian Holdings Limited (“China Haidian”) and served as the head of project investment in 2004, responsible for China Haidian’s investment projects in the PRC. Mr. Justin Chen received his MBA from Lancaster University in the United Kingdom in 1999 and bachelor’s degree in economics from the University of International Business and Economics in the PRC in 1988.

THE YANG SUBSCRIPTION AGREEMENT

Date

23 May 2013

Parties

(i) the Company, as issuer; and
(ii) Mr. Yang, as subscriber.

Mr. Yang is an executive Director and the managing director of the Company. As at the Latest Practicable Date, Profit Channel Development Limited, a company wholly owned by Mr. Yang, is a substantial Shareholder holding 267,511,621 Shares, representing approximately 12.54% of the issued share capital of the Company as at the Latest Practicable Date. Mr. Yang is therefore a connected person of the Company.

The Yang Subscription

Yang Shares

Assuming that there is no change in the issued share capital of the Company other than the allotment and issue of the Yang Shares and the Consideration Shares since the Latest Practicable Date up to the date of Completion, the 66,488,379 Yang Shares represent approximately:

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LETTER FROM THE BOARD

(i) 3.12% of the existing issued share capital of the Company;
(ii) 3.02% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares; and
(iii) 2.62% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares and the Consideration Shares.

The aggregate nominal value of the Yang Shares will be HK$6,648,837.9. The Yang Shares shall rank pari passu in all respects among themselves and with all other Shares in issue as at the date of their allotment and issue.

The Yang Shares will be allotted and issued under a specific mandate to be sought for approval from the Independent Shareholders at the EGM. Application has been made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Yang Shares.

Conditions precedent

Completion of the Yang Subscription is conditional upon the fulfilment or waiver (as the case may be) of the following conditions:

(i) the Company having obtained all necessary approvals and consents for the Yang Subscription from the Stock Exchange and/or other regulatory authorities in Hong Kong, including but not limited to the approval for the issue of the circular in relation to the Yang Subscription by the Stock Exchange;
(ii) the granting of the approval for listing of, and permission to deal in, the Yang Shares by the Listing Committee of the Stock Exchange;
(iii) the resolution(s) approving the Yang Subscription having been passed by the Independent Shareholders at the EGM;
(iv) all representations, warranties and undertakings given or made by each of Mr. Yang and the Company as set out in the Yang Subscription Agreement remaining true and accurate in all material respects on the date of completion of the Yang Subscription; and
(v) the fulfilment or waiver by the relevant parties to the Acquisition Agreement of all conditions precedent under the Acquisition Agreement, save for any conditions which could only be fulfilled at the date of Completion.

The Company may at any time waive any of the above conditions (except the conditions referred to in (i), (ii) and (iii) above) by written notice to Mr. Yang. As at the Latest Practicable Date, condition referred to in (i) above has been fulfilled and the Company has no intention to waive any of the conditions above.

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LETTER FROM THE BOARD

Completion

The Company shall serve a written notice to Mr. Yang to request for completion of the Yang Subscription within five Business Days of the date on which all of the conditions precedent as set out above have been fulfilled or waived (as the case may be). Completion of the Yang Subscription shall then take place on the fifth Business Days following the issue of such written notice. It is expected that completion of the Yang Subscription and the Acquisition will take place simultaneously.

ISSUE PRICE OF THE YANG SHARES

The Issue Price of HK$3.10 per Yang Share represents:

(i) a premium of approximately 1.64% to the closing price of HK$3.05 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
(ii) a discount of approximately 19.1% to the closing price of HK$3.83 per Share as quoted on the Stock Exchange on the Last Trading Day;
(iii) a discount of approximately 18.4% to the average of the closing prices as quoted on the Stock Exchange for the last five consecutive full trading days up to and including the Last Trading Day of approximately HK$3.80 per Share;
(iv) a discount of approximately 9.4% to the average of the closing prices as quoted on the Stock Exchange for the last 30 consecutive full trading days up to and including the Last Trading Day of approximately HK$3.42 per Share; and
(v) a premium of approximately 264.7% over the unaudited consolidated net asset value of the Group attributable to the Shareholders as at 30 June 2013 of approximately HK$0.85 per Share (based on 2,133,410,807 Shares in issue).

REASONS FOR THE YANG SUBSCRIPTION AND INTENDED USE OF PROCEEDS

As disclosed in the Announcement, in addition to the Acquisition Agreement and the Yang Subscription Agreement, the Company also entered into the Sinopharm Subscription Agreement and the Placing Agreement on 23 May 2013. The Placing was completed on 4 June 2013, under which a total of 225,000,000 new Shares have been placed to not less than 6 placees who are third parties independent of the Company and its connected persons. The Placing Shares were issued at the issue price of HK$3.10 per Share, raising net proceeds of approximately HK$690.5 million for the Group.

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LETTER FROM THE BOARD

Pursuant to the Sinopharm Subscription Agreement, Sinopharm Fund Trustee, in its capacity as the trustee of Sinopharm Fund and for the benefit of Sinopharm Fund, conditionally agreed to subscribe for 125,000,000 Sinopharm Shares at the issue price of HK$3.10 per Sinopharm Share. The Sinopharm Subscription was completed on 9 July 2013, raising net proceeds of approximately HK$385.0 million for the Group. The proceeds from the Placing and the Sinopharm Subscription are intended to fund any potential investments of the Group including the Acquisition if it is completed.

The Directors have considered and compared feasibilities of other financing methods such as rights issue and open offer of the Company. However, the Directors are of the view that such financing methods are more costly as compared to the Placing, the Sinopharm Subscription and the Yang Subscription. Based on the above and in view of the current market conditions and to maintain the public float in the Shares following the Acquisition, the Directors consider that the Yang Subscription together with the Placing and the Sinopharm Subscription are appropriate and preferred means of funding the cash portion of the Total Consideration.

The Directors have been reviewing potential investment opportunities for the Group from time to time, particularly in companies which are engaged in the traditional Chinese medicine industry in the PRC. In assessing potential investment opportunities, the Directors will take into consideration, among other things, types of products, scale of operation, brand and market position and geographical coverage of the target, size of the investment and potential synergistic effect with the Group. As at the Latest Practicable Date, save for the acquisition of a piece of land located in Foshan, the PRC as announced on 14 August 2013, the Group had no agreement, arrangement, understanding, intention or negotiation with any party (concluded or otherwise) about any investments other than the Acquisition.

In the event that the Acquisition does not proceed, the Company will deposit the net proceeds from the Placing and the Sinopharm Subscription in licensed financial institutions in Hong Kong and pursue other investment opportunities based on the aforesaid factors and use such proceeds to finance these investments if the Directors consider appropriate.

The Directors are of the view that the Yang Subscription Agreement was entered into on normal commercial terms which are fair and reasonable, and the Yang Subscription is in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE OF THE COMPANY

Set out below is the shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) immediately after allotment and issue of the Yang Shares and the Consideration Shares (assuming that there is no change in the issued share capital of the Company other than the allotment and issue of the Yang Shares and the Consideration Shares since the Latest Practicable Date up to the date of Completion):

Substantial Shareholders: Sinopharm Sinopharm Fund Trustee (Note 1) Profit Channel Development Limited (Note 2) Mr. Yang Hanmax Public Shareholders Total: Notes:		As at the Latest Practicable Date No. of Shares %	As at the Latest Practicable Date No. of Shares %	Immediately after allotment and issue of the Yang Shares and the Consideration Shares No. of Shares % 1,016,023,044 40.10 125,000,000 4.93 267,511,621 10.56 66,488,379 2.62 334,000,000 13.18 1,809,023,044 71.39 724,876,142 28.61 2,533,899,186 100.00
		1,016,023,044 125,000,000 267,511,621 – –	47.62 5.86 12.54 – –	1,016,023,044 125,000,000 267,511,621 66,488,379 334,000,000
		1,408,534,665 724,876,142 2,133,410,807	66.02 33.98 100.00	1,809,023,044 724,876,142 2,533,899,186

Pursuant to the Sinopharm Subscription Agreement, Sinopharm Fund Trustee agreed to subscribe for the Sinopharm Shares for the benefit of Sinopharm Fund.
Profit Channel Development Limited is wholly owned by Mr. Yang, an executive Director and the managing director of the Company.

As disclosed above, Sinopharm will remain as the controlling Shareholder after Completion. The Acquisition will not result in a change in control of the Company.

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LETTER FROM THE BOARD

EQUITY FUND-RAISING ACTIVITIES IN PAST TWELVE MONTHS

The Company has conducted the following fund raising activities in the past twelve months before the Latest Practicable Date:

Date of	Fund raising		Intended use of	Actual use of
announcement	activity	Net proceeds	proceeds	proceeds
24 May 2013	Best effort	Approximately	To fund potential	Not yet utilised
	placing of up to	HK$690.5	investments	and will be
	225,000,000	million	including the	used as
	new Shares		Acquisition if it	intended
			is completed
24 May 2013	Subscription of	Approximately	To fund potential	Not yet utilised
	125,000,000	HK$385.0	investments	and will be
	new Shares by	million	including the	used as
	Sinopharm		Acquisition if it	intended
	Fund Trustee		is completed

Save as disclosed above, the Company has not conducted any equity fund-raising activities in the past twelve months before the Latest Practicable Date.

PROPOSED CHANGE OF COMPANY NAME

The Board proposes to change the name of the Company from “Winteam Pharmaceutical Group Limited 盈天醫藥集團有限公司” to “China Traditional Chinese Medicine Co. Limited 中國中藥有限公司”. The change of Company name shall become effective after satisfaction of the conditions mentioned below.

Conditions

The change of Company name is subject to the following:

(i) the approval by the Shareholders by way of a special resolution at the EGM; and
(ii) the issuance of certificate of change of name by the Registrar of Companies in Hong Kong.

The relevant filing with the Registrar of Companies in Hong Kong will be made after the passing of the special resolution at the EGM.

Effects of change of Company name

Upon the change of Company name becoming effective, the Shares will be traded on the Stock Exchange under the new name. The change of Company name will not affect any of the rights of the Shareholders. All existing share certificates bearing the Company’s existing name shall continue to be evidence of title and valid for trading, settlement, registration and delivery for the same number of Shares in the new name of the Company.

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LETTER FROM THE BOARD

There will not be any arrangements for free exchange of existing Share certificates for new certificates under the new name of the Company. Should any Shareholders desire to exchange their existing certificates for certificates in the new name of the Company, they may do so on payment of a fee of HK$2.50 for each certificate (or such higher amount as may from time to time be allowed by the Stock Exchange). Once the change of Company name becomes effective, any issue of certificates will be under the new name of the Company.

Reasons for the change of Company name

The Board considers that the change of Company name will better reflect the business nature of the Company and its subsidiaries and provide the Company with a fresh new corporate image and identity. The Board considers the change of Company name in the interests of the Company and the Shareholders as a whole.

Further announcement will be made by the Company to inform the Shareholders the effective date of the change of Company name and the change of stock short name in both English and Chinese and the arrangement for the trading and dealings in the Shares (including the date on which the Shares will be traded under the new name on the Stock Exchange).

LISTING RULES IMPLICATIONS

As one or more of the applicable percentage ratios (as defined under the Listing Rules) exceed 100%, the Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules. Since it is proposed that Mr. Wang will be appointed as a Director with effect from the date of Completion, the Acquisition also constitutes a connected transaction of the Company under Rule 14A.13(1)(b)(i) of the Listing Rules. The Acquisition is therefore subject to the reporting, announcement and independent shareholders’ approval requirements under the Listing Rules.

Mr. Yang is a Director and Profit Channel Development Limited, a company wholly owned by Mr. Yang, is a substantial Shareholder. Accordingly, Mr. Yang is a connected person of the Company and the Yang Subscription constitutes a connected transaction of the Company under the Listing Rules which is subject to the independent shareholders’ approval requirements of the Listing Rules.

The EGM will be convened by the Company at which ordinary resolutions will be proposed to seek approval from the Independent Shareholders by way of poll for the Acquisition and the Yang Subscription, including the grant of the specific mandate for the issue of the Consideration Shares and the Yang Shares. Mr. Yang and his associates shall abstain from voting at the EGM in respect of the resolutions approving the Acquisition and the Yang Subscription. Mr. Yang also abstained from voting on the Board resolutions approving the Acquisition and the Yang Subscription. As at the Latest Practicable Date, Mr. Yang and his associates held 267,511,621 Shares (representing approximately 12.54% of the issued share capital of the Company). Hanmax, Fosun and their respective associates did not

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LETTER FROM THE BOARD

hold any Shares as at the Latest Practicable Date. A special resolution will also be proposed at the EGM to seek approval from the Shareholders by way of poll for the proposed change of company name.

The Independent Board Committee has been established to advise the Independent Shareholders on the Acquisition and the Yang Subscription. The Independent Board Committee consists of Mr. Zhou Bajun, Mr. Xie Rong and Mr. Fang Shuting, all are independent non-executive Directors. Guotai Junan has been appointed by the Company as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders.

EGM

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 Tuesday, 15 October 2013 at 3:30 p.m. is set out on pages EGM-1 and EGM-2 of this circular. A form of proxy for use by the Shareholders at the EGM is enclosed. 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

The Independent Board Committee, having taken into account the advice of Guotai Junan, considers that the Acquisition Agreement and the Yang Subscription Agreement were entered into on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned, and the Acquisition and the Yang Subscription are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions in this regard to be proposed at the EGM.

Your attention is drawn to the letter from the Independent Board Committee set out on page 34 of this circular which contains its recommendation to the Independent Shareholders, the letter of advice from Guotai Junan set out on pages 35 to 83 of this circular containing its advice to the Independent Board Committee and the Independent Shareholders on the Acquisition and the Yang Subscription, and other information contained in the appendices of this circular.

The Directors also recommend the Shareholders to vote in favour of the special resolution in respect of the change of company name at the EGM.

By order of the Board Winteam Pharmaceutical Group Limited Wu Xian Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [252 x 36] intentionally omitted <==

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

19 September 2013

To the Independent Shareholders

Dear Sir or Madam,

(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF ENTIRE ISSUED SHARE CAPITAL OF TONGJITANG CHINESE MEDICINES COMPANY INVOLVING ISSUE OF NEW SHARES

AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE AND

(II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE

We have been appointed as the Independent Board Committee to advise the Independent Shareholders in respect of the Acquisition and the Yang Subscription, details of which are set out in the letter from the Board contained in the circular of the Company (the “Circular”) dated 19 September 2013. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used in this letter.

We wish to draw your attention to the letter from the Board on pages 7 to 33 of the Circular and the letter from Guotai Junan to the Independent Board Committee and the Independent Shareholders containing its advice on the Acquisition and the Yang Subscription on pages 35 to 83 of the Circular.

Having taken into account the advice of and the principal factors and reasons considered by Guotai Junan in relation to the Acquisition and the Yang Subscription as stated in its letter, we consider that the Acquisition Agreement and the Yang Subscription Agreement were entered into on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned, and the Acquisition and the Yang Subscription are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Acquisition and the Yang Subscription.

Yours faithfully,

For and on behalf of the Independent Board Committee

ZHOU Bajun XIE Rong FANG Shuting

Independent Non-executive Directors

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LETTER FROM GUOTAI JUNAN

The following is the text of the “Letter from Guotai Junan” to the Independent Board Committee and the Independent Shareholders prepared for the purpose of inclusion in this circular.

19 September 2013

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF ENTIRE ISSUED SHARE CAPITAL OF TONGJITANG CHINESE MEDICINES COMPANY INVOLVING ISSUE OF NEW SHARES AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE (II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE

INTRODUCTION

We refer to our engagement as the independent financial adviser to make recommendation to the Independent Board Committee and the Independent Shareholders in relation to (i) the Acquisition Agreement, pursuant to which the Company conditionally agreed to acquire, and Hanmax and Fosun conditionally agreed to sell, the Hanmax Sale Shares and the Fosun Sale Shares respectively for the Total Consideration; and (ii) the Yang Subscription Agreement, pursuant to which the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for Yang Shares at the Issue Price. The details of the Acquisition and Yang Subscription are set out in the letter from the Board (“ Letter from the Board ”) contained in the circular to the Shareholders dated 19 September 2013 (“ Circular ”), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

It is proposed that Mr. Wang will be appointed as a Director and therefore the Acquisition constitutes a connected transaction of the Company under Rule 14A.13(1)(b)(i) of the Listing Rules. Since one or more of the applicable percentage ratios as defined under the Listing Rules calculated for the Company in respect of the Acquisition exceed 100%, the Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules and is therefore subject to the reporting, announcement and independent shareholders’ approval requirements of the Listing Rules. Furthermore, Mr. Yang is a Director and Profit Channel Development Limited, a company wholly owned by Mr. Yang, is a substantial Shareholder. Accordingly, Mr. Yang is a connected person of the Company and the Yang Subscription constitutes a connected transaction of the Company under the Listing Rules which is subject to the independent shareholders’ approval requirements of the Listing Rules.

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LETTER FROM GUOTAI JUNAN

The Independent Board Committee, comprising all of the three independent non-executive Directors, has been formed to consider whether the Acquisition and the Yang Subscription were entered into on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and Shareholders as a whole, and to make recommendations to the Independent Shareholders in respect thereof. We, Guotai Junan Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

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, Mr. Wang, the Vendors and Mr. Yang or, where applicable, any of their respective associates. We are independent from and not connected with the Group, Mr. Wang, the Vendors and Mr. Yang 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 Acquisition and the Yang Subscription.

BASIS OF OUR OPINION

In formulating our advice and recommendation, we have relied on the information and facts supplied, and the opinions expressed, by the Directors and management (“ Management ”) of the Company and have assumed that such information, facts and opinions are true and accurate. We have also sought and received confirmation from the Management that no material facts have been omitted from the information supplied and opinions expressed to us. However, we have not conducted any independent investigation into the business, operations or financial condition of the Group and the Target Group. We have assumed that all statements and representations made or referred to in the Circular were accurate at the time when they were made and are true at the date of the Circular.

We consider we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation.

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LETTER FROM GUOTAI JUNAN

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

In formulating our view on the transactions contemplated under the Acquisition Agreement and the Yang Subscription Agreement, we have taken into consideration the principal factors and reasons as set out below. In reaching our conclusion, we have considered the results of the analysis in light of each other and ultimately reached our opinion based on the results of all analysis taken as a whole.

(A) Background of and reasons for the Acquisition

(i) Business and financial information of the Group

The Company is an investment holding company incorporated in Hong Kong with limited liability and through its subsidiaries is principally engaged in the manufacture and sale of Traditional Chinese Medicine (“ TCM ”) and pharmaceutical products in the PRC with focuses on respiratory system drugs and nasal preparations, cerebro-cardiovascular drugs, and rheumatic diseases and bone injury drugs.

The Group commenced engaging in the pharmaceutical business since late 2006. In the past six years, the Group has delivered satisfactory results and has developed a number of well-known TCM brand names (e.g. Dezhong, Foshan and Feng Liao Xing). According to the interim results announcement of the Company for the six months ended 30 June 2013 (the “ 2013 Interim Results ”), the Group has a total of 327 products, 28 of which are national exclusive products. The Group has 53 products being listed on the National Essential Drugs List, 2 of which are exclusive products.

A summary of the financial information of the Group are set out below as extracted from the 2013 Interim Results, the interim report of the Company for the six months ended 30 June 2012 and the annual reports of the Company for each of the financial years ended 31 December 2012 (the “ 2012 Annual Report ”), 31 December 2011 (the “ 2011 Annual Report ”) and 31 December 2010 (the “ 2010 Annual Report ”):

	For the year ended 31	For the year ended 31	December
	2010	2011	2012
	(Audited)	(Audited)	(Audited)
	HK$’000	HK$’000	HK$’000
Turnover	939,178	1,015,935	1,268,143
Gross profit	523,904	548,406	693,228
Gross profit margin	55.8%	54.0%	54.7%
Profit for the year	86,079	73,708	212,654
Profit margin	9.2%	7.3%	16.8%
Profit for the year attributable to equity
Shareholders	60,925	72,072	207,134

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LETTER FROM GUOTAI JUNAN

2011 compared to 2010

As stated in the 2011 Annual Report, the Group recorded an increase in turnover from approximately HK$939.2 million in the year 2010 to approximately HK$1,015.9 million in the year 2011 (representing an increase of approximately 8.2%). The increase in turnover was mainly attributable to the Group’s successful strategy in expanding product coverage in primary health care institutions and formation of partnerships with strategic distributors and drug chains to increase the Group’s over-the-counter (“ OTC ”) retail market coverage and penetration.

In November 2011, the Group completed the acquisition of 100% equity interest in Foshan Nanhai Yikang Pharmaceutical Co., Ltd. (currently known as Foshan Winteam Pharmaceutical Sales Company Limited, the “Winteam Sales”). Winteam Sales is principally engaged in wholesale of Chinese herbal medicine tablets, Chinese patent medicine, chemical medicine, antibiotic medicine, biochemical medicine, biological products (other than vaccine), protein anabolic agents, peptide hormones; wholesale of medical devices; wholesales of health food; wholesale and retail of pre-packaged foodstuffs; sale of disinfection supplies, cosmetics, daily necessities and health appliances. The acquisition of Winteam Sales allowed the Group to make use of Winteam Sales as an integrated sales platform for the major products manufactured by the various subsidiaries of the Group.

However, the Group’s gross profit margin decreased slightly from approximately 55.8% in 2010 to approximately 54.0% in 2011, due to the price hike in TCM materials which exerted pressure on the cost of sales. As a result, the profit for the year attributable to equity Shareholders increased from approximately HK$60.9 million in the year 2010 to approximately HK$72.1 million in the year 2011 (representing an increase of approximately 18.4%), mainly because of the successful acquisition of additional equity interests in Foshan Dezhong Pharmaceutical Co., Ltd. and Foshan Feng Liao Xing Pharmaceutical Co., Ltd. and hence leading to the consolidation of the results of these companies.

2012 compared to 2011

As stated in the 2012 Annual Report, the Group recorded an increase in turnover from approximately HK$1,015.9 million in the year 2011 to approximately HK$1,268.1 million in the year 2012 (representing an increase of approximately 24.8%). It was mainly attributable to the Group’s successful expansion of product coverage in primary health care institutions, as well as the partnerships established with major chain pharmacies which have increased the coverage of the Group in the OTC retail market, resulting in the satisfactory growth of the core products of the Group (such as Yu Ping Feng Granule （玉屏風顆粒） and Bi Yan Kang Tablet （鼻炎康片）. In addition, the business of Winteam Sales, which was acquired by the Group at the end of 2011, also contributed to the increase in the turnover of the Group directly. The Group’s gross profit margin slightly increased from approximately 54.0% in 2011 to approximately 54.7% in 2012. The profit for the year attributable to equity Shareholders increased from approximately HK$72.1 million in the year 2011 to approximately HK$207.1 million in the year 2012 (representing an increase of approximately 187.4%) was

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LETTER FROM GUOTAI JUNAN

mainly due to the growth in turnover, as well as the effective reinforcement of operating cost control, during the year 2012. The Group enhanced control over sales costs reducing advertising and promotion and traveling expenses by approximately 23.4% from approximately HK$221.1 million in year 2011 to approximately HK$169.3 million in year 2012, and other sales and distribution costs by approximately 33.4% from approximately HK$32.2 million in 2011 to approximately HK$21.4 million in 2012, resulting in an overall decrease in sales and distribution costs of approximately 11.9% as compared to the year 2011.

The six months ended 30 June 2013 compared to the six months ended 30 June 2012

	For the six months	For the six months
	ended 30 June
	2012	2013
	(Unaudited) (Unaudited)
	HK$’000	HK$’000
Continuing operations
Turnover	589,565	633,848
Gross profit	314,540	368,247
Gross profit margin	53.4%	58.1%
Profit from continuing operations for the period	79,556	84,821
Profit margin	13.5%	13.4%
Discontinued operations
Loss from discontinued operations (net of tax)	–	(11,500)
Profit for the period	79,556	73,321
Profit for the period attributable to equity Shareholders
– Continuing operations	77,967	84,340
– Discontinued operation	–	(5,865)
	77,967	78,475

As stated in the 2013 Interim Results, the Group recorded an increase in turnover from approximately HK$589.6 million for the six months ended 30 June 2012 to approximately HK$633.8 million for the six months ended 30 June 2013 (representing an increase of approximately 7.5%) mainly attributable to the implementation of new pricing policy on certain products based on a combination of factors resulting in price increase of relevant products while ensuring a stable sales volume. In addition, the successful expansion of the Group’s product coverage in primary health care institutions and the increase in varieties of essential drugs as compared to year 2012 has promoted stable growth in turnover. As at 30 June 2013, the coverage of Yu Ping Feng Granule （玉屏風顆粒） in ranked hospitals was extended from around 1,800 hospitals in 2012 to around 2,000 hospitals, and from around 8,000 primary healthcare institutions to around 8,300 institutions. The profit for the period attributable to equity Shareholders from continuing operations increased from approximately HK$78.0 million for the six months ended 30 June 2012 to approximately HK$84.3 million for

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LETTER FROM GUOTAI JUNAN

the six months ended 30 June 2013 (representing an increase of approximately 8.1%) mainly because of the Group’s endeavour to control operating cost and improve operating efficiency offset by the exceptional expenses due to merger and acquisition incurred in the period under review.

On 26 August 2013, Guangdong Medi-World, a company established in the PRC and an indirect wholly-owned subsidiary of the Company, entered into sale and purchase agreement with independent third party to dispose of its 51% interest in the registered capital of Guizhou Zhongtai for a cash consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million), details of which are set out in the announcement of the Company dated 26 August 2013. Accordingly, the operating results of Guizhou Zhongtai and its subsidiaries for the six months ended 30 June 2013 are presented as discontinued operations in the 2013 Interim Results. As a result of the disposal, the Group recorded an one-off loss from discontinued operations of HK$11.5 million in the six months ended 30 June 2013.

Set out below is a summary of consolidated statement of financial position of the Group as at 31 December 2010, 2011 and 2012 and 30 June 2013, as extracted from the 2013 Interim Result and the annual reports of the Company of the relevant period.

Consolidated assets and liabilities Total non-current assets Total current assets Total current liabilities Total non-current liabilities Non-controlling interests Total equity attributable to equity Shareholders	As 2010 (Audited) HK$’000 813,811 592,365 (489,089) (67,903) (13,525) 835,659	at 31 December 2011 2012 (Audited) (Audited) HK$’000 HK$’000 913,238 912,308 709,510 1,004,512 (596,849) (800,722) (61,584) (73,007) (15,577) (21,059) 948,738 1,022,032	As at 30 June 2013 (Unaudited) HK$’000 940,938 1,921,014 (889,972) (75,300) (85,901) 1,810,779

As at 30 June 2013, the consolidated net asset value of the Group attributable to the equity Shareholders amounted to approximately HK$1,810.8 million, representing an increase of approximately 77.2% from HK$1,022.0 million as at 31 December 2012. As at 30 June 2013, total assets amounted to approximately HK$2,862.0 million. Non-current assets amounted to approximately HK$940.9 million as at 30 June 2013, primarily consisted of fixed assets and construction in progress of approximately HK$595.4 million (representing the production facilities of the Group); intangible assets of approximately HK$87.2 million (representing production rights, trademarks, distribution network and customer relationship); and goodwill of approximately HK$212.0 million (as arisen from the various acquisitions of equity interests in a number of subsidiaries of the Group). Current assets, on the other hand, amounted to

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LETTER FROM GUOTAI JUNAN

approximately HK$1,921.0 million as at 30 June 2013, primarily consisted of trade and other receivables of approximately HK$522.5 million, inventories of approximately HK$256.2 million and assets held for sale of approximately HK$307.6 million.

As at 30 June 2013, total liabilities amounted to approximately HK$965.3 million. Non-current liabilities comprised of deferred tax liabilities and deferred government grants of approximately HK$58.5 million and approximately HK$16.8 million, respectively. Current liabilities mainly consisted of bank loans of approximately HK$480.1 million, trade and other payables of approximately HK$255.4 million and liabilities held for sale of approximately HK$131.8 million, respectively.

For further financial information on the Group, please refer to Appendix I to the Circular.

(ii) Information on the Target Group

As stated in the Letter from the Board, the Target Company is an investment holding company incorporated in the Cayman Islands with limited liability. Through its operating subsidiaries in the PRC, the Target Company is engaged in the development, manufacturing and marketing of modernised TCMs with emphasis on orthopaedics under the famous brand name “Tongjitang”, a well-established brand in the PRC dating back to 1888. “Tongjitang” was recognised in 1994 as one of the “Top 100-Year-Old Brands of China”. The Target Company became the first TCM company listed on the New York Stock Exchange by initial public offering in 2007 and was subsequently privatised by Hanmax and Fosun in 2011. The principal operating subsidiaries of the Target Company include Tongjitang Pharmaceutical, Guizhou LLF, Jingfang and Pulante.

The Target Group manufactures and markets modernised TCMs and western medicines. The Target Group has obtained approvals from China Food and Drug Administration for all of its products. Its principal exclusive products, namely 仙靈骨葆膠囊（片） (Xianling Gubao Capsules and Tablets), 潤燥止癢膠囊 (Moisturizing and Anti-Itching Capsules), 棗仁安神膠囊 (Zaoren Anshen Capsules), 頸舒顆粒 (Jingshu Granules) and 風濕骨痛膠囊 (Fengshi Gutong Capsules*), are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance. 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.

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LETTER FROM GUOTAI JUNAN

Set out below is selective audited financial information of the Target Group for each of the three years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2013 and the unaudited financial information of the Target Group for the four months ended 30 April 2012 as extracted from Appendix II to the Circular:

				For the four months	For the four months
	For the year ended 31		December	ended 30 April
	2010	2011	2012	2012	2013
	(Audited)	(Audited)	_(Audited) _	(Unaudited)	(Audited)
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Turnover	579,046	912,249	1,267,446	356,407	389,696
Gross profit	350,975	500,173	764,154	207,038	242,341
Gross profit margin	60.6%	54.8%	60.3%	58.1%	62.2%
Profit before taxation	39,562	60,903	206,759	33,532	43,470
Profit from continuing
operations	37,474	45,370	169,466	26,478	34,392
Profit from discontinued
operations (net of tax)	8,162	–	–	−	–
Profit for the year/period	45,636	45,370	169,466	26,478	34,392
Profit margin	7.9%	5.0%	13.4%	7.4%	8.8%
Profit for the year/period
attributable to equity
shareholders of the
Target Company	46,748	45,370	169,466	26,478	34,392

We note that the Target Group’s turnover increased from approximately HK$579.0 million for year 2010 to approximately HK$912.2 million for year 2011. As advised by the Management, the increase was mainly due to the increase in demand of its principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) which were included in the 2009 National Essential Drugs List, as a result of the policies of medical reform being carried out in more provinces in the PRC.

The Target Group’s turnover increased further to approximately HK$1,267.4 million for year 2012. As advised by the Management, the increase was mainly attributable to the increase in demand of its principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) driven by the government policies on medical reform in the PRC whereby an increased funding had been spent on the healthcare sector, especially more subsidy to products which are on the National Essential Drugs List.

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LETTER FROM GUOTAI JUNAN

For the four months ended 30 April 2013, the Target Group recorded turnover of approximately HK$389.7 million, representing an increase of approximately 9.3% as compared with the same period of the previous year. As advised by the Management, such increase was mainly attributable to (i) the increase in demand of the Target Group’s principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) driven by the government policies on medical reform in the PRC whereby an increased funding had been spent on the healthcare sector, especially the increase of subsidies to products which are on the National Essential Drugs List; and (ii) the strategy of promoting 仙靈骨葆片 (Xianling Gubao Tablets*) in the OTC market.

The Target Group’s gross profit increased from approximately HK$351.0 million for year 2010 to approximately HK$500.2 million for year 2011, which was generally in line with the increase in turnover. The gross profit margin decreased from approximately 60.6% to approximately 54.8%. As advised by the Management, the decrease was mainly due to the sale of larger proportion of lower-margin products as compared with the previous year.

The Target Group’s gross profit increased further to approximately HK$764.2 million for year 2012, which was generally in line with the increase in turnover. The gross profit margin rebounded from approximately 54.8% to approximately 60.3%. As advised by the Management, the improvement in gross profit margin was mainly due to economies of scale, the reduced unit cost of packaging, higher production efficiency as a result of optimisation of production process.

For the four months ended 30 April 2013, the Target Group recorded gross profit of approximately HK$242.3 million, representing an increase of approximately 17.1% as compared with the same period of the previous year as a result of the increase in turnover as described above and the improvement in gross profit margin to approximately 62.2% from approximately 58.1% in the same period of 2012. As advised by the Management, the improvement in gross profit margin was mainly due to improved economies of scale, reduced unit cost of packaging and higher production efficiency as a result of optimisation of production process.

The Target Group’s profit from continuing operations increased from approximately HK$37.5 million for year 2010 to approximately HK$45.4 million for year 2011. As advised by the Management, such increase was mainly attributable to the increase in gross profit in 2011. The Target Group’s profit from continuing operations rebounded to approximately HK$169.5 million for year 2012. As advised by the Management, the significant increase was mainly due to the increase in gross profit and decrease in administrative expenses in 2012.

For the four months ended 30 April 2013, the Target Group’s profit from continuing operations was approximately HK$34.4 million, representing an increase of approximately 29.9% as compared with the same period of the previous year.

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LETTER FROM GUOTAI JUNAN

Set out below is a summary of consolidated statement of financial position of the Target Group as at 31 December 2010, 2011 and 2012 and 30 April 2013, as extracted from Appendix II to the Circular:

	As at 31 December	As at 31 December	As at 31 December	As at 30 April
	2010	2011	2012	2013
	(Audited)	(Audited)	(Audited)	(Audited)
	HK$’000	HK$’000	HK$’000	HK$’000
Total assets	1,512,460	1,457,293	1,519,783	1,554,176
Total liabilities	(383,496)	(436,478)	(483,962)	(474,784)
Net assets	1,128,964	1,020,815	1,035,821	1,079,392
Net current assets	939,015	833,127	802,315	790,585
Total equity attributable to
equity shareholders of the
Target Company	1,128,964	1,020,815	1,035,821	1,079,392

As at 30 April 2013, the Target Group’s current assets amounted to approximately HK$1,250.3 million, which included cash and cash equivalents and deposits with banks of approximately HK$179.5 million. Current liabilities amounted to approximately HK$459.7 million. Net current assets amounted to approximately HK$790.6 million. The Target Group’s current ratio was approximately 2.7. The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.2 as at 30 April 2013.

(iii) Chinese medicine industry in the PRC

The PRC economy is one of the world’s fastest growing economies. According to National Bureau of Statistics of China, the nominal gross domestic product (“ GDP ”) of China grew at a compound annual growth rate (“ CAGR ”) of approximately 14.3% from 2007 to 2012, and its per capita nominal GDP grew from approximately RMB20,169 in 2007 to approximately RMB38,353 in 2012, representing a CAGR of approximately 13.7%. Increase in per capita GDP has resulted in a higher level of disposable income in the same period. According to National Bureau of Statistics of China, the average per capita annual disposable income of China’s urban residents increased from approximately RMB13,786 in 2007 to approximately RMB24,565 in 2012, representing a CAGR of approximately 12.2%, and the average per capita annual net income of China’s rural residents increased from approximately RMB4,140 in 2007 to approximately RMB7,917 in 2012, representing a CAGR of approximately 13.8%.

According to National Bureau of Statistics of China, the proportion of the population aged 65 or above in China has increased from approximately 7.7%, or approximately 100.6 million people, in 2005, to approximately 9.4%, or approximately 127.1 million people, in 2012. The rising living standards, increasing disposable income, aging population of China is expected to drive demand for healthcare products and services in China.

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LETTER FROM GUOTAI JUNAN

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.

As mentioned in the Appendix I to the Circular, on 5 June 2012, the State Administration of Traditional Chinese Medicine promulgated the “12th Five-Year Plan for the Development of Chinese Medicine Industry （中醫藥事業發展「十二五」規劃）”, which stated that the government will increase spending on TCM and include TCM in the medical insurance system, such as to extend medical insurance coverage to qualified Chinese medical institutions, Chinese medical diagnosis and treatment, Chinese medicine and preparations, in order to build up a foundation for the development of Chinese medicine industry. The Management expected that it will lead Chinese medicine industry into its golden age and open opportunities for the Group for sustainable development in the future.

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. Following the issue of the 2012 National Essential Drugs List, related policies will be perfected, 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.

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LETTER FROM GUOTAI JUNAN

(iv) Reasons for and benefits of the Acquisition

Core strategies for the Group’s long-term development

According to the 2012 Annual Report, the Group is committed to becoming the most influential TCM company in China and the core strategies for the Group’s long-term development are underpinned by the aim of promoting its legendary brands as well as inheriting the essences of over 400 years of history in Lingnan TCM culture.

As stated in the Letter from the Board, the Group currently owns the brands of “Dezhong”, “Foshan” and “Feng Liao Xing”. With the addition of “Tongjitang”, a brand which has more than 100 years of history, the brand portfolio of the Group will be enriched, resulting in an enhanced market position and brand recognition of the Group. The Group will also be able to strengthen its presence and increase its market share in the TCM market. We note that the Acquisition is consistent with the core strategies of the Group.

Instant access to the orthopaedics TCM

As stated in the Letter from the Board, the Target Group is a leading pharmaceutical enterprise in the PRC with an emphasis on orthopaedics TCM. The Target Group’s flagship product, namely 仙靈骨葆 (Xianling Gubao*), is approved by the China Food and Drug Administration for the treatment of osteoporosis and is a solid sales driver. The Management considered the Acquisition will allow the Group to gain instant access to the orthopaedics TCM in both the prescription and the OTC markets and take advantage of the high growth potential of the Target Group.

Expansion of product portfolio to capture the growth opportunities of the Chinese medicine market

We understand that the Acquisition represents an opportunity for the Group to enlarge its product coverage. The Group has a total of 327 products, 53 of which are on the 2012 National Essential Drugs List. With the addition of the products manufactured by the Target Group, it is expected that the product portfolio of the Enlarged Group will be boosted to over 500 products after the Acquisition. We note from the 2012 Annual Report that the Group intended to focus its research and development on new products on cerebro-cardiovascular drugs. For the year 2011 and 2012, the Group’s expenses for product research and development amounted to approximately HK$41.5 million and approximately HK$42.9 million, respectively. As such, the Acquisition allows the Group to expand its product portfolio by over 52.9% instantly as well as to focus its resources (including but not limited to human resources and capital resources) on its planned projects.

Furthermore, as stated in the paragraphs headed “Information on the Target Group” above, 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. Together with the Group’s exclusive products, namely 玉屏風顆粒 (Yu Ping Feng Granule) and 鼻炎康片 (Bi Yan Kang Tablet), the Group will own a total of

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LETTER FROM GUOTAI JUNAN

seven exclusive products which are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance after the Acquisition and become the pharmaceutical enterprise which produces the most number of exclusive products on the 2012 National Essential Drugs List in the PRC, allowing it to capitalise on the growth opportunities of the Chinese medicine market brought about by the recent reforms in the pharmaceutical industry in the PRC.

Potential synergetic effect

The Group expects to realise synergetic effect as a result of the consolidation of the Target Group. This will be achieved, among others, through (i) optimisation of capacity as the Enlarged Group will become the pharmaceutical enterprise to produce the most number of exclusive products on the 2012 National Essential Drugs List in the PRC; (ii) internal cost savings from the transferable skills of the management from the Target Group and expanded portfolio and coverage which may enhance the Enlarged Group’s financial and operation performance; (iii) extended management expertise and additional negotiating power for both customer and supplier relationship.

We have discussed with the Management and were given to understand that (i) after the Acquisition, the Enlarged Group will possess a combined sales force of more than 4,000 staff and enjoy a competitive edge in marketing its products; (ii) following the Acquisition, the Enlarged Group will own a total of seven exclusive products, which are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance, after the Acquisition and become the pharmaceutical enterprise which produces the most number of exclusive products on the 2012 National Essential Drugs List in the PRC; (iii) the Enlarged Group’s unaudited pro forma adjusted turnover and cost of sales for the year 2012 would amount to approximately HK$2,535.6 million and approximately HK$1,078.2 million; and (iv) it is proposed that, after the Acquisition, Mr. Wang will be appointed as a Director and Mr. Justin Chen has been appointed as the chief financial officer of the Company with effect from 1 July 2013.

As the Target Group has a long and successful history of operations and has established reputable products in the pharmaceutical market and extensive distribution networks in the PRC, the Board considers that the Acquisition would allow the Group to further penetrate into the TCM market in the PRC and enhance the synergetic effect.

Our view:

Having considered the above, in particular,

(i) the Acquisition are principally consistent with the business development strategy of the Group;
(ii) leveraged on its leading position in the TCM industry and brand equity, the Target Group achieved a significant growth in revenue and net profit during the past few years. The Target Group’s revenue increased from approximately HK$579.0 million for year 2010 to approximately HK$1,267.4

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LETTER FROM GUOTAI JUNAN

million for year 2012, representing a CAGR of approximately 47.9% and profit from continuing operations increased from approximately HK$37.5 million for year 2010 to approximately HK$169.5 million for year 2012, representing a CAGR of approximately 112.6%;

(iii) both the Group and the Target Group are principally engaged in development, manufacturing and marketing of TCM. Therefore, the experiences and skills of the Management in the TCM industry is expected to be transferable to/from the Target Group, which may smooth the way through the consolidation of the Target Group and enhance the synergetic effect;
(iv) the Group’s product portfolio and coverage will be expanded, which may enhance the Group’s financial and operating performance;
(v) the promising business opportunities in the TCM market in the PRC resulting from the government supports illustrated in the “12th Five-Year Plan for the Development of Chinese Medicine Industry（中醫藥事業發展「十二五」規劃）”;

we are of the view that, although the Acquisition is not in the ordinary and usual course of business of the Group, the Acquisition is (i) consistent with the overall corporate strategy of the Group; and (ii) in the interests of the Company and the Shareholders as a whole.

(B) Terms of the Acquisition

On 23 May 2013, the Company entered into the Acquisition Agreement with Mr. Wang, Hanmax and Fosun pursuant to which the Company conditionally agreed to acquire, and Hanmax and Fosun conditionally agreed to sell, the Hanmax Sale Shares and the Fosun Sale Shares respectively for the Total Consideration which is equal to the HK$ equivalent of RMB2,640 million (equivalent to approximately HK$3,321.1 million) based on the Applicable Exchange Rate, but in any event not less than HK$3,200 million and not more than HK$3,400 million. The Hanmax Sale Shares and the Fosun Sale Shares collectively represent the entire issued share capital of the Target Company. The Target Group is a leading specialty pharmaceutical company focusing on the development, manufacturing and marketing of modernised TCMs in the PRC.

We have reviewed the principal terms of the Acquisition Agreement and note the followings:

1. Total consideration

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LETTER FROM GUOTAI JUNAN

As advised by the Management, the range of the Total Consideration was set such that fluctuations in the exchange rate would not result in a significant change in the HK$ equivalent of the Total Consideration. We note that the range of Total Consideration from HK$3,200 million to HK$3,400 million implied an exchange rate from approximately HK$1.21 per RMB to HK$1.29 per RMB, with the midpoint of HK$1.25 per RMB. According to the People’s Bank of China, on 23 May 2013, being the date of the Acquisition Agreement, the central parity rate was approximately HK$1.25296 per RMB, which was close to the midpoint of HK$1.25 per RMB. We also note that the Applicable Exchange Rate represents the central parity rate for the exchange of Hong Kong dollar into Renminbi published by the People’s Bank of China (or its successor) or its authorised agency which is displayed on the third Business Day prior to Completion. As such, we are of the view that appropriate and sufficient pricing mechanism has been in place to determine the HK$ equivalent of the Total Consideration.

As stated in the Letter from the Board, the Total Consideration was determined after arm’s length negotiations among the Company, Mr. Wang, Hanmax and Fosun, having taken into account, among other things, (i) the profitability and proven track records of the Target Group; (ii) the price-to-earnings ratio (“ PER ”) of approximately 19.1 times implied by the Total Consideration based on the unaudited net profit of the Target Group for the year ended 31 December 2012, which falls within the range of the PERs of the comparable companies engaged in the pharmaceutical industry in the PRC, listed on the Main Board of the Stock Exchange and recognised profit for the most recent financial year from approximately 9.4 to 42.8 times with an average of approximately 21.9 times as extracted from Bloomberg on 25 April 2013; (iii) the well-established brand name of the Target Group; (iv) the broad customer base and extensive distribution network of the Target Group built up from its long history of operations and establishment of reputable products in the pharmaceutical market in the PRC including third-party distributors who resell products of the Target Group to over 15,000 hospitals and primary healthcare institutions and to over 45,000 retail pharmacies in the PRC; (v) the synergetic effect given that five of the Target Group’s exclusive products have been included in both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance and are expected to record significant growth in demand to be realised as a result of the consolidation of the Target Group; and (vi) the potential growth and prospects of the Target Group, among other things, of combined sales force of more than 4,000 staff which is expected to enhance the competitiveness in marketing of products of the Enlarged Group.

For the purpose of assessing the fairness and reasonableness of the Total Consideration, we have, on the best effort basis, independently identified 20 companies listed on the Main Board of the Stock Exchange (the “ Comparable Companies ”) (i) principally engaged in manufacture and/or sale of pharmaceutical products business in the PRC; (ii) recognised profit in the last financial year; and (iii) with market capitalisation higher than HK$500 million, which we considered to be a full and exhaustive sample. We note that the Target Group and the Comparable Companies are not the same in terms of business segments, scale of business, market capitalisation,

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LETTER FROM GUOTAI JUNAN

stage of development and profitability. However, as the Comparable Companies are principally engaged in manufacture and/or sale of pharmaceutical products business in the PRC, we considered the Comparable Companies are reasonable reference.

We have reviewed and compared the PERs, price-to-book ratios (“ PB ”) and price/ earnings to growth ratios (“ PEG ”) of the Comparable Companies with the implied PER, PB and PEG of the Target Group. The PERs are calculated based on their respective share price on the Last Trading Day divided by their respective earnings per share as set out in their latest annual reports before the Last Trading Day. The PBs are calculated based on their respective share price on the Last Trading Day divided by their respective net asset values per share as set out in their latest annual reports before the Last Trading Day. The PEGs are calculated based on their respective PER as at the Last Trading Day divided by their respective compound annual growth rate of profit attributable to the equity holders as set out in their annual reports for the three financial years before the Last Trading Day.

			Market
		Capitalisation
			as at the
			Last			Year 1 –(v)	Year 2 –(v)
	Company		Trading			Year 3	Year 3
	(Stock code)	Principal activities	Day	PER	PB	PEG	PEG
			HK$ (billion)	(X)	(X)	(X)	(X)
1	Sihuan Pharmaceutical	Research and development,	23.5	20.7	2.6	0.65	2.12(ii)
	Holdings Group Ltd.	manufacturing and sale of
	(460)	pharmaceutical products.
2	Lansen Pharmaceutical	Manufacture and trade of	1.1	10.0	1.3	0.58	0.80
	Holdings Ltd. (503)	pharmaceutical products.
3	China Grand	Manufacture and sales of	1.1	16.8	1.5	NM(iv)	0.70
	Pharmaceutical and	pharmaceutical, healthcare
	Healthcare Holdings	products and chemical
	Ltd. (512)	products.
4	Winteam Pharmaceutical	Production and sales of Chinese	6.8	33.0	6.7	0.39	0.18
	Group Ltd. (570)	medicine and pharmaceutical
		products.
5	Hua Han	Manufacture and sale of	8.0	9.2	1.6	0.16	0.19
	Bio-Pharmaceutical	pharmaceutical products,
	Holdings Ltd. (587)	medicinal healthcare products
		for women and
		biopharmaceutical products.
6	Extrawell Pharmaceutical	Marketing and distribution of	1.6	78.5(ii)	4.3	4.33(ii)	1.03
	Holdings Ltd. (858)	pharmaceutical products,
		development, manufacture &
		sale of pharmaceutical
		products, commercial
		exploitation & development
		of genome-related
		technology, development
		commercialisation of oral
		insulin products.

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LETTER FROM GUOTAI JUNAN

			Market
		Capitalisation
			as at the
			Last			Year 1 –(v)	Year 2 –(v)
	Company		Trading			Year 3	Year 3
	(Stock code)	Principal activities	Day	PER	PB	PEG	PEG
		HK$ (billion)		(X)	(X)	(X)	(X)
7	China Medical System	Marketing, promotion, sales and	17.4	26.4	5.0	0.40	0.72
	Holdings Ltd. (867)	manufacturing of
		pharmaceutical products.
8	Guangzhou	Manufacture and sales of	6.7	49.3(ii)	4.8	2.28(ii)	1.32(ii)
	Pharmaceutical Co.	Chinese Patent Medicine,
	Ltd. (874)(i)	wholesale, retail, import and
		export of western and
		Chinese pharmaceutical
		products and medical
		apparatus; research and
		development of natural
		medicine and biological
		medicine.
9	Lee’s Pharmaceutical	Development, manufacturing	2.8	23.7	4.6	0.59	0.66
	Holdings Ltd. (950)	and sales of pharmaceutical
		products.
10	Essex Bio-Technology	Investment holding;	0.6	16.3	3.2	0.77	0.93
	Ltd. (1061)	development, manufacture
		and selling of
		biopharmaceutical products.
11	CSPC Pharmaceutical	Manufacture and sales of	10.6	2.6	0.9	0.04	0.01
	Group Ltd. (1093)	pharmaceutical products.
12	Sinopharm Group Co.	Distribution of medicines,	23.9	23.3	2.7	0.84	0.88
	Ltd. (1099)(i)	medical device &
		pharmaceutical products;
		operation of pharmaceutical
		chain stores, distribution of
		laboratory supplies;
		manufacture & distribution of
		chemical reagents; production
		& sale of related products.
13	Sino Biopharmaceutical	Research and development,	7.1	29.5	5.7	1.16	0.32
	Ltd. (1177)	production and sale of a
		series of modernised Chinese
		medicines and chemical
		medicines.
14	Tong Ren Tang	Manufacture and sales of	7.1	38.2	6.5	1.31	1.29
	Technologies Co. Ltd.	Chinese Patent Medicine in
	(1666)(i)	the forms of granules, pills,
		tablets and soft capsules.
15	Lijun International	Research, development,	7.9	28.3	3.2	7.36(ii)	NM(iv)
	Pharmaceutical	manufacture and sale of wide
	(Holding) Co. Ltd.	range of finished medicines
	(2005)	and bulk pharmaceutical
		through a network
		independent retailers.

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LETTER FROM GUOTAI JUNAN

			Market
		Capitalisation
			as at the
			Last			Year 1 –(v)	Year 2 –(v)
	Company		Trading			Year 3	Year 3
	(Stock code)	Principal activities	Day	PER	PB	PEG	PEG
			HK$ (billion)	(X)	(X)	(X)	(X)
16	Shanghai Fosun	Development, manufacture and	5.0	14.8	1.7	0.43	0.43
	Pharmaceutical	sale of pharmaceutical
	(Group) Co., Ltd.	products and medical
	(2196)(i)	equipment, import and export
		of medical equipment and the
		provision of related and other
		consulting services and
		investment management.
17	Jiwa Bio-Pharm	Research, manufacturing, sales	1.3	30.1	2.0	NM(iv)	NM(iv)
	Holdings Ltd. (2327)	and trading of pharmaceutical
		and health care products.
18	Dawnrays	Development, manufacture and	2.0	14.2	1.7	NM(iv)	NM(iv)
	Pharmaceutical	sale of non-patented
	(Holdings) Ltd. (2348)	pharmaceutical medicines
		including intermediate
		pharmaceutical, bulk
		medicines and finished drugs.
19	Shanghai	Research and development,	12.0	16.3	1.4	0.87	31.4(ii)
	Pharmaceuticals	manufacture and sale of
	Holding Co., Ltd.	pharmaceutical and
	(2607)(i)	healthcare products; provide
		distribution, warehousing,
		logistics and supply chain
		solutions and related services;
		operate and franchise a
		network of retail pharmacies.
20	China Shineway	Research and development,	11.7	14.4	2.3	NM(iv)	NM(iv)
	Pharmaceutical Group	manufacture and trading of
	Ltd. (2877)	Chinese pharmaceutical
		products.
		Average		20.4	3.2	0.63	0.63
		Maximum		38.2	6.7	1.31	1.29
		Minimum		2.6	0.9	0.04	0.01
		Target Group(iii)		20.1	3.3	0.18	0.05

Source: Bloomberg and website of the Stock Exchange (www.hkex.com.hk)

Notes:

(i) The market capitalisation of these PRC incorporated Comparable Companies included H shares only and excluded A Share.
(ii) Given these ratios were numerically distant from the rest of the Comparable Companies, we considered they were outliers and therefore excluded them from the calculation of average, maximum and minimum of the Comparable Companies.

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LETTER FROM GUOTAI JUNAN

According to the annual reports of Sihuan Pharmaceutical Holdings Group Ltd. for each of the three years ended 31 December 2012, its net profit attributable to the company’s owners amounted to approximately RMB522.1 million, RMB824.0 million and RMB904.4 million, respectively, representing a year-over-year growth of 57.8% and 9.8%. Due to relatively high valuation represented by the market capitalization to the earnings’ growth rate on one-year basis, its PEG on one-year basis was treated as an outlier.

According to the annual reports of Extrawell Pharmaceutical Holdings Ltd. for each of the three years ended 31 March 2012, its profit for the year attributable to equity holders amounted to HK$14.6 million, HK$11.6 million and HK$20.4 million, respectively, representing a year-over-year decline of 20.5% and year-over-year growth of 75.9%. The increase in profit for the year attributable to equity holders of approximately HK$8.8 million for year 2012 was mainly due to a reclassification from translation reserve of approximately HK$8.4 million which was non-recurring in nature. The reversal of year-over-year change resulted in a lower growth rate and a higher PEG on two-year basis. Due to relatively high valuation represented by the market capitalisation to the earnings, Extrawell Pharmaceutical Holdings Ltd.’s PER was treated as an outlier.

According to the annual report of Guangzhou Pharmaceutical Co. Ltd., on 21 December 2012, it received the approval of the asset acquisition through issuance of shares to Guangzhou Pharmaceutical Holdings Limited and the absorption and merger of Guangzhou Baiyunshan Pharmaceutical Co., Ltd. from the China Securities Regulatory Commission. Pursuant to the approval, the Company was allowed to issue 34,839,645 shares to Guangzhou Pharmaceutical Holdings Limited for the acquisition of the related assets and 445,601,005 shares to swap shares with Guangzhou Baiyunshan Pharmaceutical Co., Ltd.. Due to relatively high valuation represented by the market capitalisation to the earnings and earnings’ growth rates, Guangzhou Pharmaceutical Co. Ltd.’s PER and PEGs were treated as outliers.

According to the annual reports of Lijun International Pharmaceutical (Holding) Co. Ltd. (“ Lijun ”) for years ended 31 December 2010 and 2012, it recorded profit attributable to shareholders of approximately HK$260.6 million and HK$281.0 million, respectively. However, according to its annual report for the year ended 31 December 2011, Lijun recorded loss attributable to shareholders of approximately HK$41.4 million after impairment loss of goodwill of approximately HK$224 million arising from its acquisition of Shijiazhuang No.4 Pharmaceutical Co., Ltd. in June 2007. Due to relatively high valuation represented by the market capitalisation to the earnings’ growth rate on two-year basis, Lijun’s PER and PEGs were treated as outliers.

According to the annual reports of Shanghai Pharmaceuticals Holding Co., Ltd. for three years ended 31 December 2012, its net profit attributable to equity holders amounted to RMB1,456.2 million, RMB2,042.2 million and RMB2,052.9 million, respectively. In 2011, Shanghai Pharmaceuticals Holding Co., Ltd. recorded an one-off special income from the deconsolidation of TECHPOOL Bio-Pharma Co., Ltd. of approximately RMB334 million, which resulted in lower year-over-year earnings growth rate in 2012 as compared with 2011 and higher PEG on one-year basis.

(iii) The maximum amount of the Total Consideration is used in calculating the respective ratios for the propose of comparison.
(iv) The Comparable Companies experienced decrease in profit attributable to the equity holders during the indicated periods and therefore such PEGs are not meaningful (“NM”).
(v) Year 3 represents the most recent financial year; Year 2 represents the financial year prior to Year 3; and Year 1 represents the financial year prior to Year 2.

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LETTER FROM GUOTAI JUNAN

PER

As stated in the Letter from the Board, in determining the Total Consideration, the Company had primarily made reference to PER of the Target Group which the Company considered to be an appropriate reference for evaluating the market value of a pharmaceutical company. Although the Target Company is unlisted, taking into account the advantages of the Acquisition, the Company considers that it is fair and reasonable to use the average of the PERs of the Comparable Companies for determining the Total Consideration.

We note that the Target Group’s net profit for the year ended 31 December 2012 was approximately HK$169.5 million. As such, the implied PER by the Total Consideration (being HK$3,200 million to HK$3,400 million) ranged from 18.9 times to 20.1 times, with the midpoint of 19.5 times.

We note that the most commonly adopted market multiple analysis for valuation of companies principally engaged in manufacture and/or sale of pharmaceutical products business is PER. Therefore, we are of the view that PER analysis is an appropriate approach to assess the fairness and reasonableness of the Total Consideration.

Based on the above table, we note that the Target Group’s highest implied PER of 20.1 times is within the range of the PERs of the Comparable Companies and is lower than the average of the PERs of the Comparable Companies, which indicate that the valuation (by reference to earnings) implied by the Total Consideration is in line with the Comparable Companies and is therefore fair and reasonable.

PEG

While PER is a direct comparison of companies’ value with their respective earning level and does not take into account the historical earning growth rate of such companies, PEG demonstrates the ratio of the price of a company to its growth rate. We consider that the PEG, on one-year and two-year basis, to be an indicator for analysing the Total Consideration given the profitability track record and the strong growing financial performance of the Target Group.

The Target Group’s implied PEG on one-year basis and two-year basis by the Total Consideration ranged from (i) 0.050 times to 0.053 times, with the midpoint of 0.052 times; and (ii) 0.168 times to 0.178 times, with the midpoint of 0.174 times, respectively. Based on the above table, we note that (i) the Target Group’s highest implied PEG on one-year basis of 0.053 times is within the range of the PEGs of the Comparable Companies and is significantly lower than the average of the PEGs of the Comparable Companies on the same basis; and (ii) the Target Group’s highest implied PEG on two-year basis of 0.178 times is within the range of the PEGs of the Comparable Companies and is significantly lower than the average of the PEGs of the Comparable Companies on the same basis. Lower PEGs implied by the Total Consideration indicates that the pricing of the

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LETTER FROM GUOTAI JUNAN

Target Group (by reference to growth rate of net profit) in the Acquisition is relatively attractive when it is benchmarked against the PEGs of the Comparable Companies.

PB

As mentioned above, we consider PER analysis is an appropriate approach to assess the fairness and reasonableness of the Total Consideration. However, pursuant to the unaudited pro forma consolidated statement of financial position of the Enlarged Group as set out in Appendix III to the Circular, goodwill of approximately HK$2,241.7 million will be recognised as a result of the Acquisition. Such amount represents the excess of the aggregate of the fair value of the Total Consideration over the net fair value of the Target Group’s identifiable assets and liabilities measured at the date of the Completion. As stated in the Letter from the Board, the Directors considered that it is common that the fair values of pharmaceutical companies are higher than their net asset values.

We note from the Letter from the Board that the Company did not take into consideration of PB of the Target Group when determining the Total Consideration. However, PB analysis remains a tried and tested method for identifying undervalued stocks that the market has neglected or avoiding overvalued stocks. As such, we further compared the PB of the Target Group to those of the Comparable Companies.

The implied PB by the Total Consideration ranged from 3.1 times to 3.3 times, with the midpoint of 3.2 times. Based on the above table, we note that the Target Group’s highest implied PB of 3.3 times is within the range of the PBs of the Comparable Companies and is slightly higher than the average of the PBs of the Comparable Companies, which indicate that the valuation (by reference to book value) implied by the Total Consideration is in line with the Comparable Companies and is therefore fair and reasonable.

Taking into consideration the above and (i) reasons for and benefits of the Acquisition mentioned above; (ii) the Total Consideration was determined after arm’s length negotiations among the Company, Mr. Wang, Hanmax and Fosun; (iii) we consider the methodology used by the Management for the valuation of the Target Group, being PER, to be a commonly adopted approach, we are of the view that the Total Consideration is fair and reasonable so far as the Independent Shareholders are concerned.

2. Settlement methods of the Total Consideration

As stated in the Letter from the Board, the Total Consideration consists of the Hanmax Consideration and the Fosun Consideration. The Fosun Consideration (ranging from approximately HK$1,027.2 million to approximately HK$1,091.4 million) is equal to 32.1% of the Total Consideration and will be payable in cash by the Company to

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LETTER FROM GUOTAI JUNAN

Fosun at Completion. The Hanmax Consideration (ranging from approximately HK$2,172.8 million to approximately HK$2,308.6 million) is equal to 67.9% of the Total Consideration and will be satisfied in the following manner:

(i) HK$935.2 million by way of allotment and issue of 334,000,000 Consideration Shares, credited as fully paid, by the Company to Hanmax (or any nominee(s) as it may direct) at Completion;
(ii) the HK$ equivalent of approximately RMB274.4 million (equivalent to approximately HK$345.2 million) based on the Applicable Exchange Rate, by way of the Company assuming the Unisources Debt at Completion; and
(iii) the remaining balance of the Hanmax Consideration (ranging from approximately HK$892.4 million to approximately HK$1,028.2 million assuming the amount as referred to in (ii) above is approximately HK$345.2 million) in cash payable by the Company to Hanmax at Completion.

As stated in the Letter from the Board, the total cash portion of the Hanmax Consideration and the Fosun Consideration (ranging from approximately HK$1,919.6 million to approximately HK$2,119.6 million based on the Applicable Exchange Rate) are expected to be financed by the proceeds from the Placing, the Sinopharm Subscription, the Yang Subscription, the disposal of interest in Guizhou Zhongtai and other means of financing as follows:

(i) approximately HK$690.5 million from the Placing;
(ii) approximately HK$385.0 million from the Sinopharm Subscription;
(iii) approximately HK$205.7 million from the Yang Subscription;
(iv) approximately HK$126.1 million from the net proceeds from the disposal of interest in Guizhou Zhongtai which is expected to be completed in the fourth quarter of 2013 (if completed, failing which such amount will be financed by bank borrowings); and
(v) the remaining balance ranging from approximately HK$512.3 million to approximately HK$712.3 million (calculated based on the aforementioned proceeds substracted from the aggregate cash portion) from bank borrowings.

As advised by the Management, the Directors have primarily considered the cost, time and flexibility of various financing methods to finance the Acquisition. As stated in the Letter from the Board, the Company has obtained a non-legally binding offer letter (the “ Offer Letter ”) from a branch of a state-owned commercial bank in the PRC (the “ Bank ”) pursuant to which the Bank conditionally agreed to extend a loan of up to HK$900.0 million to the Company for the purpose of funding the Acquisition. The term of the loan will be three years from the date of the formal loan agreement and the principal amount will be payable at maturity. The loan will be guaranteed and carry an interest rate of Hong Kong Interbank Offered Rate (“ HIBOR ”) plus 2% per

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LETTER FROM GUOTAI JUNAN

annum. The terms of such loan are expected to be finalised and the formal contract is expected to be signed before Completion. The Company does not foresee any difficulty in obtaining sufficient bank borrowings to fund the Acquisition. As at the Latest Practicable Date, apart from the Yang Subscription and the potential bank borrowings of up to HK$900 million as described above, the Company has no intention to conduct other debt or equity fund raising.

We have reviewed the Offer Letter and further note that (i) the loan will be guaranteed and carry an interest rate of 1-month HIBOR or 3-month HIBOR + 2% per annum; and (ii) such loan is conditional upon:

(i) due execution of the loan agreement;
(ii) a guarantee issued by the Bank in the PRC;
(iii) no breach of contract or potential breach of contract; and
(iv) obtaining all necessary approvals and consents for such loan from relevant regulatory authorities.

Taking into consideration (i) such loan is for the purpose of funding the Acquisition; (ii) the principal amount of up to HK$900.0 million is sufficient for settling the remaining balance of the cash portion of the Hanmax Consideration and the Fosun Consideration; (iii) the interest rate to be offered to the Company under the Offer Letter will be determined based on the prevailing HIBOR from time to time; and (iv) during the year ended 31 December 2012, the 1-month HIBOR ranged from approximately 0.28% to approximately 0.36% and the 3-month HIBOR ranged from approximately 0.38% to approximately 0.40%. As such, for illustration purpose only, the 1-month HIBOR +2% would have ranged from approximately 2.28% to approximately 2.36% and the 3-month HIBOR would have ranged from approximately 2.38% to approximately 2.40%, which would be lower than the Group’s effective interest rate of 6.75% as at 31 December 2012 as set out in the 2012 Annual Report (for reference, the 1-month HIBOR and the 3-month HIBOR were approximately 0.21% and approximately 0.39% as at the Latest Practicable Date), we consider that the principal terms of the Offer Letter are fair and reasonable to the Company.

Assumption of the Unisources Debt

Pursuant to the Acquisition Agreement, the Company will assume the Unisources Debt as settlement of the HK$ equivalent of approximately RMB274.4 million (equivalent to approximately HK$345.2 million) based on the Applicable Exchange Rate.

The Unisources Debt is the debt to be owed by Hanmax to Unisources in an amount equal to the Hong Kong dollar equivalent of approximately RMB274.4 million (equivalent to approximately HK$345.2 million) which arises as a result of Hanmax

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assuming the Huixian Debt. The Huixian Debt represented the amount owed by Huixian to Unisources as a result of the disposal of Guizhou Tongjitang Asset Management Co., Ltd. by Unisources to Huixian in 2010.

Shareholders should note that the terms of the Unisources Debt are still being finalised. However, as stated in the Letter from the Board, the Company expects the terms of the Unisources Debt to be (i) approximately the HK$ equivalent of RMB274.4 million (equivalent to approximately HK$345.2 million) based on Applicable Exchange Rate; (ii) due within 180 days of the date of Completion; (iii) interest free; and (iv) completion of the Acquisition is conditional upon Hanmax, Unisources and Huixian having executed a document in form and substance reasonably satisfactory to the Company under which Hanmax assumes the Huixian Debt. The relevant legal documents regarding the assumption of the Unisources Debt is expected to be executed at Completion in accordance with the terms and conditions of the Acquisition Agreement. As the Unisources Debt to be assumed by the Company upon Completion will be eliminated in the consolidated financial statements of the Company, the Directors consider that the terms of the Unisources Debt would not have material adverse financial effects on the Enlarged Group.

Taking into account the above and, in particular, the assumption of the Unisources Debt (i) allows the Group to reduce its immediate cash outlay in connection with the Acquisition; (ii) does not involve in issuing any securities and convertibles of the Group; and (iii) the Unisources Debt is expected to be due within 180 days of the date of Completion, we are of the view that assuming the Unisources Debt is fair and reasonable so far as the Independent Shareholders are concerned.

Issuance of the Consideration Shares

Pursuant to the Acquisition Agreement, the Company will allot and issue 334,000,000 Consideration Shares, credited as fully paid, at the Issue Price of HK$2.80 per Consideration Share to Hanmax (or any nominee(s) as it may direct) as settlement of HK$935.2 million of the Hanmax Consideration.

(i) 15.66% of the existing issued share capital of the Company;
(ii) 13.54% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares; and
(iii) 13.18% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares and the Consideration Shares.

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LETTER FROM GUOTAI JUNAN

The Consideration Shares shall (i) rank pari passu in all respects among themselves and with all other Shares in issue as at the date of their allotment and issue; and (ii) be subject to a lock-up period of 24 months from the date of Completion.

The issue price of the Consideration Shares is HK$2.80 per Consideration Share and represents:

(i) a discount of approximately 8.2% to the closing price of HK$3.05 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
(ii) a discount of approximately 26.9% to the closing price of HK$3.83 per Share as quoted on the Stock Exchange on the Last Trading Day;
(iii) a discount of approximately 26.3% to the average of the closing prices as quoted on the Stock Exchange for the last five consecutive full trading days up to and including the Last Trading Day of approximately HK$3.80 per Share;
(iv) a discount of approximately 18.1% to the average of the closing prices as quoted on the Stock Exchange for the last 30 consecutive full trading days up to and including the Last Trading Day of approximately HK$3.42 per Share;
(v) a premium of approximately 14.8% over the average of the closing prices as quoted on the Stock Exchange for the last 90 consecutive full trading days up to and including the Last Trading Day of approximately HK$2.44 per Share; and
(vi) a premium of approximately 229.4% over the unaudited consolidated net asset value of the Group attributable to the Shareholders as at 30 June 2013 of approximately HK$0.85 per Share (based on 2,133,410,807 Shares in issue).

As set out in the Letter from the Board, the issue price of the Consideration Shares was determined after arm’s length negotiations amongst the Company, Mr. Wang and Hanmax with reference to (i) the recent market price of the Shares; (ii) the lock-up period of 24 months of the Consideration Shares; and (iii) the audited consolidated net asset value of the Group attributable to the Shareholders as at 31 December 2012 of approximately HK$0.57 per Share.

In assessing the reasonableness of the issue price of the Consideration Shares, we have (i) compared the issue price of the Consideration Shares with the trading price of the Shares for a period commencing from 23 May 2012, being 12-month period prior to the date of the Acquisition Agreement, up to and including the Latest Practicable Date (the “ Review Period ”); (ii) reviewed the trading liquidity of the Shares during Review Period; and (iii) compared the issue price of the Consideration Shares to the

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LETTER FROM GUOTAI JUNAN

issue prices of the issue of shares by companies listed on the Stock Exchange under a specific mandate as all or part of the consideration for a period from 1 January 2013 and up to and including 23 May 2013, being the date of the Acquisition Agreement.

(a) Review on Share prices performance

Set out below is a chart showing the correlation between the trading price of the Shares, the issue price of the Consideration Shares and the Hang Seng China Enterprises Index (the “ HSCEI ”), during the Review Period.

==> picture [326 x 188] intentionally omitted <==

----- Start of picture text -----

5.00 12,500
4.50 12,000
4.00
11,500
3.50
11,000
3.00
10,500
2.50
10,000
2.00
9,500
1.50
1.00 9,000
0.50 8,500
- 8,000
Share price Issue price HSCEI
2012/5/232012/6/232012/7/232012/8/232012/9/232012/10/232012/11/232012/12/232013/1/232013/2/232013/3/232013/4/232013/5/232013/6/232013/7/232013/8/23
HK$
----- End of picture text -----

Source: Bloomberg and the website of the Stock Exchange (www.hkex.com.hk)

Note: Trading in the Shares was suspended on 31 August 2012 and from 13 May 2013 to 24 May 2013 (both days inclusive).

During the Review Period, the daily closing prices of the Shares ranged from HK$1.26 recorded on 29 June 2012 to HK$4.63 recorded on 30 May 2013. We noted that the Share price surged sharply since the beginning of March 2013 and reached the highest of HK$4.63 on 30 May 2013, representing a premium of 65.4% over the issue price of the Consideration Shares.

We note that the Share price increased gradually from 23 May 2012 to 27 February 2013 and increased significantly since 28 February 2013 up to the Last Trading Day.

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LETTER FROM GUOTAI JUNAN

During 23 May 2012 to 27 February 2013, the Share price increased gradually from HK$1.31 on 23 May 2012, peaked at HK$1.71 on 14 February 2013 and reached HK$1.70 on 27 February 2013, as compared to HSCEI increased from approximately 9,574 on 23 May 2012, peaked at approximately 12,215 on 1 February 2013 and reached approximately 11,144 on 27 February 2013. During the period, the share price increased by 29.8% as compared to HSCEI increased by 16.4%. We note that during such period:

on 31 August 2012, a joint announcement in relation to, amongst other thing, (i) Sinopharm Group Hongkong Co., Limited (the “ Offeror ”, being an indirect wholly-owned subsidiary of CNPGC) entered into a sale and purchase agreement with certain Shareholders, pursuant to which the Offeror has conditionally agreed to purchase and such certain Shareholders have conditionally agreed to sell or procure the sale of the sale shares. The sale shares represent approximately 19.9% of then entire issued share capital of the Company; and (ii) possible pre-conditional voluntary conditional cash offer (the “ Offer ”) by Citigroup Global Markets Asia Limited (“ Citigroup ”) for the on behalf of the Offeror for all the issued Shares;
a positive profit alert for the Group’s annual results for the year ended 31 December 2012 was announced on 28 November 2012;
on 17 January 2013, the Company published a joint announcement in relation to, amongst other thing, the Offeror had obtained all the consents and approvals required for the completion of the sale and purchase of the sale shares. Subject to satisfaction of the remaining acquisition conditions, the completion was scheduled to take place on 29 January 2013. On 29 January 2013, the Company announced that, amongst other thing, Citigroup would, for and on behalf of the Offeror, make a voluntary conditional cash offer to acquire all the issued Shares;
on 5 February 2013, an announcement in relation to the master purchase agreement and master supply agreement entered into between the Company and CNPGC was published; and
on 14 February 2013, a joint announcement was published in relation to, amongst other thing, the Offeror had received valid acceptances of the Offer in respect of approximately 31.54% of the then total issued Shares. As such, the Offeror and parties acting in concert with it were interested in approximately 51.44% of the then total issued Shares and the Offer has become unconditional in all respects on 14 February 2013.

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LETTER FROM GUOTAI JUNAN

During 28 February 2013 to 10 May 2013 (being the Last Trading Day), the Share price increased gradually from HK$1.96 on 28 February 2013, peaked at HK$3.88 on 9 May 2013 and reached HK$3.83 on 10 May 2013. During the period, the Share price increased by 95.4% as compared to HSCEI decreased by 0.8%. We note that during such period:

on 28 February 2013, a joint announcement in relation to, amongst other thing, close of the Offer was published;
on 7 March 2013, a circular in relation to, amongst other thing, the continuing connected transactions contemplated under the said master purchase agreement and master supply agreement was issued; and
on 24 March 2013, the Company announced its annual results for the year ended 31 December 2012.

We have enquired into and were confirmed by the Directors that save and except for the aforementioned announcements, they were not aware of any material incidents which might have affected the Share price from 28 February 2013 to 10 May 2013.

Subsequent to 10 May 2013, Share price decreased gradually. In light of the Share price fluctuation, we consider that we should evaluate the issue price of the Consideration Shares against the 12-month average Share price rather than the Share price on a particular date or the Share price which only maintained temporarily during a short period of time. During the Review Period, the average closing price of the Share was HK$2.25. The issue price of the Consideration Shares represents a premium of approximately 24.4% over such average closing price during the Review Period, and a discount of approximately 8.2% to the closing price on the Latest Practicable Date of HK$3.05.

We note from the above that the issue price of the Consideration Shares is (i) within the historical closing price range of the Shares; (ii) higher than the majority of the closing prices of the Shares during the Review Period; (iii) higher than the lowest closing during the Review Period by approximately 122.2%; and (iv) lower than the closing price of HK$3.05 per Share on the Latest Practicable Date by approximately 8.2%.

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LETTER FROM GUOTAI JUNAN

(b) Review on trading liquidity of the Shares

For the purpose of assessing the trading liquidity of the Shares, the following table shows the daily trading volume of the Shares during the Review Period:

					Percentage
					of average
					daily	Percentage
					turnover	of average
					over total	daily
					number of	turnover
					issued	over total
					Shares held	number of
					by the	Shares in
		Highest	Lowest	Average	public as at	issue as at
	No. of	daily	daily	daily	the Latest	the Latest
	trading	turnover	turnover	turnover	Practicable	Practicable
	days in	(in number	(in number	(in number	Date	Date
Month	each month	of Shares)	of Shares)	of Shares)	(Note 1)	(Note 2)
2012
June	21	1,724,000	24,000	517,905	0.07	0.03
July	21	5,092,000	–	853,714	0.12	0.04
August	22	6,280,000	200,000	1,447,545	0.20	0.07
September	20	21,928,000	254,000	3,226,100	0.45	0.16
October	20	2,956,000	188,000	1,119,088	0.15	0.06
November	22	5,392,000	150,000	1,475,604	0.20	0.07
December	19	9,658,000	264,000	1,427,680	0.20	0.07
2013
January	22	366,082,750	326,000	19,668,541	2.71	0.98
February	17	40,498,000	2,800,521	10,008,385	1.38	0.50
March	20	42,336,000	3,634,000	20,938,060	2.89	1.04
April	20	16,242,000	2,828,000	8,723,436	1.20	0.43
May	12	52,780,500	3,858,000	17,059,363	2.35	0.85
June	19	36,342,000	2,742,000	13,687,579	1.89	0.64
July	22	7,244,000	1,190,000	3,150,990	0.43	0.15
August	21	13,337,780	1,542,000	4,306,050	0.59	0.20
2 September to the
Latest Practicable
Date	11	23,202,000	3,442,000	12,449,007	1.72	0.58

Source: The website of the Stock Exchange (www.hkex.com.hk)

Notes:

Based on 724,876,142 Shares held in public hands as at the Latest Practicable Date.
Based on 2,133,410,807 Shares in issue as at the Latest Practicable Date.

As illustrated in the table above, during the Review Period, we noted that the average daily trading volume of the Shares as a percentage of the average total number of Shares in issue ranged from approximately 0.03% to approximately 1.04% while the average daily trading volume of the Shares as a

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LETTER FROM GUOTAI JUNAN

percentage of the average total number of the Shares held by the public ranged from approximately 0.07% to approximately 2.89%. Based on the above, the trading volume of the Shares during the Review Period was very thin. Although it is noted that there had been an increase in average daily trading volume to approximately 20.9 million Shares during March 2013 (which was the month immediately after the publication of the announcement in relation to, amongst other thing, close of the Offer), save for the completion of the transaction of 354,898,750 Shares on 29 January 2013, trading volume reduced again subsequently during the period in April 2013.

The average daily volume of the Shares increased to approximately 17.0 million Shares during May 2013 and reached approximately 13.7 million Shares during June 2013. We note that during such period (i) immediately following the release of the Announcement in 24 May 2013, the trading volume surged to approximately 52.8 million Shares on 27 May 2013, possibly caused by the stimulation following the announcement in relation to, among other things, the Acquisition and the Sinopharm Subscription; (ii) on 4 June 2013, an announcement in relation to the completion of the Placing of 225,000,000 new Shares was published; and (iii) on 14 June 2013, a circular in relation to, amongst other thing, the Sinopharm Subscription was issued. During July and August 2013, the average daily volume of the Shares decreased to approximately 3.2 million Shares and 4.3 million Shares, respectively.

We note that the average daily volume of the Shares increased to approximately 12.4 million Shares in September 2013 following the publication of the interim results announcement of the Company for the six months ended 30 June 2013 on 29 August 2013.

Save for the aforesaid, we note that the average daily trading volume of the Shares as a percentage of the average total number of Shares in issue ranged from approximately 0.15% to approximately 0.64% while the average daily trading volume of the Shares as a percentage of the average total number of the Shares held by the public ranged from approximately 0.43% to approximately 1.89% since the publication of the Announcement up to the Latest Practicable Date.

Based on the above, we therefore consider the trading of the Shares was relatively thin and inactive during the Review Period.

(c) Comparable analysis

In order to assess the fairness and reasonableness of the terms of the Consideration Shares, we have, on the best effort basis, identified 14 companies with market capitalisation higher than HK$500 million listed on the Main Board and Growth Enterprise Market of the Stock Exchange (the “ CS Comparables ”), which have made announcements for acquisitions involving the issue of shares under a specific mandate as all or part of the consideration for the period from 1 January 2013 and up to and including 23 May 2013 (the “ CS Comparables Review Period ”), being the date of the Acquisition Agreement.

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Shareholders should note that the businesses, operations and prospects of the Company are not the same as the CS Comparables. In view that (i) the terms of the CS Comparables are determined under similar market conditions and sentiments as the Consideration Shares; and (ii) the Consideration Shares will be issued under a specific mandate as part of the consideration, we consider the CS Comparables are fair and representative samples, and are meaningful and exhaustive during the CS Comparables Review period. The table below summarises our findings:

								Premium/
								(discount)
							Premium/	of the
							(discount)	issue price
							of the	over/(to)
							issue price	the 5-day
							over/(to)	average
					Whether	Whether	the closing	closing
					subscriber/	subscriber/	price on	price on
					placee is a	placee is	the last	the last
Date of	Company name			Market	connected	subject to	trading	trading
announcement	(stock code)	Principal activities	Capitalisation		person	lock-up	day	day
			_HK$ _	(million)			(%)	(%)
7 January 2013	Paradise Entertainment	Development, supply and sales		888	Yes	No	2.56	0.50
	Limited (1180)	of electronic gaming systems;
		and the provision of casino
		management services.
15 January	China Digital	Provision of e-Learning		627	No	Yes	(34.69)	(1.72)
2013	Licensing (Group)	programs and development of				(6 months)
	Limited (8175)	related products; and services
		for the distribution of
		copyright-protected items and
		other entertainment-related
		business.
17 January	China Gogreen Assets	Solar energy business focus on		1,453	Yes	Yes	(3.03)	4.30
2013	Investment Limited	development, construction,				(9 months)
	(397)	operation and maintenance of
		power station projects, money
		lending business and assets
		investment.
18 January	Goldpoly New Energy	Retail business and		2,334	Yes	No	(21.26)	(22.12)
2013	Holdings Limited	manufacturing of fashion
	(686)	apparel, sale and provision of
		subcontracting services of
		solar energy related products.
22 January	Shenzhen Investment	Development, investment and		13,470	Yes	No	9.10	9.30
2013	Limited (604)	management of property;
		provision of transportation
		services; manufacture and
		sale of industrial and
		commercial products.

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LETTER FROM GUOTAI JUNAN

							Premium/
							(discount)
						Premium/	of the
						(discount)	issue price
						of the	over/(to)
						issue price	the 5-day
						over/(to)	average
				Whether	Whether	the closing	closing
				subscriber/	subscriber/	price on	price on
				placee is a	placee is	the last	the last
Date of	Company name		Market	connected	subject to	trading	trading
announcement	(stock code)	Principal activities	Capitalisation	person	lock-up	day	day
			HK$ (million)			(%)	(%)
23 January	Newtree Group	Manufacture and trading of	1,824	Yes	No	(18.81)	(19.13)
2013	Holdings Limited	hygienic disposables for
	(1323)	household and clinical uses;
		agent of MTBE products;
		wholesale and retail of
		household consumables.
5 March 2013	Lisi Group (Holdings)	Manufacturing and trading of	817	Yes	No	(6.25)	(1.64)
	Limited (526)	household products.
10 April 2013	Zhuhai Holdings	Investment and property	1,812	Yes	No	8.13	10.83
	Investment Group	holding, management of
	Limited (908)	holiday resort, theme park
		and amusement park, and
		provision of port facilities
		and ticketing services in
		Zhuhai, the PRC.
15 April 2013	Hsin Chong	Building & civil engineering	1,133	No	No	(13.80)	(10.70)
	Construction Group	construction,electrical &
	Limited (404)	mechanical
		installation,renovation &
		fitting-out,property
		development &
		investment,construction/
		project management
		consultancy service,property
		management & facility
		management service.
19 April 2013	Branding China Group	Provision of one-stop branding	760	No	No	2.80	2.80
	Limited (8219)	services including
		advertising, PR and event
		marketing to domestic and
		international brands.
24 April 2013	Tonic Industries	Trading of electronic and	2,981	Yes	No	(44.50)	(42.30)
	Holdings Limited	electrical products and
	(978)	building related materials and
		equipment.
29 April 2013	Mongolia Investment	Provision of maintenance &	607	No	No	(1.96)	(0.64)
	Group Limited	construction work on civil
	(402)	engineering contract in
		respect of waterwork
		engineering, road work &
		drainage & slope upgrading
		in HK, water supply service
		in PRC & mining &
		exploration of mineral
		resource in Mongolia.

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LETTER FROM GUOTAI JUNAN

							Premium/
							(discount)
						Premium/	of the
						(discount)	issue price
						of the	over/(to)
						issue price	the 5-day
						over/(to)	average
				Whether	Whether	the closing	closing
				subscriber/	subscriber/	price on	price on
				placee is a	placee is	the last	the last
Date of	Company name		Market	connected	subject to	trading	trading
announcement	(stock code)	Principal activities	Capitalisation	person	lock-up	day	day
			HK$ (million)			(%)	(%)
8 May 2013	China City Railway	Design, implementation and	584	No	Yes	(16.67)	(16.07)
	Transportation	maintenance of application			(1 year)
	Technology	solutions for centralising
	Holdings Company	various functions of public
	Limited (8240)	transport systems.
23 May 2013	China Huiyuan Juice	Manufacturing and sales of	4,596	Yes	No	(5.20)	(7.74)
	Group Limited	juice products.
	(1886)
All CS Comparables:
	Minimum					(44.50)	(42.30)
	Maximum					9.10	10.83
	Mean					(10.26)	(6.74)
	Median					(5.73)	(1.68)
_CS Comparables _	of which the subscriber/placee is a connected person
	Minimum					(44.50)	(42.30)
	Maximum					9.10	10.83
	Mean					(8.81)	(7.56)
	Median					(5.20)	(1.64)
	Company					(26.90)	(26.30)

Based on the above table, we note that:

the premium/discount represented by the issue price per share issued by respective CS Comparables to their respective closing prices on the last trading day ranged from a premium of approximately 9.1% to a discount of approximately 44.5% (the “ CS LTD Range ”) with an average discount of approximately 8.8%. Upon comparison, we note that the discount of the Issue Price to the closing price on the Last Trading Day falls within the CS LTD Range and is higher than the average;
the premium/discount represented by the issue price per share issued by respective CS Comparables to their respective 5-day-average closing prices for the five consecutive trading days up to and including the last trading day ranged from a premium of approximately 10.83% to a discount of approximately 42.3% (the “ CS 5-Day Range ”) with an average discount of

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LETTER FROM GUOTAI JUNAN

approximately 7.6%. Upon comparison, we note that the discount of the Issue Price to the 5-day-average closing price for the five consecutive trading days up to and including the Last Trading Day falls within the CS 5-Day Range and is higher than the average; and

– the premium/discount ranges for CS Comparables of which the subscriber/ placee is a connected person were the same as CS LTD Range and CS 5-Day Range, respectively.

Taking into account the above and, in particular,

(i) although the issue price of HK$2.80 per Consideration Shares is 9.7% lower that the issue price of HK$3.10 per Share of the Yang Subscription, the Sinopharm Subscription and the Placing, the issue price of the Consideration Shares was determined after arm’s length negotiations amongst the Company, Mr. Wang and Hanmax with reference to, amongst other thing, the recent market price of the Shares and the lock-up period of 24 months of the Consideration Shares;
(ii) the Consideration Shares represent approximately 15.66% of the existing issued share capital of the Company. Given the trading of the Shares was relatively thin and inactive during the Review Period, it may be difficult for the Company to issue such an amount of new Shares to the public market without downward pressure on the Share price;
(iii) the issue price of the Consideration Shares represents a premium of approximately 24.4% over the average closing price of the Shares during the Review Period;
(iv) the potential synergetic effect expected to be realised as a result of the consolidation of the Target Group. This will be achieved, among others, through optimisation of capacity as the Enlarged Group will become the pharmaceutical enterprise to produce the most number of exclusive products on the 2012 National Essential Drugs List in the PRC; internal cost savings from the transferable skills of the management from the Target Group and expanded portfolio and coverage which may enhance the Enlarged Group’s financial and operation performance; extended management expertise and additional negotiating power for both customer and supplier relationship.

Taking into consideration the aforementioned factors and reasons, we consider the issue price of the Consideration Shares is fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM GUOTAI JUNAN

Our view on the settlement methods of the Total Consideration

Having considered the above and (i) the assumption of the Unisources Debt and the issue of Consideration Shares allow the Group to reduce its immediate cash outlay in connection with the Acquisition; (ii) there is no immediate funding needs to settle the Unisources Debt; (iii) the assumption of the Unisources Debt does not involve in issuing any securities and convertibles of the Group and therefore will not dilute the shareholding interests of the existing Shareholders, we are of the view that the settlement method of the Total Consideration is fair and reasonable and in the interests of both the Company and Shareholders as a whole.

3. Undertakings from Mr. Wang, Hanmax and Fosun

We have reviewed the Acquisition Agreement and noted that, each of Mr. Wang, Hanmax and Fosun has undertaken to the Company that they shall not, for the period of two years after the date of Completion, directly or indirectly recruit, solicit or instigate, or attempt to recruit, solicit or instigate any persons who have been customers, distributors or agents of any members of the Target Group during the 12 months prior to the date of Completion to change, reduce or terminate their business relationship with any members of the Target Group.

Taking into consideration of the aforementioned factors and reasons, we consider the terms of the Acquisition Agreement are fair and reasonable, on normal commercial terms and in the interests of both the Company and the Shareholders as a whole.

(C) The Yang Subscription

As stated in the Letter from the Board, on 23 May 2013, the Company and Mr. Yang entered into the Yang Subscription Agreement pursuant to which the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for 66,488,379 Yang Shares at the Issue Price of HK$3.10 per Yang Share.

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LETTER FROM GUOTAI JUNAN

Practicable Date. Mr. Yang is therefore a connected person of the Company. The Yang Shares will be allotted and issued under a specific mandate to be sought for approval from the Independent Shareholders at the EGM.

1. Reasons for and benefits of the Yang Subscription

As disclosed in the Letter from the Board, in addition to the Acquisition Agreement and the Yang Subscription Agreement, the Company also entered into the Sinopharm Subscription Agreement and the Placing Agreement on 23 May 2013. The Placing was completed on 4 June 2013, under which a total of 225,000,000 new Shares have been placed to not less than 6 placees who are third parties independent of the Company and its connected persons. The Placing Shares were issued at the issue price of HK$3.10 per Share, raising net proceeds of approximately HK$690.5 million for the Group.

As stated in the Letter from the Board, the Directors consider that the Yang Subscription together with the Placing and the Sinopharm Subscription are appropriate and preferred means of funding the cash portion of the Total Consideration in view of the current market conditions and to maintain the public float in the Shares following the Acquisition.

Based on the 66,488,379 Yang Shares to be allotted and issued to Mr. Yang at the Issue Price of HK$3.10 per Yang Share and the estimated expenses incidental to the Yang Subscription of approximately HK$400,000, the gross proceeds and net proceeds from the Yang Subscription will be approximately HK$206.1 million and approximately HK$205.7 million respectively. On that basis, the net price per Yang Share is approximately HK$3.09. The Company intends to apply the proceeds from the Yang Subscription to finance part of the Total Consideration. As advised by the Management, the Company expected the remaining balance of the cash portion of the Total Consideration will be financed by estimated amount of approximately HK$126.1 million from the net proceeds from the disposal of interest in Guizhou Zhongtai which is expected to be completed in the fourth quarter of 2013 (if completed, failing which such amount will be financed by bank borrowings) and by bank borrowings. Pursuant to the Offer Letter, the Bank conditionally offered a loan amounted to HK$900.0 million to the Company.

After discussion with the Management, we understand that other than the Yang Subscription, the Directors have also considered and compared feasibilities of other financing methods such as rights issue and open offer of the Company. However, the Directors are of the view that such financing methods are more costly as compared to

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LETTER FROM GUOTAI JUNAN

the Placing, the Sinopharm Subscription and the Yang Subscription. Based on the above and in view of the current market conditions and to maintain the public float in the Shares following the Acquisition, the Directors consider that the Yang Subscription together with Placing and the Sinopharm Subscription are appropriate and preferred means of funding the cash portion of the Total Consideration.

To the best of our knowledge, we have identified 22 rights issues and 7 open offers by companies listed on the Main Board of the Stock Exchange which have issued a prospectus from 25 November 2012 up to and including 23 May 2013, being the date of the Yang Subscription Agreement, which we consider to be an exhaustive sample. We note that the expenses for such rights issues ranged from 0.35% to 6.70%, with an average of 2.83%, of the gross proceeds and expenses for such open offers ranged from 1.57% to 8.39%, with an average of 5.83%, of the gross proceeds.

Taking into consideration the above and (i) the reasons for and benefits of the Acquisition as stated in the Announcement; (ii) the size of the funding requirements for the Acquisition (if it is completed); and (iii) the continuing support from the senior management building up investors’ confidence, we agree with the Directors’ view that, although the Yang Subscription is not in the ordinary and usual course of the business of the Group, the Yang Subscription is in the interests of both the Company and the Shareholders as a whole.

2. Principal terms of the Yang Subscription Agreement

Pursuant to the Yang Subscription Agreement, the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for, 66,488,379 Yang Shares at the Issue Price of HK$3.10 per Yang Share. As at the Latest Practicable Date, the Company had 2,133,410,807 Shares in issue. Assuming that there is no change in the issued share capital of the Company other than the allotment and issue of the Yang Shares and the Consideration Shares since the Latest Practicable Date up to the date of Completion, the 66,488,379 Yang Shares represent approximately (i) 3.12% of the existing issued share capital of the Company; (ii) 3.02% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares; and (iii) 2.62% of the issued share capital of the Company as enlarged by the allotment and issue of the Yang Shares and the Consideration Shares.

The Yang Shares shall rank pari passu in all respects among themselves and with all other Shares in issue as at the date of their allotment and issue. Shareholders should note that the completion of Yang Subscription is conditional upon the fulfillment or waiver by the relevant parties to the Acquisition Agreement of all conditions precedent under the Acquisition Agreement, save for any conditions which could only be fulfilled at the date of Completion. Therefore, it is expected that completion of the Yang Subscription and the Acquisition will take place simultaneously.

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LETTER FROM GUOTAI JUNAN

The Issue Price of HK$3.10 per Yang Share represents:

(i) a premium of approximately 1.6% over the closing price of HK$3.05 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
(ii) a discount of approximately 19.1% to the closing price of HK$3.83 per Share as quoted on the Stock Exchange on the Last Trading Day;
(iii) a discount of approximately 18.4% to the average of the closing prices as quoted on the Stock Exchange for the last five consecutive full trading days up to and including the Last Trading Day of approximately HK$3.80 per Share;
(iv) a discount of approximately 9.4% to the average of the closing prices as quoted on the Stock Exchange for the last 30 consecutive full trading days up to and including the Last Trading Day of approximately HK$3.42 per Share; and
(v) a premium of approximately 264.7% over the unaudited consolidated net asset value of the Group attributable to the Shareholders as at 30 June 2013 of approximately HK$0.85 per Share (based on 2,133,410,807 Shares in issue).

The Issue Price was determined after arm’s length negotiations between the Company and Mr. Yang with reference to, among other things, the recent market price of the Shares and the audited consolidated net asset value of the Group attributable to the Shareholders as at 31 December 2012 of approximately HK$0.57 per Share. The Issue Price of HK$3.10 is the same as the issue price of the placing Shares to independent third parties pursuant to the placing agreement and the issue price of the Sinopharm Shares to Sinopharm Fund Trustee pursuant to the Sinopharm Subscription as set out in the Announcement.

In assessing the reasonableness of the Issue Price, we have (i) compared the Issue Price with the trading price of the Shares during the Review Period (a period commencing from 23 May 2012, being 12-month period prior to the date of the Acquisition Agreement and the Yang Subscription Agreement, up to and including the Latest Practicable Date); (ii) reviewed the trading liquidity of the Shares during Review Period; and (iii) compared the Issue Price to the issue prices of the issue of shares to connected person(s) by companies listed on the Stock Exchange 25 November 2012 up to and including 23 May 2013, being the date of the Yang Subscription Agreement.

– 72 –

LETTER FROM GUOTAI JUNAN

(a) Review on Share prices performance

==> picture [333 x 191] intentionally omitted <==

Source: Bloomberg and the website of the Stock Exchange (www.hkex.com.hk)

Note: Trading in the Shares was suspended on 31 August 2012 and from 13 May 2013 to 24 May 2013 (both days inclusive).

During the Review Period, the daily closing prices of the Shares ranged from HK$1.26 recorded on 29 June 2012 to HK$4.63 recorded on 30 May 2013. We noted that the Share price surged sharply since the beginning of March 2013 and reached the highest of HK$4.63 on 30 May 2013, representing a premium of 49.4% over the Issue Price. Our analysis of the Share price surge is set out in the paragraphs headed “Review on Share prices performance” under the section headed “The Acquisition” above.

We noted that (i) the Issue Price represents a premium of approximately 37.8% over the average closing price of the Shares during the Review Period, and a premium of approximately 1.6% over the closing price on the Latest Practicable Date; (ii) the Issue Price is within the historical closing price range of the Shares; and (iii) the Issue Price is higher than the lowest closing during the Review Period by approximately 146.0%.

(b) Review on trading liquidity of the Shares

Our analysis of the trading liquidity of the Shares is set out in the paragraphs headed “Review on trading liquidity of the Shares” under the section headed “Terms of the Acquisition” above.

Based on the above, we therefore consider the trading of the Shares was relatively thin and inactive during the Review Period.

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LETTER FROM GUOTAI JUNAN

(c) Comparable Analyses

In order to assess the fairness and reasonableness of the Issue Price, to the best of our knowledge, we have looked into eight companies listed on the Main Board and Growth Enterprise Market of the Stock Exchange (the “ Share Comparables ”) which (i) have made announcements for connected transactions of share issues and would be listed on the Stock Exchange from 25 November 2012 up to and including 23 May 2013, being the date of the Yang Subscription Agreement, and (ii) had the market capitalisation higher than HK$500 million for reference, which we consider to be an exhaustive sample. In view that (i) the terms of the Share Comparables are determined under similar market conditions and sentiments as the Yang Subscription and (ii) the Yang Shares will be issued to connected persons to the Company, we consider the Share Comparables are fair and representative samples.

				Premium/	Premium/
				(discount) of	(discount) of
			Premium/	the issue	the issue
			(discount) of	price over/	price over/
			the issue	(to) the	(to) the
			price over/	5-day	10-day
			(to) the	average	average
			closing price	closing price	closing price
Date of	Share Comparable	Market	on the last	on the last	on the last
announcement	(stock code)	Capitalization	trading day	trading day	trading day
		(HK$ million)	(%)	(%)	(%)
25 November	Hybrid Kinetic Group	926.5	(9.91)	(9.91)	(2.72)
2012	Limited (1188)
17 January	IRC Limited (1029)	3,923.5	(33.80)	(27.20)	(25.30)
2013
23 January	China Gogreen Assets	1,334.6	(4.46)	(6.13)	6.37
2013	Investment Limited
	(397)
24 January	China Bio-Med	1,441.9	(1.20)	(2.94)	–
2013	Regeneration
	Technology Limited
	(8158)
14 February	Asia Coal Limited (835)	1,172.7	(82.46)	(83.24)	(0.89)
2013*
15 April 2013	Hsin Chong Construction	1,130.1	(13.79)	(10.71)	5.45
	Group Limited (404)
26 April 2013	Great China Properties	617.3	(18.67)	(19.95)	(2.09)
	Holdings Limited (21)
8 May 2013	SPG Land (Holdings)	9,470.7	(50.30)	(44.00)	(38.40)
	Limited (337)
	Minimum*		(50.30)	(44.00)	(38.40)
	Maximum*		(1.2)	(2.94)	6.37

– 74 –

LETTER FROM GUOTAI JUNAN

				Premium/	Premium/
				(discount) of	(discount) of
			Premium/	the issue	the issue
			(discount) of	price over/	price over/
			the issue	(to) the	(to) the
			price over/	5-day	10-day
			(to) the	average	average
			closing price	closing price	closing price
Date of	Share Comparable	Market	on the last	on the last	on the last
announcement	(stock code)	Capitalization	trading day	trading day	trading day
		(HK$ million)	(%)	(%)	(%)
	Mean*		(18.88)	(17.26)	(8.10)
	Company		(19.1)	(18.4)	(12.5)

Source: website of the Stock Exchange (www.hkex.com.hk)

According to the circular of Asia Coal Limited dated 8 February 2013, the Asia Coal Limited experienced default of convertible bonds and substantial loss and net liabilities. In order to safeguard the interests of the shareholders of Asia Coal Limited from risk of possible liquidation, the connected transactions of share issues at substantial discount was conducted to obtain financing for redemption of convertible bonds. Given it was an outlier, we excluded it from the industry data.

Based on the above illustration, the premium/discount represented by the issue price per share issued by respective Share Comparables to their respective closing prices on the last trading day ranged from a discount of approximately 1.2% to a discount of approximately 50.3% (the “ LTD Range ”). Upon comparison, we note that the discount of the Issue Price to the closing price on the Latest Trading Day falls within the LTD Range.

The premium/discount represented by the issue price per share issued by respective Share Comparables to their respective 5-day-average closing prices for the five consecutive trading days up to and including the last trading day ranged from a discount of approximately 2.9% to a discount of approximately 44.0% (the “ 5-Day Range ”). Upon comparison, we note that the discount of the Issue Price to the 5-day-average closing price for the five consecutive trading days up to and including the Last Trading Day falls within the 5-Day Range.

The premium/discount represented by the issue price per share issued by respective Share Comparables to their respective 10-day-average closing prices for the ten consecutive trading days up to and including the last trading day ranged from a premium of approximately 6.4% to a discount of approximately 38.4% (the “ 10-Day Range ”). Upon comparison, we note that the discount of the Issue Price to the 10-day-average closing price for the ten consecutive trading days up to and including the Last Trading Day falls within the 10-Day Range.

As mentioned above, subsequent to 10 May 2013, Share price decreased gradually. In light of the Share price fluctuation, we consider that we should evaluate the Issue Price against the 12-month average Share price rather than the Share price on a particular date or the Share price which only maintained temporarily during a short period of time. During the Review period, the average closing price of the Share was

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LETTER FROM GUOTAI JUNAN

HK$2.25. The Issue Price represents a premium of approximately 37.8% over such average closing price during the Review Period, and a premium of approximately 1.6% over the closing price on the Latest Practicable Date of HK$3.05.

Taking into consideration of the aforementioned factors and reasons, we consider the terms of the Yang Subscription are fair and reasonable, on normal commercial terms and in the interests of both the Company and the Shareholders as a whole.

(D) Other alternative methods of financing

We have discussed with the Management and note that the Management has prudently considered and compared feasibilities of various financing methods such as debt financing, rights issue and open offer of the Company.

As stated in the Letter from the Board, the Total Consideration ranges from HK$3,200 million to HK$3,400 million (based on the Applicable Exchange Rate). We noted that, among all, approximately HK$1,280.4 million will be satisfied by Consideration Shares and assumption of the Unisources Debt. Furthermore, we have reviewed the Company’s announcement dated 4 June 2013 and noted that the Placing was completed on 4 June 2013 and a total of 225,000,000 Shares had been placed to not less than six independent placees at the issue price of HK$3.10 per Share. We have also reviewed the announcement dated 9 July 2013 issued by the Company and noted that the Sinopharm Subscription was completed. The remaining balance of the cash portion of the Total Consideration is expected to be financed by proceeds of approximately HK$205.7 million from the Yang Subscription; estimated amount of approximately HK$126.1 million from the net proceeds from the disposal of interest in Guizhou Zhongtai which is expected to be completed in the fourth quarter of 2013 (if completed, failing which such amount will be financed by bank borrowings) and by bank borrowings.

We have discussed with the Management and noted that the Company has considered debt financing such as bank borrowings, convertible bonds and promissory notes. However, as compared with the Yang Subscription, other debt financing would incur financial costs such as interests which would be higher than the cost of the Yang Subscription. We have reviewed the 2012 Annual Report and noted that the effective interest rate of the Group’s total borrowings at the end of 2012 was approximately 6.75%. As stated in the Letter from the Board, the estimated expenses incidental to the Yang Subscription to be borne by the Group is approximately HK$400,000, representing approximately 0.2% of the gross proceeds of HK$206.1 million, which was lower than the Group’s effective interest rate as at the end of 2012. Therefore, the Directors are of the view, that Yang Subscription is a more cost-effective means of fund raising so as to minimise the total financial costs for the Acquisition.

The Directors note that a rights issue or an open offer of the Company will give an opportunity to all Shareholders to participate in the subscription for new Shares to be issued by the Company on a pro rata basis. However, the Directors consider that the Company would encounter difficulties in finding an independent underwriter in Hong Kong which is interested to underwrite a rights issue or open offer of the Company with reasonable underwriting fee. Furthermore, the Directors advised that in order to take up its entitlements

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LETTER FROM GUOTAI JUNAN

in a rights issue or an open offer in Hong Kong, the controlling Shareholder will be subject to stringent approval from the relevant PRC government authority which will present higher uncertainties. As such, the Directors are of the view that rights issue or open offer may not be the appropriate mean for its fund raising exercise. The Directors confirmed that, up to the Latest Practicable Date, the Company has not attempted to engage an underwriter in relation to a rights issue or an open offer.

In addition, the Yang Subscription demonstrates the recognition of the value of the Company and signifies the confidence of the senior management in the existing and future development potentials of the Group. With the continuing support of the senior management of the Company, this will ensure business stability and continuity of the Group which is crucial and beneficial to the long-term development of the Group.

In view of (i) a rights issue or open offer takes longer time to complete than the Yang Subscription as the former would involve numerous steps including notice period for book closure, issue of prospectus and offer period under the prevailing Listing Rules; (ii) the potential substantial underwriting costs for a rights issue or open offer as compared to the Yang Subscription; (iii) other debt financing methods would incur interests which would increase the financial costs to the Group; and (iv) the continuing support from the senior management, we agree with the Directors’ view that the Yang Subscription is a more feasible and beneficial way of fund raising available and applicable to the Group on the basis that the Yang Subscription is a more cost-effective means of fund raising as compared to debt financing, rights issue and open offer.

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LETTER FROM GUOTAI JUNAN

(E) Dilution effect of the Acquisition and the Yang Subscription on the shareholding interests of the Shareholders

The shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) immediately after allotment and issue of the Yang Shares and the Consideration Shares (assuming that there is no change in the issued share capital of the Company other than the allotment and issue of the Yang Shares and the Consideration Shares since the Latest Practicable Date up to the date of Completion) are summarised as follows:

Substantial Shareholders: Sinopharm Sinopharm Fund Trustee (Note 1) Profit Channel Development Limited (Note 2) Mr. Yang Hanmax Public Shareholders Total: Notes:		As at the Latest Practicable Date No. of Shares %	As at the Latest Practicable Date No. of Shares %	Immediately after allotment and issue of the Yang Shares and the Consideration Shares No. of Shares % 1,016,023,044 40.10 125,000,000 4.93 267,511,621 10.56 66,488,379 2.62 334,000,000 13.18 1,809,023,044 71.39 724,876,142 28.61 2,533,899,186 100.00
		1,016,023,044 125,000,000 267,511,621 – –	47.62 5.86 12.54 – –	1,016,023,044 125,000,000 267,511,621 66,488,379 334,000,000
		1,408,534,665 724,876,142 2,133,410,807	66.02 33.98 100.00	1,809,023,044 724,876,142 2,533,899,186

Pursuant to the Sinopharm Subscription Agreement, Sinopharm Fund Trustee agreed to subscribe for the Sinopharm Shares for the benefit of Sinopharm Fund.
Profit Channel Development Limited is wholly owned by Mr. Yang, an executive Director and the managing director of the Company.

Immediately after allotment and issue of the Sinopharm Shares, the Yang Shares and the Consideration Shares, Sinopharm Fund Trustee, Mr. Yang and Hanmax will hold 125,000,000 Shares, 66,488,379 Shares and 334,000,000 Shares, representing 4.93%, 2.62% and 13.18% of the issued share capital of the Company as enlarged by the issue of the Sinopharm Shares, the Yang Shares and the Consideration Shares. As disclosed above, immediately after allotment and issue of the Yang Shares and the Consideration Shares, the shareholding interests of (i) Sinopharm will be decreased by approximately 7.52% from approximately 47.62% to approximately 40.10%; (ii) Profit Channel Development will be decreased by approximately 1.98% from approximately 12.54% to approximately 10.56%; and (iii) the Shareholders deemed as “public” as at the Latest Practicable Date will be decreased by approximately 5.37% from approximately 33.98% to approximately 28.61%. The Sinopharm Subscription was completed on 9 July 2013.

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LETTER FROM GUOTAI JUNAN

Taking into consideration the above and (i) the reasons for and benefits of the Acquisition and the Yang Subscription as discussed before; (ii) the size of the funding requirements for the Acquisition; and (iii) the continuing support from the senior management can build up investors’ confidence in the Group, we consider that such dilution effect on the shareholding interests of the existing public Shareholders resulting from the issue of the Consideration Shares and the Yang Shares is acceptable.

(F) The Possible Financial Effects of the Acquisition on the Group

Upon Completion, the assets, liabilities and results of the Target Group will be consolidated into the financial statements of the Group. The unaudited pro forma financial information of the Enlarged Group (“ Pro Forma Financial Information ”) as set out in Appendix III to the Circular has been prepared to illustrate the effects of the Acquisition, assuming the Acquisition and the Yang Subscription had been completed on 30 June 2013.

(i) Effects on net asset value

According to the 2013 Interim Results, the consolidated net asset value attributable to equity shareholders of the Company was approximately HK$1,810.8 million. As shown in the Pro Forma Financial Information, the unaudited pro forma adjusted net asset value attributable to the equity shareholders of the Company of the Enlarged Group would be approximately HK$2,940.9 million.

(ii) Effects on earning

Based on the Pro Forma Financial Information, the unaudited pro forma adjusted net profit attributable to the equity shareholders of the Enlarged Group would be approximately HK$365.4 million, representing an increase of approximately 76.4%, as compared to the audited net profit attributable to the equity shareholders of the Group as set out in the 2012 Annual Report.

In view of (i) the profitability and proven track record of the Target Group; and (ii) following the Acquisition, the Enlarged Group will own a total of seven exclusive products, which are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance and become the pharmaceutical enterprise which produces the most number of exclusive products on the 2012 National Essential Drugs List in the PRC. Based on the above, the Directors are of the view that the Acquisition will improve the profitability of the Enlarged Group and are optimistic about the trading prospects of the Enlarged Group.

(iii) Effects on gearing

According to the 2013 Interim Results, the Group’s gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Company) was 0.3. As shown in the Pro Forma Financial Information, the unaudited pro forma adjusted gearing ratio would be 0.2.

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LETTER FROM GUOTAI JUNAN

The decrease in the gearing ratio mainly because (i) the Target Group’s gearing ratio as at 30 April 2013, being 0.2, was lower than the Group; and (ii) the effect of additional potential bank borrowings to finance the Acquisition has not been accounted for in the Pro Forma Financial Information.

However, as stated in the Letter from the Board, after the Acquisition, the debt level of the Enlarged Group is expected to increase as a result of the addition of potential bank borrowings to finance the Acquisition. The gearing ratio of the Enlarged Group based on the Pro Forma Financial Information and taking into account the potential bank loan of HK$900 million and the net proceeds from the Sinopharm Subscription of approximately HK$385.0 million is expected to be approximately 0.47, which is comparable to the gearing ratio of the Group as at 31 December 2012. The Directors consider that the gearing level is acceptable.

(iv) Effects on working capital

Based on the Pro Forma Financial Information, the Enlarged Group would recognised an unaudited pro forma adjusted net current liabilities of approximately HK$369.4 million, as compared to the Group’s unaudited net current assets of HK$1,031.0 million as at 30 June 2013.

As stated in the Letter from the Board, although the aggregate of cash and cash equivalents and deposit with banks as shown in the Pro Forma Financial Information would be decreased to a negative balance of approximately HK$831.6 million, the Directors expect that the Enlarged Group will record a positive cash balance when taking into account the net proceeds of approximately HK$385.0 million from the Sinopharm Subscription which was completed on 9 July 2013, the net proceeds of approximately HK$126.1 million from the disposal of interest in Guizhou Zhongtai (which is expected to be completed in the fourth quarter of 2013) and the potential borrowings from banks to the Company to fund the cash portion of the Total Consideration. We have discussed with the Management and were given to understand that as the potential bank borrowings and the Sinopharm Subscription are not the subject matter of the Circular (being the Acquisition and the Yang Subscription), and the amounts of such financing are dependent on future events or decisions, the Company considers that no pro forma adjustments should be made in this regard in accordance with the relevant accounting guidance issued by the Hong Kong Institute of Certified Public Accountants. Instead, such significant subsequent events together with the fact that they have not been reflected as pro forma adjustments have been disclosed in note 5(e) to the Unaudited Pro Forma Financial Information of the Enlarged Group. The Company has obtained the Offer Letter pursuant to which the Bank conditionally agreed to extend a loan of up to HK$900.0 million to the Company for the purpose of funding the Acquisition. Furthermore, as mentioned in the Appendix I to the Circular, on 14 August 2013, the Group acquired a piece of land through the auction at a consideration of RMB234.05 million (equivalent to approximately HK$294.9 million). On 26 August 2013, the Group entered into a disposal agreement with an independent third party to dispose of its 51% interest in the registered capital of Guizhou Zhongtai

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LETTER FROM GUOTAI JUNAN

for a cash consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million). Completion of the disposal is expected to take place in the fourth quarter of 2013.

Based on the above, the Directors are of the view that the Enlarged Group will have a sufficient working capital and the Acquisition will not have material impact on the Enlarged Group’s working capital position. The Directors, after due and careful consideration, are of the opinion that the Enlarged Group has sufficient working capital to meet with its present requirements, that is for at least the next 12 months from the date of this circular.

Taking into consideration the above, in particular:

we have reviewed the Offer Letter pursuant to which the Bank, as lender, conditionally offered a loan amounted to HK$900.0 million to the Company, as borrower, for the Acquisition; and
the sum of (i) the net proceeds of approximately HK$690.5 million from the Placing which was completed on 4 June 2013; (ii) the net proceeds of approximately HK$385.0 million from the Sinopharm Subscription; (iii) estimated net proceeds of approximately HK$205.7 million from the Yang Subscription (assuming it is completed); (iv) estimated amount of approximately HK$126.1 million from the net proceeds from the disposal of interest in Guizhou Zhongtai which is expected to be completed in the fourth quarter of 2013 (if completed, failing which such amount will be financed by bank borrowings); and (v) the potential bank borrowing of approximately HK$900.0 million as contemplated under the Offer Letter (assuming it is granted), exceed the cash portion of the Total Consideration. Therefore, the Company is not required to finance the cash portion of the Total Consideration by its internal resources.

we are of the view that the Acquisition will not have material adverse impact on the Enlarged Group’s working capital position.

(v) Effects on goodwill

As illustrated in the Pro Forma Financial Information, the unaudited pro forma adjusted goodwill of the Enlarged Group would be approximately HK$2,456.7 million, representing an increase of approximately HK$2,244.7 million from the Group’s goodwill of HK$212.0 million as at 30 June 2013. The increase was due to (i) the Target Group’s goodwill of approximately HK$2.9 million as at 30 April 2013 and (ii) goodwill of approximately HK$2,241.7 million will be recognized as a result of the Acquisition. Such amount represents the excess of the aggregate of the fair value of the Total Consideration over the net fair value of the Target Group’s identifiable assets and liabilities measured at the date of Completion.

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LETTER FROM GUOTAI JUNAN

As stated in the Letter of the Board, the Directors considered that the goodwill of HK$2,241.7 million is solely derived from applicable accounting standards which would not have any future impact on the cash flow of the Enlarged Group. Such goodwill is an intangible asset recognised as a result of the Acquisition representing the future economic benefits arising from other assets of the Target Group that are not individually identified and separately recognised, which may include the self-established brand name, customer base and extensive distribution network, and relationship with existing stakeholders.

As stated in the Letter from the Board, the Directors considered that it is common that the fair values of pharmaceutical companies are higher than their net asset values. As stated in the paragraphs headed “Total consideration” in the section headed “Terms of the Acquisition”, the Comparable Companies’ PB ranged from approximately 0.9 times to approximately 6.7 times with an average of approximately 3.2 times as at the Last Trading Day. We note that the PB implied by the maximum Total Consideration of HK$3,400 million was approximately 3.3 times, which is within the range of the PBs of the Comparable Companies.

As stated in the Letter from the Board, based on the Company’s assessment in accordance with applicable accounting standards, basis of determing the Total Consideration and assessment on comparable companies, the Directors consider that there is no indication of impairment on the goodwill upon Completion and the fair value of the Total Consideration of approximately HK$3,321.1 million approximates to the fair value of the Target Group. The Company will adopt accounting policies and principal assumptions in assessing any impairment of goodwill in its first set of financial statements after Completion in accordance with the Company’s accounting policy on impairment of assets and applicable accounting standards. The Company’s auditor will perform required procedures in connection with the impairment of goodwill according to Hong Kong Standards of Auditing for the purpose of forming an opinion on the financial statements of the Group as a whole.

Shareholders should note that as disclosed in note 5(b) to the Pro Forma Financial Information, the amount of goodwill of the Enlarged Group and fair value of the identifiable assets and liabilities are subject to change. The actual amount of goodwill will be determined with reference to, among other things, (i) the fair value of the identifiable assets (including intangible assets) and liabilities of the Target Group as at the date of Completion; (ii) the financial position of the Target Group on the date of Completion; and (iii) closing price of the Shares on the Stock Exchange on the date of Completion. In addition, the actual amount of depreciation and amortization, and the related tax on the assets of the Target Group may also be different depending on the actual fair value adjustments to the identifiable assets of the Target Group. Therefore, the actual amounts of goodwill and other assets and liabilities of the Target Group may be different from those disclosed in the unaudited pro forma financial information in Appendix III to the circular.

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LETTER FROM GUOTAI JUNAN

RECOMMENDATION ON THE ACQUISITION AND YANG SUBSCRIPTION

Having taken into account the above principal factors and reasons, in particular,

the reasons for and benefits of the Acquisition as stated in the paragraphs headed “Reasons for and benefits of the Acquisition” in the section headed “Background of and reasons for the Acquisition” are in the interests of the Company and the Shareholders as a whole;
the terms of the Acquisition Agreement are fair and reasonable, on normal commercial terms and in the interests of both the Company and the Shareholders as a whole;
the reasons for and benefits of the Yang Subscription as stated in the paragraphs headed “Reasons for and benefits of the Yang Subscription” in the section headed “The Yang Subscription” are in the interests of the Company and the Shareholders as a whole;
the terms of the Yang Subscription Agreement are fair and reasonable, on normal commercial terms and in the interests of both the Company and the Shareholders as a whole;
the dilution effect of the Acquisition and the Yang Subscription on the shareholding interests of the Shareholders is acceptable; and
the possible financial effects of the Acquisition on the Group,

we consider that, although the Acquisition and the Yang Subscription are not in the ordinary and usual course of business of the Group, the Acquisition Agreement and the Yang Subscription Agreement are on normal commercial terms and the Acquisition and the Yang Subscription are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to approve the Acquisition Agreement and the Yang Subscription Agreement, as detailed in the notice of EGM as set out at the end of the Circular.

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

Managing Director

* for identification purpose only

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

The financial information of the Group for each of the three years ended 31 December 2010, 2011 and 2012 and the six months ended 30 June 2013 respectively are disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.winteamgroup.com) respectively:

annual report of the Company for the year ended 31 December 2010 published on 28 April 2011 (pages 44 to 112);
annual report of the Company for the year ended 31 December 2011 published on 5 April 2012 (pages 44 to 114);

– annual report of the Company for the year ended 31 December 2012 published on 18 April 2013 (pages 47 to 112); and

interim results announcement of the Company for the six months ended 30 June 2013 published on 30 August 2013 (pages 2 to 17).

2. MANAGEMENT DISCUSSION AND ANALYSIS

FOR THE SIX MONTHS ENDED 30 JUNE 2013

Business performance

During the period under review, despite of the uncertainty of the macroeconomic environment in China, the Group still recorded growth in both turnover and profit. By raising product selling price, while pushing up sales volume via proactive promotion, the Group’s turnover from continuing operations increased by 7.5% to HK$633,848,000 from HK$589,565,000 for the corresponding period last year.

The Group also endeavored to control operating cost and improve operating efficiency. However, given the one-off loss from the discontinued operations and the exceptional expenses due to merger and acquisition incurred in the period, net profit attributable to shareholders of the Company was HK$78,475,000, which was 0.7% higher than HK$77,967,000 for the corresponding period last year.

Group overview

The Group is a generic drug manufacturing enterprise with well-known brands. It has 327 products, 28 of which are national exclusive products. The Group has 53 products being listed on the National Essential Drugs List, 2 of which are exclusive products, namely Yu Ping Feng Granule（玉屏風顆粒）and Bi Yan Kang Tablet（鼻炎康片）. The Group has over 150 products being listed on National Drugs List for Basic Medical Insurance, among which Yu Ping Feng Granule （玉屏風顆粒）, Bi Yan Kang Tablet （鼻炎康片）, Gandakang Tablet （肝達康片）, Bai Ling Tablet （白靈片）and Wuji Baifeng Granule（烏雞白鳳顆粒）are exclusive products on the National Drugs List for Basis Medical Insurance.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group has been advocated for TCM manufacturing for over 400 years, and is in possession of a range of TCM secret formulas, many of them are national famous products, such as Po Chai Pills （保濟丸）, Da Huo Luo Pills （大活絡丸）, Yuanjilin Herbal Tea （源吉林甘和茶）, etc. The Group has accumulated extensive technical experience in the extraction of Chinese medicine, preparation of modern Chinese medicine, sustained or controlled release preparation, and enhancement of quality.

The Group has established manufacturing facilities in Foshan City of Guangdong Province and Jining City of Shandong Province, with an annual production capacity of 5 billion tablets, 1 billion of capsules, 800 million of packs of granules, 14 million bottles of medical wine, and 100 million jabs of antibiotic and oncology powder for injection, as well as 20,000 tonnes of Chinese medicine preprocessing and extraction.

During the period of review, sales of TCM accounted for approximately 83.6% of the turnover of the Group, while sales of chemical drugs made up approximately 16.4% of the turnover. The Group’s sustainable development in the future is closely related to the implementation of the National Essential Drugs system and the development Chinese medicine industry.

Industry overview

National Essential Drugs List

On 15 March 2013, the Ministry of Health of China launched the new edition of National Essential Drugs List, which contains 317 chemical and bio-drugs and 203 TCM. Following the issue of the new edition of the National Essential Drugs List, more-detailed policies were released, such as further optimizing the tendering system of essential drugs, rules on the percentage of purchasing and using essential drugs for each category of healthcare institutions, etc.

In respect of optimizing the tendering system of essential drugs, the Ministry of Health emphasized the introduction of “two-envelops” mechanism with full assessment on the drug quality and the reputation of the manufacturers during the economic and technical standard assessment. Passing the new Good Manufacturing Practice for Pharmaceutical Products (“GMP”) certification is a vital benchmark for quality assessment. During the commercial standard assessment, comprehensive review will be made for drugs with obvious low tender price in order to avoid vicious competition. Priority will be given to the generic drugs reaching international standards to encourage drug manufacturers to improve the quality of their products. The Group has been making efforts to maintain and to improve the quality standard of its drugs. Dezhong, Dezhong Gaoming and Luya have passed the new GMP certification, while Guangdong Medi-World and Feng Liao Xing are expected to pass the new GMP certification in the second half of 2013, which placed the Group in a favourable position in essential drugs tenders and purchases.

In respect of rules on the percentage of purchasing and using essential drugs for each category of healthcare institutions, the Ministry of Health indicated that it is necessary to accelerate the formulation of administrative measures for the use of

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

essential drugs by healthcare institutions in each level and category, revise and optimize the Guideline for the Clinical Application and Prescription Catalogue of National Essential Drugs and motivate healthcare institutions in each level and category to stock up and give priority in using essential drugs. It also stated that primary healthcare institutions run by local government should fully stock up and use essential drugs, while class 2 and class 3 hospitals shall prescribe essential drugs by a reasonable percentage of their total prescription. The healthcare institutions should enhance the promotion and training in using the Guideline for the Clinical Application and Prescription Catalogue of National Essential Drugs and promote the priority of using essential drugs at a reasonable degree. By implementing such policies, it is expected that the consumption volume of essential drugs in total and as a percentage of the entire consumption of drugs will increase, especially in class 2 and class 3 hospitals. Thus, the introduction of the New Edition of National Essential Drugs List would provide tremendous market opportunities to the Group in the future.

Golden age for the Chinese Medicine Industry

On 5 June 2012, the State Administration of Traditional Chinese Medicine promulgated the “12th Five-Year Plan for the Development of Chinese Medicine Industry（中醫藥事業發展「十二五」規劃）”, which stated that the government will increase spending on TCM and include TCM in the medical insurance system, such as to extend medical insurance coverage to qualified Chinese medical institutions, Chinese medical diagnosis and treatment, Chinese medicine and preparations, in order to build up a foundation for the development of Chinese medicine industry. Chinese medical diagnosis and treatment focus on curing illnesses fundamentally, recuperation and improving patient’s living habit and physical functions. Chinese medicines are made from natural substance with minimal toxic side effect and drugs resistance, therefore particularly suitable for chronic diseases and specialty medicines with relatively low treatment costs. As aging population in China has created huge demand for healthcare services and products, it will lead Chinese medicine industry into its golden age and open opportunities for the Group for sustainable development in the future.

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 Group generates the majority of its sales revenues from TCM products and will benefit from government policies of developing Chinese medicine industry.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Quality Consistency Evaluation for Generic Drugs

On 16 February 2013, China Food and Drug Administration issued the “Notice regarding Conducting Quality Consistency Evaluation for Generic Drugs”, with the purpose of, by quality consistency evaluation, setting up a preliminary index of contrast preparations for and improving the quality evaluation system of generic drugs, in order to eliminate low quality and ineffective products and to raise the overall level of generic drug manufacturing in China up to or close to the international standard. By 2015, the method and the standard of quality consistency evaluation for all generic drugs on the National Essential Drugs List will be established. The Group has completed the research on the quality consistency evaluation between generic and novelty drugs for one of its core products, Nifedipine Sustained-release Tablet (Sheng Tong Ping) （硝苯地平緩釋片（聖通平））. It is expected that China Food and Drug Administration (“SDA”) would approve and recognize that the quality and technology of the product is consistent with the novelty drug, which may facilitate the Group in promoting Sheng Tong Ping and winning larger market share.

Business review

From continuing operations

Sales of products

During the period under review, the Group’s turnover increased by 7.5% to HK$633,848,000, which was mainly attributable to the focus strategies in terms of specific products, markets and management. Focusing on specific products means the Group emphasized on expanding the market for its core products, particularly for Yu Ping Feng Granule （玉屏風顆粒）. Focusing on markets means enhancing the market development by increasing the usage of our products at all healthcare institutions, especially by expanding the coverage of essential drugs among primary healthcare institutions, and co-operating with mainstream chain stores to increase coverage of end-market retailing for our products. Focusing on management means adopting a systematic KPI system to our sales team at all levels and enhancing the overall management ability of our regional managers.

As at 30 June 2013, the coverage of Yu Ping Feng Granule（玉屏風顆粒）in ranked hospitals was extended from around 1,800 hospitals in 2012 to around 2,000 hospitals, and from around 8,000 primary healthcare institutions to around 8,300 institutions.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Analysis by types of medicines:

Respiratory system drugs and nasal preparations Cerebro-cardiovascular drugs Rheumatic diseases and bone injury drugs Antibiotics Oncology drugs Others Total	For the six months ended 30 June 2013 Percentage 2012 Percentage HK$’000 to turnover HK$’000 to turnover 325,661 51.4% 273,182 46.3% 75,949 12.0% 74,927 12.7% 73,632 11.6% 60,134 10.2% 34,554 5.5% 28,750 4.9% 10,301 1.6% 7,749 1.3% 113,751 17.9% 144,823 24.6% 633,848 100.0% 589,565 100.0%	Change 19.2% 1.4% 22.4% 20.2% 32.9% -21.5%
		7.5%

Analysis of traditional Chinese medicine and chemical medicine:

Traditional Chinese medicine Chemical medicine Total	For the six months ended 30 June 2013 Percentage 2012 Percentage HK$’000 to turnover HK$’000 to turnover 529,793 83.6% 491,482 83.4% 104,055 16.4% 98,083 16.6% 633,848 100.0% 589,565 100.0%	Change 7.8% 6.1%
		7.5%

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Sales analysis of core products:

Yu Ping Feng Granule Bi Yan Kang Tablet Feng Liao Xing Medicinal Wine Sheng Tong Ping Gaode Other products Total	For the six months ended 30 June 2013 Percentage 2012 Percentage HK$’000 to turnover HK$’000 to turnover 138,280 21.8% 91,330 15.5% 123,355 19.5% 122,798 20.8% 53,073 8.4% 36,725 6.2% 50,159 7.9% 49,059 8.3% 33,339 5.2% 28,352 4.8% 235,642 37.2% 261,301 44.4% 633,848 100.0% 589,565 100.0%	Change 51.4% 0.5% 44.5% 2.2% 17.6% -9.8%
		7.5%

Research and development

In April 2013, the Group initiated the project of “Yu Ping Feng Granule（玉屏風顆粒）Re-evaluation”. The project will have several phases, including collection of typical cases of targeted diseases, analysis of the efficacy mechanism, clinical trials with reasonable sample size, etc. The purpose is to provide more solid medicinal theoretical foundation for prescribing Yu Ping Feng Granule （玉屏風顆粒） to the appropriate patients, so that it would be helpful to our academic promotion of the product to different categories of healthcare institutions. The project is expected to last for several years and may attract financial subsidy from relevant government institutions.

The Group possesses the know-how of controlling sustained release by multi-layers of films, and has applied such innovative technique on Nifedipine Sustained-release Tablet (30mg) (New Sheng Tong Ping)（硝苯地平緩片（新聖通平））. The New Sheng Tong Ping will have clear cost advantage over the same product in the market from the competitors, which will place the Group in a favourable position at tenders of essential drugs. It is expected the product would be launched in the second half of 2013.

Construction of Manufacturing Facilities

In December 2012, the Group received the GMP certificate for its Dezhong Gaoming TCM extraction base. The facilities will provide an annual capacity of processing 20,000 tonnes of TCM materials. With the approval of Guangdong Food and Drug Administration, Dezhong Gaoming facilities could be shared among all manufacturing companies of the Group, so that the Group may centralize its TCM preprocessing and extraction to save cost and to improve operating efficiency.

During the period under review, Guangdong Medi-World completed the construction of its new workshop of granule products. The new facilities will carry a capacity of producing 500 million packs of granules per annum, which provides the

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Group with the basis of expanding sales of its core product-Yu Ping Feng Granule（玉屏風顆粒）. Another new workshop for multiple solid preparations has been planned for Guangdong Medi-World, which will support the development strategy of the Group in the future.

Acquisition of Tongjitang

On 23 May 2013, the Company entered into a conditional agreement with Mr. Wang, Hanmax and Fosun pursuant to which the Company conditionally agreed to acquire, and Hanmax and Fosun conditionally agreed to sell the entire issued share capital of Tongjitang at a consideration between HK$3,200 million and HK$3,400 million. The consideration consists of the way of allotment and issue of 334,000,000 consideration shares to Hanmax (or any nominee(s) as it may direct), settlement of the debt of Unisources Enterprises Limited and cash. The cash portion of the consideration is financed by the placing and subscription of new shares of the Company and a combination of the Company’s internal resources and debt or equity financing transactions.

Tongjitang is a leading pharmaceutical enterprise in the PRC with an emphasis on orthopaedics traditional Chinese medicine. The Group expects that acquisition of Tongjitang will allow the Group to gain instant access to the orthopaedics traditional Chinese medicine in both the prescription and the over-counter markets and take advantage of the high growth potential of Tongjitang.

Prospects

In the short run, as essential drugs tenders in all provinces tend to push down bid price, the pressure has become a general challenge faced by all pharmaceutical companies, especially for generic drugs manufacturers. Costs, such as purchase price of raw materials, salary, energy expenses and finance costs, keep rising. The introduction of the new Pharmacopoeia and the new GMP has increased the costs of reconstructing and maintaining production lines. Uncertainty in global economy, as well as the weakening consumption sentiment has affected the sales of drugs to certain extent. However, in the medium to long run, the change in population structure and spectrum of disease will inevitably drive up the rigid demand for drugs. With medical reform entering into a critical stage, government spending continues to expand the market. The number of hospitals of different levels is increasing steadily, while the growth of primary healthcare institutions, such as community health service centers, is more apparent. With the improvement of infrastructure, as well as higher affordability brought by medical insurance, it is expected that the demand for diagnosis and treatment will be driven up.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Financial review

From continuing operations

Turnover

For the six months ended 30 June 2013, the Group’s turnover increased by 7.5% to HK$633,848,000 from HK$589,565,000 for the corresponding period last year. The increase in sales was attributable to our implementation of new pricing policy on certain products based on a combination of factors resulting in price increase of relevant products while ensuring a stable sales volume. In addition, the successful expansion of our product coverage in primary health care institutions and the increase in varieties of essential drugs compared with last year has promoted the stable growth in turnover.

Cost of sales and gross profit margin

For the six months ended 30 June 2013, the Group’s cost of sales was HK$265,601,000, representing a decrease of 3.4% as compared to HK$275,025,000 for the corresponding period last year. Direct raw materials, labor and production overhead accounted for approximately 71.0%, 12.3% and 16.7% of the total cost of sales respectively, as compared to 71.0%, 10.2% and 18.8% for the corresponding period last year. Gross profit for the period was HK$368,247,000, representing an increase of HK$53,707,000 as compared to HK$314,540,000 for the corresponding period last year. Gross profit margin increased to 58.1% from 53.4% for the corresponding period last year.

Other revenue

For the six months ended 30 June 2013, the Group’s other revenue was HK$8,012,000, representing a decrease of approximately 11.0% compared to HK$8,999,000 for the corresponding period last year. Of which, interest income was HK$4,137,000, government grants was HK$3,503,000 and rental income was HK$372,000.

Other net income

For the six months ended 30 June 2013, the Group’s other net income was HK$696,000, representing an increase of HK$429,000 as compared to HK$267,000 for the corresponding period last year. Other net income increased, which was mainly due to exchange gains increased by approximately HK$633,000.

Sales and distribution costs

For the six months ended 30 June 2013, the Group’s sales and distribution costs amounted to HK$172,562,000 (for the six months ended 30 June 2012: HK$145,125,000).

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Advertising, promotion and traveling expenses Salary expenses of sales and marketing staffs Distribution and logistics costs Other sales and distribution costs Total	For the six months ended 30 June 2013 2012 HK$’000 HK$’000 104,624 84,723 45,959 37,034 4,683 7,536 17,296 15,832 172,562 145,125	Change 23.5% 24.1% -37.9% 9.2%
		18.9%

Sales and distribution costs increased by 18.9% compared with last year, of which salary increased by HK$8,925,000 and advertising, promotion and traveling expenses increased by HK$19,901,000. The increase was mainly attributable to the adjustment of the Group’s remuneration policy and the implementation of sales policy, which increased investment in certain key products such as the launch of nationwide “Qin Program” of Yu Ping Feng and invested in promotion and sales campaign while facing the outbreak of H7N9 avian influenza, while a change in the policy for the sales channel of Gaode products from the former wholesale price basis to retail price basis also resulted in the corresponding costs increase.

Administrative expenses

For the six months ended 30 June 2013, the Group’s administrative expenses amounted to HK$80,780,000 (for the six months ended 30 June 2012: HK$63,039,000).

Staff salary Depreciation and amortization Expenses for product research and development Office rental cost and other expenses Total	For the six months ended 30 June 2013 2012 HK$’000 HK$’000 21,650 16,428 5,684 6,173 23,011 20,419 30,435 20,019 80,780 63,039	Change 31.8% -7.9% 12.7% 52.0%
		28.1%

Increase in administrative expenses was mainly due to the aggregate increase in the cost of research and development and executive salary expense of HK$7,814,000, decrease in depreciation and amortization of HK$489,000 and increase in office rental costs and other expenses of HK$10,416,000 (of which professional fees related to mergers and acquisitions increased by HK$6,901,000).

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APPENDIX I

Profit from continuing operations

For the six months ended 30 June 2013, the Group’s profit from operations was HK$123,613,000, representing an increase of 6.9% as compared to HK$115,642,000 for the corresponding period last year, while operating profit ratio (defined as profit from operations divided by total turnover) decreased to 19.5% from 19.6% for the corresponding period last year.

Finance costs

For the six months ended 30 June 2013, the Group’s finance costs amounted to HK$16,735,000 (for the six months ended 30 June 2012: HK$13,921,000), and the higher finance costs as compared with the corresponding period last year was attributable to the capitalisation of interest expense amounted to HK$3,554,000 into construction in progress in the corresponding period last year and the interest expense was no longer capitalised after the project commenced production during the period. The effective interest rate for the loans was 6.03% (31 December 2012: 6.75%).

Earnings per share

For the six months ended 30 June 2013, the basic earnings per share from continuing and discontinued operations was HK4.32 cents, representing a decrease of 1.1% as compared to HK4.37 cents for the corresponding period last year. The decrease in earnings per share was attributable to the loss for the period of discontinued operations and the effect of weighted number of shares increased to 1,815,910,000 shares from 1,783,411,000 shares of the corresponding period of last year due to the issuance of 225,000,000 new shares at the early of June. Profit attributable to equity shareholders increased by 0.7% to approximately HK$78,475,000 (for the six months ended 30 June 2012: HK$77,967,000). Excluding the discontinued operations, the basic earnings per share from continuing operations of the Group was HK4.64 cents, representing an increase of 6.2% as compared to HK4.37 cents for the corresponding period last year.

Liquidity and financial resources

As at 30 June 2013, the Group’s current assets amounted to approximately HK$1,921,014,000 (31 December 2012: HK$1,004,512,000), which included cash, cash equivalents and deposits with banks of approximately HK$834,747,000 (31 December 2012: HK$165,118,000), as well as trade and other receivable of approximately HK$522,457,000 (31 December 2012: HK$546,088,000). Current liabilities amounted to approximately HK$889,972,000 (31 December 2012: HK$800,722,000). Net current assets aggregated to approximately HK$1,031,042,000 (31 December 2012: HK$203,790,000). The Group’s current ratio was 2.2 (31 December 2012: 1.3). The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Company) decreased to 26.5% from 50.0% as at 31 December 2012. Decrease in gearing ratio was attributable to the slight decrease in bank loans

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APPENDIX I

while issuance of additional shares led to the equity attributable to equity shareholders of the Company increased to HK$1,810,779,000 from HK$1,022,032,000 from the corresponding period of last year.

Bank loans and pledge of assets

As at 30 June 2013, the balance of the Group’s bank loans was approximately HK$480,057,000 (31 December 2012: HK$511,104,000), of which approximately HK$163,202,000 (31 December 2012: HK$313,776,000) was secured by the Group’s assets with book value of HK$113,444,000 (31 December 2012: HK$233,545,000).

Contingent liabilities

The Group did not have any contingent liabilities as at 30 June 2013 (31 December 2012: Nil).

Employee and remuneration policies

As at 30 June 2013, the Group employed a total of 3,275 (31 December 2012: 3,167) staff members, including directors of the Company, of which the number of sales staff, production staff and those engaged in research and development, operation and administration and senior management were 1,532, 1,287 and 456 respectively. Remuneration packages principally comprised salary and discretionary performance bonus based on individual merits. The Group’s total remuneration for the period was approximately HK$101,756,000 (for the six months ended 30 June 2012: HK$84,462,000).

Interim dividend

The Board has resolved not to declare an interim dividend (for the six months ended 30 June 2012: HK2.50 cents per share) in respect of the six months ended 30 June 2013.

Subsequent events

Acquisition of a piece of land

On 14 August 2013, 佛山盈天醫藥發展有限公司 (Foshan Winteam Pharmaceutical Development Company Limited), a wholly-owned subsidiary of the Group, acquired a piece of land and through the auction at a consideration of RMB234.05 million (equivalent to approximately HK$294.9 million). The land has a net usable site area of 22,041.7 square metres and is located at Chancheng District, Foshan City, the PRC. The Group intends to develop the land as its future headquarters and staff quarters for senior management. As at the date hereof, the Group has not drawn up any concrete development and construction plan for the land.

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Disposal of Guizhou Zhongtai

On 26 August 2013, Guangdong Medi-World entered into a disposal agreement with an independent third party to dispose of its 51% interest in the registered capital of Guizhou Zhongtai for a cash consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million). Guizhou Zhongtai is in its early stage of development, which requires further injection of substantial investment in order to bring its operation to a sizeable scale. In addition, the principal business activities of the Group are the manufacture and sale of traditional Chinese medicine and pharmaceutical products in the PRC. The products of Guizhou Zhongtai are not in line with those of the Group which are traditional Chinese medicine and pharmaceutical products. The Group will recover the investment cost and dedicate more resources to its core businesses. The disposal is in the interests of the Group and its shareholders as a whole. Completion of the disposal is expected to take place in the fourth quarter of 2013. Details of the disposal are set out in the announcement of the Company dated 26 August 2013.

FOR THE YEAR ENDED 31 DECEMBER 2012

Group overview

The Group is a generic drugs manufacturing enterprise with excellent brands. It has a total of 327 products and 465 product specifications, 28 of which are national exclusive products, while 3 are State’s protected traditional Chinese medicines. The Group has 53 products, including 73 product specifications being listed on the New Edition of National Essential Drugs List, 13 of which are chemical medicines, 40 of which are traditional Chinese medicines, 2 of which are exclusive products, namely Bi Yan Kang Tablet（鼻炎康片）and Yu Ping Feng Granule（玉屏風顆粒）and 1 of which is exclusive product specification, An Gong Niu Huang Wan (1.5g) （安宮牛黃丸(1.5g)）. The Group has 96 products being listed on the National Drugs List (Category A) for Basic Medical Insurance, and another 60 products being listed on the National Drugs List (Category B) for Basic Medical Insurance, among which Bi Yan Kang Tablet（鼻炎康片）, Yu Ping Feng Granule （玉屏風顆粒）, Gandakang Tablet （肝達康片）, Bai Ling Tablet（白靈片）and Wuji Bai Feng Granule（烏雞白鳳顆粒）are exclusive products on the National Drugs List for Basic Medical Insurance. Furthermore, the Group has been advocating for traditional Chinese medicines manufacturing for over 400 years, and is in possession of a range of traditional Chinese medicine secret formulas, many of them are national famous products, such as Po Chai Pills（保濟丸）, Da Huo Luo pills（大活絡丸）, Shaolin Dieda Herbal Plaster （少林跌打止痛膏）, Yuanjilin Herbal Tea （源吉林甘和茶）, etc. The Group has accumulated extensive technical experience in the extraction of Chinese medicine, preparation of modern Chinese medicine, sustained or controlled release preparation, manufacturing of traditional Big Candid Pills （大蜜丸） and enhancement of quality.

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The Group has had 5 manufacturing bases in Foshan of Guangdong Province and Jining of Shandong Province, with an annual production capacity of 400 million packs of granules, 4 billion tablets, 200 million capsules, 14 million bottles of medical wine, and 100 million jabs of antibiotics and oncology powder for injection, as well as 20,000 tonnes of Chinese medicine preprocessing and extraction.

Industry overview

New edition of National Essential Drugs List

On 15 March 2013, the Ministry of Health of China issued the New Edition of National Essential Drugs List, which contains three parts, namely chemical and bio-drugs, traditional Chinese medicines and traditional Chinese medicines decoction pieces, 317 of which are chemical and bio-drugs and 203 of which are traditional Chinese medicines, 520 drugs in total. Following the issue of the New Edition of National Essential Drugs List, related policies will be perfected, such as further optimizing the mechanism of essential drugs tenders and purchase, and the way how health care institutions use these essential drugs.

In respect of optimizing the mechanism of essential drugs tenders and purchase, the Ministry of Health clearly stated that it is necessary to optimize “two-envelope” tendering system with full assessment on the drugs quality and services and reputation of the manufacturers during the economic and technical standard assessment. Passing the new GMP certification will be a vital benchmark for quality assessment. While during the commercial standard assessment, comprehensive assessment will be made for drugs with obviously low tender price to avoid vicious competition. Priority will be given to the generic drugs reaching international standards and encourage corporations to improve the quality of essential drugs. The Group has been paying attention to the management of drug quality. Dezhong and Dezhong Gaoming have passed the new GMP certification and finished the research on the quality consistency evaluation for generic and novelty drugs for two generic drugs, namely Gaode and Sheng Tong Ping, which places the Group in a favorable position in essential drugs tenders and purchases.

In respect of the way that how essential drugs are stocked up and used among health care institutions, the Ministry of Health stated that it is necessary to accelerate the formulation of administrative measures for the use of essential drugs by health care institutions in each level and category, revise and optimize the Guideline for the Clinical Application and Prescription Catalogue of National Essential Drugs and motivate health care institutions in each level and category to gradually stock up and give priority in using essential drugs. It also clarified that the governmental and primary health care institutions should be fully equipped with and use essential drugs, reasonably determine the usage of essential drugs for second and third class hospitals, enhance the promotion and training for the Guideline for the Clinical Application and Prescription Catalogue of National Essential Drugs and promote the priority in reasonably using essential drugs. Upon implementing such policies, it is expected that the proportion and consumption of essential drugs will increase, especially for the

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APPENDIX I

second and third class hospitals. Thus, the introduction of the New Edition of National Essential Drugs List is favorable to the Group’s market sales in essential drugs in future.

The “12th Five-Year” Plan for Pharmaceutical Industry

On 19 January 2012, the Ministry of Industry and Information Technology promulgated the “12th Five-Year Development Plan for Pharmaceutical Industry（《醫藥工業「十二五」發展規劃》）” while the State Council promulgated the “12th Five-Year Plan for National Drugs Safety（《國家藥品安全「十二五」規劃》）” on 20 January 2012. These two plans were set to create a more favorable environment for the pharmaceutical industry of China by implementing supportive policy during the period from 2011 to 2015 (“12th Five-Year”). The core idea of these plans is to require pharmaceutical enterprises to enhance the overall quality and technical standard of drugs; while government policy towards the pharmaceutical industry will focus on supporting those enterprises with quality advantage and scalable sales, with an aim to help improve China’s medicine quality to meet or rise closer to international standard. Therefore, the Group has also made relevant arrangements, firstly is to carry out the “research on the quality consistency evaluation for generic and novelty drugs” Nifedipine Sustained-release Tablet (Sheng Tong Ping)（硝苯地平緩釋片（聖通平））and Cefodizime Sodium for injection (Gaode) （注射用頭孢地嗪鈉（高德））, both of which are the core products of the Group. It is expected that in the coming year, the State Food and Drug Administration (“SDA”) will approve and recognize that the quality and technology of these two medicines are consistent with novelty drugs. At such time, these two core products can apply for differential pricing. Products approved for differential pricing can be sold at a price higher than the unified price, which help expand their market share.

On 14 March 2012, the State Council promulgated the “Regulation and Implementation Plan for Deepening Medical and Health System Reformation during the 12th Five-year Plan Period（《「十二五」期間深化醫藥衛生體制改革規劃暨實施方案》）”. The plan explicitly stated that the National Essential Drugs List will be further enhanced; the practice of marking up drugs prices in public hospital will be cancelled; the reformation of drugs production and circulation will be encouraged; and that the coverage of medical insurance will continue to be expanded. By 2015, all county-level public hospitals should have achieved the reformed target of that stage, and comprehensive reformation on urban public hospitals will be implemented in full. These measures could help to increase the sales of general and inexpensive drugs in ranked hospital and retail pharmacies, which will be beneficial to the Group as well.

Golden age for the Chinese medicine industry

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APPENDIX I

preparations, so as to build a foundation for the development of Chinese medicine industry. Chinese medical practitioners focus on curing illnesses fundamentally, recuperation and improving patient’s living habit and physical functions. Chinese medicines are made from natural substance with minimal toxic side effect and drugs resistance, therefore particularly suitable for chronic diseases and specialty medicines, and the treatment costs are relatively low. As aging population in China has created huge demand for health care services and products, it will lead Chinese medicine industry into its golden age and open opportunities for the Group for sustainable development in the future.

National Essential Drugs Policy

The Ministry of Health issued the Key Health Task for 2012 on 2 February 2012, which emphasized that the task for this year is to further expand the scope of the National Essential Drugs System, and to formulate administrative measures for the use of essential drugs by health care institutions. It is also stated that the “Guideline for the Clinical Application of National Essential Drugs（國家基本藥物臨床應用指南）” and “National Essential Drugs Prescription Catalogue（國家基本藥物處方集）” will be revised. The Ministry also considered formulating incentive policy to promote the use of essential drugs, so as to motivate other health care institutions to gradually stock up and give priority in using essential drugs.

On 21 June 2012, Guangdong Province has completed its first tender procurement after the issuance of No. 56 Document for Tender Procurement of Essential Drugs（關於基本藥物招標採購的56號文件）by the State Council. Essential drugs tenders conducted in Guangdong Province will continue to adopt the “Anhui Model”, which is to use “two-envelope” tendering（「雙信封」招標）system, purchase based on agreed price and volume, as well as sourcing from single supplier. The difference lays in that the Tender Procurement of Essential Drugs in Guangdong Province adopted the Inexpensive Essential Drugs List, which meant that drugs listed on the Inexpensive Drugs List would not adopt the “two-envelope” system but would be decided by quality and technology of the drugs. The highest score company would win the tender, which avoided vicious competition for low price drugs. Guangdong Province is the biggest sales region for the Group’s pharmaceutical products which accounts for 40% of the total sales amount. 25 products and product specifications of the Group won tender in the recent Essential Drugs Tender in Guangdong Province, which is expected to expand our market shares in the hospitals in Guangdong Province, especially for Nifedipine Sustained-release Tablet （聖通平）, a cerebro-cardiovascular drug being listed on the Inexpensive Drugs List.

Since the implementation of the Essential Drugs System, Guangdong Province is the first and the only province that proposes the use of an Inexpensive Essential Drugs List in the tender. Such Inexpensive Essential Drugs List has been adopted in the tender procedures of Jiangsu Province. The Group’s products, including VC Yinqiao Tablet, Guifu Dihuang Wan, Hericium Erinaceus Tablets and Maren Wan, have been listed on the Inexpensive Drugs List of Jiangsu Province. The implementation of inexpensive drugs policy has created a favorable condition for the Group to explore the market and expand the market share for generic drugs.

– I-15 –

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APPENDIX I

Administrative Measures on the Clinical Use of Antibiotics

“Administrative Measures on the Clinical Use of Antibiotics（《抗菌藥物臨床應用管理辦法》）” has been duly implemented since 1 August 2012. The requirement to classify antibiotics into different grades has inevitably reduced the market of antibiotics, and the effect on our Cefodizime Sodium for injection (Gaode)（注射用頭孢地嗪鈉（高德）） is more apparent. Such management requirement has promoted the prudent use of antibiotics by clinicians, while certain Chinese medicines that have antibiotic function has gained more attention from doctors, and therefore should have better sales prospect. During the year under review, anti-inflammatory traditional Chinese medicines of the Group such as Lianzhi Anti-inflammatory Tablet（蓮芝消炎片）, Anti-inflammatory Cholagogic Tablet（消炎利膽片）, Yinqiao Antidotal Tablet（銀翹解毒片）, VC Yinqiao Tablet（維C銀翹片）and Andrographis Tablet（穿心蓮片）have achieved good sales performance.

Business review

Sales of products

During the year under review, the Group’s turnover increased by 24.8% from HK$1,015,935,000 for the corresponding period last year to HK$1,268,143,000, which was mainly attributable to the focus strategies in terms of specific products, markets and management. Focusing on specific products means the Group emphasized on expanding the market for its core products, including Yu Ping Feng Granule（玉屏風顆粒）, Nifedipine Sustained-release Tablet (Sheng Tong Ping)（硝苯地平緩釋片（聖通平））, Bi Yan Kang Tablet （鼻炎康片） and Feng Liao Xing Medicinal Wine （馮了性藥酒）. Focusing on markets means enhancing the market development work and increasing the usage of our core products at ranked health care institutions; expanding the coverage of essential drugs among primary health care institutions, and co-operating with major chain pharmacies to increase coverage of end-market retailing for our core products. Focusing on management means the implementation of a comprehensive performance evaluation on our sales team at all levels and enhancing the integrated management ability of our provincial managers.

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Analysis by types of medicines:

Respiratory system drugs and nasal preparations Cerebro-cardiovascular drugs Rheumatic diseases and bone injury drugs Antibiotics Oncology drugs Others Total	For the year ended 31 December 2012 Percentage 2011 Percentage HK$’000 to turnover HK$’000 to turnover 587,505 46.3% 442,942 43.6% 164,894 13.0% 151,975 15.0% 155,749 12.3% 132,438 13.0% 70,318 5.6% 66,165 6.5% 20,414 1.6% 19,581 1.9% 269,263 21.2% 202,834 20.0% 1,268,143 100.0% 1,015,935 100.0%	Change 32.6% 8.5% 17.6% 6.3% 4.3% 32.8%
		24.8%

Analysis of traditional Chinese medicine and chemical medicine:

Traditional Chinese medicine Chemical medicine Total	For the year ended 31 December 2012 Percentage 2011 Percentage HK$’000 to turnover HK$’000 to turnover 1,050,544 82.8% 821,211 80.8% 217,599 17.2% 194,724 19.2% 1,268,143 100.0% 1,015,935 100.0%	Change 27.9% 11.7%
		24.8%

– I-17 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Sales analysis of top ten products:

Bi Yan Kang Tablet Yu Ping Feng Granule Sheng Tong Ping Feng Liao Xing Medicinal Wine Gaode VC Yinqiao Tablet Yuanjilin Herbal Tea Sha Pei Lin Shedan Chuanbei San Yao Shen Herbal Plaster Other products Total	For the year ended 31 December 2012 Percentage 2011 Percentage HK$’000 to turnover HK$’000 to turnover 272,224 21.5% 220,424 21.7% 205,649 16.2% 130,200 12.8% 109,128 8.6% 92,699 9.1% 106,677 8.4% 82,845 8.2% 69,105 5.4% 67,022 6.6% 41,673 3.3% 23,113 2.3% 28,439 2.2% 18,284 1.8% 20,414 1.6% 19,618 1.9% 18,771 1.5% 15,124 1.5% 18,175 1.4% 14,409 1.4% 377,888 29.9% 332,197 32.7% 1,268,143 100.0% 1,015,935 100.0%	Change 23.5% 57.9% 17.7% 28.8% 3.1% 80.3% 55.5% 4.1% 24.1% 26.1% 13.8%
		24.8%

Cost control

During the year under review, the Group kept deepening the integration of end-market sales resources, streamlining sales personnel, reinforcing sales expense control and improving sales and marketing efficiency, so as to lay a solid foundation for the stable sales growth of the Group. Meanwhile, the Group rationalized and optimized the management procedures of various departments, including marketing, operation, finance, research and development, production and human resources, so as to reduce administrative costs and improve the output per capita and management efficiency.

Research and development

The Group’s research and development on new products will be focused on cerebro-cardiovascular drugs. In 2012, Nicotinic Acid Sustained Release Capsules (Luoweiding)（煙酸緩釋膠囊（洛唯定））, an exclusive drug for hyperlipemia was granted the production approval, Rosuvastatin Tablet（瑞舒伐他汀片）, Indapamide Release Tablet （吲噠帕胺緩釋片） and Nifedipine Sustained-release Tablet (30mg) (New Sheng Tong Ping) （硝苯地平緩釋片（新聖通平）） were reported, and the consistency evaluation of “Sheng Tong Ping” was finished and reported. These products are expected to commence production and launch for sales next year, which will greatly enrich our cerebro-cardiovascular product lines and will serve as the catalyst for the sustainable sales growth in the future.

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APPENDIX I

In addition, the Group has achieved a remarkable progress in some major research and development projects, such as obtaining approval for Aspirin Paracetamol and Caffeine Tablet （阿咖酚片） (use for curing migraine) for a term of 2 years and completing the revision on its quality standard; completing the reporting procedures for enhancing the standard of Cefodizime Sodium for injection (Gaode)（注射用頭孢地嗪（高德））; rolling out Phase IV clinical trial of Sha Pei Lin（沙培林）used for curing bladder cancer in full; and Fexofenadine/Pseudophedrine Sustained-release capsule（非索偽麻緩釋膠囊）, a category 3.2 new drug, has entered into the technical evaluation and complementary stage.

Products under research and development include: Cerebro-cardiovas products--Metoprolol Tartrate Sustained Release Tablet （酒石酸美托洛爾緩釋片）, Telmisartan Tablet （替米沙坦片）, Telmisartan and Hydrochlorothiazide Bilayer Tablet （替米沙坦+氫氯噻嗪雙層片）, Amlodipine Besylate and Atorvastatin Calcium Tablet（氨氯地平阿托伐他汀鈣片）, Benidipine Tablet （貝尼地平片）, Sitagliptin Tablet （西格列汀）, Dofetilide （多非利特）; drug for dysmnesia treatment-Galanthamine Hydrobromide Sustained Release Capsule （氫溴酸加蘭他敏緩釋膠囊）; and drug for BPH treatment – Alfuzosin Hydrochloride Sustained Release Tablet（鹽酸阿夫唑嗪緩釋片）.

The clinical trial of two new products, namely “Hongzhu Capsule（紅珠膠囊）”, a Chinese medicine under category 5 for respiratory system and Artemether Xureqing Granule （蒿甲虛熱清顆粒）, a new Chinese medicine under category 6 which has specified healing efficacy for fever in children, has been successfully undergoing relevant complementary trials in accordance with new technical standards. The re-development proposal of Feng Liao Xing Medicinal Wine has been progressed as planned while the development of a new Chinese medicine under category 6 for diabetes has commenced. These new projects for Chinese medicine will further enhance the existing and future development of the Group’s Chinese medicine business.

Progress of investment projects

“Feng Liao Xing Materials & Slices” brand

Foshan Nanhai Pharmaceutical Group Medicinal Material Co., Ltd.（佛山市南海醫藥集團藥材有限公司）, a wholly-owned subsidiary of the Group, has been renamed as Foshan Feng Liao Xing Medicinal Materials & Slices Co., Ltd.（佛山馮了性藥材飲片有限公司）with effect from 15 June 2012, so as to reflect its business development and “Feng Liao Xing Material & Slices” brand strategy. The new name can better reflect the three major business scopes that will be developed in the future, including traditional Chinese medicine decoction pieces business, high-end quality traditional Chinese medicine decoction pieces and health care business.

According to the five-year (2011-2015) plan of the Group, the business strategy of Feng Liao Xing Material & Slices will focus on traditional Chinese medicine decoction pieces, and supplemented by health care products, and will become the new driver for the Group’s sales growth by enriching our product mix, exploring new sales channels and improving overall product quality.

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Guizhou Zhongtai

Pursuant to a conditional investment agreement dated 22 December 2011 entered into among a wholly-owned subsidiary of the Group, Guangdong Medi-World and Henan Xintai Medicine Company Limited (“Henan Xintai”) and Guizhou Zhongtai (“the Investment Agreement”), Henan Xintai has agreed that Guizhou Zhongtai will increase its registered capital (“Increased Capital”) and Guangdong Medi-World has agreed to invest in the Increased Capital of Guizhou Zhongtai for a cash consideration of RMB153 million (equivalent to approximately HK$183.6 million). The Increased Capital represented 51% of the entire registered capital of Guizhou Zhongtai upon completion. In addition, the Group provided a pledged loan of RMB70 million (equivalent to approximately HK$86 million) to Guizhou Zhongtai through Guangdong Medi-World (the “Loan”) as its working capital. In accordance with the loan agreement, if increase in registered capital of Guizhou Zhongtai is approved by the relevant authority in Guizhou Province within three months after entering into the Investment Agreement, the Loan would bear no interest, otherwise interest payment should be made by Guizhou Zhongtai to Guangdong Medi-World at the then prevailing interest rate for bank borrowing and should be accrued since the date of the Loan. In 2012, interest income recognized for the Loan was approximately HK$8,332,000. The net interest income of the Loan was HK$1,861,000, less the financing cost of the Group of approximately HK$6,471,000.

In January 2013, with approval of local government, Guangdong Medi-World invested RMB23 million (approximately HK$28 million). Pursuant to the investment agreement, the first consideration is RMB93 million (approximately HK$115 million) and the remaining balance of RMB70 million (approximately HK$86 million) will be paid after Guizhou Zhongtai repays the loan. Guizhou Zhongtai will become the subsidiary of the Group upon the completion of the transaction above.

Land for the headquarters

In April 2010, the Group successfully bid a land parcel of 33 mus at the south part of Kui Qi Road and the east part of Ling Nan Road, Chan Cheng Area, Foshan, at a consideration (land premium) of approximately RMB77,060,000. Such land parcel is originally planned to be used for education (research and development and design). The Group plans to construct its headquarters building and research and development center on the land. According to the letter “關於啟動市中心組團新城區北片控制詳細規劃（修訂）嶺南大道以東、魁奇路以南地塊規劃調整的復函”, the usage of such land parcel has been adjusted for commercial land use. The land bank management office of Chan Cheng Area in Foshan (the “Land Bank Management Office”) will auction the land use right of such land parcel by additional tender. The Land Bank Management Office pays the interest for the land premium, calculated at the one year benchmark lending rate of People’s Bank of China, as a compensation. In 2012, the interest income of such land premium recognized was HK$14,226,000 since the payment of land premium from August 2010 to the end of 2012. The net interest income of such land premium was HK$7,811,000, less the corresponding financing cost of the Group of approximately HK$6,415,000 in 2012. Notwithstanding the foregoing, the Board considered that there will not be any material adverse effect to the Group.

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Dezhong Gaoming base

By the end of 2012, the Group completed the construction of Dezhong Gaoming base which has started operation, representing upgraded and next generation equipment, technology and technique for traditional Chinese medicine materials pre-processing and extraction. It is a modern traditional Chinese medicine extraction and drinking pills production base possessing the most advanced technology and management system in China with an annual production capacity of processing 20,000 tonnes traditional Chinese medicine materials and 80 million packets of traditional Chinese medicine decoction pieces.

Solid preparations workshop

Yu Ping Feng Granules is one of our core products, the sales of which have increased substantially in recent years. In order to meet the need for strategic development of the Group, we have started to constructing a new and modernized solid preparations workshop since last year. On 15 June 2012, the construction of the new solid preparations workshop with an annual capacity of 600 million bags of granules has commenced. This workshop occupies a site area of 2,660 square meters and its production technology and equipment model will fully comply with the new GMP’s requirement.

Financial review

Turnover

During the reporting period, the Group’s turnover increased by 24.8% to HK$1,268,143,000 from HK$1,015,935,000 for the corresponding period last year. The increase in sales was attributable to the successful expansion of our product coverage in primary health care institutions, as well as the partnerships established with major chain pharmacy which has increased its coverage in over-the-counter (“OTC”) retail market, resulting in the satisfactory growth of our core products (such as Yu Ping Feng Granule and Bi Yan Kang Tablet). In addition, the business of Foshan Winteam Pharmaceutical Sales Company Limited (formerly known as Foshan Nanhai Yikang Pharmaceutical Co., Ltd.), which was acquired by the Group at the end of last year, also contributed to the increase in the turnover of the Group directly.

Cost of sales

During the reporting period, the Group’s cost of sales was HK$574,915,000, representing an increase of 23.0% as compared to HK$467,529,000 for the corresponding period last year. Direct raw materials, direct labor and production overhead accounted for approximately 71.4%, 10.8% and 17.8% of the total cost of sales, respectively, as compared to 76.7%, 11.3% and 12.0% for the corresponding period last year.

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APPENDIX I

Other revenue

During the year under review, the Group’s other revenue was HK$30,872,000, representing an increase of approximately 150.9% compared to HK$12,306,000 for the corresponding period last year.

Interest income Government grants Rental income Total	For the year ended 31 December 2012 2011 HK$’000 HK$’000 24,908 1,452 4,960 9,432 1,004 1,422 30,872 12,306	Change 1615.4% -47.4% -29.4%
		150.9%

Interest income increased, which was mainly due to the interest income of HK$14,226,000 from the compensation for land premium of the land for headquarters and interest income of HK$8,332,000 from the loan to Guizhou Zhongtai.

Other net income

During the year under review, the Group’s other net income was HK$242,000, representing a decrease of HK$383,000 as compared to HK$625,000 for the corresponding period last year. Other net income decreased, which was mainly due to the increase of approximately HK$320,000 in the loss of disposal of fixed assets.

Sales and distribution costs

During the year under review, the Group’s sales and distribution costs amounted to HK$289,651,000 (2011: HK$328,642,000).

Advertising, promotion and traveling expenses Salary expenses of sales and marketing staffs Distribution and logistics costs Other sales and distribution costs Total	For the year ended 31 December 2012 2011 HK$’000 HK$’000 169,269 221,094 84,773 62,021 14,192 13,368 21,417 32,159 289,651 328,642	Change -23.4% 36.7% 6.2% -33.4%
		-11.9%

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APPENDIX I

Although the increase in sales amount drove the salary expenses of sales and marketing staff to increase by 36.7%, the Group enhanced control over sales costs, reducing advertising and promotion and traveling expenses by 23.4%, other sales and distribution costs by 33.4%, resulting in a decrease in sales in distribution cost of 11.9% as compared to the corresponding period of last year.

Administrative expenses

During the year under review, the Group’s administrative expenses amounted to HK$144,876,000 (2011: HK$130,551,000).

Staff salary Depreciation and amortization Expenses for product research and development Office rental cost and other expenses Total	For the year ended 31 December 2012 2011 HK$’000 HK$’000 40,567 36,960 13,480 8,323 42,862 41,506 47,967 43,762 144,876 130,551	Change 9.8% 62.0% 3.3% 9.6%
		11.0%

Administrative expenses increased by 11.0% as compared to the corresponding period of last year, which was mainly due to the aggregate increase in executive salary expense of HK$3,607,000; increase in depreciation and amortization of HK$5,157,000, which was mainly due to the increase in depreciation of fixed asset during the construction preparation period of Dezhong Gaoming. Office rental costs and other expenses increased by HK$4,205,000.

Profit from operations

During the year under review, the Group’s profit from operations was HK$289,815,000, representing an increase of 183.7% as compared to HK$102,144,000 for the corresponding period last year, while operating profit ratio (defined as profit from operations divided by total turnover) increased to approximately 22.9% from 10.1% for the corresponding period last year.

Finance costs

During the year under review, the Group’s finance costs amounted to HK$23,831,000 (2011: HK$7,689,000), and the higher finance costs as compared with the corresponding period last year was attributable to the increase in the Group’s bank borrowings to approximately HK$511,104,000 (31 December 2011: HK$340,570,000). The effective interest rate for the loans was 6.75% (31 December 2011: 6.23%).

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APPENDIX I

Earnings per share

During the year under review, the basic earnings per share was HK11.61 cents, representing an increase of 187.4% as compared to HK4.04 cents for the corresponding period last year. The increase in basic earnings per share was due to the profit attributable to equity shareholders increased by 187.4% to approximately HK$207,134,000 (2011: HK$72,072,000).

Liquidity and financial resources

As at 31 December 2012, the Group’s current assets amounted to approximately HK$1,004,512,000 (31 December 2011: HK$709,510,000), which included cash, cash equivalents and deposits with banks of approximately HK$165,118,000 (31 December 2011: HK$47,273,000), as well as trade and other receivable of approximately HK$546,088,000 (31 December 2011: HK$346,891,000). Current liabilities amounted to approximately HK$800,722,000 (31 December 2011: HK$596,849,000). Net current assets aggregated to approximately HK$203,790,000 (31 December 2011: HK$112,661,000). The Group’s current ratio was 1.3 (31 December 2011: 1.2). The gearing ratio (defined as bank loans divided by the interests attributable to equity shareholders of the Company) increased to 50.0% from 35.9% as at 31 December 2011. Such increase was due to the increase in bank loans to fund the Group’s business expansion and production capacity expansion.

Bank loans and pledge of assets

As at 31 December 2012, the balance of the Group’s bank loans was approximately HK$511,104,000 (31 December 2011: HK$340,570,000), of which approximately HK$313,776,000 (31 December 2011: HK$161,711,000) was secured by the Group’s assets with book value of HK$233,545,000 (31 December 2011: HK$80,627,000). The additional bank loans were mainly used as the loan for Guizhou Zhongtai, and the construction cost of Dezhong Gaoming.

Contingent liabilities

The Group did not have any contingent liabilities as at 31 December 2012 (31 December 2011: Nil).

Employee and remuneration policies

As at 31 December 2012, the Group employed a total of 3,167 (31 December 2011: 3,510) staff members, including directors of the Company, of which the number of sales staff, production staff and those engaged in operation and administration and senior management were 1,450, 1,269 and 448, respectively. Remuneration packages principally comprised salary and discretionary performance bonus based on individual merits. The Group’s total remuneration for the period was approximately HK$184,600,000 (2011: HK$148,212,000).

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APPENDIX I

Final dividend

The Board has resolved not to declare a final dividend for the year ended 31 December 2012 (2011: HK5.00 cents per share).

FOR THE YEAR ENDED 31 DECEMBER 2011

Group overview

During the year under review, turnover of the Group increased by 8.2% to HK$1,015,935,000 from HK$939,178,000 in 2010. Gross profit rose by 4.7% to HK$548,406,000 from HK$523,904,000 in 2010, while gross profit margin decreased from 55.8% in 2010 to 54.0%, which is mainly due to the significant hike in the price of traditional Chinese medicine materials. Excluding growth in procurement volume, price hike in traditional Chinese medicine materials has increased our procurement cost by about HK$43,000,000, which accounted for 12.0% of the costs of materials.

Profit from operations decreased by 14.2% to HK$102,144,000 from HK$119,061,000 in 2010. Net profit attributable to equity shareholders was HK$72,072,000, representing an increase of 18.3% as compared to HK$60,925,000 in 2010, which is attributable to the successful completion of the acquisition of 93.0% equity interest in Foshan City An Ning Company Limited (“An Ning”) and 95.57% equity interest in Foshan Zhong Hong Company Limited (“Zhong Hong”) in April and December 2010 respectively. The Group’s equity interest in Foshan Dezhong Pharmaceutical Company Limited (“Dezhong”) increased to 96.57% from 51.0%, while the equity interest in Foshan Feng Liao Xing Pharmaceutical Company Limited (“Feng Liao Xing”) also increased to 97.8% from 51.0% after the above two acquisitions. The above two acquisitions have contributed to the increase in profit attributable to the equity shareholders of the Company.

As at 31 December 2011, the balance of trade and other receivables was HK$346,891,000 (31 December 2010: HK$211,502,000), of which trade debtors (less: allowance for doubtful debt) amounted to HK$170,453,000 (31 December 2010: HK$141,097,000) and bills receivable amounted to HK$150,417,000 (31 December 2010: HK$46,312,000). Balance of trade debtors that aged within 3 months amounted to HK$148,465,000; balance that aged 3 to 6 months amounted to HK$15,022,000; and balance that aged more than 6 months amounted HK$6,966,000. Bills receivable were all bank acceptance, most of which with maturity within 3 months. Except for the HK$11,349,000 used as security for the bank loans of the Group, the remaining balance can be cashed back before 30 June 2012 as general capital or used for dividend distributions.

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APPENDIX I

Industry review

National Essential Drugs Policy

Reinforce and improve the National Essential Drugs System

The Ministry of Health issued the Key Health Task for 2012 on 2 February 2012, which emphasized that the scope of the National Essential Drugs System will be further expanded, and will formulate the administrative measures for the use of essential drugs by health care institutions. It is also stated that the “Guideline for the Clinical Application of National Essential Drugs （國家基本藥物臨床應用指南）” and “National Essential Drugs Prescription Catalogue（國家基本藥物處方集）” will be revised. The ministry will also consider formulating incentive policy to promote the use of essential drugs, so as to motivate other health care institutions to gradually stock and give priority in using essential drugs. In respect of the sourcing of essential drugs, the upholding principle is “to purchase in bulk, to purchase based on agreed price and volume, and to combine the tendering and sourcing function”, as well as to make better arrangement for delivering drugs to rural and remote area.

Expanding the National Essential Drugs List

The National Essential Drugs List is now being revised. Chen Zhu（陳竺）, former minister of the Ministry of Health, stated on the National Drugs Supervision Meeting held on 20 December 2011 that the National Essential Drugs List should further expand in order to accommodate all drugs used by health care institutions. The expanded lists will be issued no later than 2012, which will help to increase the usage of essential drugs.

The stocking and using of essential drugs in county hospitals or above

As at 29 February 2012, the health administrative authorities of 10 provinces, such as Jiangxi, Jilin, Henan, have required secondary hospitals or above to stock and use essential drugs. Other provincial authorities will also issue policy sooner or later in 2012, setting out the required proportion of essential drugs for county hospitals or above, which may stimulate the sales of essential drugs substantially. Such policy has provided favorable condition for the expansion of essential drugs market.

Essential Drugs Policy of Guangdong Province

After 3 years of effort on promoting the use of essential drugs in Guangdong Province, the Essential Drugs System is now fully implemented, under which all primary health care institutions run by the government have stocked and used essential drugs. Such policy has provided a better environment for the promotion and marketing of essential drugs. Dezhong, Feng Liao Xing and Guangdong Medi-World, all are subsidiaries of the Group, are well-known drugs enterprises in Guangdong Province which is an important market for the Group. In 2011, the Group’s product sales in

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APPENDIX I

Guangdong Province represented 43.0% of the total sales of the Group. For this reason, the wider implementation of Essential Drugs Policy in Guangdong Province would be beneficial to the Group’s development.

Under terms of essential drugs bidding invitation mode, only technical tender required for inexpensive drugs

The Terms of Tender for Essential Drugs in Guangdong Province 2011 (2011年廣東省基藥招標方案規定) stated that, in order to avoid vicious competition, only technical tender will be required for drugs listed in the inexpensive Essential Drugs List. Currently, the tendering process is still ongoing. Several products of the Group had been included in the inexpensive drugs list. Sheng Tong Ping (Nifedipine Sustained release Tablet I), one of our key products, has solid market foundation in Guangdong Province. It has been listed in the inexpensive drugs list which will greatly increase our chance of winning the tender. It was proposed that this mode of tendering will be adopted in other provinces, and the implementation of the inexpensive drugs policy will help us in exploring the market for the Group’s good and inexpensive traditional Chinese medicines. Meanwhile, the Terms of Tender for Essential Drugs has clearly stated that some products may quote a price that is higher than the awarded price in 2009 based on factors, such as technology advancement. Therefore, it is expected that two of our exclusive essential drugs products, Yu Ping Feng Granule and Bi Yan Kang Tablet, can set a higher price for bidding as it has improved its technology level.

To explore and formulate policies and measures for the implementation of the Essential Drugs System in secondary hospitals or above

At the Guangdong Province Drugs Policy Meeting（廣東省藥品政策工作會議）held in May 2011, the Department of Health of Guangdong Province has emphasized the needs to deepen the enforcement of the Essential Drugs System, as well as the needs to explore and formulate appropriate policies and measures for the implementation of the Essential Drugs System in secondary hospitals or above. As the Group’s products had a solid foundation in Guangdong market, it will bring huge benefits to the Group if such policies and measures are to be fully promoted in Guangdong.

Business review

Successful tenders in essential drugs

Since the State Council issued the “Guiding Opinions on Establishing and Regulating the Procurement System of Essential Drugs for Primary Health Care Institutions Run by the Government (Circular 56)”《建立和規範政府辦基層醫療衛生機構基本藥物採購機制的指導意見》 (56號文) on 9 December 2010, there were a total of 23 provinces completed the essential drugs tender. The Group has 16 essential drugs participated in the tender and the success rate was 35.9%. Excluding the 4 products with lower sales, the overall success rate was as high as 51.0%, far exceeding the average level of approximately 18.2% for the top 100 pharmaceutical enterprises in the nation.

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APPENDIX I

Our exclusive products Yu Ping Feng Granule and Bi Yan Kang Tablet have participated in the essential drugs tender of 23 provinces, and had won tenders in 21 provinces and 22 provinces respectively, representing a success rates of 91.3% and 95.6% respectively. Products which won tenders in more than 6 provinces include Shengmai capsule（生脈膠囊）(7 provinces), Berberine Hydrochloride Capsule（鹽酸小檗堿膠囊）(10 provinces), Chuang Xiong Cha Tiao Granule（川芎茶調顆粒）(9 provinces), An Gong pill（安宮牛黃丸）(6 provinces) and Po Chai pill (12 provinces).

As at 29 February 2012, a total of 6 provincial governments have not yet started the tender of essential drugs. Currently, essential drugs tender of Guangdong Province is in process.

Sales of products

Analysis of essential drugs and non-essential drugs:

Essential drugs Non-essential drugs Total	For the year ended 31 December 2011 2010 HK$’000 HK$’000 478,388 356,920 537,547 582,258 1,015,935 939,178	Change 34.0% -7.7%
		8.2%

Essential drugs

The essential drugs of the Group mainly included respiratory system drug, nasal preparations and cerebrocardiovascular drug. Benefiting from the full implementation of the national system of essential drugs in primary health care institutions and a significant increase in usage volume of essential drugs, turnover of the Group’s essential drugs during the year under review increased significantly to HK$478,388,000, representing an increase of 34.0% compared to that of HK$356,920,000 for the corresponding period of last year. The percentage of the turnover of essential drugs to the Group’s total turnover increased to 47.1% from 38.0% for the corresponding period of last year.

Non-essential drugs

Turnover of non-essential drugs was HK$537,547,000, representing a decrease of 7.7% as compared to HK$582,258,000 for the corresponding period last year and accounting for 52.9% of the Group’s total turnover. Non-essential drugs of the Group mainly included rheumatic diseases and traumatic injury drug, antibiotics and oncology drugs as well as other Chemical drugs and Chinese patent medicines.

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APPENDIX I

Analysis by types of medicines:

Respiratory system drug and nasal preparations Cerebro-cardiovascular drug Rheumatic diseases and bone injury drug Antibiotics Oncology drug Other products Total	For the year ended 31 December 2011 2010 HK$’000 HK$’000 442,942 341,937 151,975 141,441 132,438 71,344 66,165 92,012 19,581 14,752 202,834 277,692 1,015,935 939,178	Change 29.5% 7.4% 85.6% -28.1% 32.7% -27.0%
		8.2%

Respiratory system drug and nasal preparations

During the year under review, sales of respiratory system drug and nasal preparations were HK$ 442,942,000, representing an increase of 29.5% compared to the corresponding period last year, which is mainly due to the significant growth in the sales of Yu Ping Feng Granule. Sales of respiratory system drug and nasal preparations accounted for 43.6% of the turnover of the Group.

Yu Ping Feng Granule is mainly targeted at secondary hospitals or above. During the year under review, Yu Ping Feng Granule has been successfully sold to 1,316 secondary hospitals or above, covering 17.0% of secondary hospitals or above in China and representing an increase of 66.6% compared to that of 790 hospitals in the corresponding period last year. Driven by the health care institutions, sales of Yu Ping Feng Granule in OTC retail market also recorded robust growth. Sales of Yu Ping Feng Granule increased significantly by 65.4% compared to the corresponding period last year.

The Group’s core marketing strategy for Bi Yan Kang Tablet was to establish strategic cooperation with large-scale pharmaceutical chains, and at the same time to increase our penetration rate in primary health care institutions. During the year under review, the strategy has achieved substantial progress. The Group signed strategic partnership agreements with more than 1,000 large-scale drug retail chains nationwide and Bi Yan Kang Tablet was included in the Strategic Cooperation Product List of top retail stores, thus enabling us to achieve breakthrough in maintaining reasonable price, securing better display area, and increase in the rate of first recommendation, etc. The acceleration in implementing the National Essential Drugs System also provided a good opportunity for us to the increase the penetration rate of Bi Yan Kang in primary health care institutions, and has successfully penetrated into over 12,000 primary health care institutions, representing a significant increase of 2.5 times compared to about 3,400 health care institutions for the corresponding period last year. This has become the new

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APPENDIX I

driving force for the rapid growth in sales of Bi Yan Kang Tablet in the future. Sales of Bi Yan Kang Tablet grew by 1.8% compared to that of the corresponding period last year.

Rheumatic diseases and traumatic injury drug

During the year under review, sales of rheumatic diseases and traumatic injury drug was HK$132,438,000, representing a significant growth of 85.6% compared to the corresponding period last year, and accounted for 13.0% of the Group’s turnover. This type of traditional Chinese medicine was the Group’s featured products and includes main products such as Feng Liao Xing Rheumatism Medicinal Wine and exclusive external products for traumatic injury such as Shaolin Dieda Herbal Plaster（少林跌打止痛膏）, Jinlong Shangshi Herbal Plaster（金龍傷濕止痛膏）, Jin Shu Dieda Pill（金術跌打丸） and Jiehong Dieda Tincture（竭紅跌打酊）. The significant growth of rheumatic diseases and traumatic injury drug was mainly due to the effort of the Group in increasing the sales strategy for this type of drug since the second half of 2010. Through redesigning the packaging and adjusting product prices and sales channels for rheumatic diseases and traumatic injury products, the products have successfully penetrated into the primary medical market and retail market at county and rural village. Among which, sales of Feng Liao Xing Rheumatism Medicinal Wine increased significantly by 93.6% as compared to the corresponding period last year. Capitalising on the strong market foundation in Hunan Province and Jiangxi Province, our sales coverage for Feng Liao Xing Pheumatism Medical Wine has fully extended to county, village and town levels through rationalizing and integrating sales channels. Building on the core sales area in Guangdong Province, we have successfully tapped into some ten more populated counties in Hunan Province and Jiangxi Province in 2011, leading to a rapid growth in sales, and have gradually explored new markets of Northern China, Northeastern China and Eastern China, thus laid down a solid foundation for the sustainable rapid growth of Feng Liao Xing Rheumatism Medicinal Wine.

Cerebro-cardiovascular drug

During the year under review, sales of cerebro-cardiovascular drug was HK$151,975,000, representing an increase of 7.4% compared to the corresponding period last year, and accounted for 15.0% of the Group’s turnover. Cerebro-cardiovascular drug was one of the key product lines of the Group. As the nation lowered the prices of cerebro-cardiovascular drug, the selling price of our major product Sheng Tong Ping (Nifedipine Sustained-release Tablet I) has decreased. However, Sheng Tong Ping has successfully won the tender in the centralized procurement of essential drugs of Shanghai in May 2011, thus secured its market shares Shanghai which is an important market for us. In addition, as Sheng Tong Ping was accredited as Self-Innovated Product of Guangdong Province and was included in the inexpensive drugs list, we can enjoy more advantages in the centralized essential drugs procurement of Guangdong Province.

In 2011, the Group has based on the existing strong sales coverage of Sheng Tong Ping, to vigorously explore the strategic cooperation opportunity with chain medicine stores in the niche markets in respect of the new specification of Sheng Tong Ping, and

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APPENDIX I

has achieved some preliminary results. In 2011, Sheng Tong Ping was sold to 3,465 county hospitals or above, representing an increase of 23.8% compared to 2,798 institutions in 2010.

During the year under review, the Group also launched two new products: (1) Yishuang（依雙）(Compound Eualapril) which is a drug to lower blood pressure; and (2) Ruizhi （銳旨） (Nicotinic Acid Sustained Release Capsules) which is a drug to reduce blood fats. At present, nicotinic acid drug is one of the most common clinical-used blood fats lowering drugs. Ruizhi is an exclusive product and health insurance class B type in China. It adopted a brand new technology of multi-layer compound isolation sustained release film which facilitates a more stable and slow release of medicines with enhanced safety and efficacy and fewer side effects, and is currently the only blood fat lowering drug that can lower LP(a) (independent risk factor for coronary). Ruizhi also won the tender in the centralized procurement of essential drugs of Shanghai.

In addition, the Group will launch “New Sheng Tong Ping” (Nifedipine Sustained release Tablet III), which is a more advanced drug with better performance in lowering blood pressure. It can help to enlarge the market scale of the Group’s Cerebro-cardiovascular drug.

Antibiotics

During the year under review, sales of antibiotics were HK$66,165,000, representing a decrease of 28.1% as compared to the corresponding period of last year. Such drop was mainly due to the introduction of a State policy that restricted the use of antibiotics. Sales of antibiotics accounted for 6.5% of the Group’s turnover. In 2011, the only type of antibiotics marketed by the Group is Gaode (Cefodizime Sodium for injection) which had been used by 246 secondary hospitals or above, compared to 564 hospitals in 2010.

Oncology drug

During the year under review, sales of oncology drug were HK$19,581,000, representing an increase of 32.7% as compared to the corresponding period of last year and accounted for 1.9% of the Group’s turnover. The only type of oncology drug marketed by the Group is Sha Pei Lin (Group A Streptococcus for injection), which is mainly used to cure ascites caused by malignant neoplasm and as ancillary treatment of tumors in hospitals in the second or upper level. The number of hospitals using Sha Pei Lin increased by 58.5% to 233 hospitals in 2011 from 147 hospitals in 2010.

Other products

During the year under review, sales of other products were HK$202,834,000, representing a decrease of 27.0% as compared to the corresponding period of last year. Due to the significant price hike in traditional Chinese medicine materials in the past year, the Group adjusted its product mix by reducing or ceasing the production of some non-leading products to maintain our overall gross profit margin.

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APPENDIX I

Integration of marketing structures

During the year under review, the Group has effectively integrated the end-market sales resources of Guangdong Medi-World, Dezhong and Feng Liao Xing. Provincial managers have been assigned to be accountable for the sales in their respective provinces. The sales structure has been divided into prescription, OTC and commercial (including distribution) sales in order to reinforce the overall marketing management and to realize sharing of end-market resources. Sales performance evaluation has been fully implemented and functions of each sales team have been clearly defined to increase responsiveness to the market. These measures have laid a solid foundation for further growth in the sales of the Group. After the integration, sales effectiveness of the sales staff in average terms has been greatly improved.

Throughout the year under review, the Group have evaluated marketing resources for all products and classified 286 products into six categories, including strategic development products, profit-making products, featured development products, essential drug breakthrough products, sole and jointly devised products, as well as reserve products. The classification has pointed to clearer development strategies of every product and as an effective guidance to put forth the marketing strategies.

Brand assets evaluation has also been carried out to define branding strategies during the year under review. “Dezhong” brand has inherited the development of modern Chinese patent medicine and general drugs, while the Cerebro-cardiovascular brand of “Sheng Tong Ping” and “Sheng Tong Luo （聖通絡）” would represent the development of the Group’s new products under moderate release technology, “Foshan” would become the major brand for Lingnan Chinese patent medicine while other quality subsidiary brands like “Feng Liao Xing” and “Yuanjilin” would lend strong support to the “Foshan” brand.

Research and development

During the year under review, several research and development projects of the Group were included in the technology development plans across all levels, including province, city. Approval of Aspirin Paracetamol and Caffeine Tablet which cures migraine headache has been extended, while the technology transfer of Ruizhi and approval for production had been completed and obtained. Meanwhile, application for enhancement of standard of Gaode (Cefodizime) had been filed. These moves are expected to increase competitiveness of these three products and lay solid grounds for market expansion.

Meanwhile, our national exclusive products Fexofenadine/Pseudophedrine Sustained-release Capsule（非索偽麻緩釋小丸膠囊）(Category III New Chemical Drug), Yao Tong Kang Granule（腰痛康顆粒）(Category VI New Traditional Chinese Medicine) and Nifedipine Sustained-release Tablet III （硝苯地平緩釋片(III)） are now under evaluation and testing by Center for Drug Evaluation, SFDA. Besides, Gaode (Cefodizime Sodium) （高德（頭孢地嗪）） API, our Group’s product produced under contract manufacturing through technology co-operation, is now preparing for the new GMP certification. Meanwhile, the Originator Product Reassessment (International

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APPENDIX I

Advance Level) Project for our key product Sheng Tong Ping (Nifedipine Sustained-release Tablet I) （聖通平（硝苯地平緩釋片I）） and the Cerebro-cardiovascular Controlled-released and Modified Release Preparation Project approved in 2012 is progressing smoothly. All of these projects can help to enhance the Group’s competitiveness.

Construction of Gaoming base

Construction of the Gaoming traditional Chinese medicine extraction project commenced in October 2010 and the main structure of traditional Chinese medicine extraction workshop and medicines materials pre-processing workshop had been completed. Currently, the interior furnishing is underway. The Gaoming facility is expected to realize the production capacity of processing 20,000 tonnes of traditional Chinese medicine materials and 80 million packets of traditional Chinese medicine drinking pills upon completion and will increase significantly the Group’s production capacity.

Growth strategies

Growth strategies of existing products

Our 2012 strategies will be focusing on specific products, marketing and management. Major products such as Yu Ping Feng Granule, Sheng Tong Ping, Bi Yan Kang Tablet, Feng Liao Xing Medicinal Wine and Ruizhi would be our main focus. As for marketing strategies, emphasis will be on the development for and sales to ranked health care institutions, while extending coverage of essential drugs among primary health care institutions. We will also put on OTC and cooperation with mainstream chain stores to stabilize market prices, maintain and increase coverage of end-market retailing. For management aspect, focus will be on performance evaluation of sales team at all levels and enhancement of the ability of provincial managers on integration management.

Benefiting from the nation’s policy to promote the application of essential drugs, the Group will increase coverage of two exclusive essential drug products, namely Yu Ping Feng Granule and Bi Yan Kang Tablet, in secondary hospitals or above and primary health care institutions. In 2012, the coverage of Yu Ping Feng Granule in second and upper level hospitals will be extended from around 1,300 hospitals in 2011 to around 1,600 hospitals, and from around 5,000 primary health care institutions to around 10,000 institutions. Meanwhile, coverage of Bi Yan Kang Tablet in second and upper level hospitals will be extended from around 300 hospitals to around 600 hospitals, and from around 12,000 primary health care institutions to around 20,000 institutions.

Implementation of merger and acquisition

The Group will select target enterprises which have unique types of products and appropriate market platform for mergers and acquisitions, with the aim of supplementing the Group’ product lines in cerebro-cardiovascular drug, modified

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APPENDIX I

release technology products, oral cephalosporin products and oncology drug, optimizing product mix and expanding our marketing network and sales scale. Meanwhile, the Group will also consider acquisition of new businesses in addition to its key product mix such as biological medicines to seek for new growth engines in operation.

Financial review

Turnover

For the year under review, the Group’s turnover increased by 8.2% to HK$1,015,935,000 from HK$939,178,000 for the corresponding period of last year. The increase in sales was the result of the Group’s successful strategy in expanding products coverage in primary health care institutions, and formation of partnerships with strategic distributors and drug chains to increase its OTC retail market coverage and penetration.

Cost of sales and gross profit margin

For the year under review, the Group’s cost of sales was HK$467,529,000, representing an increase of 12.6% as compared to HK$415,274,000 for the corresponding period of last year. Direct raw materials, direct labor and production overhead accounted for approximately 76.7%, 11.3% and 12.0% of the total cost of sales respectively, as compared to 75.6%, 10.5% and 13.9% for the corresponding period of last year. The Group’s gross profit margin reduced to 54.0% from 55.8% in 2010 due to the significant price hike in traditional Chinese medicine materials which exerted pressure on the cost of sales. However, the Group adjusted the product mix by reducing or ceasing the production of some non-leading products with low gross profit margin and managed to minimize the adverse effect caused by the price rise in traditional Chinese medicine materials.

Other revenue

For the year under review, the Group’s other revenue was HK$12,306,000, representing a decrease of approximately 7.8% as compared to HK$13,348,000 for the corresponding period of last year. Such decrease was mainly attributable to the decrease of government grants by HK$403,000, the decrease of HK$427,000 of interest income as well as the decrease of rental income and other income by HK$212,000 as compared to last year.

Other net income

For the year under review, the Group’s other net income was HK$625,000, representing a decrease of 93.1% as compared to HK$9,034,000 for the corresponding period of last year. The reason for such decrease was that a one-off gain of HK$8,774,000 on the disposal of the land and buildings of the old factory in Guangdong Medi-world was recorded as other net income last year, and no similar gain was realized during the year under review.

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Sales and distribution costs

During the year under review, the Group’s sales and distribution costs amounted to HK$328,642,000 (2010: HK$317,161,000), which mainly consisted of advertising, promotion and traveling expenses of HK$221,094,000, salary expenses of sales and marketing staff of HK$62,021,000, distribution and logistics costs of HK$13,368,000 and other sales and distribution costs of HK$32,159,000. The 3.6% increase in sales and distribution costs as compared to last year was due to the fact that the Group allocated more resources to develop strong product portfolios, and improve nationwide marketing and sales capabilities, so as to increase our essential drugs coverage in primary health care institutions.

Administrative expenses

During the year under review, the Group’s administrative expenses amounted to HK$130,551,000 (2010: HK$110,064,000). Such expenses mainly comprised staff salary of HK$36,960,000, depreciation and amortization of HK$8,323,000, expenses for product research and development of approximately HK$41,506,000, office rental cost and other expenses of approximately HK$43,762,000. The increase in administrative expenses was mainly attributable to the increase of research and development costs and salary expenses of administrative staff by HK$13,506,000.

Profit from operations

During the year under review, the Group’s profit from operations was HK$102,144,000, representing a drop of 14.2% as compared to HK$119,061,000 for the corresponding period of last year. The operating profit ratio (defined as the profit from operations divided by the total turnover) decreased to approximately 10.1% from 12.7% for the corresponding period of last year.

Finance costs

During the year under review, the Group’s finance costs amounted to HK$7,689,000 (2010: HK$3,831,000) and such increase was mainly due to increase in the Group’s bank borrowings to approximately HK$340,570,000 (31 December 2010: HK$109,294,000). The effective interest rate for the loans was 6.23% (31 December 2010: 5.34%).

Earnings per share

During the year under review, the basic earnings per share was HK$4.04 cents, representing an increase of 14.4% as compared to HK$3.53 cents for the corresponding period of last year. The increase in basic earnings per share was due to the increase of 18.3% in the profit attributable to equity shareholders, which amounted to approximately HK$72,072,000 (2010: HK$60,925,000).

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Liquidity and financial resources

As at 31 December 2011, the Group’s current assets amounted to approximately HK$709,510,000 (31 December 2010: HK$592,365,000), including cash, cash equivalents and deposits with banks of approximately HK$47,273,000 (31 December 2010: HK$180,887,000), as well as trade and other receivable of HK$346,891,000 (31 December 2010: HK$211,502,000). Current liabilities amounted to approximately HK$596,849,000 (31 December 2010: HK$489,089,000). Net current assets aggregated to approximately HK$112,661,000 (31 December 2010: HK$103,276,000). The Group’s current ratio remained at 1.2 as at 31 December 2011, which is the same as that as of 31 December 2010. The gearing ratio (defined as bank loans divided by the interests attributable to equity shareholders of the Company) increased from 13.1% as at 31 December 2010 to 35.9% as at 31 December 2011. Such increase was due to the increase in bank loans to fund the Group’s business expansion and upgrade the production capacity.

Bank loans and pledge of assets

As at 31 December 2011, the balance of the Group’s bank loan was approximately HK$340,570,000 (31 December 2010: HK$109,294,000), of which approximately HK$161,711,000 (31 December 2010: HK$109,294,000) was secured by the Group’s assets with net book value of HK$80,627,000 (31 December 2010: HK$115,962,000). The additional bank loans were mainly used as expenditure on the Group’s subsidiary Zhong Hong and construction cost for investment in Gaoming Base.

Contingent liabilities

The Group did not have any contingent liabilities as at 31 December 2011 (31 December 2010: Nil).

Employee and remuneration policies

As at 31 December 2011, the Group employed a total of 3,510 (31 December 2010: 2,760) staff members, including directors of the Company, of which the number of sales staff, production staff and those engaged in research and development, operation and administration and senior management were 1,710, 1,364 and 436 respectively. Remuneration packages principally comprised of salary and discretionary performance bonus based on individual merits. The Group’s total remuneration for employees for the year was HK$148,212,000 (31 December 2010: HK$116,680,000).

FOR THE YEAR ENDED 31 DECEMBER 2010

Group overview

2010 was a critical year during which the medical and health system reform of China (the “New Medical Reform”) was fully implemented. Ancillary policies for the New Medical Reform were gradually promulgated and implemented, bringing new momentum to the pharmaceutical industry along with new challenges. The Group

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leveraged on the development opportunities brought by the New Medical Reform to the pharmaceutical industry, strengthened our resources consolidation, and improved the standards of corporate management and new drug development. All these together have brought the production and operation of the Group to a new arena.

Following the further implementation of the National Essential Drugs system and the further improvement of the National Medical Insurance coverage and protection standard, there was an upward trend of the usage of those of our prescription drugs which were listed on the new version of the Essential Drugs List and the New Medical Insurance List by medical institutions. With the strong brand promotion in various media channels of the Group, our major OTC products also showed a substantial increase in sales quantity in retail drug stores, resulting in a record high turnover since our establishment.

In April and December 2010, the Group completed the acquisitions of a 93% equity interest of An Ning and a 95.6% equity interest of Zhong Hong. The equity interest of Dezhong held by the Group increased to 96.6% from 51%; while the equity interest of Feng Liao Xing held by the Group also increased to 97.8% from 51%. These two acquisitions not only increased the profit attributable to equity holders of the Company but also had substantial strategic significance for the Group, allowing the Group to formulate strategic development plans for the China time-honored brand “Feng Liao Xing” which has 430 years of history and the China well-known brand “Dezhong”. On the “List of Protected Cultural Heritage of Traditional Chinese Lingnan* Medicine” announced by Guangdong province in 2010, there were a total of 19 Feng Liao Xing and Dezhong products selected under the protected list of traditional Chinese medicine with secret formula, which rank top among all pharmaceutical companies in Guangdong province. These included the famous Feng Liao Xing Rheumatism Medicinal Wine, Yuanjilin Herbal Tea （源吉林甘和茶） and Shaolin Dieda Herbal Plaster （少林跌打止痛膏）. The brands “Feng Liao Xing” and “Dezhong” demonstrated the philosophy of “moral first, people oriented” which has been advocated for pharmaceutical manufacturing for over 400 years. This philosophy also aligns with the corporate value that the Group has been pursuing. The Group will continue to capitalise on the rich traditional Chinese medicine resources of Feng Liao Xing and Dezhong to establish its corporate image as “King of Lingnan Medicine”（「南藥王」）in China.

Led by its brand strategy, the Group started a product selection project, which involved systematic and scientific analysis of over 200 types of products and specifications of products according to their market absorption capacity, growth rate and degree of competition, to determine the focus of the Group’s product development. These product lines include respiratory system drug, pediatrics and immunology medicine, cerebro-cardiovascular drug, rheumatic disease and injury drug, special antibiotics, oncology drug with the representative products being Bi Yan Kang Tablet, VC Yinqiao Tablet, Yu Ping Feng Granule, Sheng Tong Ping (Nifedipine

Lingnan（嶺南）is a geographic area referring to lands in the south of China’s “Five Ranges”. The region covers the Guangdong, Guangxi, Hainan, Hunan, and Jiangxi provinces.

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Sustained-release Tablet), Feng Liao Xing Rheumatism Medicinal Wine, Gaode (Cefodizime Sodium for injection) and Sha Pei Lin (Group A Streptococcus for injection).

During the year under review, based upon the above brand positioning and key product lines planning, the Group implemented different sales strategies for the three major end markets of the pharmaceutical products of China, namely (i) city hospital, (ii) retail pharmacy, and (iii) village, town and district hospitals. The prescription drug business department and OTC business department have been set up, with an aggregate of approximately 1,200 staff. The target markets of the sales team of the prescription drug business department were the retail pharmacy and village, town and district hospitals end markets, and the main products being promoted were pediatrics and immunology medicine, cerebro-cardiovascular drug, anti-biotics and oncology drug etc. The OTC business department on the other hand was mainly responsible for the sale of respiratory system drug and rheumatic disease and injury drug to chain store pharmacies in cities, villages and towns. This strategy was an important drive for the business development of the Group, leading to a remarkable growth in turnover of the core products in 2010.

The Group also achieved significant results in its techniques and quality of products. Guangdong Medi-World accumulated rich technical experience in the manufacturing of controlled-released and sustained-release preparation, and produced two signature products, namely Nifedipine Sustained-release Tablet, and Fexofenadine/ Pseudophedrine Sustained-release Capsule. Dezhong was also among the top in modern traditional Chinese medicine preparation technology and quality standard research in China, particularly in the techniques of Spray drying method and double-decked sheeting technology. The quality control standard of the Group has always been above the national standard, and our products, namely Bi Yan Kang Tablet, Yu Ping Feng Granule and VC Yinqiao Tablet rank first among like products in terms of quality, and were included in the “National Pharmacopoeia” in 2010. Our continuing emphasis on quality of drugs and production technique have enabled us to achieve good results in the centralized public bidding in drug purchasing of medical institutions of various provinces.

Business review

During the year under review, the Group adjusted the product mix according to the medical reform policies and market changes, and devoted more efforts and resources on promoting the corporate and product brand images. We adopted more diversified sales model to explore sales network and channel in increase the product coverage to more hospitals and retail end markets. We also strengthened the market position of our core products amid intense competition in the pharmaceutical market, resulting in satisfactory growth of sales.

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Sales of core products

According to the product mix planning, the Group focused on developing products with market capacity and state policy advantages. These products cover respiratory system drug, cerebro-cardiovascular drug, pediatrics and immunology medicine, Rheumatic diseases and injury drug, special antibiotics and oncology drugs, with major products such as Bi Yan Kang Tablet, VC Yinqiao Tablet, Sheng Tong Ping (Nifedipine Sustained-release Tablet), Yu Ping Feng Granule, Feng Liao Xing Rheumatism Medicinal Wine, Gaode (Cefodizime Sodium for injection) and Sha Pei Lin (Group A Streptococcus for injection).

During the year under review, sales of the Group were HK$939,178,000, representing an increase of 40.1%, as compared to HK$670,175,000 of the same period last year. Sales of the 7 core products were HK$575,784,000, representing an increase of 51.2%, as compared to HK$380,700,000 of the same period last year, and accounted for 61.3% of the sales of the Group.

Respiratory system drug

The major products were Bi Yan Kang Tablet and VC Yinqiao Tablet produced by Dezhong. Bi Yan Kang Tablet is one of the exclusive products under the new version of the National Essential Drugs List and the Medical Insurance List. During the year under review, sales of Bi Yan Kang Tablet amounted to HK$216,570,000, representing an increase of 101.4% compared to HK$107,558,000 of the same period last year, and accounted for 23.1% of the total sales of the Group. Sales of VC Yinqiao Tablet were HK$32,616,000, decreased by 6.7% compared to HK$34,975,000 of the same period last year, and accounted for 3.5% of the sales of the Group.

The remarkable growth of sales of Bi Yan Kang Tablet was principally attributable to the resources that the Group spent on promoting the product through various media across China including television advertisement by phases, and the increased production volume to match the promotion and marketing campaign undertaken at retail sales points such as pharmacies and large chain store pharmacies. These efforts have effectively enhanced the brand awareness and coverage of Bi Yan Kang Tablet, resulting in satisfactory results of sales in the retail sales points. The growth of sales of Bi Yan Kang Tablet was also benefited from the growth of sales in hospital prescription after the product was included in the National Essential Drugs List, as well as the highly effective product price maintenance measures.

Using Biyankang Tablet as the centre of focus, the Group also selectively introduced western medicine such as antihistamine drug to cure allergic rhinitis and other types of Chinese patent drugs and Phinamide （鼻炎滴劑）, creating a comprehensive product line for rhinitis under the “Dezhong” brand. The target market of these products was mainly retail pharmacies and basic medical institutions.

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Cerebro-cardiovascular drug

The major product was Sheng Tong Ping (Nifedipine Sustained-release Tablet) produced by Guangdong Medi-World which was a chemical drug mainly used to relieve high blood pressure and nerve pain of heart. It is the leading product of its kind in the mainland and the model of controlled-release and sustained-release preparation in Guangdong province. During the year under review, sales of Sheng Tong Ping were HK$98,664,000, increased by 21.2% compared to HK$81,388,000 of the same period last year, and accounted for 10.5% of the total sales of the Group.

From 2004 to 2009, sales of Sheng Tong Ping increased to 9.11 million packs from 3.49 million packs, with a compound annual growth rate of 21.1%. This was benefited from the academic marketing strategy of Sheng Tong Ping which the Group has been persistently implementing. The cerebro-cardiovascular team of the Group invited authoritative medical experts to cooperate on a long term basis. Through hosting forum and discussion panels on high blood pressure studies, we established the brand and product image of Sheng Tong Ping in the professional domain. Besides, since March 2008, the Group launched the “Step by Step Penetration Program”（「星火燎原計劃」）(the “Plan”) in full to explore the village, town and district hospitals end market. The Plan used Guangdong as the focal point to expand its sales network and penetrate into other provinces in China. At present, the Plan already covered 22 provinces and fostered the steady and continuous growth of sales of products of Sheng Tong Ping over the years.

Going forward, the Group has selected several types of cerebro-cardiovascular product on which its promotion efforts will be focused. These include western medicine such as Sheng Tong Ping, Compound Eualapril, Telmisartan and Indapamide sustained-release Tablets; and the exclusive Chinese patent medicines such as Shengmai Capsule （生脈膠囊）and Shentian Capsule （參田膠囊）. The market positioning of the cerebro-cardiovascular products is the second tier and third tier municipal hospitals and basic medical institutions of county and village and town levels.

Pediatrics and immunology medicine

The principal product under this category was Yu Ping Feng Granule produced by Guangdong Medi-World, which was a traditional Chinese medicine used to strengthen the immune system. Yu Ping Feng Granule is included in the “National Traditional Chinese Medicine Protected Category”, “Reserve Drugs for Severe Pandemic” of the state and the exclusive product under Chinese patent medicine in the new version of the National Essential Drugs List. During the year under review, sales of Yu Ping Feng Granule were HK$78,737,000, which recorded a substantial rise of 140.0% as compared to HK$32,811,000 of the same period last year.

Yu Ping Feng Granule was a product that the Group developed with emphasis, targeting at hospitals in large cities as well as basic medical institutions and OTC retail markets. The Group fully leveraged on the progress of research on immunology in recent years and positioned Yu Ping Feng Granule as “The Chinese medicinal herb immunomodulator”. Through promotion in the academic domain and hosting

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conferences for all key hospital units in China, the Group promoted the pathological effects of “Two-way immune modulation” of Yu Ping Feng Granule with medical proof. At the end of 2010, the Group supported the National pediatrics Immunology Annual Meeting as sole sponsor, and invited famous experts of pediatrics and immunology from China and abroad to deliver seminars. The research reports published during the Meeting proved the regulatory effects to the immunological system of Yu Ping Feng Granule, which has benefited the promotion of Yu Ping Feng Granule in China, and at the same time provided a basis for clinical application of Yu Ping Feng Granule by a lot of doctors.

With the gradual implementation of the National Essential Drugs System, a growing trend of sales for medical institution prescription appeared. Driven by the support from medical institutions and the effective implementation of the promotion plan of core products in OTC sales points in China by the Group, growth of Yu Ping Feng Granule was also seen in the OTC retail markets. From 2008 to 2010, the annual compound growth rate of sales of Yu Ping Feng Granule was 100%.

Rheumatic diseases and traumatic injury drug

This type of Chinese patent medicine was the signature product of the Group. The major product was Feng Liao Xing Rheumatism Medicinal Wine. During the year under review, sales of Feng Liao Xing Rheumatism Medicinal Wine were HK$42,791,000, which showed a decrease of 19.4% compared to HK$53,097,000 of the same period last year, and accounted for 4.6% of the total sales of the Group.

During the second half of 2010, the Group redeveloped the future sales strategy for rheumatic disease and traumatic injury drug. On top of Feng Liao Xing Rheumatism Medicinal Wine which has always been our emphasis, we also supplemented some exclusive external products for traumatic injury to enrich our product mix, which are Shaolin Dieda Herbal Plaster, Jinlong Shangshi Herbal Plaster （金龍傷濕止痛膏）, Jin Shu Dieda Pill（金術跌打丸）and Jiehong Dieda Tincture（竭紅跌打酊）. Through redesigning packaging, adjusting product prices and sales channels, and allocating more sales staff for Rheumatic diseases and traumatic injury products, we have successfully penetrated the basic medical market at county and village and town levels as well as the retail market.

Anti-biotics for injection

Gaode (Cefodizime Sodium for injection), an antibiotic of injection type under Cefodizime Sodium, currently enjoyed the largest market share for the same type of products in China. The product is applied to infection caused by allergic bacteria, such as upper and lower urinary infection and Gonorrhea. During the year under review, sales of Gaode were HK$91,986,000, increased by 51.6% compared to HK$60,663,000 of the same period last year, and accounted for 9.8% of the total sales of the Group.

Since more provinces included Gaode in the Medical Insurance List at provincial level and Essential Drugs List for New Village Cooperative Medical Treatment, the geographical coverage of Gaode has been expanded. At the same time, there was

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further refinement of the original sales agency model in provinces, with the distribution system penetrated to cities at local and county levels which resulted in a wider market coverage for this product.

Oncology drug

Sha Pei Lin (Group A Streptococcus for injection) was the most powerful and widely accepted super antigen biological reactions modulators (BRM). It was mainly used to cure ascites caused by malignant neoplasm and as ancillary treatment of tumors. During the year under review, sales of Sha Pei Lin were HK$14,420,000, which recorded an increase by 41.3% compared to HK$10,208,000 of the same period last year, and accounted for 1.5% of the total sales of the Group.

Sales of other products

During the year under review, sales of other products of the Group were HK$363,394,000, increased by 25.5% compared to HK$289,475,000 of the same period last year, and accounted for 38.7% of the total sales of the Group. The adjustment of product lines and clear brand positioning of the Group not only fostered the sales of core products but also drove the growth of sales of other products. Other than the above core products, 6 products of the Group recorded sales of over HK$10 million, reflecting the rich product resources of the Group and potential for future development.

Cost control

During the year under review, due to inflation pressure, there was a significant surge in prices of raw materials of traditional Chinese medicine as well as the costs of packing materials and fuel costs. Despite this, gross profit of the Group managed to improve by 62.4% to HK$523,904,000. Gross profit margin increased by 7.6 percentage points to 55.8% from 48.2% of the same period last year.

During the year under review, the Group strictly implemented cost control measures. These measures mainly included careful selection of suppliers to ensure raw materials procured are of high quality at low costs with stable and adequate supply; optimizing skills to improve the quality of products and efficiency of production; and re-formulating employee remuneration policies such as floating wages system and incentive and punishment proposals. In addition, the group’s subsidiary, Foshan Nanhai Pharmaceutical Group Medicinal Material Co., Ltd. (“Nanhai Pharmaceutical”), served as the central procurement platform of the traditional Chinese medicinal materials and effectively reduced the costs of procurement through bulk purchases. Reasonable price hikes of several core products also contributed to the increased gross profit margin of the Group.

It is expected that the prices of Chinese medicinal materials would still stand at a relatively high level in 2011 which is expected to exert pressure on the cost of sales for the Group. In light of this, the Group planned to set up the Good Agriculture

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Practice bases for key traditional Chinese medicinal materials (such as astragali radix and angelica sinensis) in Gansu province of China with an aim to ensuring stability in the supply and prices of traditional Chinese medicinal materials.

Research and development

Research and development expenses invested by the Group during the year under review amounted to HK$37,508,000, representing a substantial growth of 216.7% compared to HK$11,845,000 of last year. Based on our own advantages and the current development status of the pharmaceutical sector, we determined modernisation of traditional Chinese medicine and new pharmaceutical preparations （新型藥物製劑） as the development strategy of our core competitiveness.

In the area of new drugs, the Group would enrich the existing product lines of cerebro-cardiovascular system, nervous system, special antibiotics, and anti-oncology drugs. In the pharmaceutical preparations area, controlled-release and sustained-release preparation and lipid microsphere would be the representative products. The competitiveness of the Group would be enhanced from a technical perspective by implementing and planning of product research and development, developing characteristics and advantages of our product types, and improving production skills and quality level.

Substantial capital investment

The Group commenced several projects to enhance productivity and competitiveness during the year to meet the keen demand in the pharmaceutical market in the future.

In January 2010, the Group acquired the land use right of a plot of land located in Gao Ming District, Foshan, at a consideration of approximately RMB17,500,000 for the purpose of constructing a modern Chinese medicine extract and preliminary treatment centre to increase production capacity to meet the ever increasing sales demand of the Group. The centre occupied approximately 106 mu with a gross floor area of approximately 70,000 square metres. Construction work is expected to be completed and operation is expected to commence at the end of year 2011, with a capacity to process 20,000 tonnes of traditional Chinese medicine, process and pack 80 million packs of traditional Chinese herbal slices, and produce 10,000 tonnes of traditional Chinese medicinal wine. The centre is also expected to achieve an upgrade in technology and techniques for preparatory treatment, extracting of traditional Chinese medicine, and become the most advanced and sizeable extraction and preliminary treatment centre in the Pearl Delta region. The centre would help to remove the bottleneck constraints of the production of Chinese patent medicine for the Group.

In April 2010, the Group successfully obtained the land use right of a plot of land of approximately 33 mu located in Chan Cheng District, Foshan by tender at a consideration of approximately RMB77,060,000. The plot of land is planned to be used for the construction of the headquarters of the Group, a product inspection centre and a modern pharmaceutical research centre.

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In addition, the Group also expanded the workshop of the granule products at Guangdong Medi-World, increasing its production capacity by 3.5 times of the existing capacity to 1 billion packs. The workshop is expected to commence operation in June 2012.

The development of pharmaceutical companies can be affected easily by state pharmaceutical policies. For instance, the new policy for centralised procurement by tender and centralised allocation and distribution will further standardise the market practices; the promulgation of the new version of GMP standard will enhance the standard and quality control of the production of drugs. These will speed up the adjustment and consolidation of the sector. In addition, there will be more changes in the pricing principles, method of ascertaining prices and individual pricing etc as a result of the forthcoming implementation of “Administrative Measures for the Pricing of Drugs”. Furthermore, the Group will have to face keen competitions and challenges from competitors in the pharmaceutical sector, particularly from those who possess richer or more exclusive product lines, stronger brands and distribution network, and lower cost structure. Such factors bring uncertainty and volatility to the sales of the Group. In response to these, we may need to invest more capital to upgrade our production facilities, conduct marketing and promotion activities for our products and brand, as well as carry out research and development of new drugs. These measures may cause costs and expenses to increase.

Notwithstanding these challenges, with the thorough implementation of the established development strategies, enhancement of three critical operating capability in research and development and innovation, quality of production and marketing, and by grasping those merger and acquisition opportunities which will benefit us in the aspects of brand, sales network, product and research and development, we believe the Group is in a niche position to gain from the future golden opportunities of the pharmaceutical sector and create higher value for shareholders.

Financial overview

Turnover

For the year ended 31 December 2010, the Group’s turnover increased by 40.1% to HK$939,178,000 from HK$670,175,000 for the corresponding period of last year. The increase in turnover was the result of the Group’s successful strategy in focusing on the medicines which have substantial market and enjoy advantages from state policies.

Cost of sales and gross profit margin

For the year ended 31 December 2010, the Group’s cost of sales was HK$415,274,000, representing an increase of 19.5% as compared to HK$347,479,000 for the corresponding period of last year. Direct raw materials, direct labor and production overhead accounted for 75.6%, 10.5% and 13.9% of the total cost of sales respectively, as compared to 62.2%, 12.2% and 25.6% respectively for the corresponding period of last year. For the year ended 31 December 2010, the Group’s

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gross profit margin was 55.8%, representing an increase of 7.6 percentage points as compared to 48.2% for the corresponding period of last year. As Nanhai Pharmaceutical served as procurement platform of the Chinese medicinal materials for the subsidiaries of the Group, it effectively reduced the costs of procurement by bulk purchase of Chinese medicinal materials. Reasonable price hikes of several core products also contributed to the increased gross profit margin of the Group.

Other revenue

For the year ended 31 December 2010, the Group’s other revenue was HK$13,348,000, representing an increase of 11.2% as compared to HK$12,004,000 for the corresponding period of last year. Such increase was mainly attributable to the increase of government grants by HK$481,000 to HK$9,835,000 and the increase of HK$435,000 of interest income as compared to the corresponding period of last year.

Other net income

For the year ended 31 December 2010, the Group’s other net income was HK$9,034,000, representing an increase of 663.0% as compared to HK$1,184,000 for the corresponding period of last year. Such increase was mainly attributable to HK$8,797,000 net gain on the disposal of properties, plant and machinery during the year.

Selling and distribution costs

For the year ended 31 December 2010, the Group’s selling and distribution costs amounted to HK$317,161,000, representing an increase of 96.2% as compared to HK$161,625,000 for the corresponding period of last year, which mainly consisted of advertising and promotion expenses of HK$87,701,000, salary expenses of sales and marketing staff of HK$49,176,000, distribution costs and traveling expenses of HK$144,579,000, and other cost of sales of HK$35,705,000. The increase in selling and distribution costs as compared to last year was due to the fact that the Group put more resources to promote the product image and brand image as well as extending the sales network with diversified marketing models, which allowed its products to gain access to more hospitals and the retail market.

Administrative expenses

For the year ended 31 December 2010, the Group’s administrative expenses amounted to HK$110,064,000, representing an increase of 40.3% as compared to HK$78,473,000 for the corresponding period of last year. Such increase was mainly attributable to the increase of research and development costs by HK$25,663,000 to HK$37,508,000 as compared to the corresponding period of last year. The administrative expenses mainly comprised of staff costs of HK$27,452,000, depreciation and amortisation of HK$6,359,000, product research and development expenses of HK$37,508,000 and office rental and other expenses of HK$38,745,000.

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Profit from operations

For the year ended 31 December 2010, the Group’s profit from operations was HK$119,061,000, representing an increase of 24.3% as compared to HK$95,786,000 for the corresponding period of last year; and the operating profit ratio (defined as the profit from operations divided by the total turnover) decreased to 12.7% from 14.3% for the corresponding period of last year. Such decrease was due to the significant increase in selling and distribution costs for the year ended 31 December 2010.

Finance costs

For the year ended 31 December 2010, the Group’s finance costs amounted to HK$3,831,000 (year ended 31 December 2009: HK$5,321,000) which mainly represented the interest expenses of bank borrowings. The effective interest rate for the loans was 5.3% (31 December 2009: 5.6%).

Earnings per share

For the year ended 31 December 2010, the basic earnings per share was HK$ cent 3.53, representing a 25.2% increase as compared to HK$ cent 2.82 for the corresponding period of last year. The increase in basic earnings per share was due to the increase of 38.3% in the profit attributable to equity shareholders, which amounted to HK$60,925,000 (year ended 31 December 2009: HK$44,054,000).

Liquidity and financial resources

As at 31 December 2010, the Group’s current assets amounted to HK$600,712,000 (31 December 2009: HK$508,246,000), including cash and cash equivalents and deposits with banks of HK$180,887,000 (31 December 2009: HK$233,495,000). Current liabilities amounted to HK$489,089,000 (31 December 2009: HK$268,184,000). Net current assets aggregated to HK$111,623,000 (31 December 2009: HK$240,062,000). The Group’s current ratio decreased from 1.9 as at 31 December 2009 to 1.2 as at 31 December 2010. The gearing ratio (defined as the bank loans divided by the interests attributable to equity shareholders of the Company) slightly increased from 12.2% as at 31 December 2009 to 13.1% as at 31 December 2010. Such increase was due to the increment of bank loans as the Group requires sufficient fund to continue its business expansion and fund the investment to upgrade the production capacity.

Bank loans and pledge of assets

As at 31 December 2010, the balance of the Group’s bank loan was HK$109,294,000 (31 December 2009: HK$84,042,000), of which HK$94,016,000 (31 December 2009: HK$59,511,000) was secured by the Group’s assets.

– I-46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Contingent liabilities

The Group did not have any contingent liabilities as at 31 December 2010 (31 December 2009: Nil).

Exchange rate risk

During the period, individual companies within the Group have limited foreign currency risk as most of the transactions were denominated in the same currency as the functional currency of the operations to which they related. The Group is of the opinion that its exposure to foreign exchange rate fluctuations is limited and no financial instrument has been used for the purpose of hedging exchange rate risks.

Employee and remuneration policies

As at 31 December 2010, the Group employed a total of 2,760 (31 December 2009: 2,350) staff members, including directors of the Company, of which the number of sales staff, production staff and those engaged in research and development, operation and administration and senior management were 1,165, 1,130 and 465 respectively. Remuneration packages were principally comprised of salary and discretionary performance bonus based on individual merits. The Group’s total remuneration for employees for the year was HK$116,680,000 (31 December 2009: HK$100,302,000).

3. INDEBTEDNESS STATEMENT

At the close of business on 31 July 2013, being the latest practicable date for the purpose of the indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding bank loans and other borrowing of approximately HK$640,646,000. As at 31 July 2013, bank loans amounting to approximately HK$352,423,000 were secured by the Enlarged Group’s interests in leasehold land, buildings, and deposits with banks with an aggregate carrying value of approximately HK$171,500,000, personal guarantee provided by Mr. Yang who is an executive Director.

Save as disclosed above, at the close of business on 31 July 2013, the Enlarged Group did not have any other outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts or loans, liabilities under acceptance or other similar indebtedness, hire purchase or finance lease obligations or any guarantees or other material contingent liabilities.

The Directors confirmed that there is no material change in the indebtedness and contingent liabilities of the Enlarged Group since 31 July 2013 up to the Latest Practicable Date.

– I-47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. WORKING CAPITAL

The Directors, after due and careful consideration, are of the opinion that the Enlarged Group has sufficient working capital to meet with its present requirements, that is for at least the next 12 months from the date of this circular. In assessing the working capital sufficiency of the Enlarged Group, the Directors have made the following assumptions:

(i) there will be no material change in the existing government policies or political, legal, fiscal, market or economic conditions in regions where the Enlarged Group operates;
(ii) there will be no material change in interest rates, exchange rates and inflation rates from those presently prevailing on 31 December 2012;
(iii) there will be no material change in the rates of taxation applicable to the activities of the Enlarged Group in its operating regions and the Enlarged Group will not be materially and adversely affected by changes in the tax base or the rates of taxation;
(iv) there will be no significant change in the existing accounting policies, critical accounting estimates and judgement underlying the preparation of the forecast of working capital of the Enlarged Group from those adopted in the preparation of the Group’s results for the year ended 31 December 2012 in the annual report of the Company, and the Target Group’s results for the three years ended 31 December 2010, 2011 and 2012 in the accountants’ report on the Target Group as set out in Appendix II to this circular;
(v) the operations and business of the Enlarged Group will not be materially affected or interrupted by any force majeure events or unforeseeable factors or any unforeseeable reasons that are beyond the control of the Directors, including but not limited to the occurrence of natural disasters, supply failure, labor dispute, significant lawsuit and arbitration;
(vi) the Directors expect that no extraordinary financial items will be incurred during the next 12 months from the date of this circular;
(vii) the Enlarged Group can substantially maintain its business relationship with major customers and suppliers during the next 12 months from the date of this circular;
(viii) the Enlarged Group’s production and operation will not be significantly affected by interruptions as a result of the failure to meet relevant production and advertising regulations, or obtain industry safety and qualification certificates;
(ix) the core management of the Enlarged Group will continue to serve the Enlarged Group after the Completion and the Enlarged Group will not encounter any material difficulties in recruiting and retaining qualified staff;

– I-48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(x) save for the Acquisition, the Enlarged Group is not expected to undertake major acquisition or disposal of assets and/or investments;
(xi) the Enlarged Group will be able to renew the existing banking facilities in the amount of approximately HK$788 million as at 31 July 2013 as general working capital of the Enlarged Group; and
(xii) the Group will be able to obtain new banking facilities of HK$900 million to fund the Acquisition.

The Company does not foresee any difficulty in renewing the existing banking facilities in the amount of approximately HK$788 million as described in (xi) above.

5. FINANCIAL AND TRADING PROSPECTS

While making efforts on growing our existing businesses, the Group will identify merger and acquisition targets with unique products and established market share. Priority will be given to traditional Chinese medicines companies possessing a product portfolio complementary to that of the Group. Our focus will be on cerebrocardiovascular drugs, oncology drugs, orthopedic drugs, drugs targeting the problems of the aging population, etc. The Directors will evaluate the possibility of acquiring traditional Chinese medicines related businesses to strengthen the Group’s competitive position in the industry.

As the Target Group has a long and successful history of operations and has established reputable products in the pharmaceutical market and strong distribution networks in the PRC, the Board considers that the Acquisition would allow the Group to further penetrate into the traditional Chinese medicine market in the PRC, particularly in the market of medication with emphasis on orthopaedics and cervical spondylosis.

Following the Acquisition, the Enlarged Group will own a total of seven exclusive products which are on both the 2012 National Essential Drugs List and the National Drugs List for Basic Medical Insurance and become the pharmaceutical enterprise which produces the most number of exclusive products on the 2012 National Essential Drugs List in the

– I-49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

PRC. Based on the above, the Directors are of the view that the Acquisition will improve the profitability of the Enlarged Group and are optimistic about the trading prospects of the Enlarged Group.

On 14 August 2013, the Group acquired a piece of land through the auction at a consideration of RMB234.05 million (equivalent to approximately HK$294.9 million). The land has a net usable site area of 22,041.7 square metres and is located at Chancheng District, Foshan City, the PRC. The Group intends to develop the land as its future headquarters and staff quarters for senior management.

On 26 August 2013, the Group entered into a disposal agreement with an independent third party to dispose of its 51% interest in the registered capital of Guizhou Zhongtai for a cash consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million). Guizhou Zhongtai is in its early stage of development, which requires further injection of substantial investment in order to bring its operation to a sizeable scale. In addition, the principal business activities of the Group are the manufacture and sale of traditional Chinese medicine and pharmaceutical products in the PRC. The products of Guizhou Zhongtai are not in line with those of the Group which are traditional Chinese medicine and pharmaceutical products. The Group will recover the investment cost and dedicate more resources to its core businesses. Completion of the disposal is expected to take place in the fourth quarter of 2013.

As at the Latest Practicable Date, save as disclosed above, the Group does not have any concrete acquisition plan or target and does not have any intention to downsize the existing business of the Enlarged Group.

6. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial and trading position of the Group since 31 December 2012 (being the date to which the latest published audited financial statements of the Group were made up).

– I-50 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

1. ACCOUNTANTS’ REPORT ON THE TARGET GROUP

The following is the text of a report, prepared for the purpose of incorporation in this circular, received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong.

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

19 September 2013

The Directors Winteam Pharmaceutical Group Limited

Dear Sirs,

INTRODUCTION

We set out below our report on the financial information relating to Tongjitang Chinese Medicines Company (the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the “Target Group”) comprising the consolidated income statements, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements of the Target Group, for each of the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2013 (the “Relevant Periods”), and the consolidated statements of financial position of the Target Group and the statements of financial position of the Target Company as at 31 December 2010, 2011 and 2012 and 30 April 2013 together with the explanatory notes thereto (the “Financial Information”), for inclusion in the circular issued by Winteam Pharmaceutical Group Limited (the “Company”) dated 19 September 2013 (the “Circular”) in connection with the proposed acquisition of the Target Company by the Company.

The Target Company was incorporated in the Cayman Islands on 16 May 2006 as an exempted company with limited liability under the Companies Law, Chapter 22 (Law 3 of 1961, as combined and revised) of the Cayman Islands.

As at the date of this report, no audited financial statements have been prepared for the Target Company and Unisources Enterprises Limited, as they are investment holding companies and not subject to statutory audit requirements under the relevant rules and regulations in the jurisdiction of incorporation.

All companies now comprising the Target Group have adopted 31 December as their financial year end date. Details of the companies comprising the Target Group that are subject to audit during the Relevant Periods and the names of the respective auditors are set out in note 1(b) of Section B. The statutory financial statements of these companies were

– II-1 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) or the Accounting Standards for Business Enterprises issued by the Ministry of Finance of the People’s Republic of China (“PRC”).

The directors of the Target Company have prepared the consolidated financial statements of the Target Group for the Relevant Periods (the “Underlying Financial Statements”) in accordance with HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). The Underlying Financial Statements for each of the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2013 were audited by KPMG Huazhen (Special General Partnership) in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information has been prepared by the directors of the Target Company for inclusion in the Circular based on the Underlying Financial Statements, with no adjustments made thereon and in accordance with the applicable disclosure provisions of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL INFORMATION

The directors of the Target Company are responsible for the preparation of the Financial Information that gives a true and fair view in accordance with HKFRSs issued by the HKICPA, the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Listing Rules and for such internal control as the directors of the Target Company determine is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error.

REPORTING ACCOUNTANTS’ RESPONSIBILITY

Our responsibility is to form an opinion on the Financial Information based on our procedures performed in accordance with Auditing Guideline “Prospectuses and the Reporting Accountant” (Statement 3.340) issued by the HKICPA. We have not audited any financial statements of the Target Company, its subsidiaries or the Target Group in respect of any period subsequent to 30 April 2013.

OPINION

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Target Group and the Target Company as at 31 December 2010, 2011 and 2012 and 30 April 2013 and the Target Group’s consolidated results and cash flows for the Relevant Periods then ended.

CORRESPONDING FINANCIAL INFORMATION

For the purpose of this report, we have also reviewed the unaudited corresponding interim financial information of the Target Group comprising the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the four months ended 30

– II-2 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

April 2012, together with the notes thereto (the “Corresponding Financial Information”), for which the directors of the Target Company are responsible, in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the HKICPA.

The directors of the Target Company are responsible for the preparation of the Corresponding Financial Information in accordance with the same basis adopted in respect of the Financial Information. Our responsibility is to express a conclusion on the Corresponding Financial Information based on our review.

A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the Corresponding Financial Information.

Based on our review, for the purpose of this report, nothing has come to our attention that causes us to believe that the Corresponding Financial Information is not prepared, in all material respects, in accordance with the same basis adopted in respect of the Financial Information.

– II-3 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

A FINANCIAL INFORMATION

1 Consolidated income statements

Section B Note *Continuing operations* Turnover 2 Cost of sales Gross profit Other revenue 3 Other net income/ (expenses) 3 Selling and distribution expenses Administrative expenses Profit from operations Finance costs 4(a) Profit before taxation 4 Income tax 5 Profit from continuing operations *Discontinued operations* Profit from discontinued operations (net of tax) 6 Profit for the year/ period	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 579,046 912,249 1,267,446 (228,071) (412,076) (503,292) 350,975 500,173 764,154 9,646 11,108 10,768 3,598 (3,195) 2,233 (240,598) (353,294) (484,995) (68,271) (81,580) (72,524) 55,350 73,212 219,636 (15,788) (12,309) (12,877) 39,562 60,903 206,759 (2,088) (15,533) (37,293) 37,474 45,370 169,466 8,162 – – 45,636 45,370 169,466	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 356,407 389,696 (149,369) (147,355) 207,038 242,341 2,396 2,053 270 2,345 (152,493) (170,318) (18,413) (28,088) 38,798 48,333 (5,266) (4,863) 33,532 43,470 (7,054) (9,078) 26,478 34,392 – – 26,478 34,392

– II-4 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Section B Note Attributable to: Equity shareholders of the Target Company – Continuing operations – Discontinued operations Non-controlling interests – Continuing operations – Discontinued operations Profit for the year/period Earnings per share (HK$): Basic and diluted 10 – Continuing operations – Discontinued operations	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 37,474 45,370 169,466 26,478 34,392 9,274 – – – – 46,748 45,370 169,466 26,478 34,392 ---------- ---------- ---------- ---------- ---------- – – – – – (1,112) – – – – (1,112) – – – – - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ 45,636 45,370 169,466 26,478 34,392 0.75 0.91 3.39 0.53 0.69 0.18 – – – – 0.93 0.91 3.39 0.53 0.69	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 37,474 45,370 169,466 26,478 34,392 9,274 – – – – 46,748 45,370 169,466 26,478 34,392 ---------- ---------- ---------- ---------- ---------- – – – – – (1,112) – – – – (1,112) – – – – - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ 45,636 45,370 169,466 26,478 34,392 0.75 0.91 3.39 0.53 0.69 0.18 – – – – 0.93 0.91 3.39 0.53 0.69
		34,392 ---------- – –
		– - - - - - - - - - ------------------------------------ 34,392

		0.69 –
		0.69

The accompanying notes form part of the Financial Information.

– II-5 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

2 Consolidated statements of comprehensive income

Profit for the year/period Other comprehensive income (after tax and reclassification adjustments) Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of financial statements of entities not using Hong Kong Dollar (“HK$”) as functional currency Exchange reserves realised on disposal of subsidiaries Total comprehensive income for the year/period Total comprehensive income attributable to: – Equity shareholders of the Target Company – Non-controlling interests Total comprehensive income for the year/period	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 45,636 45,370 169,466 33,156 31,179 (1,352) (15,447) – – 63,345 76,549 168,114 64,457 76,549 168,114 (1,112) – – 63,345 76,549 168,114	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 26,478 34,392 1,529 9,179 – – 28,007 43,571 28,007 43,571 – – 28,007 43,571	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 26,478 34,392 1,529 9,179 – – 28,007 43,571 28,007 43,571 – – 28,007 43,571
			43,571

			43,571 –
			43,571

The accompanying notes form part of the Financial Information.

– II-6 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

3 Consolidated statements of financial position

Section B Note Non-current assets Fixed assets – Property, plant and equipment 11 – Interests in leasehold land held for own use under operating leases 11 Construction in progress 12 Intangible assets 13 Goodwill 14 Other receivables 18 Deferred tax assets 23(b) Current assets Other financial assets 16 Inventories 17 Trade and other receivables 18 Deposits with banks 19 Cash and cash equivalents 19 Current liabilities Trade and other payables 20 Bank loans 21 Current taxation 23(a) Current portion of deferred government grants 22 Net current assets Total assets less current liabilities	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 129,435 123,483 125,229 53,181 50,316 48,693 182,616 173,799 173,922 153 2,943 5,561 28,571 25,717 20,303 2,756 2,893 2,893 2,425 9,526 42,101 14,255 18,683 21,128 230,776 233,561 265,908 ----------- ----------- ----------- 1,338 866 863 155,592 146,563 148,101 786,833 811,908 847,818 91,078 6,168 – 246,843 258,227 257,093 1,281,684 1,223,732 1,253,875 ----------- ----------- ----------- 146,281 152,142 191,045 172,754 199,827 187,462 5,857 13,112 21,724 17,777 25,524 51,329 342,669 390,605 451,560 ----------- ----------- ----------- 939,015 833,127 802,315 ----------- ------------------------------------------ ----------- ------------------------------------------ ----------- ------------------------------------------ 1,169,791 1,066,688 1,068,223 ----------- ------------------------------------------ ----------- ------------------------------------------ ----------- ------------------------------------------	As at 30 April 2013 HK$’000 128,623 49,406
		178,029 73,348 18,757 2,927 8,050 22,780
		303,891 ----------- 863 180,702 889,251 – 179,469
		1,250,285 ----------- 182,552 189,711 18,333 69,104
		459,700 ----------- 790,585 ----------- ------------------------------------------ 1,094,476 ----------- ------------------------------------------

– II-7 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Section B Note Non-current liabilities Bank loans 21 Deferred tax liabilities 23(b) Deferred government grants 22 Net assets Equity Share capital 25(c) Reserves Total equity attributable to equity shareholders of the Target Company Non-controlling interests Total equity	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 5,876 – – 11,061 11,252 11,683 23,890 34,621 20,719 40,827 45,873 32,402 ----------- ------------------------------------------ ----------- ------------------------------------------ ----------- ------------------------------------------ 1,128,964 1,020,815 1,035,821 787 389 389 1,128,177 1,020,426 1,035,432 1,128,964 1,020,815 1,035,821 – – – 1,128,964 1,020,815 1,035,821	As at 30 April 2013 HK$’000 – 11,814 3,270
		15,084 ----------- ------------------------------------------ 1,079,392

		389 1,079,003
		1,079,392 –
		1,079,392

The accompanying notes form part of the Financial Information.

– II-8 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

4 Statements of financial position

Section B Note Non-current assets Investments in subsidiaries 15 Other receivables 18 Total non-current assets Current assets Other receivables 18 Cash and cash equivalents 19 Total current assets Current liabilities Other payables 20 Total current liabilities Net current assets Net assets Equity Share capital 25(c) Reserves Total equity 25(a)	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 1 1 1 – 2,300 1,864 1 2,301 1,865 466,781 438,533 437,550 1,027 23 405 467,808 438,556 437,955 ----------- ----------- ----------- 19,667 2,546 2,539 19,667 2,546 2,539 ----------- ----------- ----------- 448,141 436,010 435,416 ----------- ------------------------------------------ ----------- ------------------------------------------ ----------- ------------------------------------------ 448,142 438,311 437,281 787 389 389 447,355 437,922 436,892 448,142 438,311 437,281	As at 30 April 2013 HK$’000 1 1,722
		1,723 437,413 405
		437,818 ----------- 2,542
		2,542 ----------- 435,276 ----------- ------------------------------------------ 436,999

		389 436,610
		436,999

The accompanying notes form part of the Financial Information.

– II-9 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

5 Consolidated statements of changes in equity

Attributable to equity holders of the Target Company

At 1 January 2010 Changes in equity for 2010 Profit for the year Other comprehensive income Total comprehensive income Acquisition of a subsidiary (note 15) Disposal of Subsidiaries (note 6) Reversal of share-based compensation (note 24) Transfer to reserve fund At 31 December 2010 and 1 January 2011 Changes in equity for 2011 Profit for the year Other comprehensive income Total comprehensive income Dividends approved and paid in respect of the previous years Cancellation of share incentive plan (note 24) Transfer to reserve fund Arising from privatization (note 25 (c)) At 31 December 2011 and 1 January 2012 Changes in equity for 2012 Profit for the year Other comprehensive income Total comprehensive income Dividends approved and paid in respect of the previous years Transfer to reserve fund At 31 December 2012	Share capital HK$’000 (note 25(c)) 787 – – – – – – – 787 – – – – – – (398) 389 – – – – – 389	Share premium HK$’000 (note 25(d)) 825,868 – – – – – (314) – 825,554 – – – (185,087) – – – 640,467 – – – (72,836) – 567,631	Capital reserve HK$’000 (note 25(g)) 67,072 – – – – – – – 67,072 – – – – (67,072) – 787 787 – – – – – 787	Reserve fund HK$’000 (note 25(f)) 52,963 – – – – – – 4,929 57,892 – – – – – 4,467 – 62,359 – – – – 16,245 78,604	Exchange reserve HK$’000 (note 25(e)) 74,777 – 17,709 17,709 – – – – 92,486 – 31,179 31,179 – – – – 123,665 – (1,352) (1,352) – – 122,313	Retained profits HK$’000 43,354 46,748 – 46,748 – – – (4,929) 85,173 45,370 – 45,370 – 67,072 (4,467) – 193,148 169,466 – 169,466 (80,272) (16,245) 266,097	Total Non- controlling interests HK$’000 HK$’000 1,064,821 – 46,748 (1,112) 17,709 – 64,457 (1,112) – 2,112 – (1,000) (314) – – – 1,128,964 – 45,370 – 31,179 – 76,549 – (185,087) – – – – – 389 – 1,020,815 – 169,466 – (1,352) – 168,114 – (153,108) – – – 1,035,821 –	Total equity HK$’000 1,064,821 45,636 17,709
								63,345 2,112 (1,000) (314) –
								1,128,964 45,370 31,179
								76,549 (185,087) – – 389
								1,020,815 169,466 (1,352)
								168,114 (153,108) –
								1,035,821

– II-10 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Total equity HK$’000 1,035,821 34,392 9,179
Share capital HK$’000 (note 25(c)) 389 – – – 389 389 – – – – 389	Share premium HK$’000 (note 25(d)) 567,631 – – – 567,631 640,467 – – – (72,836) 567,631	Capital reserve HK$’000 (note 25(g)) 787 – – – 787 787 – – – – 787	Reserve fund HK$’000 (note 25(f)) 78,604 – – – 78,604 62,359 – – – – 62,359	Exchange reserve HK$’000 (note 25(e)) 122,313 – 9,179 9,179 131,492 123,665 – 1,529 1,529 – 125,194	Retained profits HK$’000 266,097 34,392 – 34,392 300,489 193,148 26,478 – 26,478 (80,272) 139,354
						43,571
						1,079,392

						1,020,815 26,478 1,529
						28,007 (153,108)
						895,714

The accompanying notes form part of the Financial Information.

– II-11 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

6 Consolidated cash flow statements

Note
Operating activities
Cash (used in)/generated
from operations
19(b)
PRC tax paid
Net cash (used in)/
generated from
operating activities
Investing activities
Acquisition of a
subsidiary (note 15)
Proceeds from disposal of
subsidiaries (notes 6
and 15)
Proceeds from disposal of
fixed assets
Payment for the purchase
of fixed assets
Payment for the purchase
of intangible assets
Advance to related parties
Changes in deposits with
banks
Interest received
Net cash (used in)/
generated from
investing activities
Financing activities
Proceeds from new bank
loans
Proceeds from shares
issued (note 25(c))
Dividend paid to the
equity shareholders of
the Target Company
Interest paid
Repayment of bank loans

For the year ended 31 December
For the four months
ended 30 April
2010
2011
2012
2012
2013
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(unaudited)
(88,823)
127,074
252,364
33,155
(20,938)
(7,933)
(12,310)
(30,815)
(4,874)
(14,086)
(96,756)
114,764
221,549
28,281
(35,024)
----------
----------
----------
----------
----------
5,411
–
–
–
–
13,811
6,166
–
–
–
17,885
240
5,503
102
12
(93,557)
(20,240)
(57,946)
(9,188)
(40,580)
(466)
(4,620)
(12)
–
–
(57)
(282)
–
–
–
(88,140)
81,972
6,168
6,168
–
2,182
1,516
1,543
930
247
(142,931)
64,752
(44,744)
(1,988)
(40,321)
----------
----------
----------
----------
----------
284,056
235,541
186,823
126,978
127,648
–
–
389
389
–
–
(185,087)
(153,108)
(153,108)
–
(19,752)
(12,309)
(12,877)
(5,266)
(4,863)
(114,850)
(220,524)
(199,115)
(126,978)
(127,648)

– II-12 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Note Net cash generated from/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December/30 April 19	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 149,454 (182,379) (177,888) - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ (90,233) (2,863) (1,083) 326,596 246,843 258,227 10,480 14,247 (51) 246,843 258,227 257,093	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) (157,985) (4,863) - - - - - - - - - ------------------------------------ - - - - - - - - - ------------------------------------ (131,692) (80,208) 258,227 257,093 357 2,584 126,892 179,469

The accompanying notes form part of the Financial Information.

– II-13 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

B NOTES TO CONSOLIDATED FINANCIAL INFORMATION

1 Significant accounting policies

(a) Statement of compliance

The Financial Information set out in this report has been prepared in accordance with HKFRSs, which collective term includes Hong Kong Accounting Standards and related interpretations, promulgated by the HKICPA. Further details of the significant accounting policies adopted are set out in the remainder of this Section B.

The HKICPA has issued a number of new and revised HKFRSs. For the purpose of preparing this Financial Information, the Target Group has adopted all these new and revised HKFRSs to the Relevant Periods, except for any new standards or interpretations that are not yet effective for the accounting period beginning 1 January 2013. The revised and new accounting standards and interpretations issued but not yet effective for the accounting period beginning on 1 January 2013 are set out in note 31.

The Financial Information also complies with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The accounting policies set out below have been applied consistently to all periods presented in the Financial Information.

The Corresponding Financial Information for the four months ended 30 April 2012 has been prepared in accordance with the same basis and accounting policies adopted in respect of the Financial Information.

(b) Basis of preparation

The Financial Information comprises the Target Company and its subsidiaries. As at the date of this report, the Target Company has direct or indirect interests in the following subsidiaries, which are private limited liability companies. The particulars of these subsidiaries are set out below:

		Issued and
	Place and date	fully paid up/
	of incorporation/	registered	Attributable		Principal
Name of company	establishment	capital	equity	interest	activities
			Direct	Indirect
Unisources	British Virgin	HK$350,333/	–	100%	Investment holding
Enterprises	Islands,	HK$350,333
Limited	22 November
(“Unisources”)	2004
Tongjitang	Hong Kong,	HK$1,000/	100%	–	Investment holding
Pharmaceutical	18 November	HK$10,000
(Hong Kong)	2008
Limited
Guizhou Tongjitang	Guiyang, the	RMB249,759,458/	–	100%	Development,
Pharmaceutical	PRC	RMB249,759,458			manufacturing,
Co., Ltd	29 June 2005				marketing and
（貴州同濟堂製藥有					sales of
限公司）(i)					medicine
					products

– II-14 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

		Issued and
	Place and date	fully paid up/
	of incorporation/	registered	Attributable		Principal
Name of company	establishment	capital	equity	interest	activities
			Direct	Indirect
Anhui Jingfang	Xuancheng, the	RMB39,000,000/	–	100%	Development,
Pharmaceutical	PRC	RMB39,000,000			manufacturing,
Co., Ltd.	7 March 2000				marketing and
（安徽精方藥業股份					sales of
有限公司）(i)					medicine
					products
Guizhou Longlife	Guiyang, the	RMB50,000,000/	–	100%	Development,
Pharmaceutical	PRC	RMB50,000,000			manufacturing,
Co., Ltd.	23 October				marketing and
（貴州老來福藥業有	2001				sales of
限公司）(i)					medicine
					products
Qinghai Pulante	Xining, the PRC	RMB27,520,000/	–	100%	Development,
Pharmaceutical	1 June 2000	RMB27,520,000			manufacturing,
Co., Ltd.					marketing and
（青海普蘭特藥業有					sales of
限公司）(i)					medicine
					products
Guizhou Jincili	Guiyang, the	RMB1,000,000/	–	100%	Development of
Technology	PRC	RMB1,000,000			medicine
Development Co.,	26 March 2008				products
Ltd.（貴州金刺梨科
技開發有限公司）(i)

Details of the companies comprising the Target Group that are subject to statutory audit during the Relevant Periods and the names of the respective auditors are set out below:

Name of companies	Financial period	Statutory auditors
Tongjitang Pharmaceutical (Hong	Years ended December 31,	Lui & Cheng Certified
Kong) Limited	2010, 2011 and 2012	Public Accountants
Guizhou Tongjitang Pharmaceutical	Years ended December 31,	Guizhou Junhe Certified
Co., Ltd. (“Tongjitang	2010, 2011 and 2012	Public Accountants
Pharmaceutical”)		（貴州君和會計師事務所）(i)
Anhui Jingfang Pharmaceutical Co.,	Years ended December 31,	Guizhou Junhe Certified
Ltd. (“Jingfang”)	2010, 2011 and 2012	Public Accountants
		（貴州君和會計師事務所）(i)
Anhui Jingfang Pharmaceutical	Years ended 31 December	Guizhou Junhe Certified
Chemical Co., Ltd.	2010 and 2011	Public Accountants
（宣城精方醫藥化工有限公司）(i)(ii)		（貴州君和會計師事務所）(i)
Guizhou Longlife Pharmaceutical	Years ended December 31,	Guizhou Junhe Certified
Co., Ltd. (“Guizhou LLF”)	2010, 2011 and 2012	Public Accountants
		（貴州君和會計師事務所）(i)
Qinghai Pulante Pharmaceutical Co.,	Years ended December 31,	Guizhou Junhe Certified
Ltd. (“Pulante”)	2010, 2011 and 2012	Public Accountants
		（貴州君和會計師事務所）(i)

– II-15 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Name of companies	Financial period	Statutory auditors
Guizhou Jincili Technology	Years ended December 31,	Guizhou Junhe Certified
Development Co., Ltd. (“Jincili”)	2010, 2011 and 2012	Public Accountants
		（貴州君和會計師事務所）(i)
Guizhou Tongjitang Asset	Year ended 31 December	Guizhou Junhe Certified
Management Co., Ltd.	2010	Public Accountants
（貴州同濟堂資產管理有限公司）(i)(ii)		（貴州君和會計師事務所）(i)
Guizhou Tongjitang Pharmaceutical	Year ended 31 December	Guizhou Junhe Certified
Distribution Co., Ltd. (“Tongjitang	2010	Public Accountants
Distribution”)		（貴州君和會計師事務所）(i)
（貴州同濟堂藥品配送有限公司）(i)(ii)
Guizhou Tongjitang Pharmacy Chain	Year ended 31 December	Guizhou Junhe Certified
Stores Co., Ltd. (“Tongjitang	2010	Public Accountants
Chain Stores”)		（貴州君和會計師事務所）(i)
（貴州同濟堂藥房連鎖有限公司）(i)(ii)
Guizhou Distillery Co., Ltd.	Year ended 31 December	Guizhou Junhe Certified
（貴州貴酒有限責任公司）(i)(ii)	2010	Public Accountants
		（貴州君和會計師事務所）(i)

(i) The official names of these entities are in Chinese. The English translation of the names is for reference only.
(ii) These entities were disposed of by the Target Group during the Relevant Periods.

(c) Basis of measurement

The Financial Information is presented in Hong Kong dollars (“HK$”), rounded to the nearest thousand except for per share data. It is prepared on the historical cost basis. Renminbi (“RMB”) is the functional currency of the Target Group’s major operating entities. The methods used to measure fair value are set out in note 26(e).

(d) Use of estimates and judgments

The preparation of the Financial Information in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the Financial Information and major sources of estimation uncertainty are discussed in note 30.

(e) Subsidiaries

Subsidiaries are entities controlled by the Target Group. The Target Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Target Group has power, only substantive rights (held by the Target Group and other parties) are considered.

– II-16 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Target Company, and in respect of which the Target Group has not agreed any additional terms with the holders of those interests which would result in the Target Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Target Group can elect to measure any non-controlling interests at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable assets.

Non-controlling interests are presented in the consolidated statements of financial position within equity, separately from equity attributable to the equity shareholders of the Target Company. Non-controlling interests in the results of the Target Group are presented on the face of the consolidated income statements and the consolidated statements of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Target Company.

Changes in the Target Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of the controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Target Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see note 1(g)).

In the Target Company’s statements of financial position, an investment in a subsidiary is stated at cost less impairment losses (see note 1(l)).

(f) Goodwill

Goodwill represents the excess of

(i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Target Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.

When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as a gain on a bargain purchase.

Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash generating units, that is expected to benefit from the synergies of the combination and is tested at the end of the reporting period for impairment (see note 1(l)).

On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

(g) Other investments in equity securities

The Target Group’s and the Target Company’s policies for investments in debt and equity securities, other than investments in subsidiaries are as follows:

– II-17 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Investments in equity securities are initially stated at fair value, which is their transaction price unless fair value can be more reliably estimated using valuation techniques whose variables include only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification:

Investments in securities held for trading are classified as current assets. Any attributable transaction costs are recognised in profit or loss as incurred. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in profit or loss. The net gain or loss recognised in profit or loss does not include any dividends or interest earned on these investments.

Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognised in the statement of financial position at cost less impairment losses (see note 1(l)).

Investments in securities which do not fall into any of the above categories are classified as available-for-sale securities. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in other comprehensive income and accumulated separately in equity in the fair value reserve, except foreign exchange gains and losses resulting from changes in the amortised cost of monetary items such as debt securities which are recognised directly in profit or loss. Dividend income from these investments is recognised in profit or loss and, where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. When these investments are derecognised or impaired (see note 1(l)), the cumulative gain or loss is reclassified from equity to profit or loss.

Investments are recognised/derecognised on the date the Target Group commits to purchase/sell the investments or they expire.

(h) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (note 1(l)).

Cost includes expenditures that are directly attributable to the acquisition of an asset. The cost of self-constructed items of property, plant and equipment includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

Depreciation is calculated to write off the cost or valuation of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

–	Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of
	lease and their estimated useful lives, being no more than 50 years after the date of completion
–	Plant, machinery and equipment 5 – 10 years
–	Motor vehicles 6 – 10 years
–	Others 5 – 10 years

Both the useful life of an asset and its residual value, if any, are reviewed at the end of the reporting period.

– II-18 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(i) Construction in progress

Construction in progress represents buildings and, various plant and equipment under construction and pending installation, and is stated at cost less any impairment losses (see note 1(l)). Cost comprises direct costs of construction as well as borrowing cost, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to borrowing costs, during the period of construction.

Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.

No depreciation is provided in respect of construction in progress.

(j) Intangible assets (other than goodwill)

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Target Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable (see note 1(w)). Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see note 1(l)). Other development expenditure is recognised as an expense in the period in which it is incurred.

Intangible assets that are acquired by the Target Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and accumulated impairment losses (note 1(l)). Expenditure on internally generated goodwill and brands is recognised as an expense in the period in which it is incurred.

Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets’ estimated useful lives. The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:

–	Production	protection	right	over	the	production	protection period
–	Trademarks						10 years
–	Software						10 years

Both the period and method of amortisation are reviewed at the end of the reporting period.

(k) Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Target Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i) Classification of assets leased to the Target Group

Assets that are held by the Target Group under leases which transfer to the Target Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Target Group are classified as operating leases.

– II-19 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(ii) Operating lease charges

Where the Target Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the period of the lease term.

(l) Impairment of assets

(i) Impairment of investment in equity securities and trade and other receivables

Investment in equity securities and other current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Target Group about one or more of the following loss events:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;
it becoming probable that the debtor will enter bankruptcy or other financial reorganisation;
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and
a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

If any such evidence exists, any impairment loss is determined and recognised as follows:

For investments in subsidiaries, the impairment loss is measured by comparing the recoverable amount of the investment with its carrying amount in accordance with note 1(l)(ii). The impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount in accordance with note 1(l)(ii).
For trade and other current receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

– II-20 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

For available-for-sale securities, the cumulative loss that has been recognised in the fair value reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss.

Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised in other comprehensive income.

Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in profit or loss.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Target Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

(ii) Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment;
interests in leasehold land classified as being held under an operating lease;
construction in progress;
intangible assets; and
goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated at the end of the reporting period whether or not there is any indication of impairment.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

– II-21 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

(m) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any writedown of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any writedown of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

(n) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less allowance for impairment of doubtful debts (see note 1(l)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts (see note 1(l)).

(o) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method.

(p) Trade and other payables

Trade and other payables are initially recognised at fair value. Trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(q) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

– II-22 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(r) Employee benefits

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

(s) Income tax

Income tax for the year/period comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to business combinations, or items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year/period, using tax rates enacted or substantively enacted at the date of statements of financial position, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Target Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the date of statements of financial position. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

– II-23 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Target Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Target Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(t) Provisions and other contingent liability

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group or the Target Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(u) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Target Group and the turnover and costs, if applicable, can be measured reliably, turnover is recognised in profit or loss as follows:

(i) Sales of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

(ii) Interest income

Interest income is recognised as it accrues using the effective interest method.

(iii) Government grants

Government grants are recognised in the statements of financial position initially when there is reasonable assurance that they will be received and that the Target Group will comply with the conditions attaching to them. Grants that compensate the Target Group for expenses incurred are recognised as revenue in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Target Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognised in profit or loss over the useful life of the asset by way of reduced depreciation expense.

– II-24 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(v) Translation of functional currency

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into HK$ at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statements of financial position items are translated into HK$ at the closing foreign exchange rates at the end of the reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the exchange reserve.

On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to profit or loss when the profit or loss on disposal is recognised.

(w) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production which necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

(x) Discontinued operations

A discontinued operation is a component of the Target Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Target Group and which represents a separate major line of business or geographical area of operations, or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. It also occurs if the operation is abandoned.

Where an operation is classified as discontinued, a single amount is presented on the face of the income statements, which comprises:

the post-tax profit or loss of the discontinued operations; and
the post-tax gain or loss recognised on the measurement to fair value less costs to sell, or on the disposal, of the assets or disposal group(s) constituting the discontinued operations.

(y) Related parties

(a) A person, or a close member of that person’s family, is related to the Target Group if that person:
(i) has control or joint control over the Target Group;

– II-25 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(ii) has significant influence over the Target Group; or
(iii) is a member of the key management personnel of the Target Group or the Target Group’s parent.
(b) An entity is related to the Target Group if any of the following conditions applies:
(i) the entity and the Target Group are members of the same Group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
(ii) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
(iii) both entities are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

(z) Segment reporting

Operating segments, and the amounts of each segment item reported in the Financial Information, are identified from the financial information provided regularly to the Target Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of the Target Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

2 Turnover and segment reporting

(a) Turnover

Continuing operations

The principal activities of the Target Group are developing, manufacturing, marketing and sale of modernized traditional Chinese medicine.

– II-26 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Turnover represents the sales value of goods sold less returns, discounts, value added tax, and sales tax. The amount of each significant category of revenue recognised in turnover during the Relevant Periods is as follows:

Sales of pharmaceutical products – Capsules and tablets – Granules – Others	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 495,853 747,952 1,038,204 63,022 128,075 178,942 20,171 36,222 50,300 579,046 912,249 1,267,446	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 295,549 316,875 47,708 58,326 13,150 14,495 356,407 389,696	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 295,549 316,875 47,708 58,326 13,150 14,495 356,407 389,696
			389,696

Further details regarding the Target Group’s principal activities are disclosed below.

(b) Segment reporting

The Target Group manages its business by subsidiaries. In a manner consistent with the way in which information is reported internally to the Target Group’s most senior executive management for the purposes of resource allocation and performance assessment, the Target Group has presented the following entities as reportable segments for each year. No operating segments have been aggregated to form the following reportable segments.

For the year ended 31 December 2010

Tongjitang Pharmaceutical
Jingfang
Guizhou LLF
Pulante
Jincili
Tongjitang Distribution (discontinued operation)
Tongjitang Chain Stores (discontinued operation)
Guizhou Distillery (discontinued operation)

For the years ended 31 December 2011 and 2012 and the four months ended 30 April 2012 and 2013

Tongjitang Pharmaceutical
Jingfang
Guizhou LLF
Pulante
Jincili

– II-27 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(c) Segment results

For the purposes of assessing segment performance and allocating resources between segments, the Target Group’s most senior executive management monitors the results, assets and liabilities attributable to each reportable segment on the following bases:

Segment assets include all tangible, intangible assets and current assets with the exception of investments in financial assets, deferred tax assets and other corporate assets. Segment liabilities include trade payables, and accruals attributable to the manufacturing and sales activities of the individual segments and bank borrowings managed directly by the segments.

Revenue and expenses are allocated to the reportable segments with reference to sales generated by those segments and the expenses incurred by those segments or which otherwise arise from the depreciation or amortisation of assets attributable to those segments.

The measure used for reporting segment profit is “adjusted EBITDA” i.e. “adjusted profit before interest, taxes, depreciation and amortisation”. To arrive at adjusted EBITDA the Target Group’s earnings are further adjusted for items not specifically attributed to individual segments, such as directors’ remuneration and other head office or corporate administration costs.

In addition to receiving segment information concerning adjusted EBITDA, management is provided with segment information concerning revenue (including inter-segment sales), interest income and expenses from cash balances and borrowings managed directly by the segments, depreciation, amortisation and additions to non-current segment assets used by the segments in their operations.

Information regarding the Target Group’s reportable segments as provided to the Target Group’s most senior executive management for the purposes of resource allocation and assessment of segment performance for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 is set out below.

Year ended 31 December 2010

		Continuing	operations				Discontinue	d operations		Total HK$’000 684,099 57,347
Tongjitang Pharmaceutical HK$’000 452,414 42,073	Jingfang HK$’000 102,003 3,321	Guizhou LLF HK$’000 14,442 1,475	Pulante HK$’000 10,187 272	Jincili HK$’000 – –	Subtotal HK$’000 579,046 47,141	Tongjitang Distribution HK$’000 71,259 10,206	Tongjitang Chain Stores HK$’000 20,584 –	Guizhou Distrillery HK$’000 13,210 –	Subtotal HK$’000 105,053 10,206
494,487	105,324	15,917	10,459	–	626,187	81,465	20,584	13,210	115,259	741,446

72,794 1,900 (15,679) (18,633) 1,100,720 47,073 457,949	16,222 57 – (4,210) 117,157 370 54,726	8,918 1 (109) (2,784) 36,809 313 20,072	3,530 17 – (1,384) 39,966 313 10,070	(2) 4 – – 1,270 – 85	101,462 1,979 (15,788) (27,011) 1,295,922 48,069 542,902	1,928 19 (201) (1,206) – 207 –	1,611 – – (328) – 10 –	(14,660) 135 (3,763) (2,333) – 62,398 –	(11,121) 154 (3,964) (3,867) – 62,615 –	90,341 2,133 (19,752) (30,878) 1,295,922 110,684 542,902

– II-28 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Year ended 31 December 2011

	Continuing operations	Continuing operations	Continuing operations	Total HK$’000 912,249 798
Tongjitang Pharmaceutical HK$’000 719,377 797 720,174 70,504 1,414 (12,102) (19,308) 1,003,097 17,293 534,613	Jingfang HK$’000 159,154 – 159,154 15,439 68 (154) (3,686) 165,294 4,373 70,440	Guizhou LLF HK$’000 19,570 1 19,571 6,974 4 (53) (2,950) 32,072 423 9,300	Pulante HK$’000 14,148 – 14,148 4,293 24 – (1,393) 46,280 389 11,643
				913,047

				97,206 1,516 (12,309) (27,337) 1,248,078 22,478 626,086

Year ended 31 December 2012

	Continuing operations	Continuing operations	Continuing operations	Total HK$’000 1,267,446 1,486
Tongjitang Pharmaceutical HK$’000 994,616 1,486 996,102 186,594 990 (12,128) (15,556) 1,026,311 20,674 554,519	Jingfang HK$’000 215,332 – 215,332 8,029 476 – (2,558) 240,183 35,325 121,202	Guizhou LLF HK$’000 38,636 – 38,636 7,390 17 – (2,951) 39,617 201 11,891	Pulante HK$’000 18,861 – 18,861 27,654 44 (749) (1,360) 54,967 2,194 17,777
				1,268,932

				229,662 1,532 (12,877) (22,425) 1,362,382 58,394 705,448

– II-29 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Four months ended 30 April 2013

	Continuing operations	Continuing operations	Continuing operations	Total HK$’000 389,696 260
Tongjitang Pharmaceutical HK$’000 292,134 249 292,383 35,679 102 (4,761) (4,906) 1,036,951 16,770 544,948	Jingfang HK$’000 77,020 – 77,020 12,926 130 (103) (874) 249,034 23,902 117,877	Guizhou LLF HK$’000 13,124 11 13,135 903 6 – (959) 38,338 154 10,967	Pulante HK$’000 7,418 – 7,418 2,346 9 – (469) 54,368 16 15,512
				389,956

				51,850 247 (4,863) (7,208) 1,380,008 40,842 689,363

Four months ended 30 April 2012 (unaudited)

	Continuing operations	Continuing operations	Continuing operations	Total HK$’000 356,407 423
Tongjitang Pharmaceutical HK$’000 277,975 423 278,398 29,800 825 (5,018) (4,688) 880,542 2,044 535,861	Jingfang HK$’000 62,958 – 62,958 8,166 90 (250) (851) 184,480 7,194 86,852	Guizhou LLF HK$’000 10,761 – 10,761 4,927 4 – (1,132) 35,376 – 9,273	Pulante HK$’000 4,713 – 4,713 1,493 11 – (431) 46,314 3 10,904
				356,830

				44,386 930 (5,266) (7,102) 1,148,038 9,241 642,968

– II-30 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(d) Reconciliations of reportable segment turnover and profits

For the year ended 31 December	For the year ended 31 December	For the year ended 31 December	For the four months ended 30 April	For the four months ended 30 April
2010	Total HK$’000 741,446 (57,347) 684,099 90,341 (3,946) 86,395 41,319 (19,752) (30,878) (28,842) 48,242	2011 HK$’000 913,047 (798) 912,249 97,206 – 97,206 7,913 (12,309) (27,337) (4,570) 60,903	2012 HK$’000 (unaudited) 356,830 (423) 356,407 44,386 – 44,386 2,666 (5,266) (7,102) (1,152) 33,532	2013 HK$’000 389,956 (260)
Continuing operations Discontinued operations HK$’000 HK$’000 626,187 115,259 (47,141) (10,206) 579,046 105,053 101,462 (11,121) (3,244) (702) 98,218 (11,823) 13,244 28,075 (15,788) (3,964) (27,011) (3,867) (29,101) 259 39,562 8,680
				389,696

				51,850 –
				51,850 4,398 (4,863) (7,208) (707)
				43,470

– II-31 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Assets Reportable segment assets Elimination of inter-segment receivables Other financial assets Deferred tax assets Unallocated head office and corporate assets Consolidated total assets Liabilities Reportable segment liabilities Elimination of inter-segment payables Current tax liabilities Deferred tax liabilities Unallocated head office and corporate liabilities Consolidated total liabilities	As 2010 HK$’000 1,295,922 (13,848) 1,282,074 1,338 14,255 214,793 1,512,460 542,902 (196,790) 346,112 5,857 11,061 20,466 383,496	at 31 December 2011 2012 HK$’000 HK$’000 1,248,078 1,362,382 (26,596) (74,320) 1,221,482 1,288,062 866 863 18,683 21,128 216,262 209,730 1,457,293 1,519,783 626,086 705,448 (214,228) (256,658) 411,858 448,790 13,112 21,724 11,252 11,683 256 1,765 436,478 483,962	As at 30 April 2013 HK$’000 1,380,008 (63,056) 1,316,952 863 22,780 213,581 1,554,176 689,363 (246,907) 442,456 18,333 11,814 2,181 474,784

(e) Geographic information

Analysis of the Target Group’s turnover and results as well as analysis of the Target Group’s carrying amount of segment assets and additions to property, plant and equipment by geographical market has not been presented as substantially all of the Target Group’s revenue and assets are generated and located in the PRC.

– II-32 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

3 Other revenue and net income/(expenses)

Continuing operations

Other revenue

Government grants (note 22) Rental income Interest income	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 7,590 9,571 9,210 28 21 15 2,028 1,516 1,543 9,646 11,108 10,768	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 1,466 1,806 – – 930 247 2,396 2,053	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 1,466 1,806 – – 930 247 2,396 2,053
			2,053

Other net income/(expenses)

Net gain/(loss) on disposal of fixed assets Loss arising from disposal of subsidiaries Net realised and unrealised losses on trading securities Exchange gain Others	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 7,289 (190) (78) – (972) – (350) (527) (3) 1,310 4,438 5,676 (4,651) (5,944) (3,362) 3,598 (3,195) 2,233	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) (57) (29) – – – – 392 2,519 (65) (145) 270 2,345	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) (57) (29) – – – – 392 2,519 (65) (145) 270 2,345
			2,345

4 Profit before taxation

Continuing operations

Profit before taxation is arrived at after charging:

(a) Finance costs

					For the four	For the four
		For the	year ended 31	December	monthsended	30 April
		2010	2011	2012	2012	2013
		HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
					(unaudited)
Interest	expenses	15,788	12,309	12,877	5,266	4,863

– II-33 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(b) Staff costs

Salaries, wages and other benefits Contributions to defined contribution retirement plan	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 90,420 109,710 130,375 15,612 18,915 22,479 106,032 128,625 152,854	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 43,123 51,404 7,443 8,866 50,566 60,270	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 43,123 51,404 7,443 8,866 50,566 60,270
			60,270

Staff costs included directors’ remuneration (note 7).

Pursuant to the relevant labour rules and regulations in the PRC, the PRC subsidiaries participate in defined contribution retirement benefit schemes (the “Schemes”) organised by the local authority whereby the PRC subsidiaries are required to make contributions to the Schemes based on certain percentages of the eligible employee’s salaries. The local government authority is responsible for the entire pension obligations payable to the retired employees.

Contributions to the Mandatory Provident Fund (“MPF”) are required under the Hong Kong Mandatory Provident Fund Schemes Ordinance. The Target Group and its employees in Hong Kong make monthly mandatory contributions to the MPF Scheme at 5% of the employees’ relevant income as defined under the Mandatory Provident Fund Schemes Ordinance. The contributions from employees and employer are subject to a cap of monthly relevant income of HK$20,000 for the period from 1 January 2010 to 31 May 2012. With effective from 1 June 2012, the maximum amount of monthly relevant income for MPF mandatory contributions was changed from HK$20,000 to HK$25,000.

The Target Group has no other obligations for payments of retirement and other post-retirement benefits of employees other than the contributions described above.

– II-34 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(c) Other items

Cost of inventories (i)
Depreciation
– assets held for use under
operating leases
– other property, plant and
equipment
Amortisation
– intangible assets
Impairment losses (reversed)/
recognised
– trade receivables
– other receivables
(Reversal of)/write down of
inventories
Operating lease charges
Research and development
expenses
Auditors’ remuneration
Fee charged for early
termination of the deposit
receipt facility (ii)

For the year ended 31 December
For the four months
ended 30 April
2010
2011
2012
2012
2013
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(unaudited)
228,071
412,076
503,292
149,369
147,355
1,425
1,437
2,285
470
358
19,969
17,097
14,737
4,894
5,072
5,617
8,803
5,403
1,738
1,778
(21,636)
2,437
–
–
1,467
574
999
–
–
1,380
(5,489)
722
530
229
799
2,074
1,296
1,373
361
925
13,443
12,845
17,700
4,393
6,062
2,515
2,291
197
37
198
17,118
–
–
–
–

(i) Cost of inventories includes HK$40,219,000, HK$47,126,000, HK$50,742,000, HK$17,422,000 (unaudited) and HK$19,056,000 for the year ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 relating to staff cost, depreciation and amortisation expenses, which amounts are also included in the respective total amounts disclosed separately above or in note 4(b) for each of these types of expenses.
(ii) During 2007, the Target Company and a depositary (the “Depositary”) have entered into a deposit agreement establishing a deposit receipt facility (the “Depositary Agreement”).

Pursuant to the Depositary Agreement, the Depositary agreed to waive the initial issuance fee for the 2007 offering and to reimburse the Target Company certain amount of expenses relating to the establishment and maintenance of the deposit receipt facility.

Pursuant to the Depositary Agreement, the Target Company agreed to pay to the Depositary an amount equal to all fees and expenses waived or reimbursed upon the occurrence of the termination by the Target Company of the deposit receipt facility within five years from the effective date. To the best of the Directors’ estimation up to 31 December 2009, the possibility of an outflow of abovementioned fees and expenses waived or reimbursed was remote. Accordingly the fees and expenses waived or reimbursed were recognised as income when incurred. The directors determined that the Target Company was to be privatised according to the resolution of the board of directors on 29 October 2010 and the directors considered that it was probable that an outflow of economic benefits will be required to settle the obligation and accordingly the provision was recognised for the year ended 31 December 2010. The provision was subsequently settled in 2011.

– II-35 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

5 Income tax in the consolidated income statements

(a) Income tax expenses in the consolidated income statements represent:

Current tax – PRC income tax
Provision for PRC income tax
Over-provision in respect of prior
years
Deferred tax
Origination and reversal of
temporary differences
Income tax expenses
Representing:
Income tax expense from continuing
operations
Income tax expense from
discontinued operations
– Income tax expense from sale of
discontinued operations
– Income tax benefit from ordinary
activities
Income tax expenses

For the year ended 31 December
For the four months
ended 30 April
2010
2011
2012
2012
2013
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(unaudited)
13,886
19,301
39,619
8,764
10,483
(4,732)
–
–
–
–
(6,548)
(3,768)
(2,326)
(1,710)
(1,405)
2,606
15,533
37,293
7,054
9,078
2,088
15,533
37,293
7,054
9,078
1,474
–
–
–
–
(956)
–
–
–
–
2,606
15,533
37,293
7,054
9,078

(b) Reconciliation between income tax expenses and accounting profit at applicable tax rates:

Profit before taxation
Notional tax on profit before
taxation calculated at the standard
tax rates applicable at the
jurisdictions concerned (i)
Effect of non-deductible expenses
Effect of preferential tax treatments
(ii)
Effect of tax losses not recognised
Tax effect of other temporary
differences not recognised
Over-provision in prior years
Income tax expenses

For the year ended 31 December
For the four months
ended 30 April
2010
2011
2012
2012
2013
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(unaudited)
48,242
60,903
206,759
33,532
43,470
15,587
15,325
51,452
8,481
10,346
3,405
6,732
6,865
2,444
2,170
(13,653)
(5,830)
(20,314)
(3,340)
(4,084)
(67)
184
(865)
(769)
–
2,066
(878)
155
238
646
(4,732)
–
–
–
–
2,606
15,533
37,293
7,054
9,078

– II-36 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(i) Pursuant to the relevant rules and regulations of the Cayman Islands and the British Virgins Islands (“the BVI”), the Target Company and Unisources are not subject to any income tax in the Cayman Islands or the BVI.

No provision was made for Hong Kong Profits Tax as the Target Group did not earn any income subject to Hong Kong Profits Tax for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013.

(ii) Prior to 1 January 2008, under then effective tax laws and regulations, Tongjitang Pharmaceutical being a manufacturing foreign investment enterprise, and Pulante, being an enterprise registered in the Xining Economic and Technology Development Zone, were entitled to a two-year full exemption from income tax and followed by a three-year 50% deduction in income tax rate (the “2+3 tax holidays”) starting from the first profit-making year from a PRC tax perspective.

On 16 March 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of PRC (the “CIT Law”) which was effective on 1 January 2008. The statutory income tax rate under the CIT law is 25%. The CIT Law and its relevant regulations grandfather the 2+3 tax holidays until they expire. Accordingly, Tongjitang Pharmaceutical and Pulante can continue to enjoy the 50% tax reduction for the years from 2008 to 2010.

Tongjitang Pharmaceutical, Guizhou LLF and Pulante were entitled to a preferential income tax rate of 15% starting from 2001, 2009 and 2002 respectively, under the Western Development Tax Concession, which ended in 2010. Pursuant to CaiShui [2011] No. 58 dated 27 July 2011, Tongjitang Pharmaceutical, Guizhou LLF and Pulante, being a qualified enterprise located in the western region of the PRC, enjoys a preferential income tax rate of 15% effective retroactively from 1 January 2011 to 31 December 2020.

Based on above, Tongjitang Pharmaceutical and Pulante are subject to income tax at 7.5% for 2010, 15% from 2011 to 2020 and 25% thereafter. Guizhou LLF is subject to income tax at 15% from 2010 to 2020, and 25% thereafter.

In 2008, Jingfang was qualified as a High and New Technology Enterprise (“HNTE”) which entitled it to a preferential income tax rate of 15% from 2008 to 2010. In 2011, Jingfang renewed its HNTE qualification, which entitled it to a preferential income tax rate of 15% from 2011 to 2013.

Other PRC subsidiaries are subject to income tax at 25% from 2008 onwards.

(iii) PRC dividend withholding tax

According to the CIT Law and its implementation rules, dividends receivable by non-PRC-resident corporate investors from PRC enterprises are subject to withholding income tax at 10%, unless reduced by tax treaties or arrangements, for profits earned since 1 January 2008. The Target Group’s has adopted the 10% withholding tax rate for PRC withholding tax purposes.

As a part of the continuing evaluation of the Target Group’s funding requirements, the directors have determined that the undistributed profits earned by the Target Group’s PRC subsidiaries on or after 1 January 2010 will not be distributed in the foreseeable future. As such, no further deferred tax liabilities in this regard have been recognised on the undistributed profits of HK$60,183,000, HK$100,101,000, HK$262,549,000 and HK$294,363,000 earned by the Target Group’s PRC subsidiaries on or after 1 January 2010, as at 31 December 2010, 2011 and 2012 and 30 April 2013 respectively.

– II-37 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

6 Discontinued operations

On 22 November 2010, the Target Group entered into sale and purchase agreement with independent third party to dispose of its entire interest in Guizhou Tongjitang Asset Management Co., Ltd. (“Asset Management”) and its subsidiaries, including Tongjitang Distribution, Tongjitang Chain Stores and Guizhou Distillery for a consideration of RMB305,340,000, equivalent to HK$358,836,000. The disposal was completed on 27 December 2010.

Accordingly, the operating results of Assets Management and its subsidiaries for the year ended 31 December 2010 are presented as discontinued operations in the Financial Information.

(a) Result of the discontinued operations:

Revenue (note 2)
Expenses
Loss before taxation
Income tax benefit
Loss from operation
Gain on sale of discontinued operation, net of tax expense of HK$1,474,000
Profit for the year
(b)
Result of the discontinued operations is arrived at after charging:
(i)
Other revenue
Rental income
Interest income
(ii)
Finance costs:
Interest expense
(iii)
Staff costs:
Salaries, wages and other benefits
Contributions to defined contribution retirement plan

For the
year ended
31
December
2010
HK$’000
105,053
(126,899)
(21,846)
956
(20,890)
29,052
8,162
For the
year ended
31
December
2010
HK$’000
1,482
154
1,636
3,964
9,404
1,599
11,003

– II-38 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

		For the
		year ended
		31
		December
		2010
		HK$’000
(iv)	Other items:
	Cost of inventories	84,394
	Depreciation
	– assets held for use under operating leases	664
	– other property, plant and equipment	3,101
	Amortisation
	– intangible assets	102
	Impairment losses recognised
	– trade and other receivables	41
	Operating lease charges	481
	Research and development expenses	113
	Auditors’ remuneration	664

(c) Cash flows of the discontinued operations:

Net cash used in operating activities Net cash used in investing activities Net cash generated from financing activities Effect of foreign exchange rate changes Net cash inflows for the year	For the year ended 31 December 2010 HK$’000 (129,089) (25,110) 168,369 283
	14,453

– II-39 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(d) Effect of disposal on the financial position of the Target Group:

Notes
Net assets disposed of:
Fixed assets
– Property, plant and equipment
11
– Interests in leasehold land held for own use under operating leases
11
Construction in progress
12
Intangible assets
13
Other non-current asset
Goodwill
14
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Bank loans – current
Bank loans – non-current
Deferred tax liabilities
23(b)
Non-controlling interest
Net identifiable assets
Exchange reserve realised on disposal
Gain on disposal of subsidiaries
Satisfied by:
Consideration
Analysis of the net cash inflow in respect of the disposal of subsidiaries
Cash received
Cash and cash equivalent of the subsidiaries disposed of
Net cash inflow

For the
year ended
31
December
2010
HK$’000
150,595
25,101
175,696
62,614
916
162,372
93,119
39,803
118,390
22,581
(143,157)
(111,087)
(58,760)
(17,730)
(1,000)
343,757
(15,447)
30,526
358,836
358,836
36,392
(22,581)
13,811

– II-40 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

7 Directors’ remuneration

Details of directors’ remuneration of the Target Group are disclosed as follows:

Executive directors Wang Xiaochun Chen Yan (i) Sub-total Independent directors Chen Yongcun (i) Harry K. Genant (i) David Ray White (i) Sub-total Total Executive directors Wang Xiaochun Chen Yan (i) Cui Zhiping (ii) Sub-total Non-executive director Xu Qian (iii) Independent directors Chen Yongcun (i) Harry K. Genant (i) David Ray White (i) Sub-total Total	Directors’ fees HK$’000 207 – 207 - - - - - - - - - - - - 622 622 622 1,866 ------------ --------------------------------------------- 2,073 Directors’ fees HK$’000 217 – − 217 - - - - - - - - - - - - 392 702 702 702 2,106 ------------ --------------------------------------------- 2,715	For the year ended 31 December 2010 Salaries, allowances and benefits in kind Contributions to defined contribution retirement plans Discretionary bonuses HK$’000 HK$’000 HK$’000 480 24 – 831 42 – 1,311 66 – - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - – – – – – – – – – – – – ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- 1,311 66 – For the year ended 31 December 2011 Salaries, allowances and benefits in kind Contributions to defined contribution retirement plans Discretionary bonuses HK$’000 HK$’000 HK$’000 480 24 – 277 14 – − − − 757 38 – - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - − − − − − − – – – – – – – – – ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- 757 38 –	Total HK$’000 711 873
			1,584 - - - - - - - - - - - - 622 622 622
			1,866 ------------ --------------------------------------------- 3,450

			Total HK$’000 721 291 −
			1,012 - - - - - - - - - - - - 392
			702 702 702
			2,106 ------------ --------------------------------------------- 3,510

– II-41 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

For the year ended 31 December 2012

	For the year ended 31 December 2012
Executive directors Wang Xiaochun Cui Zhiping (ii) Sub-total Non-executive director Xu Qian (iii) Total Executive directors Wang Xiaochun Cui Zhiping (ii) Sub-total Non-executive director Xu Qian (iii) Total Executive directors Wang Xiaochun Cui Zhiping (ii) Sub-total Non-executive director Xu Qian (iii) Total	Directors’ fees Salaries, allowances and benefits in kind Contributions to defined contribution retirement plans Discretionary bonuses Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 221 480 24 – 725 – − − – − 221 480 24 – 725 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 399 – – – 399 620 480 24 – 1,124 For the four months ended 30 April 2013 Directors’ fees Salaries, allowances and benefits in kind Contributions to defined contribution retirement plans Discretionary bonuses Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 74 160 8 – 242 – – – – – 74 160 8 – 242 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 134 – – – 134 ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- 208 160 8 – 376 For the four months ended 30 April 2012 (unaudited) Directors’ fees Salaries, allowances and benefits in kind Contributions to defined contribution retirement plans Discretionary bonuses Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 74 160 8 – 242 – – – – – 74 160 8 – 242 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 133 – – – 133 ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- ------------ --------------------------------------------- 207 160 8 – 375	Total HK$’000 725 −
		725 - - - - - - - - - - - - 399
		1,124

		Total HK$’000 242 –
		242 - - - - - - - - - - - - 134 ------------ --------------------------------------------- 376

		242 - - - - - - - - - - - - 133 ------------ --------------------------------------------- 375

– II-42 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(i) Resigned on 2 May 2011.
(ii) Appointed as an executive director on 2 May 2011.
(iii) Appointed as a non-executive director on 2 May 2011.

During the Relevant Periods, no amount was paid or payable by the Target Group to the directors or any of the five highest paid individuals set out in note 8 below as an inducement to join or upon joining the Target Group or as compensation for loss of office. There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

8 Individuals with highest emoluments

Of the five individuals with highest emoluments, five, four, two, two and two were directors of the Target Company for the years ended at 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 respectively whose emoluments are disclosed in note 7. The emoluments in respect of the other one director in 2012 and the four months ended 30 April 2012 and 2013 is as follows:

Salaries and other emoluments Contributions to defined contribution retirement plans Total	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 – 554 1,479 – 28 171 – 582 1,650	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 494 495 57 57 551 552	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 494 495 57 57 551 552
			552

The emolument of nil, one, three, three and three individuals with the highest emolument for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 respectively is within the following band:

				For the four	months	ended
	For the	year ended 31	December	30	April
	2010	2011	2012	2012		2013
	Number of	Number of	Number of	Number of	Number of
	individuals	individuals	individuals	individuals	individuals
				(unaudited)
HK$
Nil – 1,000,000	–	1	3	3		3

9 Profit attributable to equity shareholders of the Target Company

The consolidated profit attributable to equity shareholders of the Target Company for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 includes a loss of HK$31,515,000, HK$7,999,000 and HK$49,000, HK$90,000 (unaudited) and HK$827,000 respectively which has been dealt with in the financial statements of the Target Company.

– II-43 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Reconciliation of the above amount to the Target Company’s (loss)/profit for the year/period:

Amount of consolidated loss attributable to equity shareholders dealt within the Target Company’s financial statements Final dividends from subsidiaries attributable to the profits of the previous financial years, approved and paid during the year/period The Target Company’s (loss)/profit (note 25(a))	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 (31,515) (7,999) (49) – 185,087 153,108 (31,515) 177,088 153,059	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) (90) (827) 153,108 – 153,018 (827)	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) (90) (827) 153,108 – 153,018 (827)
			(827)

Details of dividends paid and payable to equity shareholders of the Target Company are set out in note 25(b).

10 Earnings per share

(a) Basic earnings per share

The calculation of basic earnings per share for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013 are based on the net profits attributable to equity shareholders of the Target Company of HK$46,748,000, HK$45,370,000, HK$169,466,000, HK$26,478,000 (unaudited) and HK$34,392,000, respectively, and the weighted average number of ordinary shares of 50,000,000 in issue for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2012 and 2013, as if the cancellation and issuance of shares on 14 April 2011 (see note 25 (c)) had been completed on 1 January 2010, calculated as follows.

Weighted average number of ordinary shares (basic):

Issued ordinary shares Net effect of cancellation and issuance of shares without a corresponding outflow of resources (Note) Weighted average number of ordinary shares for the year/period	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 In thousands of shares 104,067 50,000 50,000 50,000 50,000 (54,067) – – – – 50,000 50,000 50,000 50,000 50,000	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 In thousands of shares 104,067 50,000 50,000 50,000 50,000 (54,067) – – – – 50,000 50,000 50,000 50,000 50,000
		50,000

Note: For the purpose of calculating basic earnings per share, retrospective adjustment on the weighted average number of ordinary shares has been made for the year ended 31 December 2010 to reflect the subsequent cancellation and issuance of shares in 2011 as detailed in note 25(c) as this involved a change in share structure with no additional resources paid by the Target Company.

– II-44 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(b) Diluted earnings per share

The Target Company’s issued share options were anti-dilutive as the exercise prices of the options exceeded the fair value of ordinary shares during the years ended 31 December 2010 and 2011. As a result, diluted earnings per share were the same as basic earnings per share. There were no dilutive potential ordinary shares during the year ended 31 December 2012 and the four months ended 30 April 2012 and 2013.

11 Fixed assets

Cost: At 1 January 2010 Additions through acquisition of a subsidiary (note 15) Additions Disposals Disposals through disposal of subsidiaries (note 6) Exchange adjustments At 31 December 2010 Additions Disposals Disposals through disposal of a subsidiary (note 15) Exchange adjustments At 31 December 2011 Additions Disposals Exchange adjustments At 31 December 2012 Additions Disposals Exchange adjustments At 30 April 2013 Accumulated depreciation and amortisation: At 1 January 2010 Charge for the year Written back on disposals Write back on disposal of subsidiaries (note 6) Exchange adjustments	Buildings HK$’000 177,916 94,799 14,174 (11,739) (169,098) 7,295 113,347 3,465 – (1,565) 5,664 120,911 4,933 – (2) 125,842 - - - - - - - - - 1,163 – 1,472 128,477 - - - - - - - - - 48,091 9,338 (1,314) (22,854) 4,455	Plant, machinery and equipment HK$’000 97,495 837 2,559 (547) (2,105) 3,408 101,647 2,022 (3,525) (5,182) 5,092 100,054 5,832 (1,362) (1) 104,523 - - - - - - - - - 4,923 – 1,266 110,712 - - - - - - - - - 55,396 9,063 (413) (865) 2,108	Motor vehicles HK$’000 24,943 386 1,152 (290) (1,685) 773 25,279 2,516 (337) – 1,204 28,662 2,636 (700) (5) 30,593 - - - - - - - - - 246 (182) 439 31,096 - - - - - - - - - 8,997 2,378 (253) (89) 360	Others HK$’000 18,491 8 977 (6) (4,782) 555 15,243 2,330 (233) – 801 18,141 3,571 (31) 9 21,690 - - - - - - - - - 691 (633) 206 21,954 - - - - - - - - - 12,261 2,291 (6) (3,267) 404	Sub-total HK$’000 318,845 96,030 18,862 (12,582) (177,670) 12,031 255,516 10,333 (4,095) (6,747) 12,761 267,768 16,972 (2,093) 1 282,648 - - - - - - - - - 7,023 (815) 3,383 292,239 - - - - - - - - - 124,745 23,070 (1,986) (27,075) 7,327	Interests in leasehold land held for own use under operating leases HK$’000 49,834 1,079 29,600 – (25,615) 2,625 57,523 – – (4,180) 2,791 56,134 5,789 (5,451) (8) 56,464 - - - - - - - - - 486 – 681 57,631 - - - - - - - - - 2,627 2,089 – (514) 140	Total HK$’000 368,679 97,109 48,462 (12,582) (203,285) 14,656
							313,039 10,333 (4,095) (10,927) 15,552
							323,902 22,761 (7,544) (7)
							339,112 - - - - - - - - - 7,509 (815) 4,064
							349,870 - - - - - - - - - 127,372 25,159 (1,986) (27,589) 7,467

– II-45 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

At 31 December 2010 Charge for the year Written back on disposals Write back on disposal of a subsidiary (note 15) Exchange adjustments At 31 December 2011 Charge for the year Written back on disposals Exchange adjustments At 31 December 2012 Charge for the period Written back on disposals Exchange adjustments At 30 April 2013 Net book value: At 31 December 2010 At 31 December 2011 At 31 December 2012 At 30 April 2013	Buildings HK$’000 37,716 6,344 – (1,090) 1,983 44,953 4,516 – 9 49,478 1,554 – 705 51,737 - - - - - - - - - ---------------------------------- 75,631 75,958 76,364 76,740	Plant, machinery and equipment HK$’000 65,289 6,798 (3,222) (641) 3,301 71,525 6,274 (1,012) 6 76,793 2,165 – 937 79,895 - - - - - - - - - ---------------------------------- 36,358 28,529 27,730 30,817	Motor vehicles HK$’000 11,393 2,288 (228) – 609 14,062 2,341 (583) 4 15,824 804 (173) 80 16,535 - - - - - - - - - ---------------------------------- 13,886 14,600 14,769 14,561	Others HK$’000 11,683 1,667 (215) – 610 13,745 1,606 (30) 3 15,324 549 (601) 177 15,449 - - - - - - - - - ---------------------------------- 3,560 4,396 6,366 6,505	Sub-total HK$’000 126,081 17,097 (3,665) (1,731) 6,503 144,285 14,737 (1,625) 22 157,419 5,072 (774) 1,899 163,616 - - - - - - - - - ---------------------------------- 129,435 123,483 125,229 128,623	Interests in leasehold land held for own use under operating leases HK$’000 4,342 1,437 – (228) 267 5,818 2,285 (338) 6 7,771 358 – 96 8,225 - - - - - - - - - ---------------------------------- 53,181 50,316 48,693 49,406	Total HK$’000 130,423 18,534 (3,665) (1,959) 6,770
							150,103 17,022 (1,963) 28
							165,190 5,430 (774) 1,995
							171,841 - - - - - - - - - ---------------------------------- 182,616

							173,799

							173,922

							178,029

(i) The interests in leasehold land held for own use under operating leases are held on leases of 50 years in the PRC. At 30 April 2013, the remaining period of the land use rights ranged from 26 years to 50 years.

(ii) The carrying amount of interests in leasehold land held for own use under operating leases and buildings pledged to secure the Target Group’s bank loans as at 31 December 2010, 2011 and 2012 and 30 April 2013 is set out as below:

Carrying amount of pledged fixed assets (note 21)	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 42,140 62,723 39,166	As at 30 April 2013 HK$’000 38,566

– II-46 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

12 Construction in progress

At 1 January Additions Disposals through disposal of subsidiaries (note 6) Exchange adjustments At 31 December/30 April	As 2010 HK$’000 – 61,203 (62,614) 1,564 153	at 31 December 2011 2012 HK$’000 HK$’000 153 2,943 2,724 2,610 – – 66 8 2,943 5,561	As at 30 April 2013 HK$’000 5,561 67,242 – 545
			73,348

13 Intangible assets

Cost: At 1 January 2010 Addition Addition through acquisition of a subsidiary (note 15) Disposal through disposal of subsidiaries (note 6) Exchange adjustments At 31 December 2010 Addition Exchange adjustments At 31 December 2011 Addition Exchange adjustments At 31 December 2012 Exchange adjustments At 30 April 2013 Accumulated amortisation: At 1 January 2010 Amortisation Written back on disposal of subsidiaries (note 6) Exchange adjustments At 31 December 2010 Amortisation Exchange adjustments At 31 December 2011	Production protection right HK$’000 135,875 – – – 4,727 140,602 4,557 7,073 152,232 – (26) 152,206 1,827 154,033 - - - - - - - - - - - - 104,638 5,389 – 3,869 113,896 8,551 5,832 128,279	Trademarks HK$’000 118 250 1,018 (1,018) 10 378 – 19 397 – – 397 5 402 - - - - - - - - - - - - 6 139 (102) 1 44 39 3 86	Software HK$’000 1,833 216 – – 69 2,118 63 106 2,287 12 – 2,299 28 2,327 - - - - - - - - - - - - 378 191 – 18 587 213 34 834	Total HK$’000 137,826 466 1,018 (1,018) 4,806
				143,098 4,620 7,198
				154,916 12 (26)
				154,902 1,860
				156,762 - - - - - - - - - - - - 105,022 5,719 (102) 3,888
				114,527 8,803 5,869
				129,199

– II-47 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Amortisation Exchange adjustments At 31 December 2012 Amortisation Exchange adjustments At 30 April 2013 Net book value: At 31 December 2010 At 31 December 2011 At 31 December 2012 At 30 April 2013	Production protection right HK$’000 5,127 (4) 133,402 1,688 1,613 136,703 ------------ --------------------------------------------- 26,706 23,953 18,804 17,330	Trademarks HK$’000 40 – 126 13 2 141 ------------ --------------------------------------------- 334 311 271 261	Software HK$’000 236 1 1,071 77 13 1,161 ------------ --------------------------------------------- 1,531 1,453 1,228 1,166	Total HK$’000 5,403 (3) 134,599 1,778 1,628 138,005 ------------ --------------------------------------------- 28,571 25,717 20,303 18,757

Amortisation charge of intangible assets for the Relevant Periods is included in the cost of sales in the consolidated income statements.

14 Goodwill

A summary of the changes in the carrying amount of goodwill, by reporting unit is as follows:

Cost: As at 1 January Goodwill acquired during the year (note 15) Goodwill included in a disposal group during the year (note 6) Exchange adjustment At 31 December/30 April Accumulated impairment losses: At 1 January Exchange adjustment At 31 December/30 April Carrying amount: At 31 December/30 April	As 2010 HK$’000 34,533 89,989 (93,119) 4,331 35,734 (31,870) (1,108) (32,978) 2,756	at 31 December 2011 2012 HK$’000 HK$’000 35,734 37,507 – – – – 1,773 (6) 37,507 37,501 (32,978) (34,614) (1,636) 6 (34,614) (34,608) 2,893 2,893	As at 30 April 2013 HK$’000 37,501 – – 450 37,951 (34,608) (416) (35,024) 2,927

– II-48 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Goodwill acquired through business combination is allocated to the Target Group’s cash-generating units (CGU) identified as follows:

Pulante Jingfang	As 2010 HK$’000 – 2,756 2,756	at 31 December 2011 2012 HK$’000 HK$’000 – – 2,893 2,893 2,893 2,893	As at 30 April 2013 HK$’000 – 2,927
			2,927

The recoverable amount of the CGU is determined based on value-in-use calculations. The key assumptions used in the valuations are those regarding the expected changes to selling prices and costs, and discount rates. The changes in selling prices and costs are based on historical operating records and expectation of future changes in the market. Discount rates applied are able to reflect the current market assessments of the time value of money and the risks specific to the CGU.

The Target Group determined the value-in-use by preparing cash flow projections of each of the CGU derived from the most recent financial forecast approved by the management covering a one-year period and extrapolated to cover a period of nine more years with an estimated increase in selling prices and costs of 3%, 4.5%, 7% and 9% for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2013 respectively. The rates used to discount the forecast cash flows were 9.7%, 12%, 12% and 12% for the years ended 31 December 2010, 2011 and 2012 and the four months ended 30 April 2013 respectively.

The impairment loss recognised solely relates to Pulante. As the cash generating unit has been reduced to its recoverable amount, any adverse change in the assumptions used in the calculation of recoverable amount would result in further impairment.

15 Investments in subsidiaries

Investments in subsidiaries are stated at cost and details of the subsidiaries as at the date of this report are set out in note 1(b) of section B.

Acquisition of a subsidiary

On 4 January 2010, the Target Group acquired 100% of the equity interests in Guizhou Distillery Co., Ltd. (“Guizhou Distillery”) for a consideration of RMB114,569,000, equivalent to HK$130,116,000, which was fully prepaid in 2009. The management considers this as the acquisition of a business. The principal activity of Guizhou Distillery is manufacturing distilled spirit. On the same day, the Target Group entered into a separate share transfer agreement with Guizhou Xianling Investment Management Co., Ltd. to transfer 5% interest of Guizhou Distillery for an amount of RMB6,151,000, equivalent to HK$7,719,000. The following summaries the nature of consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date:

– II-49 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Identified assets acquired and liabilities assumed of Guizhou Distillery at the acquisition date:

Note Pre-acquisition carrying amount HK$’000 Fixed assets – Property, plant and equipment 11 18,817 – Interests in leasehold land for own use under operating leases 11 7,421 26,238 Intangible assets 13 – Other non-current assets 786 Inventories 8,561 Trade and other receivables 6,722 Cash and cash equivalents 5,411 Trade and other payables (62,360) Deferred tax liabilities 23(b) – Net identifiable assets (14,642) Share of net identifiable assets Total consideration Goodwill 14	Fair value adjustments HK$’000 77,213 (6,342) 70,871 1,018 116 (3,676) 1,631 – 5,607 (18,686) 56,881	Recognised values on acquisition HK$’000 96,030 1,079 97,109 1,018 902 4,885 8,353 5,411 (56,753) (18,686) 42,239 95% 130,116 89,989

Disposal of subsidiaries

– II-50 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

On 9 March 2011, the Target Group entered into sale and purchase agreement with independent third party to dispose of its entire interest in Anhui Jingfang Pharmaceutical Chemical Co., Ltd. (“Jingfang Chemical”) for a consideration of RMB5,000,000, equivalent to HK$6,168,000. Jingfang Chemical is the subsidiary of Jingfang. The operations and cash flows of Jingfang Chemical cannot be clearly distinguished from Jinfang and do not represent separate line of business from Jingfang. Prior to the disposal, Jingfang Chemical has already ceased its operation. The effect of the disposal on the financial position of the Target Group was as follows:

				For the year ended	For the year ended
			Note	31 December 2011
					HK$’000
Fixed assets
– other property, plant and equipment			11		5,016
– interest in leasehold land held for own use under operating
leases			11		3,952
					8,968
Cash and cash equivalents					2
Trade and other payables					(1,830)
Net identifiable assets					7,140
Loss on disposal of a subsidiary					(972)
Consideration					6,168

Analysis of the net cash inflow in respect of the disposal of
subsidiary
Cash consideration					6,168
Cash and cash equivalent of the subsidiary disposed of					(2)
Net cash inflow					6,166

Other financial assets
					As at
	As at 31		December		30 April
	2010		2011	2012	2013
	HK$’000	HK$’000		HK$’000	HK$’000
Listed equity securities at fair value – in
Hong Kong	1,338		866	863	863

16 Other financial assets

– II-51 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

17 Inventories

(a) Inventories in the statements of financial position comprise:

Raw materials Work-in-progress Finished goods Packing materials Low value consumables Total	As 2010 HK$’000 63,684 43,894 40,772 5,894 1,348 155,592	at 31 December 2011 2012 HK$’000 HK$’000 40,731 54,499 41,887 49,755 54,590 36,126 6,005 5,919 3,350 1,802 146,563 148,101	As at 30 April 2013 HK$’000 80,854 48,640 41,861 8,041 1,306
			180,702

(b) The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows:

Carrying amount of inventories sold (Reversal of)/write down of inventories Total	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 317,954 411,354 502,762 (5,489) 722 530 312,465 412,076 503,292	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 149,140 146,556 229 799 149,369 147,355	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 149,140 146,556 229 799 149,369 147,355
			147,355

– II-52 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

18 Trade and other receivables

Target Group

Current Trade receivables Bills receivables Less: allowance for doubtful debts (note 18(b)) Other receivables Non-current Other receivables Total *Target Company*	As 2010 HK$’000 303,812 107,354 (7,449) 383,116 786,833 - - - - - - - - - - - - 2,425 2,425 ------------ --------------------------------------------- 789,258	at 31 December 2011 2012 HK$’000 HK$’000 271,876 265,845 151,934 216,437 (10,307) (10,306) 398,405 375,842 811,908 847,818 - - - - - - - - - - - - - - - - - - - - - - - - 9,526 42,101 9,526 42,101 ------------ --------------------------------------------- ------------ --------------------------------------------- 821,434 889,919	As at 30 April 2013 HK$’000 279,217 196,099 (11,901) 425,836
			889,251 - - - - - - - - - - - - 8,050
			8,050 ------------ --------------------------------------------- 897,301

Current Other receivables – Amounts due from subsidiaries Non-current Other receivables Total	As 2010 HK$’000 466,781 466,781 - - - - - - - - - - - - – – ------------ --------------------------------------------- 466,781	at 31 December 2011 2012 HK$’000 HK$’000 438,533 437,550 438,533 437,550 - - - - - - - - - - - - - - - - - - - - - - - - 2,300 1,864 2,300 1,864 ------------ --------------------------------------------- ------------ --------------------------------------------- 440,833 439,414	As at 30 April 2013 HK$’000 437,413
			437,413 - - - - - - - - - - - - 1,722
			1,722 ------------ --------------------------------------------- 439,135

All of trade and other receivables, apart from those classified as non-current portion, are expected to be recovered or recognised as expense within one year.

Non-current other receivables mainly represent the prepayments for equipment.

– II-53 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(a) Ageing analysis

As of the end of the reporting period, the ageing analysis of trade receivables of the Target Group (which are included in trade and other receivables), based on the invoice date, is as follows:

Within 3 months of invoice date 3 to 6 months after invoice date More than 6 months less than 12 months Over 1 year	As 2010 HK$’000 148,743 47,396 64,596 43,077 303,812	at 31 December 2011 2012 HK$’000 HK$’000 155,331 186,710 42,176 34,238 41,412 23,847 32,957 21,050 271,876 265,845	As at 30 April 2013 HK$’000 186,894 57,172 22,104 13,047
			279,217

Trade debtors are usually due within 30 to 180 days from the date of billing. All of the trade and bills receivables are expected to be recovered within one year. Further details on the Target Group’s credit policy are set out in note 26(a).

(b) Impairment of trade and bills receivables:

Impairment losses in respect of trade receivables are recorded using an allowance account unless the Target Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade receivables directly (see note 1(l)(i)).

The movements in the allowance for doubtful debts of the Target Group during the Relevant Periods, including both specific and collective loss components, are as follows:

At 1 January Impairment loss (reversed)/ recognised Exchange adjustments At 31 December/30 April	As 2010 HK$’000 28,594 (21,636) 491 7,449	at 31 December 2011 2012 HK$’000 HK$’000 7,449 10,307 2,437 – 421 (1) 10,307 10,306	As at 30 April 2013 HK$’000 10,306 1,467 128
			11,901

At 31 December 2010, 2011 and 2012 and 30 April 2013, the Target Group’s gross trade receivables of HK$14,352,000, HK$12,839,000, HK$12,461,000 and HK$14,782,000 were individually determined to be impaired. The individually impaired receivables related to customers that were in financial difficulties and management assessed that receivables are not expected to be recovered. Consequently, specific allowances for doubtful debts of HK$7,449,000, HK$10,307,000, HK$10,306,000 and HK$11,901,000 were recognised as at 31 December 2010, 2011 and 2012 and 30 April 2013. The Target Group does not hold any collateral over these balances.

– II-54 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(c) Trade and bills receivables that are not impaired:

The ageing analysis of trade receivables of the Target Group that are neither individually nor collectively considered to be impaired are as follows:

Within 3 months of invoice date 3 to 6 months after invoice date More than 6 months less than 12 months Over 1 year	As 2010 HK$’000 141,571 45,752 62,937 39,200 289,460	at 31 December 2011 2012 HK$’000 HK$’000 154,175 186,120 41,335 33,752 40,128 23,201 23,399 10,311 259,037 253,384	As at 30 April 2013 HK$’000 186,011 56,338 21,193 893
			264,435

Receivables that were neither past due nor impaired related to a wide range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Target Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality of the customers and the balances are still considered fully recoverable. The Target Group does not hold any collateral over these balances.

19 Cash and cash equivalents

(a) Cash and cash equivalents comprise:

Target Group

Deposits with banks and other financial institutions Cash at bank and in hand Less: Bank deposits with maturity beyond three months Pledged deposits Cash and cash equivalents	As 2010 HK$’000 91,078 246,843 337,921 88,140 2,938 246,843	at 31 December 2011 2012 HK$’000 HK$’000 6,168 – 258,227 257,093 264,395 257,093 6,168 – – – 258,227 257,093	As at 30 April 2013 HK$’000 – 179,469
			179,469 – –
			179,469

The majority of the cash at bank and on hand are denominated in RMB. RMB is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.

– II-55 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Target Company

Cash and cash equivalents	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 1,027 23 405	As at 30 April 2013 HK$’000 405

Certain the Target Group’s bank deposits with carrying amount of HK$2,938,000, HK$ Nil, HK$ Nil and HK$ Nil were pledged as securities for banking facilities as at 31 December 2010, 2011 and 2012 and 30 April 2013 respectively (note 21).

(b) Reconciliation of profit before taxation to cash generated from operations:

Note Profit before taxation from – Continuing operations – Discontinued operations Adjustments for: – Depreciation and amortisation – Net (gain)/loss on disposal of fixed assets 3 – (Gain)/loss from disposal of subsidiaries 3 and 6 – (Reversal)/recognition of impairment loss on trade and other receivables 4(c) and 6 – (Reversal of)/write down on inventories 4(c) – Finance costs 4(a) and 6 – Interest income 3 and 6 – Change in fair value of other financial assets 3 – Foreign exchange gain 3 – (Increase)/decrease in inventories – (Increase)/decrease in trade and other receivables – (Decrease)/increase in trade and other payables Cash (used in)/generated from operations	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 39,562 60,903 206,759 33,532 43,470 8,680 – – – – 48,242 60,903 206,759 33,532 43,470 30,878 27,337 22,425 7,102 7,208 (7,289) 190 78 57 29 (30,526) 972 – – – (21,021) 3,436 – – 2,847 (5,489) 722 530 229 799 19,752 12,309 12,877 5,266 4,863 (2,182) (1,516) (1,543) (930) (247) 350 527 3 – – (1,310) (4,438) (5,676) (392) (2,519) 31,405 100,442 235,453 44,864 56,450 (27,162) 8,210 (2,068) (8,299) (33,400) (83,386) (2,670) (29,518) (21,787) (38,056) (9,680) 21,092 48,497 18,377 (5,932) (120,228) 26,632 16,911 (11,709) (77,388) (88,823) 127,074 252,364 33,155 (20,938)	For the year ended 31 December For the four months ended 30 April 2010 2011 2012 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (unaudited) 39,562 60,903 206,759 33,532 43,470 8,680 – – – – 48,242 60,903 206,759 33,532 43,470 30,878 27,337 22,425 7,102 7,208 (7,289) 190 78 57 29 (30,526) 972 – – – (21,021) 3,436 – – 2,847 (5,489) 722 530 229 799 19,752 12,309 12,877 5,266 4,863 (2,182) (1,516) (1,543) (930) (247) 350 527 3 – – (1,310) (4,438) (5,676) (392) (2,519) 31,405 100,442 235,453 44,864 56,450 (27,162) 8,210 (2,068) (8,299) (33,400) (83,386) (2,670) (29,518) (21,787) (38,056) (9,680) 21,092 48,497 18,377 (5,932) (120,228) 26,632 16,911 (11,709) (77,388) (88,823) 127,074 252,364 33,155 (20,938)
		43,470 7,208 29 – 2,847 799 4,863 (247) – (2,519)
		56,450 (33,400) (38,056) (5,932)
		(77,388) (20,938)

– II-56 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

20 Trade and other payables

Target Group

Trade creditors Other payables and accrued charges Advances received from customers	As 2010 HK$’000 35,893 99,398 10,990 146,281	at 31 December 2011 2012 HK$’000 HK$’000 41,972 62,541 89,420 112,110 20,750 16,394 152,142 191,045	As at 30 April 2013 HK$’000 53,590 123,284 5,678
			182,552

Target Company

Other payables	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 19,667 2,546 2,539	As at 30 April 2013 HK$’000 2,542

As of the end of the financial year, the ageing analysis of trade creditors (which are included in trade and other payables), based on the invoice date, is as follows:

Due within 1 month or on demand Due over 1 month but within 3 months Due over 3 month but within 6 months Due over 6 month but within 9 months Total	As 2010 HK$’000 3,370 2,125 29,615 783 35,893	at 31 December 2011 2012 HK$’000 HK$’000 4,339 4,624 5,521 6,629 30,389 47,990 1,723 3,298 41,972 62,541	As at 30 April 2013 HK$’000 3,160 8,618 40,161 1,651
			53,590

Other creditors and accrued charges mainly include accrued staff costs and benefits, accrued sales rebates to customers and other tax payables.

All of the trade and other payables are expected to be settled within one year or payable on demand.

– II-57 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

21 Bank loans

At 31 December 2010, 2011 and 2012 and 30 April 2013, the Target Group’s bank loans were repayable as follows:

Within 1 year or on demand After 1 year but within 2 years Total	As 2010 HK$’000 172,754 5,876 178,630	at 31 December 2011 2012 HK$’000 HK$’000 199,827 187,462 – – 199,827 187,462	As at 30 April 2013 HK$’000 189,711 –
			189,711

At 31 December 2010, 2011 and 2012 and 30 April 2013, the Target Group’s bank loans were secured as follows:

Bank loans Secured Unsecured	As 2010 HK$’000 110,468 68,162 178,630	at 31 December 2011 2012 HK$’000 HK$’000 193,660 187,462 6,167 – 199,827 187,462	As at 30 April 2013 HK$’000 189,711 –
			189,711

Notes:

(i) The following assets were pledged as securities for bank loans:

Interests in leasehold land and buildings (note 11(ii)) Cash at bank (note 19)	As 2010 HK$’000 42,140 2,938 45,078	at 31 December 2011 2012 HK$’000 HK$’000 62,723 39,166 – – 62,723 39,166	As at 30 April 2013 HK$’000 38,566 –
			38,566

(ii) The above-mentioned banking facilities of HK$178,630,000, HK$199,827,000, HK$197,328,000 and HK$199,696,000 were utilised to the extent of HK$178,630,000, HK$199,827,000, HK$187,462,000 and HK$189,711,000 as at 31 December 2010, 2011 and 2012 and 30 April 2013 respectively. The bank loans drawn were secured by assets as set out in note 21(i).

– II-58 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Parts of the Target Group’s banking facilities, amounted to HK$ Nil, HK$181,324,000, HK$24,666,000 and HK$153,516,000 as at 31 December 2010, 2011 and 2012 and 30 April 2013, are subject to the fulfilment of covenants relating to certain of the balance sheet ratios of the subsidiaries of the Target Group, as are commonly found in lending arrangements with financial institutions. If the Target Group were to breach the covenants the drawn down facilities would become payable on demand. The Target Group regularly monitors its compliance with these covenants. Further details of the Target Group’s management of liquidity risk are set out in note 26(b). As at 31 December 2010, 2011 and 2012 and 30 April 2013, none of the covenants relating to drawn down facilities had been breached.

22 Deferred government grants

The movements in deferred income as stated under current and non-current liabilities are as follows:

At the beginning of the year Received during the year Recognised in profit or loss (Note 3) Exchange reserve At the end of the year Net carrying amounts representing: Current portion Non-current portion	As 2010 HK$’000 22,641 26,301 (7,590) 315 41,667 17,777 23,890 41,667	at 31 December 2011 2012 HK$’000 HK$’000 41,667 60,145 25,642 21,082 (9,571) (9,210) 2,407 31 60,145 72,048 25,524 51,329 34,621 20,719 60,145 72,048	As at 30 April 2013 HK$’000 72,048 1,270 (1,806) 862 72,374 69,104 3,270 72,374

As at 31 December 2010, 2011 and 2012 and 30 April 2013, deferred government grants of the Target Group mainly included various conditional government grants for research and development projects of new or existing pharmaceutical products and subsidies relating to purchase of fixed assets.

Deferred government grants relating to purchase of fixed assets will be recognised as income on a straight-line basis over the expected useful life of the relevant assets.

– II-59 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

23 Income tax in the consolidated statements of financial position

(a) Current taxation in the consolidated statements of financial position represents:

At 1 January 2010
Provision for PRC income tax (note 5(a))
PRC income tax paid
Exchange adjustment
At 31 December 2010
Provision for PRC income tax (note 5(a))
PRC income tax paid
Exchange adjustment
At 31 December 2011
Provision for PRC income tax (note 5(a))
PRC income tax paid
Exchange adjustment
At 31 December 2012
Provision for PRC income tax (note 5(a))
PRC income tax paid
Exchange adjustment
At 30 April 2013

HK$’000
4,478
9,154
(7,933)
158
5,857
19,301
(12,310)
264
13,112
39,619
(30,815)
(192)
21,724
10,483
(14,086)
212
18,333

– II-60 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(b) The components of deferred tax assets/(liabilities) recognised in the consolidated statements of financial position and the movements during the year are as follows:

At 1 January 2010 Additions through acquisition of a subsidiary (note 15) (Credited)/charged to profit or loss Deductions through disposals of subsidiaries (note 6) Exchange adjustment At 31 December 2010 At 1 January 2011 Charged to profit or loss Exchange adjustment At 31 December 2011 At 1 January 2012 Charged/(credited) to profit or loss Exchange adjustment At 31 December 2012 At 1 January 2013 Charged/(credited) to profit or loss Exchange adjustment At 30 April 2013	Withholding tax on undistributed profits of PRC Subsidiaries HK$’000 (10,257) – – – (804) (11,061) (11,061) – (191) (11,252) (11,252) – (431) (11,683) (11,683) – (131) (11,814)	Impairment for inventories and receivables HK$’000 4,698 – (3,580) – 57 1,175 1,175 704 74 1,953 1,953 6 – 1,959 1,959 160 25 2,144	Fair value adjustment of tangible and intangible assets HK$’000 (32) (18,686) 893 17,730 13 (82) (82) 163 (1) 80 80 (40) – 40 40 (10) 2 32	Government grant HK$’000 – – 5,512 – 128 5,640 5,640 2,362 331 8,333 8,333 804 1 9,138 9,138 (80) 109 9,167	Accrued expenses HK$’000 3,893 – 3,723 – (94) 7,522 7,522 539 256 8,317 8,317 1,556 118 9,991 9,991 1,335 111 11,437	Total HK$’000 (1,698) (18,686) 6,548 17,730 (700)
						3,194

						3,194 3,768 469
						7,431

						7,431 2,326 (312)
						9,445

						9,445 1,405 116
						10,966

– II-61 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The deferred taxation is recognised on the consolidated statements of financial position as follows:

Deferred tax liabilities recognised on the consolidated statements of financial position Deferred tax assets recognised on the consolidated statements of financial position	As 2010 HK$’000 (11,061) 14,255 3,194	at 31 December 2011 2012 HK$’000 HK$’000 (11,252) (11,683) 18,683 21,128 7,431 9,445	As at 30 April 2013 HK$’000 (11,814) 22,780
			10,966

(c) Deferred tax assets not recognised

In accordance with the accounting policy set out in note 1(s), the Target Group has not recognised deferred tax assets in respect of cumulative tax losses of certain PRC subsidiaries of HK$4,538,000, HK$5,764,000, HK$ Nil and HK$ Nil and other temporary differences of HK$13,913,000, HK$8,062,000, HK$9,093,000 and HK$13,400,000 as at 31 December 2010, 2011 and 2012 and 30 April 2013 respectively. The Target Group determined that it was not probable that future taxable income against which the losses and other temporary differences could be utilised in the foreseeable future.

24 Share incentive plan

The Target Company has a share incentive plan which was adopted on 9 October 2006 (the “Share Incentive Plan”), under which the Target Group may grant its employees, directors and consultants various types of awards including options to purchase ordinary shares of the Target Company, share appreciation rights, dividend equivalent rights, restricted shares, restricted share units, share payments, or deferred shares. Up to 10% of the Target Company’s outstanding ordinary shares were reserved for issuance under the Share Incentive Plan. The term of each award under the Share Incentive Plan will be specified in the award agreement, but the life of any award may not exceed ten years from the date it is granted.

On 14 April 2011, the whole Share Incentive Plan was cancelled according to the resolution by an extraordinary general meeting.

(a) Share options

(i) On 24 October 2007, the Target Group granted 5,200,000 share options to certain directors and employees to acquire 5,200,000 ordinary shares. 1,730,000 of these options vested on 24 October 2007. Another 1,730,000 of the options vested on 30 June 2008 while the remainder of the options vested on 30 June 2009. These options were granted in anticipation of services to be provided during the respective vesting periods. The exercise price of these options is US$2.91 per option. These options can be exercised from the vesting date to 12 August 2017.

The Target Group calculated the estimated fair value of share options on the grant date using the Black-Scholes Option valuation model with the following assumptions:

	Granted on
	24 October 2007
Average risk-free rate of return	3.987%
Weighted average expected option life	4.9 years
Volatility rate	29.19%
Dividend yield	0%
Fair value of options at grant date per share	US$0.8980

– II-62 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The following table summarized the Target Group’s share option activity under the Share Incentive Plan during the Relevant Periods:

Outstanding at 1 January 2010, 31 December 2010 Cancelled during 31 December 2011 Outstanding at 31 December 2011	Number of options Weighted average exercise price Weighted average grant-date fair value Weighted average remaining contractual life (US$) (US$) (Years) 4,800,000 2.91 0.90 7.67 (4,800,000) – – – – – – –

A director resigned from the Target Company on 12 August 2008 and accordingly, unvested 400,000 share option granted to him were forfeited. The aggregate fair value of the remaining 4,800,000 outstanding share options at grant date was determined to be US$4,310,000 (approximately HK$33,385,000) and such amount was recognized as compensation expense using the accelerated method with a corresponding credit to capital reserve up to 1 January 2010. During the year ended 31 December 2011, capital reserve of US$4,310,000 (approximately HK$33,385,000) was reversed with a corresponding debit to retained earnings since each outstanding option to purchase shares under the Target Company’s Share Incentive Plan was cancelled without payment of any consideration from the Target Company for such options.

(ii) In December 2008, Mr. Wang Xiaochun, a shareholder and director of the Target Company, awarded 240,000 share options to an employee in anticipation of services to be provided by this employee during the vesting periods. The exercise price of these options is US$1.00 per option. The transaction is recorded as a deemed capital contribution to the Target Group and the related compensation cost was recognized.

The Target Group calculated the estimated fair value of share options granted to this employee on the grant date using the Black-Scholes Option valuation model with the following assumptions:

	Granted on
	15 December 2008
Average risk-free rate of return	1.727%
Weighted average expected option life	6.2 years
Volatility rate	36.04%
Dividend yield	0%
Fair value of options at grant date per share	US$0.1211

– II-63 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The following table summarizes the activity of the share options.

Outstanding at 1 January 2010 Forfeited during the year ended 31 December 2010 Outstanding at 31 December 2010 Cancelled during the year ended 31 December 2011 Outstanding at 31 December 2011	Number of options Weighted average exercise price Weighted average grant-date fair value Weighted average remaining contractual life (US$) (US$) (Years) 240,000 1.00 0.12 9 (200,000) – – – 40,000 1.00 0.12 8 (40,000) – – – – – – –

The aggregate fair value of 240,000 outstanding share options at grant date was determined to be US$29,000 (approximately HK$225,000) and US$15,000 (approximately HK$116,000) was recognized as compensation expense with a corresponding credit to share premium up to 1 January 2010. As of 1 January 2010, there was US$14,000 (approximately HK$109,000) of unrecognized share-based compensation cost related to share options granted to this employee which is expected to be recognized over a weighted-average vesting period of two years. This employee resigned from the Target Company on 2 December 2010 and accordingly, unvested 200,000 share options were forfeited. Compensation expense of US$10,000 (approximately HK$77,000) was reversed accordingly with a corresponding debit to share premium.

(b) Restricted shares

(i) On 24 October 2007, the Target Group granted 1,656,714 restricted shares to certain employees under the Share Incentive Plan. 871,714 and 20,000 of these restricted shares vested on 24 October 2007 and 31 December 2007 respectively. Another 345,000 and 20,000 of the restricted shares vested on 30 June 2008 and 31 December 2008 respectively, while the reminder of the restricted shares of 400,000 vested on 20 June 2009. These restricted shares were granted in anticipation of services to be provided during the respective vesting periods.

The aggregate fair value of the restricted shares at the grant date was determined to be US$4,356,000 (approximately HK$33,687,000) based on the quoted market price of the Target Company’s ordinary share at the grant date, and such amount was recognized as compensation expenses using the accelerated method with a corresponding credit to capital reserve up to 1 January 2010. During the year ended 31 December 2011, capital reserve of US$4,356,000 (approximately HK$33,687,000) was reversed with a corresponding debit to retained earnings since each restricted share granted under the Target Company’s Share Incentive Plan was cancelled.

(ii) On 15 December 2008, Mr. Wang Xiaochun, a shareholder granted 180,000 restricted shares to an employee with an aggregate grant date fair value of US$104,000 (approximately HK$806,000). US$66,000 (approximately HK$511,000) was recognized as compensation expense with a corresponding credit to share premium up to 1 January 2010. As of 1 January 2010, there was US$38,000 (approximately HK$295,000) of unrecognized share-based compensation cost related to share options granted to this employee which is expected to be

– II-64 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

recognized over a weighted-average vesting period of two years. This employee resigned from the Target Company on 2 December 2010 and accordingly, unvested 120,000 share options were forfeited.

During the year ended 31 December 2010, compensation expenses of US$31,000 (approximately HK$237,000) were reversed accordingly with a corresponding debit to share premium.

25 Capital, reserves and dividends

(a) Movements in components of equity

The reconciliation between the opening and closing balances of each component of the Target Group’s consolidated equity is set out in the consolidated statements of changes in equity. Details of the changes in the Target Company’s individual components of equity between the beginning and the end of the year are set out below:

At 1 January 2010 Loss and other comprehensive income for the year Reversal of share-based compensation At 31 December 2010 At 1 January 2011 Profit and other comprehensive income for the year Dividends approved and paid in respect of the previous years Cancellation of share incentive plan Arising from privatization (note 25(c)) At 31 December 2011 At 1 January 2012 Profit and other comprehensive income for the year Dividends approved and paid in respect of the previous years At 31 December 2012	Share capital HK$’000 787 – – 787 - - - - - - - - - - 787 – – – (398) 389 - - - - - - - - - - 389 – – 389 - - - - - - - - - -	Share premium HK$’000 825,868 – (314) 825,554 - - - - - - - - - - 825,554 – (185,087) – – 640,467 - - - - - - - - - - 640,467 – (72,836) 567,631 - - - - - - - - - -	Capital reserve HK$’000 67,072 – – 67,072 - - - - - - - - - - 67,072 – – (67,072) 787 787 - - - - - - - - - - 787 – – 787 - - - - - - - - - -	Exchange reserve HK$’000 (130,814) 2,490 – (128,324) - - - - - - - - - - (128,324) (2,221) – – – (130,545) - - - - - - - - - - (130,545) (981) – (131,526) - - - - - - - - - -	Accumulated losses HK$’000 (285,432) (31,515) – (316,947) - - - - - - - - - - (316,947) 177,088 – 67,072 – (72,787) - - - - - - - - - - (72,787) 153,059 (80,272) – - - - - - - - - - -	Total HK$’000 477,481 (29,025) (314)
						448,142 - - - - - - - - - - 448,142 174,867 (185,087) – 389
						438,311 - - - - - - - - - - 438,311 152,078 (153,108)
						437,281 - - - - - - - - - -

– II-65 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

At 1 January 2013 Loss and other comprehensive income for the period At 30 April 2013 (Unaudited) At 1 January 2012 Profit and other comprehensive income for the period Dividends approved and paid in respect of the previous years At 30 April 2012	Share capital HK$’000 389 – 389 - - - - - - - - - - ---------------------------------------- 389 – – 389	Share premium HK$’000 567,631 – 567,631 - - - - - - - - - - ---------------------------------------- 640,467 – (72,836) 567,631	Capital reserve HK$’000 787 – 787 - - - - - - - - - - ---------------------------------------- 787 – – 787	Exchange reserve HK$’000 (131,526) 545 (130,981) - - - - - - - - - - ---------------------------------------- (130,545) (759) – (131,304)	Accumulated losses HK$’000 – (827) (827) - - - - - - - - - - ---------------------------------------- (72,787) 153,018 (80,272) (41)	Total HK$’000 437,281 (282)
						436,999 - - - - - - - - - - ---------------------------------------- 438,311 152,259 (153,108)
						437,462

(b) Dividends

Dividends payable to equity shareholders of the Target Company attributable to the previous financial years, approved and paid during the Relevant Periods:

Final dividends in respect of the previous years, approved and paid during the year/period	As at 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 – 185,087 153,108	As at 30 April 2013 HK$’000 –

– II-66 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

As at 31 December As at 30 April 2013	2010 2011 2012	No. of US$’000 HK$’000 No. of US$’000 HK$’000 No. of US$’000 HK$’000 No. of US$’000 HK$’000	Shares equivalent shares equivalent shares equivalent Shares equivalent	’000 ’000 ’000 ’000	Authorised:	Ordinary shares of US$0.001	each	At 1 January 500,000 500 3,781 500,000 500 3,781 50,000 50 389 50,000 50 389	Arising from privatization	(note) – – – (450,000) (450) (3,392) – – – – – –	At 31 December/30 April 500,000 500 3,781 50,000 50 389 50,000 50 389 50,000 50 389			Ordinary shares, issued	and fully paid:	At 1 January 104,067 104 787 104,067 104 787 50,000 50 389 50,000 50 389	Arising from privatization	(note) – – – (54,067) (54) (398) – – – – – –	At 31 December/30 April 104,067 104 787 50,000 50 389 50,000 50 389 50,000 50 389			The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Target	Company. All ordinary shares rank equally with regard to the Target Company’s residual assets.	Note: Pursuant to the resolution of the board of directors on 29 October 2010, the Target Company’s authorised share capital was decreased from US$500,000 to	US$50,000. As part of the privatization of the Target Group during 2011, the Target Company cancelled 104,066,526 issued ordinary shares of the Target	Company and newly issued 50,000,000 ordinary shares of the Target Company in proportion to the shareholding of existing ultimate shareholders of the	Target Company on 14 April 2011. Pursuant to the Companies Law (2012 Revision) of the Cayman Islands, an amount equivalent to the par value of the	shares cancelled of HKD787,000 was transferred from share capital to the capital reserve.

– II-67 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(d) Share premium

The application of the share premium account is governed by the Companies Law (2012 Revision) of the Cayman Islands.

(e) Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of subsidiaries with operations in the PRC. The reserve is dealt with in accordance with the accounting policy set out in note 1(v).

(f) Reserve fund

In accordance with the accounting principles and financial regulations applicable in the PRC, the PRC subsidiaries are required to transfer part of its profit after taxation to the reserve fund. The transfer amounts are determined by the subsidiary’s board of directors in accordance with the articles of association and the transfers are made before profit distribution to the equity holders of the subsidiary. Reserve fund can only be used to make good losses, if any, and for increasing paid-in capital.

(g) Capital reserve

The capital reserve comprises 1) the portion of the grant date fair value of unexercised share options granted to employees of the Target Company that has been recognised in accordance with the accounting policy adopted for share-base payments; and 2) aggregate amount of the par value of shares cancelled as mentioned in note 25(c) pursuant to the Companies Law (2012 Revision) of the Cayman Islands.

(h) Distributability of reserves

At 31 December 2010, 2011 and 2012 and 30 April 2013, the aggregate amounts of reserve available for distribution to equity shareholders of the Target Company were HK$447,355,000, HK$437,922,000, HK$436,892,000 and HK$436,610,000 respectively.

(i) Capital management

The Target Group’s primary objectives when managing capital are to safeguard the Target Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, by pricing products and services commensurately with the level of risk and by securing access to finance at a reasonable cost.

The Target Group actively and regularly reviews and manages its capital structure to maintain a balance between the higher shareholders returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions.

The Target Group monitors its capital structure on the basis of an adjusted net debt-to-capital ratio. For this purpose, adjusted net debt is defined as total debt (which includes interest-bearing loans and borrowings) plus unaccrued proposed dividends, less cash and cash equivalents. Adjusted capital comprises all components of equity, less unaccrued proposed dividends.

During the Relevant Periods, the Target Group’s strategy was to maintain the capital in order to cover any debt position.

– II-68 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The adjusted debt-to-equity ratios at 31 December 2010, 2011 and 2012 and 30 April 2013 are as follows:

Current liabilities: Trade and other payables Bank loans Non-current liabilities: Bank loans Total debt Less: Cash and cash equivalents Adjusted net debt Total equity Adjusted net debt-to-equity ratio	As 2010 HK$’000 146,281 172,754 319,035 5,876 324,911 246,843 78,068 1,128,964 7%	at 31 December 2011 2012 HK$’000 HK$’000 152,142 191,045 199,827 187,462 351,969 378,507 – – 351,969 378,507 258,227 257,093 93,742 121,414 1,020,815 1,035,821 9% 12%	As at 30 April 2013 HK$’000 182,552 189,711
			372,263 –
			372,263 179,469
			192,794

			1,079,392

			18%

Except for covenants relating to certain of the banking facilities of the subsidiaries of the Target Group as disclosed in note 21, neither the Target Company nor its subsidiaries are subject to externally imposed capital requirements.

26 Financial risk management and fair value

Exposure to credit, liquidity, interest rate and foreign currency risks arises in normal course of the Target Group’s business. The Target Group’s exposure to these risks and the financial risk management policies and practices used by the Target Group to manage these risks are described below.

(a) Credit risk

The Target Group’s credit risk is primarily attributable to trade and other receivables. Credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Trade receivables are due within 30 to 180 days from the date of billing. Debtors with balances that are more than three months overdue are requested to settle all outstanding balances before any further credit is granted. Normally, the Target Group does not obtain collateral from customers.

The Target Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The default risk of the industry and country in which customers operate also has an influence on credit risk but to a lesser extent. At 31 December 2010, 2011 and 2012 and 30 April 2013, the Target Group has no concentration of credit risk.

The maximum exposure to credit risk is represented by the carrying amount of the asset in the consolidated statements of financial position after deducting any impairment allowance. The Target Group does not provide any guarantees which would expose the Target Group to credit risk.

– II-69 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Further quantitative disclosures in respect of the Target Group’s exposure to credit risk arising from trade and other receivables are set out in note 18.

(b) Liquidity risk

Individual operating entities within the Target Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the Target Company’s board when the borrowings exceed certain predetermined levels of authority. The Target Group’s policy is to regularly monitor its liquidity requirements to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

The following tables show the remaining contractual maturities at the date of statements of financial positions of the Target Group’s and the Target Company’s non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the date of statements of financial position and the earliest date the Target Group and the Target Company can be required to pay):

Target Group

31 December 2010

	31 December 2010	31 December 2010	31 December 2010
Bank loans Trade and other payables Total	Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 177,138 5,898 – 183,036 146,281 – – 146,281 323,419 5,898 – 329,317			Carrying amount HK$’000 178,630 146,281
	Within 1 year or on demand HK$’000 177,138 146,281 323,419	More than 1 year but less than 5 years HK$’000 5,898 – 5,898	More than 5 years HK$’000 – – –
				324,911

31 December 2011

	31 December 2011	31 December 2011	31 December 2011
Bank loans Trade and other payables Total	Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 205,108 – – 205,108 152,142 – – 152,142 357,250 – – 357,250			Carrying amount HK$’000 199,827 152,142
	Within 1 year or on demand HK$’000 205,108 152,142 357,250	More than 1 year but less than 5 years HK$’000 – – –	More than 5 years HK$’000 – – –
				351,969

– II-70 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

31 December 2012

	31 December 2012	31 December 2012	31 December 2012
Bank loans Trade and other payables Total Bank loans Trade and other payables Total	Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 192,144 – – 192,144 191,045 – – 191,045 383,189 – – 383,189 30 April 2013			Carrying amount HK$’000 187,462 191,045
	Within 1 year or on demand HK$’000 192,144 191,045 383,189	More than 1 year but less than 5 years More than 5 years HK$’000 HK$’000 – – – – – – 30 April 2013
				378,507


	Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 197,968 – – 197,968 182,552 – – 182,552 380,520 – – 380,520			Carrying amount HK$’000 189,711 182,552
	Within 1 year or on demand HK$’000 197,968 182,552 380,520	More than 1 year but less than 5 years HK$’000 – – –	More than 5 years HK$’000 – – –
				372,263

Target Company

31 December 2010	31 December 2010	31 December 2010
Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 19,667 – – 19,667 31 December 2011			Carrying amount HK$’000 19,667
Within 1 year or on demand HK$’000 19,667	More than 1 year but less than 5 years HK$’000 – 31


Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 2,546 – – 2,546			Carrying amount HK$’000 2,546
Within 1 year or on demand HK$’000 2,546	More than 1 year but less than 5 years HK$’000 –	More than 5 years HK$’000 –

– II-71 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

31 December 2012	31 December 2012
Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total HK$’000 HK$’000 HK$’000 HK$’000 2,539 – – 2,539 30 April 2013		Carrying amount HK$’000 2,539
Within 1 year or on demand HK$’000 2,539	More than 1 year but less than 5 years More than 5 years HK$’000 HK$’000 – – 30 April 2013


Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but less than 5 years More than 5 years Total 2,542 – – 2,542		Carrying amount 2,542

– II-72 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

*(c)* *Interest rate risk*	The Target Group’s interest rate risk arises primarily from short-term and long-term borrowings. Borrowings issued at variable rates expose the Target Group to	cash flow interest rate risk. The Target Group’s interest rate profile as monitored by management is set out in (i) below.	(i) Interest rate profile	At the end of reporting period, the interest rate profile of the Target Group’s interest-bearing borrowings is set out as below:	As at 31 December As at 30 April	2010 2011 2012 2013	Effective Carrying Effective Carrying Effective Carrying Effective Carrying	interest rate amount interest rate amount interest rate amount interest rate amount	HK$’000 HK$’000 HK$’000 HK$’000	Net fixed rate borrowings:	Bank loans 5.31% 108,118 6.06%~6.56% 181,325 6.00%~6.56% 187,462 6.00%~6.31% 189,711	Variable rate borrowings:	Bank loans 6.14% 70,512 6.98%~7.65% 18,502 – –	Total bank loans 178,630 199,827 187,462 189,711		Total fixed rate borrowings	as a percentage of total	borrowings 60.53% 90.74% 100% 100%		(ii) Sensitivity analysis	As at 31 December 2010, 2011 and 2012 and 30 April 2013, if interest rates on borrowings had been 100 basis points higher/lower with all other variables	held constant, profit before tax for the year/period would have been HK$705,000, HK$185,000, Nil and Nil lower/higher, respectively, mainly as a result of	higher/lower finance costs on loans and borrowings.

– II-73 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(d) Foreign currency risk

Individual companies within the Target Group has limited foreign currency risk as most of the transactions are denominated in the same currency as the functional currency of the operations in which they relate. However, as the principal subsidiaries, Tongjitang Pharmaceutical, Jingfang, Guizhou LLF and Pulante mainly carried out transactions in RMB, therefore any appreciation or depreciation of HK$ against RMB will affect the Target Group’s financial position and be reflected in the exchange reserve.

(e) Fair value

(i) The following table presents the carrying value of financial instruments measured at fair value at the end of the reporting period across the three levels of the fair value hierarchy defined in HKFRS 7, Financial Instruments: Disclosures, with the fair value of each financial instrument categorised in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:
Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments
Level 2 fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data
Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data

	As at 31 December 2010	As at 31 December 2010	As at 31 December 2010	As at 31 December 2010
	Target Group				Target Company
Level 1 HK$’000 1,338 1,338	Level 2 HK$’000 – –				Level 2 HK$’000 – –	Level 3 HK$’000 – –	Total HK$’000 –
							–


	Target Group		Total HK$’000 866 866		Target Company
Level 1 HK$’000 866 866	Level 2 HK$’000 – –	Level 3 HK$’000 – –		Level 1 HK$’000 – –	Level 2 HK$’000 – –	Level 3 HK$’000 – –	Total HK$’000 –
							–

– II-74 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

	As at 31 December 2012	As at 31 December 2012	As at 31 December 2012	As at 31 December 2012
	Target Group		Total Level 1 HK$’000 HK$’000 863 – 863 – As at 30 April 2013		Target Company
Level 1 HK$’000 863 863	Level 2 HK$’000 – –	Level 3 HK$’000 – –			Level 2 HK$’000 – –	Level 3 HK$’000 – –	Total HK$’000 –
							–


	Target Group		Total HK$’000 863 863		Target Company
Level 1 HK$’000 863 863	Level 2 HK$’000 – –	Level 3 HK$’000 – –		Level 1 HK$’000 – –	Level 2 HK$’000 – –	Level 3 HK$’000 – –	Total HK$’000 –
							–

(ii) Fair values of financial instruments carried at other than fair value

All financial instruments are carried at amounts not materially different from their fair values as at 31 December 2010, 2011 and 2012 and 30 April 2013.

27 Commitments

(a) Capital commitments of the Target Group outstanding at respective date of the consolidated statements of financial position not provided for in the Financial Information were as follows:

Contracted for Authorised but not contracted for	As 2010 HK$’000 13,057 − 13,057	at 31 December 2011 2012 HK$’000 HK$’000 66,625 53,434 55,508 31,798 122,133 85,232	As at 30 April 2013 HK$’000 132,267 25,820
			158,087

(b) At respective date of the consolidated statements of financial position, the total future minimum lease prepayments under non-cancellable operating leases are payable as follows:

Within 1 year After 1 year but within 5 years	As 2010 HK$’000 203 427 630	at 31 December 2011 2012 HK$’000 HK$’000 232 484 199 22 431 506	As at 30 April 2013 HK$’000 245 9
			254

– II-75 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Operating lease payments represent rentals payable by the Target Group for its office premises. The lease was negotiated for an average term of two years with fixed rental. The lease did not include any contingent rentals.

28 Material related party transactions

During the Relevant Periods, the directors are of the view that related parties of the Target Group include the following individuals/companies:

Name of related party

Relationship with the Target Group

Wang Xiaochun Controlling shareholder Chen Yan Key management of the Target Group Hanmax Investment Limited Effectively owned by the controlling shareholder Fosun Industrial Co., Limited Minority shareholder （復星實業有限公司）(i)

Shanghai Fosun Pharmaceutical Co., Ltd. A fellow subsidiary of Fosun Industrial Co., Limited （上海復星藥業有限公司）(i)

(i) The official names of these companies are in Chinese. The English translation of the names is for reference only.

(a) Key management personnel compensation

Key management personnel compensation comprised:

Salaries and other benefits Contribution to defined retirement plans	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 1,518 1,528 1,532 66 66 66 1,584 1,594 1,598	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 511 511 22 22 533 533	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) 511 511 22 22 533 533
			533

– II-76 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

(b) Transactions with related parties

During the Relevant Periods, the Target Group entered into the following material related party transactions:

(1) Payment of expenses by the Target Group on behalf of – Wang Xiaochun (2) Sales of goods to – Shanghai Fosun Pharmaceutical Co., Ltd.	For the year ended 31 December 2010 2011 2012 HK$’000 HK$’000 HK$’000 57 282 – – 9,216 13,106	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) – – 4,945 10,085	For the four months ended 30 April 2012 2013 HK$’000 HK$’000 (unaudited) – – 4,945 10,085

			10,085

(c) Balances with related parties

(i) Amounts due from related parties

Wang Xiaochun Shanghai Fosun Pharmaceutical Co., Ltd. Total	As 2010 HK$’000 59 – 59	at 31 December 2011 2012 HK$’000 HK$’000 350 350 37 1,400 387 1,750	As at 30 April 2013 HK$’000 350 423
			773

The outstanding balances with the related party are unsecured, interest free and have no fixed repayment terms.

29 Immediate and ultimate controlling parties

The directors consider the ultimate controlling party of the Target Company as at 30 April 2013 to be Mr. Wang Xiaochun.

– II-77 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

30 Significant accounting estimates and judgements

In the process of applying the Target Group’s accounting policies, the key sources of estimation uncertainty are as follows:

(a) Impairment

If circumstances indicate that the net book value of property, plant and equipment, goodwill, intangible assets and interests in leasehold land held for own use under operating leases may not be recoverable, these assets may be considered “impaired”, and an impairment loss may be recognised in accordance with HKAS 36, Impairment of assets. The carrying amounts of these assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Target Group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to level of sales volume, selling price, material costs and amount of operating costs. The Target Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including sales volume, expected changes to selling prices and operating costs, and discount rate.

In addition, the Target Group estimates impairment losses for bad and doubtful debts resulting from the inability of the debtors to make the required payments. The Target Group bases the estimates on the ageing of the trade and other receivables balance, credit-worthiness of the debtors and historical write-off experience. If the financial condition of the debtors were to deteriorate, actual write-offs would be higher than estimated.

(b) Depreciation and amortisation

Fixed assets and intangible assets are depreciated and amortised on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value, if any. The Target Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation and amortisation expense to be recorded during any reporting period. The useful lives are based on the Target Group’s historical experience with similar assets and taking into account upgrading and improvement work performed, anticipated technological changes, and legal or similar limits on the use of assets. The depreciation and amortisation expense for future periods is adjusted if there are significant changes from previous estimates.

(c) Write down of inventories

The Target Group determines the write-down for obsolescence of inventories. These estimates are based on the current market condition and the historical experience in selling goods of similar nature. It could change significantly as a result of change in market condition.

(d) Deferred tax assets

Deferred tax assets arising from deductible temporary differences and tax losses are recognised to the extent that it is probable that future taxable income will be available against which deductible temporary differences and tax losses can be utilised. The outcome of their actual utilisation may be different.

– II-78 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

31 Possible impact of amendments, new standards and interpretations issued but not yet effective for the four months ended 30 April 2013

Up to the date of issue of this report, the HKICPA has issued a number of amendments, and new standards which are not yet effective for the four months ended 30 April 2013 and which have not been adopted in this Financial Information. These include the following which may be relevant to the Target Group.

	Effective for
	accounting
	periods
	beginning on
	or after
Amendments to HKFRS 10, HKFRS 12 and HKAS 27, Investment entities	1 January 2014
Amendments to HKAS 32, Financial instruments: Presentation – Offsetting financial	1 January 2014
assets and financial liabilities
Amendments to HKAS 36, Recoverable amount disclosures for non-financial assets	1 January 2014
HK(IFRIC) 21, Levies	1 January 2014
HKFRS 9, Financial instruments	1 January 2015
Amendments to HKFRS 9, Financial instruments and HKFRS 7, Financial instruments:	1 January 2015
Disclosures – Mandatory effective date and transition disclosures

The Target Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Target Group’s results of operations and financial position.

C SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Company and its subsidiaries comprising the Target Group in respect of any period subsequent to 30 April 2013.

Yours faithfully, KPMG

Certified Public Accountants Hong Kong

– II-79 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

2. MANAGEMENT DISCUSSION AND ANALYSIS

For the four months ended 30 April 2013

Business review

During the four months ended 30 April 2013, the Target Group focused on renovation plans for its main manufacturing facilities, as well as development of new production base in Guiyang, the PRC, in order to meet the requirements of the new GMP certification by the end of 2015. The sales growth of 仙靈骨葆片 (Xianling Gubao Tablets*) was significant as the result from the implementation of business strategy formulated in 2012.

During the four months ended 30 April 2013, the application of 五味藿香片 (Wuwei Huoxiang Tablets*) to China Food and Safety Administration is currently pending for production approval.

Results

For the four months ended 30 April 2013, the Target Group recorded turnover of approximately HK$389.7 million, representing an increase of approximately 9.3% as compared with the same period of the previous year. Such increase was mainly attributable to (i) the increase in demand of the Target Group’s principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) driven by the government policies on medical reform in the PRC whereby an increased funding had been spent on the healthcare sector, especially the increase of subsidies to products which are on the National Essential Drugs List; and (ii) the strategy of promoting 仙靈骨葆片 (Xianling Gubao Tablets*) in the over-the-counter (“OTC”) market.

The Target Group recorded gross profit of approximately HK$242.3 million, representing an increase of approximately 17.1% as compared with the same period of the previous year as a result of the increase in turnover as described above and the improvement in gross profit margin to approximately 62.2% from approximately 58.1% in the same period of 2012. The improvement in gross profit margin was mainly due to improved economies of scale, reduced unit cost of packaging and higher production efficiency as a result of optimization of production process.

During the four months ended 30 April 2013, the Target Group recorded other net income of approximately HK$2.3 million, which was mainly due to the exchange gain of approximately HK$2.5 million.

– II-80 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Liquidity and financial information

As at 30 April 2013, the Target Group’s current assets amounted to approximately HK$1,250.3 million, which included cash and cash equivalents of approximately HK$179.5 million. Current liabilities amounted to approximately HK$459.7 million. Net current assets amounted to approximately HK$790.6 million. The Target Group’s current ratio was approximately 2.7.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.2 as at 30 April 2013.

As at 30 April 2013, the Target Group recorded trade receivables of approximately HK$279.2 million, approximately HK$178.9 million of which had been settled as at 30 June 2013.

As at 30 April 2013, the Target Group had current other receivables of approximately HK$425.8 million, mainly comprising the Huixian Debt of approximately RMB 274.4 million (equivalent to approximately HK$342.4 million) as at Completion. Details of the Huixian Debt are set out in the paragraph headed “The Acquisition Agreement” under the section headed “Letter from the Board”. In addition, the Target Group had non-current other receivables of approximately HK$8.1 million, mainly represented prepayments for equipment.

Treasury policies and foreign exchange exposure

The Target Group has limited foreign currency risk as most of the transactions are denominated in the same currency as the functional currency of the operations in which they relate, the use of financial instruments for hedging purposes is not considered necessary. However, as the principal subsidiaries of the Target Group mainly carried out transactions in RMB, therefore any appreciation or depreciation of HK$ against RMB will be reflected in the exchange reserve as the reporting currency of the Group is HK$.

Capital structure and pledge of assets

The directors of the Target Group reviewed the capital structure of the Target Group regularly and managed the capital structure, taking into consideration, among other things, the future capital requirements, the projected cash flows and the projected capital expenditures of the Target Group. As at 30 April 2013, the capital requirement of the Target Group was funded by internal resources and debts.

As at 30 April 2013, the Target Group had bank loans of approximately HK$189.7 million (all of which are subject to fixed interest rate) which were repayable within one year or on demand and secured by the Target Group’s interests in leasehold land and buildings with an aggregate book value of approximately HK$38.6 million. Save as disclosed, no other asset was pledged by the Target Group.

– II-81 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Contingent liabilities

As at 30 April 2013, the Target Group did not have any contingent liability.

Employees and remuneration policies

As at 30 April 2013, the Target Group had 3,072 employees. Total staff costs for the four months ended 30 April 2013 were approximately HK$60.3 million. Remuneration packages for employees are reviewed on a regular basis and principally comprised salaries, wages, contributions to defined contribution retirement plan and other benefits.

Significant investments held

As at 30 April 2013, the Target Group did not hold any significant investment.

Material acquisition and disposal of subsidiaries and associated companies

For the four months ended 30 April 2013, there was no material acquisition or disposal of any subsidiary and associated company by the Target Group.

Prospects and future plan for material investments

In March 2013, the Ministry of Health of the PRC released the 2012 National Essential Drugs List, which covered 520 types of medicines, including five products exclusively produced by the Target Group, namely 仙靈骨葆 (Xianling Gubao), 頸舒顆粒 (Jingshu Granules), 棗仁安神膠囊 (Zaoren Anshen Capusles), 潤燥止癢膠囊 (Moisturizing and Anti-Itching Capsules) and 風濕骨痛膠囊 (Fengshi Gutong Capules). It is expected that the Target Group will continue to capitalise on the growth in demand of these products in both the prescription and the OTC markets. The Target Group will continue its strategy of increasing sale of Xianling Gubao and Jingshu Granules, which have been on the Essential Drugs List since 2009. The directors of the Target Group will focus on the marketing and promotion of 潤燥止癢膠囊 (Moisturizing and Anti-Itching Capsules), 棗仁安神膠囊 (Zaoren Anshen Capsules) and 風濕骨痛膠囊 (Fengshi Gutong Capsules).

As at 30 April 2013, the Target Group had capital commitments contracted for of approximately HK$132.3 million and capital commitments authorized but not contracted for of approximately HK$25.8 million in relation to (i) the upgrades of certain workshop and setting up of a production base of the Target Group; and (ii) the project to improve the production process in order to meet the requirements of the new version of Good Manufacturing Practice.

– II-82 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

For the year ended 31 December 2012

Business review

During the year ended 31 December 2012, the Target Group continued sales and marketing activities for its principal products, namely 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules), particularly in the hospitals of county/township and community clinics in the PRC. The Target Group also strengthened its marketing campaigns to promote 仙靈骨葆片 (Xianling Gubao Tablets*) in the OTC market.

During 2012, the Target Group completed the phase III clinic trial for 五味藿香片 (Wuwei Huoxiang Tablets*) (which was used for treatment of clinical depression) and filed an application to China Food and Safety Administration for production approval.

Results

For the year ended 31 December 2012, the Target Group recorded turnover of approximately HK$1,267.4 million, representing an increase of approximately 38.9% as compared with the previous year. Such increase was mainly attributable to the increase in demand of the Target Group’s principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) driven by the government policies on medical reform in the PRC whereby an increased funding had been spent on the healthcare sector, especially the increase of subsidies to products which are on the National Essential Drugs List.

The Target Group recorded gross profit of approximately HK$764.2 million, representing an increase of approximately 52.8% as compared with the previous year as a result of the increase in turnover as described above and the improvement in gross profit margin to approximately 60.3% from approximately 54.8% in 2011. The improvement in gross profit margin was mainly due to improved economies of scale, reduced unit cost of packaging and higher production efficiency as a result of optimization of production process.

The Target Group recorded other net income of approximately HK$2.2 million in 2012, which was mainly due to the exchange gain of approximately HK$5.7 million and other expenses of approximately HK$3.4 million.

For the year ended 31 December 2012, the Target Group’s profit from continuing operations was approximately HK$169.5 million, representing an increase of approximately 273.5% as compared with the previous year.

– II-83 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Liquidity and financial information

As at 31 December 2012, the Target Group’s current assets amounted to approximately HK$1,253.9 million, which included cash and cash equivalents of approximately HK$257.1 million. Current liabilities amounted to approximately HK$451.6 million. Net current assets amounted to approximately HK$802.3 million. The Target Group’s current ratio was approximately 2.8.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.2 as at 31 December 2012.

As at 31 December 2012, the Target Group recorded trade receivables of approximately HK$265.8 million.

As at 31 December 2012, the Target Group had current other receivables of approximately HK$375.8 million, mainly comprising the Huixian Debt of approximately RMB274.4 million (equivalent to approximately HK$338.4 million) as at Completion. Details of the Huixian Debt are set out in the paragraph headed “The Acquisition Agreement” under the section headed “Letter from the Board”. In addition, the Target Group also had non-current other receivables of approximately HK$42.1 million, mainly represented prepayments for equipment.

Treasury policies and foreign exchange exposure

Capital structure and pledge of assets

The directors of the Target Group reviewed the capital structure of the Target Group regularly and managed the capital structure, taking into consideration, among other things, the future capital requirements, the projected cash flows and the projected capital expenditures of the Target Group. As at 31 December 2012, the capital requirement of the Target Group was funded by internal resources and debts.

As at 31 December 2012, the Target Group had bank loans of approximately HK$187.5 million (all of which are subject to fixed interest rate) which were repayable within one year or on demand and secured by the Target Group’s interests in leasehold land and buildings with an aggregate book value of approximately HK$39.2 million. Save as disclosed, no other asset was pledged by the Target Group.

– II-84 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Contingent liabilities

As at 31 December 2012, the Target Group did not have any contingent liability.

Employees and remuneration policies

As at 31 December 2012, the Target Group had 3,051 employees. Total staff costs for the year ended 31 December 2012 were approximately HK$152.9 million. Remuneration packages for employees are reviewed on a regular basis and principally comprised salaries, wages, contributions to defined contribution retirement plan and other benefits.

Significant investments held

As at 31 December 2012, the Target Group did not hold any significant investment.

Material acquisition and disposal of subsidiaries and associated companies

For the year ended 31 December 2012, there was no material acquisition or disposal of any subsidiary and associated company by the Target Group.

Prospects and future plan for material investments

As at 31 December 2012, the Target Group had capital commitments contracted for of approximately HK$53.4 million and capital commitments authorised but not contracted for of approximately HK$31.8 million in relation to (i) the upgrades of certain workshop and setting up of a new production base of the Target Group; and (ii) the project to improve the production process in order to meet the requirements of the new version of Good Manufacturing Practice.

– II-85 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

For the year ended 31 December 2011

Business review

During the year ended 31 December 2011, the Target Group expanded sales force to cover small cities, county/township hospitals and community clinics to capitalize on the growth in demand for our main products 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) as both of them were included in 2009 National Essential Drugs List. 仙靈骨葆片 (Xianling Gubao Tablets*) were repositioned as part of the marketing focus of the Target Group for the OTC market.

The Target Group continued its cooperation with Chinese University of Hong Kong in the research on the clinical mechanism of 仙靈骨葆 (Xianling Gubao*) in order to promote of the product to medical doctors.

Results

For the year ended 31 December 2011, the Target Group recorded turnover of approximately HK$912.2 million, representing an increase of approximately 57.5% as compared with the previous year. Such increase was mainly attributable to the increase in demand of the Target Group’s principal products, particularly 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) which were included in the 2009 National Essential Drugs List, as a result of the policies of medical reform being carried out in more provinces in the PRC.

The Target Group recorded gross profit of approximately HK$500.2 million, representing an increase of approximately 42.5% as compared with the previous year as a result of the increase in turnover as described above. The gross profit margin was slightly decreased to 54.8% from approximately 60.6% in 2010. Such decrease was mainly due to the sale of larger proportion of lower-margin products as compared with the previous year.

The Target Group recorded other net expenses of approximately HK$3.2 million in 2011, which was mainly due to the exchange gain of approximately HK$4.4 million and other expenses of approximately HK$5.9 million.

For the year ended 31 December 2011, the Target Group’s profit from continuing operations was approximately HK$45.4 million, representing an increase of approximately 21.1% as compared with the previous year. Such increase was mainly attributable to the increase in gross profit in 2011.

– II-86 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Liquidity and financial information

As at 31 December 2011, the Target Group’s current assets amounted to approximately HK$1,223.7 million, which included cash and cash equivalents and deposits with banks of approximately HK$264.4 million. Current liabilities amounted to approximately HK$390.6 million. Net current assets amounted to approximately HK$833.1 million. The Target Group’s current ratio was approximately 3.1.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.2 as at 31 December 2011.

As at 31 December 2011, the Target Group had current other receivables of approximately HK$398.4 million, mainly comprising the Huixian Debt of approximately RMB274.4 million (equivalent to approximately HK$338.4 million) as at Completion. Details of the Huixian Debt are set out in the paragraph headed “The Acquisition Agreement” under the section headed “Letter from the Board”. In addition, the Target Group also had non-current other receivables of approximately HK$9.5 million, mainly represented prepayments for equipment.

Treasury policies and foreign exchange exposure

Capital structure and pledge of assets

The directors of the Target Group reviewed the capital structure of the Target Group regularly and managed the capital structure, taking into consideration, among other things, the future capital requirements, the projected cash flows and the projected capital expenditures of the Target Group. As at 31 December 2011, the capital requirement of the Target Group was funded by internal resources and debts.

As at 31 December 2011, the Target Group had bank loans of approximately HK$199.8 million (approximately 90.7% of which are subject to fixed interest rate) which were repayable within one year or on demand, of which HK$193.7 million was secured by the Target Group’s interests in leasehold land and buildings with an aggregate book value of approximately HK$62.7 million. Save as disclosed, no other asset was pledged by the Target Group.

Contingent liabilities

As at 31 December 2011, the Target Group did not have any contingent liability.

– II-87 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Employees and remuneration policies

As at 31 December 2011, the Target Group had 2,797 employees. Total staff costs for the year ended 31 December 2011 were approximately HK$128.6 million. Remuneration packages for employees are reviewed on a regular basis and principally comprised salaries, wages, contributions to defined contribution retirement plan and other benefits.

Significant investments held

As at 31 December 2011, the Target Group did not hold any significant investment.

Material acquisition and disposal of subsidiaries and associated companies

On 9 March, 2011 the Target Group disposed of its entire interest in Anhui Jingfang Pharmaceutical Chemical Co., Ltd. for a consideration of RMB5,000,000 (equivalent to HK$6,168,000). As a result of the disposal, the Target Group recorded a loss of approximately HK$1.0 million. Except for the transaction mentioned above, there was no other material acquisition or disposal of any subsidiary and associated company by the Target Group for the year ended 31 December 2011.

Prospects and future plan for material investments

The National Essential Drugs List would be reviewed by the Ministry of Health of the PRC from time to time. The revised National Essential Drugs List was expected to be issued in 2012 and expanded in order to accommodate all drugs used by health care institutions which will help to increase the usage of essential drugs. The Target Group anticipated that more of its products would be included in the revised National Essential Drugs List and were optimistic about the prospect of the traditional Chinese medicine industry. The Target Group planned to further expand sales and marketing force of the company to address the increased demand of its products.

To expand the production facility of Jingfang, the Target Group started to build up a new factory in Xuancheng, Anhui Province, the PRC with a budget of approximately RMB80 million (equivalent to approximately HK$96.7 million), which would be financed by the internal resources of the Target Group. The project was expected to be completed by 2014.

For the year ended 31 December 2010

Business review

The Target Group is principally engaged in the business of developing, producing, marketing and distributing medicines, including traditional Chinese medicines, western medicines and nutritional products. Its principal products included 仙靈骨葆 (Xianling Gubao), 潤燥止癢膠囊 (Moisturizing and Anti-Inching Capsules), 頸舒顆粒 (Jingshu Granules) and 棗仁安神膠囊 (Zaoren Anshen Capsules).

– II-88 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

In March 2009, the State Council of the PRC approved a medical reform proposal for public medical and health care system. On 18 August 2009, the State Council of the PRC further released the 2009 National Essential Drugs List, marking the establishment of a national 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. The 2009 National Essential Drugs List covers over 300 types of medicines, including 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules). Since then, the demand of such products had recorded significant increase in both the prescription and the OTC markets.

During the year ended 31 December 2009, the Target Group executed the development plan in order to explore business opportunities in small cities, county/ township and community in the PRC in order to capture the growth in these untapped markets. The Target Group also carried out on-going clinical trials for a couple of new products under research and development.

Results of continuing operations

For the year ended 31 December 2010, the Target Group recorded turnover of approximately HK$579.0 million. Sales of 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) contributed approximately 75.4% to the Target Group’s turnover. The Target Group recorded gross profit of approximately HK$351.0 million and its gross profit margin was approximately 60.6%.

The Target Group recorded other net income of approximately HK$3.6 million in 2010, which was mainly due to the gain on disposal of fixed assets of approximately HK$7.3 million and other expenses of approximately HK$4.7 million.

For the year ended 31 December 2010, the Target Group recorded profit from continuing operations of approximately HK$37.5 million.

Results of discontinued operations

For the year ended 31 December 2010, the Target Group recorded profit from discontinued operations of approximately HK$8.2 million. The discontinued operations of Guizhou Tongjitang Asset Management Co., Ltd. and its subsidiaries were disposed of by the Target Group in December 2010.

Liquidity and financial information

As at 31 December 2010, the Target Group’s current assets amounted to approximately HK$1,281.7 million, which included cash and cash equivalents and deposits with banks of approximately HK$337.9 million. Current liabilities amounted to approximately HK$342.7 million. Net current assets amounted to approximately HK$939.0 million. The Target Group’s current ratio was approximately 3.7.

– II-89 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.2 as at 31 December 2010.

As at 31 December 2010, the Target Group recorded current other receivables of approximately HK$383.1 million, mainly comprising the Huixian Debt of approximately HK$322.4 million which represented the amount owed by Huixian to Unisources as a result of the disposal of Guizhou Tongjitang Asset Management Co., Ltd. by Unisources to Huixian in 2010. To the best of the Directors’ knowledge, Huixian is a third party independent of the Company. The Target Group also had non-current other receivables of approximately HK$2.4 million, mainly represented prepayments for equipment.

Treasury policies and foreign exchange exposure

Capital structure and pledge of assets

The directors of the Target Group reviewed the capital structure of the Target Group regularly and managed the capital structure, taking into consideration, among other things, the future capital requirements, the projected cash flows and the projected capital expenditures of the Target Group. As at 31 December 2010, the capital requirement of the Target Group was funded by internal resources and debts.

As at 31 December 2010, the Target Group had bank loans of approximately HK$178.6 million (approximately 60.5% of which are subject to fixed interest rate), of which approximately HK$172.8 million were repayable within one year or on demand and the remaining balance were repayable after one year but within two years. Among the bank loans, an amount of HK$110.5 million was secured by the Target Group’s interests in leasehold land and buildings and cash at bank with an aggregate book value of approximately HK$45.1 million. Save as disclosed, no other asset was pledged by the Target Group.

Contingent liabilities

As at 31 December 2010, the Target Group did not have any contingent liability.

– II-90 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Employees and remuneration policies

As at 31 December 2010, the Target Group had 2,441 employees. Total staff costs for the year ended 31 December 2010 were approximately HK$106.0 million. Remuneration packages for employees are reviewed on a regular basis and principally comprised salaries, wages, contributions to defined contribution retirement plan and other benefits.

Significant investments held

As at 31 December 2010, the Target Group did not hold any significant investment.

Material acquisition and disposal of subsidiaries and associated companies

With a view to entering the Chinese traditional medicinal liquor market, the Target Group completed the acquisition of 100% of the equity interests in Guizhou Distillery Co. Ltd. (“Guizhou Distillery”) on 4 January 2010 for a consideration of approximately RMB114.6 million (equivalent to approximately HK$130.1 million), which was fully prepaid in 2009. The principal activity of Guizhou Distillery was manufacturing distilled spirit. On the same day, the Target Group entered into a seperate share transfer agreement with Guizhou Xianling Investment Management Co., Ltd to transfer 5% Interest of Guizhou Distilley for an amount of RMB6,151,000 (equivalent to HK$7,719,000). Subsequently, the Target Group decided to disposed of certain of its non-core businesses in order to be more focus on its traditional Chinese medicine business, the Target Group entered into sale and purchase agreement on 22 November 2010 with an independent third party to dispose of its entire interest in Guizhou Tongjitang Asset Management Co., Ltd. and its subsidiaries, including Guizhou Tongjitang Pharmaceutical Distribution Co., Ltd., Guizhou Tongjitang Pharmacy Chain Stores Co., Ltd. and Guizhou Distillery for a consideration of approximately RMB305.3 million (equivalent to approximately HK$358.8 million). The disposal was completed on 27 December 2010. As a result of the disposal, the Target Group recorded a gain (net of tax expense) of approximately HK$29.1 million.

Prospects and future plan for material investments

In light of the aforesaid medical reform proposal and increased spending in fundamental public medical healthcare services by the government, it is expected that the Target Group will benefit from an increasing demand in 仙靈骨葆 (Xianling Gubao) and 頸舒顆粒 (Jingshu Granules) which were included in the 2009 National Essential Drugs List. The Target Group had fine-tuned its business plan to capitalise the potential opportunity for its products to be included in the National Essential Drugs List.

The Target Group did not have any plan for new business, material investments or acquisitions of capital assets.

– II-91 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The unaudited pro forma financial information of the Enlarged Group set out below in this Appendix should be read in conjunction with the financial information of the Group as set out in the Company’s annual report for the year ended 31 December 2012 and the interim report for the six months ended 30 June 2013, the financial information of the Target Group as set out in Appendix II to this circular, and other financial information included elsewhere in this circular.

A. Independent reporting accountants’ assurance report on the compilation of pro forma financial information of the Enlarged Group

To the Directors of

Winteam Pharmaceutical Group Limited

We have completed our assurance engagement to report on the compilation of pro forma financial information (the “Pro Forma Financial Information”) of Winteam Pharmaceutical Group Limited (the “Company”) and its subsidiaries (collectively the “Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The Pro Forma Financial Information consists of the unaudited pro forma consolidated statement of financial position as at 30 June 2013 and the unaudited pro forma consolidated income statement and pro forma consolidated cash flow statement for the year ended 31 December 2012 and related notes as set out on pages 4 to 12 of Appendix III to the circular dated 19 September 2013 (the “Circular”) issued by the Company. The applicable criteria on the basis of which the Directors have compiled the Pro Forma Financial Information are described on pages 4 to 12 in Appendix III to the Circular.

The Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the proposed acquisition of a 100% interest in Tongjitang Chinese Medicines Company (the “Acquisition”) and the proposed subscription of new shares by Mr. Yang Bin (the “Shares Subscription”) on the Group’s financial position as at 30 June 2013 and the Group’s financial performance and cash flows for the year ended 31 December 2012 as if the Acquisition and the Shares Subscription had taken place on 30 June 2013 and 31 December 2012, respectively. As part of this process, information about the Group’s financial position as at 30 June 2013 has been extracted by the Directors from the interim report of the Group for the six months ended 30 June 2013, on which a review report has been published. Information about the Group’s financial performance and cash flows for the year ended 31 December 2012 has been extracted by the Directors from the consolidated financial statements of the Company for the year then ended, on which an audit report has been published.

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Directors’ Responsibilities for the Pro Forma Financial Information

The Directors are responsible for compiling the Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

Reporting Accountants’ Responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements (“HKSAE”) 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules, and with reference to AG 7 issued by the HKICPA.

For purpose of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Pro Forma Financial Information.

The purpose of Pro Forma Financial Information included in an investment circular is solely to illustrate the impact of a significant event or transaction on the unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the events or transactions at 30 June 2013 or 31 December 2012 would have been as presented.

A reasonable assurance engagement to report on whether the Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:

the related pro forma adjustments give appropriate effect to those criteria; and

– III-2 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

the Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgement, having regard to the reporting accountants’ understanding of the nature of the Group, the event or transaction in respect of which the Pro Forma Financial Information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the Pro Forma Financial Information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion:

a) the Pro Forma Financial Information has been properly compiled on the basis stated;
b) such basis is consistent with the accounting policies of the Group, and
c) the adjustments are appropriate for the purposes of the Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

KPMG

Certified Public Accountants 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong

19 September 2013

– III-3 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

B. Pro Forma Financial Information of the Enlarged Group

1. Introduction

The Pro Forma Financial Information comprising the unaudited pro forma consolidated statement of financial position, the unaudited pro forma consolidated income statement and the unaudited pro forma consolidated cash flow statement, has been prepared to illustrate the effects of the proposed very substantial acquisition of 100% interest in the Target Group by the Company (the “Acquisition”) and the proposed subscription of new shares by Mr. Yang Bin (the “Shares Subscription”). Details of the Acquisition and the Shares Subscription are set out in the section headed “Letter from the Board” contained in this Circular.

The Pro Forma Financial Information of the Enlarged Group has been prepared in accordance with Paragraph 4.29 of the Listing Rules and has been prepared by the Directors of the Company for illustrative purposes only.

The Pro Forma Financial Information of the Enlarged Group is based upon: (i) the Group’s financial position as at 30 June 2013 which has been extracted from the Group’s unaudited interim report for the six months ended 30 June 2013, and the Group’s financial performance and cash flows for the year ended 31 December 2012 which have been extracted from the Company’s annual report for the year ended 31 December 2012; and (ii) the Target Group’s financial position as at 30 April 2013 and the Target Group’s financial performance and cash flows for the year ended 31 December 2012 as extracted from the accountant’s report thereon set out in Appendix II to this Circular, and adjusted on a pro forma basis to reflect the effects of the Acquisition and the Shares Subscription. These pro forma adjustments are (i) directly attributable to the Acquisition and the Shares Subscription and not relating to other future events and decision; (ii) factually supportable based on the terms of the agreement dated 23 May 2013 entered into among the Company and the shareholders of the Target Company (the “Acquisition Agreement”) and (iii) factually supportable based on the terms of the relevant share subscription agreement dated 23 May 2013 entered into among the Company and the subscriber.

The financial information of the Group and the Target Group as mentioned above has been prepared in accordance with the Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA. No material adjustment is required to be made to conform the accounting policies of the Target Group to those of the Group.

The Pro Forma Financial Information of the Enlarged Group is based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying Pro Forma Financial Information of the Enlarged Group does not purport to describe: (i) the actual financial position of the Enlarged Group that would have been attained had the Acquisition and the Shares Subscription been completed on 30 June 2013; and (ii) the actual results and cash flows of the Enlarged Group that would have been attained had the Acquisition and the Shares Subscription been completed on 1 January 2012. The Pro Forma Financial Information of the Enlarged Group does not purport to predict the future financial position, results or cash flows of the Enlarged Group.

– III-4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. Unaudited pro forma consolidated statement of financial position of the Enlarged Group

a Non-current assets Fixed assets – Investment properties – Property, plant and equipment – Interests in leasehold land held for own use under operating leases Construction in progress Other receivables Intangible assets Goodwill Other financial asset Deferred tax assets Current assets Other financial assets Inventories Trade and other receivables Deposits with banks Cash and cash equivalents Assets held for sale Current liabilities Trade and other payables Bank loans Current taxation Current portion of deferred government grants Liabilities held for sale Net current assets/ (liabilities) Total assets less current liabilities	The Group s at 30 June 2013 HKD’000 3,617 449,768 102,612 555,997 39,403 2,432 87,165 212,003 12,474 31,464 940,938 - - - - - - - - - – 256,236 522,457 35,422 799,325 307,574 1,921,014 - - - - - - - - - 255,367 480,057 19,944 2,801 131,803 889,972 - - - - - - - - - 1,031,042 - - - - - - - - - --------------------------------- 1,971,980 - - - - - - - - - ---------------------------------	The Target Group as at 30 April 2013 HKD’000 – 128,623 49,406 178,029 73,348 8,050 18,757 2,927 – 22,780 303,891 - - - - - - - - - 863 180,702 889,251 – 179,469 – 1,250,285 - - - - - - - - - 182,552 189,711 18,333 69,104 − 459,700 - - - - - - - - - 790,585 - - - - - - - - - --------------------------------- 1,094,476 - - - - - - - - - ---------------------------------	Pro forma adjustments HKD’000 – – – – – – – 2,241,728 – – 2,241,728 - - - - - - - - - – – (345,161) – (2,040,759) – (2,385,920) - - - - - - - - - – – – – − – - - - - - - - - - (2,385,920) - - - - - - - - - --------------------------------- (144,192) - - - - - - - - - ---------------------------------	Pro forma adjustments HKD’000 – – – – – – – – – – – - - - - - - - - - – – – – 206,114 – 206,114 - - - - - - - - - – – – – − – - - - - - - - - - 206,114 - - - - - - - - - --------------------------------- 206,114 - - - - - - - - - ---------------------------------	Pro forma adjustments Notes HKD’000 – – – – – – – – 5b – – – - - - - - - - - - – – – 5a – (11,200) 5a and d – (11,200) - - - - - - - - - – – – – − – - - - - - - - - - (11,200) - - - - - - - - - --------------------------------- (11,200) - - - - - - - - - ---------------------------------	The Enlarged Group HKD’000 3,617 578,391 152,018
						734,026 112,751 10,482 105,922 2,456,658 12,474 54,244
						3,486,557 - - - - - - - - - 863 436,938 1,066,547 35,422 (867,051) 307,574
						980,293 - - - - - - - - - 437,919 669,768 38,277 71,905 131,803
						1,349,672 - - - - - - - - - (369,379) - - - - - - - - - --------------------------------- 3,117,178 - - - - - - - - - ---------------------------------

– III-5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

a Non-current liabilities Deferred tax liabilities Deferred government grants Net assets Equity Share capital Reserves Total equity attributable to equity shareholders of the Company Non-controlling interests Total equity	The Group s at 30 June 2013 HKD’000 58,491 16,809 75,300 - - - - - - - - - --------------------------------- 1,896,680 200,841 1,609,938 1,810,779 85,901 1,896,680	The Target Group as at 30 April 2013 HKD’000 11,814 3,270 15,084 - - - - - - - - - --------------------------------- 1,079,392 389 1,079,003 1,079,392 – 1,079,392	Pro forma adjustments HKD’000 – – – - - - - - - - - - --------------------------------- (144,192) 33,011 (177,203) (144,192) – (144,192)	Pro forma adjustments HKD’000 – – – - - - - - - - - - --------------------------------- 206,114 6,649 199,465 206,114 – 206,114	Pro forma adjustments HKD’000 – – – - - - - - - - - - --------------------------------- (11,200) – (11,200) (11,200) – (11,200)	Notes 5a and c 5a and c and d	The Enlarged Group HKD’000 70,305 20,079
							90,384 - - - - - - - - - --------------------------------- 3,026,794

							240,890 2,700,003
							2,940,893 85,901
							3,026,794

– III-6 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

3. Unaudited pro forma consolidated income statement of the Enlarged Group for the year ended 31 December 2012

Turnover Cost of sales Gross profit Other revenue Other net income Selling and distribution costs Administrative expenses Profit from operations Finance costs Profit before taxation Income tax Profit for the year Attributable to: – Equity shareholders of the Company – Non-controlling interests Profit for the year	The Group HK$’000 1,268,143 (574,915) 693,228 30,872 242 (289,651) (144,876) 289,815 (23,831) 265,984 (53,330) 212,654 207,134 5,520 212,654	The Target Group HK$’000 1,267,446 (503,292) 764,154 10,768 2,233 (484,995) (72,524) 219,636 (12,877) 206,759 (37,293) 169,466 169,466 – 169,466	Pro forma adjustments HK$’000 Notes – – – – – (11,200) 5d (11,200) – 5e (11,200) – (11,200) (11,200) – (11,200)	The Enlarged Group HK$’000 2,535,589 (1,078,207) 1,457,382 41,640 2,475 (774,646) (228,600) 498,251 (36,708) 461,543 (90,623) 370,920 365,400 5,520 370,920

– III-7 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

4. Unaudited pro forma consolidated cash flow statement of the Enlarged Group for the year ended 31 December 2012

Operating activities Cash generated from operations PRC tax paid Net cash generated from operating activities Investing activities Payment for the purchase of fixed assets Payment for the purchase of intangible assets Proceeds from disposal of fixed assets Changes in deposits with banks Payment to construction in process Interest received Payment for acquisition of subsidiaries, net of cash and cash equivalents acquired Transaction costs for acquisition of subsidiaries Net cash used in investing activities Financing activities Proceeds from new bank loans Repayment of bank loans Dividend paid Interest paid Proceeds from issuance of shares Net cash generated from /(used in) financing activities Net increase/(decrease) in cash and cash equivalents	The Group HK$’000 269,132 (41,052) 228,080 - - - - - - - - - (34,881) – (59) (103,149) (88,282) 2,301 – – (224,070) - - - - - - - - - 692,205 (517,472) (133,756) (30,284) – 10,693 - - - - - - - - - 14,703	The Target Group HK$’000 252,364 (30,815) 221,549 - - - - - - - - - (55,336) (12) 5,503 6,168 (2,610) 1,543 – – (44,744) - - - - - - - - - 186,823 (199,115) (153,108) (12,877) 389 (177,888) - - - - - - - - - (1,083)	Pro forma adjustments HK$’000 – – – - - - - - - - - - – – – – – – (1,782,532) – (1,782,532) - - - - - - - - - – – – – – – - - - - - - - - - (1,782,532)	Pro forma adjustments HK$’000 – – – - - - - - - - - - – – – – – – – (11,200) (11,200) - - - - - - - - - – – – – – – - - - - - - - - - (11,200)	Pro forma adjustments HK$’000 Notes – – – - - - - - - - - - – – – – – – – 5a – 5d – - - - - - - - - - – – – – 206,114 5a 206,114 - - - - - - - - - 206,114	The Enlarged Group HK$’000 521,496 (71,867)
						449,629 - - - - - - - - - (90,217) (12) 5,444 (96,981) (90,892) 3,844 (1,782,532) (11,200)
						(2,062,546) - - - - - - - - - 879,028 (716,587) (286,864) (43,161) 206,503
						38,919 - - - - - - - - - (1,573,998)

– III-8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December	The Group HK$’000 42,354 (7) 57,050	The Target Group HK$’000 258,227 (51) 257,093	Pro forma adjustments HK$’000 (258,227) – (2,040,759)	Pro forma adjustments HK$’000 – – (11,200)	Pro forma adjustments HK$’000 Notes – 5a – 206,114	The Enlarged Group HK$’000 42,354 (58) (1,531,702)

Note: Reconciliation of profit before taxation to cash generated from operations:

Profit before taxation Adjustments for: – Depreciation and amortisation – Loss on disposal of fixed assets – Recognition of impairment loss on trade and other receivables – Write down on inventories – Finance costs – Interest income – Change in fair value of other financial assets – Foreign exchange gain – Transaction costs for acquisition of subsidiaries – Decrease/(increase) in inventories – Increase in trade and other receivables – Increase in trade and other payables Cash generated from operations	The Group HK$’000 265,984 46,693 444 2,701 597 23,831 (24,908) – (5,197) – 310,145 34,724 (97,585) 21,848 (41,013) 269,132	The Target Group HK$’000 206,759 22,425 78 – 530 12,877 (1,543) 3 (5,676) – 235,453 (2,068) (29,518) 48,497 16,911 252,364	Pro forma adjustments HK$’000 Notes (11,200) 5d – – – – – – – – 11,200 5d – – – – – –	The Enlarged Group HK$’000 461,543 69,118 522 2,701 1,127 36,708 (26,451) 3 (10,873) 11,200 545,598 32,656 (127,103) 70,345 (24,102) 521,496

– III-9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

5. Notes to the Pro Forma Financial Information of the Enlarged Group

For the purpose of this Pro Forma Financial Information, conversion of Renminbi (“RMB”) into Hong Kong dollars (“HK$”) is based on the exchange rate of RMB1.00 to approximately HK$1.258 for the pro forma consolidated statement of financial position, the pro forma consolidated income statement and the pro forma consolidated cash flow statement.

a. Pursuant to the terms of the Acquisition Agreement to acquire the entire equity interest in the Target Group, the total consideration for the Acquisition amounts to RMB2,640,000,000 based on the applicable exchange rate, but in any event not less than HK$3,200,000,000 and not more than HK$3,400,000,000. For the purpose of this Pro Forma Financial Information, the directors of the Company assumed the total consideration amounts to HK$3,321,120,000 based on the exchange rate of RMB1.00 to approximately HK$1.258. The details of total consideration are shown as follows:

i) Consideration shares issued to Hanmax Investment Limited (“Hanmax”) (Note 1) ii) Assumption of the Unisources Debt by the Company (Note 2) iii) Cash payment (Note 3) Total	HK$’000 935,200 345,161 2,040,759
	3,321,120

Analysis of the net cash outflow in respect of the Acquisition assuming the completion of the Acquisition as at 1 January 2012:

Cash payment Cash and cash equivalents of the Target Group acquired as at 1 January 2012 Net cash outflow	2,040,759 (258,227)
	1,782,532

Note 1:

Consideration Shares, representing 334,000,000 shares with par value of HK$0.1 per share are to be issued and allotted to Hanmax, a company incorporated in the British Virgin Islands with limited liability and wholly owned by the controlling shareholder of the Target Group (or any nominee(s) as it may direct).

The Consideration Shares are subject to a lock-up undertaking as detailed in the Circular and as such, the fair value of the Consideration Shares is determined by the directors of the Company and the shareholders of the Target Company with reference to the recent market price of the shares of the Company, the lock-up period of 24 months of the Consideration Shares and the audited consolidated net asset value per share of the Group attributable to the shareholders as at 31 December 2012 of approximately HK$0.57.

The fair value of the Consideration Shares, taken into account the lock-up period is determined to be HK$935,200,000 at an issue price of HK$2.8 per share. The amount of the fair value of the Consideration Shares is subject to change upon completion of the Acquisition.

Note 2:

The amount of HK$345,161,000 due from Guizhou Huixian Investment Management Co., Ltd. to a subsidiary of the Target Company, which is recorded as other receivables in the consolidated statement of financial position of the Target Group as at 31 December 2012, will be assumed by Hanmax as a part of the consideration. The resulting amount due from Hanmax to the subsidiary of the Target Company (i.e. the Unisources Debt) will be assumed by the Company.

– III-10 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Note 3:

On 23 May 2013, the Company and Mr. Yang Bin, an executive director of the Company, entered into a subscription agreement pursuant to which Mr. Yang Bin agreed, subject to fulfillment of certain conditions including approval from the shareholders at an extraordinary general meeting to be held, to subscribe for 66,488,379 shares with par value of HK$0.1 per share at a subscription price of HK$3.1 per share for a total amount of HK$206,114,000.

The estimated related expenses directly attributable to the abovementioned share subscription are insignificant.

The proceeds from the abovementioned share subscription are to finance the cash payment for the Acquisition, and have been reflected as pro forma adjustments in the pro forma statement of financial position of the Enlarged Group.

b. Goodwill represents the excess of the aggregate of the fair value of the consideration transferred over the net fair value of the Target Group’s identifiable assets and liabilities measured at the date of Acquisition.

The identifiable assets and liabilities of the Target Group will be accounted for under the acquisition method of accounting in accordance with Hong Kong Financial Reporting Standard 3 (Revised) “Business Combinations” (“HKFRS 3”) issued by the HKICPA.

For the purpose of the pro forma consolidated statement of financial position, the allocation of the purchase price is determined based on the carrying amount of the Target Group’s net assets as at 30 April 2013. As a result, the pro forma consolidated income statement does not include adjustments for additional depreciation and amortisation arising from fair value adjustments and recognition of additional intangible assets.

Goodwill is estimated as follows:

Consideration Less: Carrying amount of the Target Group’s net assets as at 30 April 2013 Goodwill	HK$’000 3,321,120 1,079,392
	2,241,728

The amounts of goodwill of the Target Group and fair value of the identifiable assets and liabilities are subject to change upon the completion of (i) the valuation of the fair value of the identifiable assets and liabilities of the Target Group and (ii) the financial position of the Target Group on the date of completion. Further, intangible assets of the Target Group which were not otherwise recognised in its historical financial information may be recognised at their fair value upon completion of the Acquisition. Therefore, the amounts of goodwill and other assets and liabilities of the Target Group may be different from the estimates used in the preparation of the Pro Forma Financial Information presented above. The actual depreciation and amortisation (and related deferred tax thereon) may also be different depending on the actual fair value adjustments to the corresponding assets.

For the purpose of this Pro Forma Financial Information, the directors of the Company have assessed whether there is any indication of impairment in respect of goodwill of the Target Group with reference to the principles in Hong Kong Accounting Standard 36 “Impairment of Assets”. Based on the directors’ assessment, the directors consider that there is no indication of impairment on the goodwill set out above.

– III-11 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

c. The adjustments represent the elimination of (i) share capital of the Target Group amounting to approximately HK$389,000, and (ii) pre-acquisition reserves of the Target Group amounting to approximately HK$1,079,003,000 on consolidation.
d. The adjustments represent estimated transaction costs for the Acquisition of approximately HK$11,200,000 which are expensed in the pro forma consolidated income statement as incurred. These adjustments are not expected to have a continuing effect on the Enlarged Group.
e. The Group will fund the Acquisition with its existing cash resources, share issuance and new bank loan facilities. The Group is currently discussing with a few commercial banks and other financial institutions in relation to borrowing funds by credit facilities to cover funding requirements in relation to the Acquisition. In addition to the equity issuance as disclosed in note 5(a) and the following paragraphs, the Company considers that no other equity issuance will be made to fund the Acquisition. The Group may incur borrowing costs arising from borrowings to fund the Acquisition. These are not taken into account in the Pro Forma Financial Information.

On 23 May 2013, the Company and Sinopharm Fund Trustee, a company incorporated in the PRC and the trustee of Sinopharm Fund, entered into a subscription agreement pursuant to which Sinopharm Fund Trustee agreed to subscribe for 125,000,000 shares with par value of HKD0.1 per share at a subscription price of HKD3.1 per share for a total amount of HKD387,500,000. Sinopharm Fund is managed by its general partner, namely 國藥集團資本管理有限責任公司 (“Sinopharm Capital Management Company Limited”), which is an associate of Sinopharm Group Hong Kong Co., Limited, the controlling shareholder of the Company. The transaction was completed on 9 July 2013 and this subsequent event has not been reflected in the Pro Forma Financial Information of the Enlarged Group.

On 23 May 2013, the Company and three placing agents entered into a placing agreement pursuant to which a total of 225,000,000 shares with par value of HK$0.1 per share are to be issued and allotted to not less than 6 independent placees at an issue price of HK$3.10 per share for a total amount of HK$697,500,000. This shares placing was completed on 4 June 2013 and this event has been reflected in the interim report of the Group as at and for the period ended 30 June 2013.

On 26 August 2013, the Group entered into a disposal agreement with an independent third party to dispose of its 51% interest in the registered capital of Guizhou Zhongtai Biological Technology Company Limited and its subsidiaries for a cash consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million) (the “Disposal”). The Company currently intends to apply the proceeds from the Disposal to fund part of the consideration for the Acquisition, or failing which to apply as general working capital for the traditional Chinese medicine business of the Group. This subsequent event has not been reflected in the Pro Forma Financial Information of the Enlarged Group.

– III-12 –

GENERAL INFORMATION

APPENDIX IV

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.

SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date were and upon Completion will be as follows:

Authorised 3,000,000,000 Shares Issued and fully paid or to be issued 2,113,410,807 Shares in issue as at the Latest Practicable Date 334,000,000 Shares to be issued under the Acquisition Agreement 66,488,379 Shares to be issued under the Yang Subscription Agreement 2,533,899,186	HK$’000 300,000

	HK$’000 211,341.1 33,400.0 6,648.8
	253,389.9

– IV-1 –

GENERAL INFORMATION

APPENDIX IV

DISCLOSURE OF INTERESTS

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 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, to be notified to the Company and the Stock Exchange were as follows:

			Approximate
			percentage of
			total
			interests to
		Number of	issued Shares
Name of Directors	Capacity	Shares	(Note 3)
Mr. Yang	Interest in controlled	267,511,621	12.54%
	corporation	(Note 1)
	Beneficial owner	66,488,379	3.12%
		(Note 2)

Notes:

The 267,511,621 Shares are held by Profit Channel Development Limited which is wholly owned by Mr. Yang.
Mr. Yang is interested in 66,488,379 Shares to be subscribed pursuant to the Yang Subscription Agreement.
Based on 2,133,410,807 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 for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.

– IV-2 –

GENERAL INFORMATION

APPENDIX IV

Interests of substantial Shareholders

			Approximate
			percentage of
			total
			interests to
		Number of	issued Shares
Name	Capacity	Shares	(Note 5)
Sinopharm	Beneficial owner	1,016,023,044	47.62%
Mr. Wang	Interest in controlled	334,000,000	15.66%
	corporation	(Note 1)
Mr. Yang	Interest in controlled	267,511,621	12.54%
	corporation	(Note 2)
	Beneficial owner	66,488,379	3.12%
		(Note 3)
Sinopharm Fund Trustee	Trustee	125,000,000	5.86%
		(Note 4)

Notes:

The 334,000,000 new Shares are to be allotted and issued to Hanmax (which is wholly owned by Mr. Wang), as part of the Hanmax Consideration. Mr. Wang is a director of Hanmax.
The 267,511,621 Shares are held by Profit Channel Development Limited which is wholly owned by Mr. Yang.
Mr. Yang is interested in the 66,488,379 Shares to be subscribed pursuant to the Yang Subscription Agreement.
The 125,000,000 Shares are held for the benefit of Sinopharm Fund pursuant to the Sinopharm Subscription Agreement.
Based on 2,133,410,807 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.

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 Enlarged 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.

– IV-3 –

GENERAL INFORMATION

APPENDIX IV

Other interests

On 23 May 2013, the Company and Mr. Yang entered into the Yang Subscription Agreement pursuant to which the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for, 66,488,379 new Shares at the issue price of HK$3.10 per Share. Completion of the Acquisition Agreement is subject to the fulfillment of a number of conditions, including the completion of the Yang Subscription.

On 23 May 2013, the Company entered into the Acquisition Agreement with Mr. Wang, Hanmax and Fosun pursuant to which the Company conditionally agreed to acquire, and Hanmax and Fosun conditionally agreed to sell, the Hanmax Sale Shares and the Fosun Sale Shares respectively for the Total Consideration which is equal to the HK$ equivalent of RMB2,640 million (equivalent to approximately HK$3,321.1 million) based on the Applicable Exchange Rate, but in any event not less than HK$3,200 million and not more than HK$3,400 million. The Total Consideration consists of the Hanmax Consideration and the Fosun Consideration. The Hanmax Consideration is equal to 67.9% of the Total Consideration and is payable by the Company partly by way of allotment and issue of 334,000,000 Consideration Shares to Hanmax (or any nominee(s) as it may direct), partly by the Company assuming the Unisources Debt, and partly in cash. The Fosun Consideration is equal to 32.1% of the Total Consideration and is payable by the Company to Fosun in cash.

Save as disclosed above, (i) none of the Directors or proposed 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) up to the Latest Practicable Date; and (ii) there was no contract or arrangement subsisting at the Latest Practicable Date in which a Director is materially interested and which is significant in relation to the business of the Group.

SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered, or was proposing to enter, into any service contract with any member of the Enlarged Group which is not expiring or may not be terminable by the Enlarged Group within one year without payment of compensation (other than statutory compensation).

CLAIMS AND LITIGATION

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

– IV-4 –

GENERAL INFORMATION

APPENDIX IV

MATERIAL CONTRACTS

The following contracts, not being contracts entered into in the ordinary course of business carried on or intended to be carried on by the Enlarged Group, had been entered into by the Enlarged Group after the date falling two years preceeding the Latest Practicable Date:

(a) an agreement dated 10 August 2011 entered into between Jingfang and 南通四建集團有限公司 (Nantong Sijian Construction Group Co., Ltd) as contractor in relation to the hydropower installation and decoration work for Jingfang’s site in Anhui Province, the PRC at the consideration of RMB35 million (equivalent to approximately HK$42 million);
(b) an equity transfer agreement dated 28 September 2011 entered into between 佛山市雅信醫藥有限公司 (Foshan Yaxin Pharmaceutical Co., Ltd) as vendor and Guangdong Medi-World as purchaser in relation to the acquisition of the entire equity interest of 佛山市南海益康醫藥有限公司 (Foshan Nanhai Yikang Pharmaceutical Co., Ltd.) at the consideration of RMB6.8 million (equivalent to approximately HK$8.31 million);
(c) an agreement dated 22 December 2011 entered into among Guangdong Medi-World, Guizhou Zhongtai and 河南欣泰藥業有限公司 (Henan Xintai Medicine Company Limited*) (the then beneficial owner of the entire registered capital of Guizhou Zhongtai), pursuant to which Guangdong Medi-World agreed to invest an amount of RMB153.0 million (equivalent to approximately HK$183.6 million) for a 51% interest in the registered capital of Guizhou Zhongtai;
(d) the loan agreement dated 22 December 2011 entered into between Guangdong Medi-World as lender and Guizhou Zhongtai as borrower in respect of the loan in the amount of RMB70.0 million (equivalent to approximately HK$84.0 million);
(e) an agreement dated 10 September 2012 entered into between Jingfang and 江蘇嘉誠淨化設備科技有限公司 (Jiangsu Jiacheng Purification Equipment Co., Ltd*) as contractor in relation to the installation of air purification equipment at Jingfang’s site in Anhui Province, the PRC at the consideration of RMB11 million (equivalent to approximately HK$13.2 million);
(f) an agreement dated 26 August 2013 entered into between Guangdong Medi-World as vendor and 佛山市順德區合峰投資有限公司 (Foshan Shunde Hefeng Investment Co., Ltd.*) as purchaser in relation to the disposal of 51% of the registered capital of Guizhou Zhongtai at the consideration of approximately RMB100.9 million (equivalent to approximately HK$127.1 million);
(g) an agreement dated 28 August 2013 entered into between 佛山盈天醫藥發展有限公司 (Foshan Winteam Pharmaceutical Development Company Limited), a wholly-owned subsidiary of the Company, and 佛山市國土資源和城鄉規劃局 (Foshan Resources and Urban and Rural Planning Authority) in relation to the acquisition of the land use rights of a plot of land located at the east of Lingnan

– IV-5 –

GENERAL INFORMATION

APPENDIX IV

Road and south of Kuiqi Road, Chancheng District, Foshan City, Guangdong Province, the PRC at the consideration of RMB234.05 million (equivalent to approximately HK$294.9 million);

(h) the Placing Agreement;
(i) the Sinopharm Subscription Agreement;
(j) the Acquisition Agreement; and
(k) the Yang Subscription Agreement.

EXPERTS AND CONSENTS

The following are the qualifications of the experts who have given opinion or advice which are contained or referred to in this circular:

Name Qualification

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

KPMG Certified Public Accountants

Guotai Junan and KPMG have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion of their respective opinions or letters and/or the references to their names in the form and context in which they are respectively included.

As as the Latest Practicable Date, neither Guotai Junan nor KPMG had any shareholding, directly or indirectly, in any member of the Enlarged Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group.

As at the Latest Practicable Date, neither Guotai Junan nor KPMG had any direct or indirect interests in any assets which had been, since 31 December 2012 (being the date to which the latest published audited financial statements of the Company were made up), (i) acquired or disposed of by; or (ii) leased to; or (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to, any member of the Enlarged Group.

MISCELLANEOUS

(a) The registered office and principal place of business of the Company is situated at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong.

– IV-6 –

GENERAL INFORMATION

APPENDIX IV

(b) The share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited at Shop 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
(c) The secretary of the Company is Mr. HUEN Po Wah who is an associate of The Hong Kong Institute of Chartered Secretaries and The Institute of Chartered Secretaries and Administrators.
(d) In the event of any inconsistency, the English text of this circular and the accompanying form of proxy shall prevail over the Chinese text.

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 published annual reports of the Company for each of the two financial years ended 31 December 2011 and 2012;
(c) the accountants’ report on the Target Group, the text of which is set out in Appendix II of this circular;
(d) the accountants’ report on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(e) the letter addressed to the Independent Shareholders from the Independent Board Committee, the text of which is set out on page 34 of this circular;
(f) 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 35 to 83 of this circular;
(g) the circulars dated 7 March 2013 and 17 June 2013 issued by the Company;
(h) the material contracts referred to in the section headed “Material Contracts” of this appendix; and
(i) the letters of consent from Guotai Junan and KPMG referred to in the section headed “Experts and Consents” of this appendix.

– IV-7 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

==> picture [252 x 36] intentionally omitted <==

(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 (the “ EGM ”) of Winteam Pharmaceutical Group 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 Tuesday, 15 October 2013 at 3:30 p.m. for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

1. “ THAT :

(a) the acquisition agreement dated 23 May 2013 (the “ Acquisition Agreement ”) entered into between Mr. Wang Xiaochun, Hanmax Investment Limited (“ Hanmax ”) and Fosun Industrial Co., Limited (collectively, the “ Vendors ”) and the Company pursuant to which the Vendors conditionally agreed to sell, and the Company conditionally agreed to acquire, the entire issued share capital of Tongjitang Chinese Medicine Company for an aggregate consideration which is equal to the Hong Kong dollars equivalent of RMB2,640 million (the “ Consideration ”) on the terms and conditions of the Acquisition Agreement, a copy of which has been produced to the meeting marked “A” and signed by the chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed;
(b) the directors of the Company be and are hereby authorised and granted a specific mandate (the “ Hanmax Specific Mandate ”) to allot and issue 334,000,000 new shares of the Company to Hanmax (or any nominee(s) as it may direct) at the issue price of HK$2.80 each in the share capital of the Company as payment of part of the Consideration payable to Hanmax upon completion of the Acquisition in accordance with the terms and conditions of the Acquisition Agreement; and
(c) the directors of the Company be and are hereby authorised to do all such further acts and things and execute such further documents and take all such steps which in their opinion may be necessary, desirable or expedient to implement and/or give effect to the Hanmax Specific Mandate and the Acquisition Agreement and the transactions contemplated thereunder.”

– EGM-1 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

“ THAT :
(a) the subscription agreement dated 23 May 2013 (the “ Yang Subscription Agreement ”) entered into between Mr. Yang Bin (“ Mr. Yang ”) and the Company, a copy of which has been produced to the meeting marked “B” and signed by the chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed;
(b) the directors of the Company be and are hereby authorised and granted a specific mandate (the “ Yang Specific Mandate ”) to allot and issue 66,488,379 new shares of the Company to Mr. Yang at the issue price of HK$3.10 each in the share capital of the Company in accordance with the terms and conditions of the Yang Subscription Agreement; and
(c) the directors of the Company be and are hereby authorised to do all such further acts and things and execute such further documents and take all such steps which in their opinion may be necessary, desirable or expedient to implement and/or give effect to the Yang Specific Mandate and the Yang Subscription Agreement and the transactions contemplated thereunder.”

SPECIAL RESOLUTION

“ THAT :
(a) the change of the English name of the Company from “Winteam Pharmaceutical Group Limited” to “China Traditional Chinese Medicine Co. Limited” be and is hereby approved;
(b) the change of the Chinese name of the Company from “盈天醫藥集團有限公司” to “中國中藥有限公司” be and is hereby approved; and
(c) the directors of the Company be and are hereby authorised to do all such further acts and things and execute such further documents and take all such steps which in their opinion may be necessary, desirable or expedient to implement and/or give effect to the change of name of the Company.”

By order of the Board

Winteam Pharmaceutical Group Limited

Yang Bin

Executive Director

19 September 2013

– EGM-2 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

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 of the meeting.

As at the date of this notice, the Board comprises nine Directors, of which Mr. WU Xian and Mr. YANG Bin are executive Directors; Mr. SHE Lulin, Mr. LIU Cunzhou, Mr. DONG Zenghe and Mr. ZHAO Dongji are non-executive Directors; and Mr. ZHOU Bajun, Mr. XIE Rong and Mr. FANG Shuting are independent non-executive Directors.

– EGM-3 –

AI assistant

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

49801_rns_2013-09-18_29b95f7c-2a6b-4c26-a85d-26681996ac50.pdf

Optima Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE (II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE AND (III) PROPOSED CHANGE OF COMPANY NAME

INTRODUCTION

LETTER FROM THE BOARD

THE ACQUISITION AGREEMENT

Date

Parties

LETTER FROM THE BOARD

Assets to be acquired

Total Consideration

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Consideration Shares

Conditions precedent

Termination

Completion

Undertakings from Mr. Wang, Hanmax and Fosun

INFORMATION ON THE TARGET GROUP

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

FUTURE OPERATIONS OF THE ENLARGED GROUP

PROPOSED APPOINTMENT OF DIRECTORS AND SENIOR MANAGEMENT

Executive Director

Independent non-executive Director

Senior management

THE YANG SUBSCRIPTION AGREEMENT

Date

Parties

The Yang Subscription

Yang Shares

Conditions precedent

LETTER FROM THE BOARD

Completion

ISSUE PRICE OF THE YANG SHARES

REASONS FOR THE YANG SUBSCRIPTION AND INTENDED USE OF PROCEEDS

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE OF THE COMPANY

EQUITY FUND-RAISING ACTIVITIES IN PAST TWELVE MONTHS

PROPOSED CHANGE OF COMPANY NAME

Conditions

Effects of change of Company name

LETTER FROM THE BOARD

Reasons for the change of Company name

LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

EGM

RECOMMENDATION

(I) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF ENTIRE ISSUED SHARE CAPITAL OF TONGJITANG CHINESE MEDICINES COMPANY INVOLVING ISSUE OF NEW SHARES

AS PART OF ACQUISITION CONSIDERATION UNDER SPECIFIC MANDATE AND

(II) CONNECTED TRANSACTION IN RELATION TO SUBSCRIPTION OF NEW SHARES BY MR. YANG UNDER SPECIFIC MANDATE

INTRODUCTION

LETTER FROM GUOTAI JUNAN

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

(A) Background of and reasons for the Acquisition

(i) Business and financial information of the Group

LETTER FROM GUOTAI JUNAN

2011 compared to 2010

2012 compared to 2011

(ii) Information on the Target Group

LETTER FROM GUOTAI JUNAN

LETTER FROM GUOTAI JUNAN

(iii) Chinese medicine industry in the PRC

LETTER FROM GUOTAI JUNAN

(iv) Reasons for and benefits of the Acquisition

Potential synergetic effect

SPT Energy Group Inc. Proxy Solicitation & Information Statement 2013