SPT Energy Group Inc. - Proxy Solicitation & Information Statement 2015

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action you should take, you should consult a licensed securities dealer, a bank manager, solicitor, professional accountant or other professional adviser.

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

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

This circular appears for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of China Traditional Chinese Medicine Co. Limited.

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

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF 87.30% OF THE REGISTERED CAPITAL OF JIANGYIN TIANJIANG PHARMACEUTICAL CO., LTD.; SUBSCRIPTION OF NEW SHARES BY THE VENDORS UNDER SPECIFIC MANDATE; AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial adviser to China Traditional Chinese Medicine Co. Limited

Optima Capital Limited

A notice convening the extraordinary general meeting of China Traditional Chinese Medicine Co. Limited to be held at Conference Room, 4th Floor, No.1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China, on Monday, 13 July 2015 at 2:30 p.m. is set out on pages EGM-1 and EGM-5 of this circular. Whether or not you intend to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of China Traditional Chinese Medicine Co. Limited at Room 1601, Emperor Group Centre, 288 Hennessy Road, Wanchai, 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.

24 June 2015

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
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:

“2014 Net Operating Profit”
the audited consolidated net profit of the Target Group excluding any non-recurring profit and loss for the year ended 31 December 2014 as agreed by the Company and the Vendors
“Acquisition”
the acquisition of the Sale Shares by the Company from the Vendors pursuant to the Acquisition Agreements
“Acquisition Agreements”
collectively, the First Acquisition Agreement, the Second Acquisition Agreement, the Third Acquisition Agreement, the Fourth Acquisition Agreement and the Fifth Acquisition Agreement
“associate(s)” has the meaning ascribed thereto in 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 and Hong Kong 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
“Company”
China Traditional Chinese Medicine Co. Limited 中國中藥有限公司, a company incorporated in Hong Kong with limited liability, the issued Shares of which are listed on the Main Board of the Stock Exchange (stock code: 570)
“Competing Business”
development, manufacturing, production and marketing of TCM
“Completion” completion of the Acquisition in accordance with the terms and conditions of the relevant Acquisition Agreements
“Completion Date”

the date on which Completion takes place

– 1 –

DEFINITIONS

“Director(s)”

“EGM”
“Enlarged Group”
“Fifth Acquisition Agreement”
“Fifth Consideration”
“Fifth Sales Shares”
“First Acquisition Agreement”
“First Consideration”
“First Sale Shares”
“First Vendors”
“Fourth Acquisition Agreement”
“Fourth Consideration”
“Fourth Sales Shares”

director(s) of the Company

the extraordinary general meeting of the Company to be convened and held for the Shareholders to consider and, if thought fit, approve the Acquisition Agreements, the Trustee Subscription Agreements and the transactions contemplated thereunder
the Group as enlarged by the Acquisition (assuming Completion has taken place)
the conditional sale and purchase agreement dated 18 March 2015 entered into between Guangdong Medi-World and Vendor D in relation to the acquisition of the Fifth Sale Shares
the consideration for the Fifth Sale Shares pursuant to the Fifth Acquisition Agreement
RMB5,200,000 of the registered capital of the Target Company, representing approximately 5.50% of the registered capital of the Target Company
the conditional sale and purchase agreement dated 31 December 2014 entered into among the Company and the First Vendors in relation to the acquisition of the First Sale Shares
the consideration for the First Sale Shares pursuant to the First Acquisition Agreement
RMB38,314,580 of the registered capital of the Target Company, representing approximately 40.52% of the registered capital of the Target Company
collectively, Vendor A, Vendor B, Vendor C and Vendor D
the conditional sale and purchase agreement dated 17 March 2015 entered into between the Company and Vendor H in relation to the acquisition of the Fourth Sale Shares
the consideration for the Fourth Sale Shares pursuant to the Fourth Acquisition Agreement

RMB303,927 of the registered capital of the Target Company, representing approximately 0.32% of the registered capital of the Target Company

– 2 –

DEFINITIONS

“GD Yifang” 廣東一方製藥有限公司 (Guangdong Yifang Pharmaceutical Co., Ltd.*), a wholly-owned subsidiary 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 a wholly-owned subsidiary of the Company
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Investors Subscriptions” the subscriptions of 1,068,338,000 new Shares by 26 professional and institutional investors which were completed on 12 May 2015 and 14 May 2015 respectively
“Investors Subscription the agreements dated 25, 26 and 27 March 2015 and 14 Agreements” April 2015 entered into between the Company and each of the investors in relation to the Investors Subscriptions
“Issue Price” the issue price of the Vendor C Shares and the Vendor E Shares
“Jiangyin Agreement”
the sale and purchase agreement dated 13 March 2015 entered into between Vendor D and Jiangyin Technology in relation to the acquisition of the Fifth Sale Shares by Vendor D from Jiangyin Technology
“Jiangyin Completion”
the completion of the registration of changes in shareholders of the Target Company with the relevant industry and commerce authority in the PRC pursuant to the Jiangyin Agreement and the registration of Vendor D as the beneficial owner of the Fifth Sale Shares
“Jiangyin Exchange”
江蘇省產權交易所 (Jiangsu Province Assets and Equity Exchange*)
“Jiangyin Technology”
江陰科技新城投資管理有限公司 (Jiangyin Technology Xincheng Investment Management Co., Ltd.*), a company established in the PRC with limited liability

– 3 –

DEFINITIONS

“Last Trading Day” 15 May 2015, being the last trading day of the Shares prior to the signing of the Trustee Subscription Agreements
“Latest Practicable Date” 19 June 2015, 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
“LX Yifang” 隴西一方製藥有限公司 (Longxi Yifang Pharmaceutical Co., Ltd.*), an indirect wholly-owned subsidiary of the Target Company
“Mr. Wang” Mr. Wang Xiaochun, an executive Director
“Mr. Yang” Mr. Yang Bin, an executive Director and the managing director of the Company
“PRC”
the People’s Republic of China, which for the purpose of this circular excludes Hong Kong, Macao Special Administrative Region and Taiwan
“Registration Completion Date”
the date on which the Target Company completes the registration of the Acquisition at, and the Company is registered as the owner of the Sale Shares by, the appropriate local agent of the State Administration for Industry and Commerce of China
“Sale Shares”
collectively, the First Sale Shares, the Second Sale Shares, the Third Sale Shares, the Fourth Sale Shares and the Fifth Sale Shares
“Second Acquisition Agreement”
the conditional sale and purchase agreement dated 15 January 2015 entered into between the Company and Vendor E in relation to the acquisition of the Second Sale Shares
“Second Consideration”
the consideration for the Second Sale Shares pursuant to the Second Acquisition Agreement
“Second Sale Shares”
RMB8,145,500 of the registered capital of the Target Company, representing approximately 8.62% of the registered capital of the Target Company
“SFO”
Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

– 4 –

DEFINITIONS

“Share(s)” ordinary share(s) in the share capital of the Company “Shareholder(s)” the holder(s) of the issued Share(s) “Sichuan Tianhao” Sichuan Tianhao Pharmaceutical Company Limited（四川天濠藥業有限公司*）, a 51%-owned subsidiary of the Target Company
“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 Subscription” the subscription of 598,290,598 new Shares by Sinopharm which was completed on 12 May 2015
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Takeovers Code” The Hong Kong Code on Takeovers and Mergers
“Target Company” 江陰天江藥業有限公司 (Jiangyin Tianjiang Pharmaceutical Co. Ltd.*), a company established in the PRC with limited liability
“Target Group” the Target Company and its subsidiaries
“TCM”

traditional Chinese medicine

“Third Acquisition Agreement” the conditional sale and purchase agreement dated 15 January 2015 entered into among the Company and the Third Vendors in relation to the acquisition of the Third Sale Shares
“Third Consideration” the consideration for the Third Sale Shares pursuant to the Third Acquisition Agreement
“Third Sale Shares” RMB30,581,349 of the registered capital of the Target Company, representing approximately 32.34% of the registered capital of the Target Company
“Third Vendors” collectively, Vendor F and Vendor G
“Tianxiang”
安徽天祥藥業有限公司 (Anhui Tianxiang Pharmaceutical Co., Ltd.*), a wholly-owned subsidiary of the Target Company
“TJ Chinese Medical” 江陰天江中醫門診有限公司 (Jiangyin Tianjiang Chinese Medical Clinics Ltd.*), a wholly-owned subsidiary of the Target Company

– 5 –

DEFINITIONS

“Total Consideration”
the aggregate amount of the First Consideration, the Second Consideration, the Third Consideration, the Fourth Consideration and the Fifth Consideration
“Total Valuation” 15 times the 2014 Net Operating Profit, but in any event shall be not less than RMB9.2 billion and not more than RMB10.2 billion and, as part of the control premium to the Third Vendors, for the purpose of calculating the Third Consideration, shall be taken as RMB10.0 billion if the 2014 Net Operating Profit is RMB650 million or more
“Trustee” 華寶信託有限責任公司 (Hwabao Trust Co., Ltd.*), a Qualified Domestic Institutional Investor appointed by Vendor C and Vendor E respectively to act as their respective trustees for the purpose of the Vendors Subscriptions
“Trustee Subscription collectively, the Vendor C Trustee Subscription Agreements” Agreement and the Vendor E Trustee Subscription Agreement
“Vendor A”
上海家化聯合股份有限公司 (Shanghai Jiahua United Co., Ltd.*), a company established in the PRC with limited liability
“Vendor B” 廣東科達潔能股份有限公司 (Guangdong Keda Clean Energy Co., Ltd.*), a company established in the PRC with limited liability
“Vendor C” 譚登平先生 (Mr. Tan Dengping*)
“Vendor C Shares”
the 80,149,157 new Shares to be subscribed by the Trustee on behalf of and for the benefit of Vendor C under the Vendor C Trustee Subscription Agreement
“Vendor C Subscription”
the subscription of 80,149,157 Vendor C Shares by the Trustee, in its capacity as the trustee of Vendor C and for the benefit of Vendor C, pursuant to the Vendor C Trustee Subscription Agreement
“Vendor C Trustee Subscription Agreement”
the trustee subscription agreement dated 15 May 2015 entered into between the Company and the Trustee in relation to the Vendor C Subscription
“Vendor D”
無錫國聯卓成創業投資有限公司 (Wuxi Guolian Zhuocheng Venture Capital Co., Ltd.*), a company established in the PRC with limited liability

– 6 –

DEFINITIONS

“Vendor E”
周嘉琳女士 (Ms. Zhou Jialin*)
“Vendor E Shares”
the 117,600,605 new Shares to be subscribed by the Trustee on behalf of and for the benefit of Vendor E under the Vendor E Trustee Subscription Agreement
“Vendor E Subscription” the subscription of 117,600,605 Vendor E Shares by the Trustee, in its capacity as the trustee of Vendor E and for the benefit of Vendor E, pursuant to the Vendor E Trustee Subscription Agreement
“Vendor E Trustee Subscription Agreement”
the trustee subscription agreement dated 15 May 2015 entered into between the Company and the Trustee in relation to the Vendor E Subscription
“Vendor F” 中金佳泰（天津）股權投資基金合夥企業（有限合夥） (CICC Jiatai (Tianjin) Equity Investment Fund Partnership (Limited Partnership)*), a company established in the PRC with limited liability
“Vendor G”
中金佳天（天津）股權投資合夥企業（有限合夥）(CICC Jiatian (Tianjin) Equity Investment Partnership (Limited Partnership)*), a company established in the PRC with limited liability
“Vendor H” 上海冠策投資諮詢事務所 (Shanghai Guance Investment Consultancy Firm*), a company established in the PRC with limited liability
“Vendors” collectively, the First Vendors, Vendor E, the Third Vendors and Vendor H
“Vendors Subscriptions” collectively, the Vendor C Subscription and the Vendor E Subscription
“Wang Subscription” the subscription of 42,735,042 new Shares by Mr. Wang which was completed on 12 May 2015
“Yang Subscription” the subscription of 42,735,042 new Shares by Mr. Yang which was completed on 12 May 2015
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“RMB” Renminbi, the lawful currency of the PRC
“%”
per cent.
for identification only

– 7 –

DEFINITIONS

Unless the context requires otherwise, amounts denominated in RMB have been converted into HK$ at an exchange rate of RMB1: HK$1.25 for the purpose of illustration only. No representation is made that any amount in HK$ or RMB could have been or could be converted at the relevant dates at the above rate or at any other rates or at all.

– 8 –

LETTER FROM THE BOARD

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

(Incorporated in Hong Kong with limited liability) (Stock Code: 570)

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

Non-executive Directors:

Registered office: Room 1601 Emperor Group Centre 288 Hennessy Road Wanchai Hong Kong

Mr. LIU Cunzhou Mr. ZHANG Jianhui Mr. DONG Zenghe Mr. ZHAO Dongji

Independent non-executive Directors:

Mr. ZHOU Bajun Mr. XIE Rong Mr. YU Tze Shan Hailson Mr. LO Wing Yat

24 June 2015

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF 87.30% OF THE REGISTERED CAPITAL OF JIANGYIN TIANJIANG PHARMACEUTICAL CO., LTD. AND SUBSCRIPTION OF NEW SHARES BY THE VENDORS UNDER SPECIFIC MANDATE

INTRODUCTION

On 31 December 2014, the Company and the First Vendors entered into the First Acquisition Agreement, pursuant to which the Company has conditionally agreed to acquire, and the First Vendors have conditionally agreed to sell, the First Sale Shares, which represent approximately 40.52% of the registered capital of the Target Company, for the First Consideration.

– 9 –

LETTER FROM THE BOARD

On 15 January 2015, the Company and Vendor E entered into the Second Acquisition Agreement, pursuant to which the Company has conditionally agreed to acquire, and Vendor E has conditionally agreed to sell, the Second Sale Shares, which represent approximately 8.62% of the registered capital of the Target Company, for the Second Consideration. On the same date, the Company and the Third Vendors entered into the Third Acquisition Agreement, pursuant to which the Company has conditionally agreed to acquire, and the Third Vendors have conditionally agreed to sell, the Third Sale Shares, which represent approximately 32.34% of the registered capital of the Target Company, for the Third Consideration.

On 17 March 2015, the Company and Vendor H entered into the Fourth Acquisition Agreement, pursuant to which the Company has conditionally agreed to acquire, and Vendor H has conditionally agreed to sell, the Fourth Sale Shares, which represent approximately 0.32% of the registered capital of the Target Company, for the Fourth Consideration.

On 18 March 2015, Guangdong Medi-World, a wholly-owned subsidiary of the Company, and Vendor D entered into the Fifth Acquisition Agreement, pursuant to which Guangdong Medi-World has conditionally agreed to acquire, and Vendor D has conditionally agreed to sell, the Fifth Sale Shares, which represent approximately 5.50% of the registered capital of the Target Company, for the Fifth Consideration.

On 15 May 2015, the Company and the Trustee entered into the Vendor C Trustee Subscription Agreement, pursuant to which the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor C for, 80,149,157 Vendor C Shares at the total subscription price equivalent to the Vendor C Trustee Payment in the amount of RMB270,070,600 (equivalent to approximately HK$337.6 million) at the Issue Price of HK$4.212 per Vendor C Share. On the same date, the Company and the Trustee entered into the Vendor E Trustee Subscription Agreement, pursuant to which the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor E for, 117,600,605 Vendor E Shares at the total subscription price equivalent to the Vendor E Trustee Payment in the amount of RMB396,267,000 (equivalent to approximately HK$495.3 million) at the Issue Price of HK$4.212 per Vendor E Share.

The Acquisition constitutes a very substantial acquisition for the Company under the Listing Rules and is subject to the reporting, announcement and shareholders’ approval requirements under the Listing Rules.

The Vendor C Shares and the Vendor E Shares will be issued under specific mandates to be sought for approval from the Shareholders by way of poll at the EGM.

The purpose of this circular is to provide you with, among other things, (i) the details of the Acquisition Agreements and the Trustee Subscription Agreements; (ii) the financial information of the Group; (iii) the financial information of the Target Group; (iv) the unaudited pro forma financial information of the Enlarged Group assuming Completion takes place; (v) the notice convening the EGM; and (vi) other information as required under the Listing Rules.

– 10 –

LETTER FROM THE BOARD

THE FIRST ACQUISITION AGREEMENT

Date

31 December 2014

Parties

(i) the Company, as purchaser of approximately 40.52% of the registered capital of the Target Company;
(ii) Vendor A, as vendor of approximately 23.84% of the registered capital of the Target Company;
(iii) Vendor B, as vendor of approximately 9.67% of the registered capital of the Target Company;
(iv) Vendor C, as vendor of approximately 5.87% of the registered capital of the Target Company; and
(v) Vendor D, as vendor of approximately 1.14% of the registered capital of the Target Company.

Assets to be acquired

Pursuant to the First Acquisition Agreement, the Company has conditionally agreed to acquire, and the First Vendors have conditionally agreed to sell, the First Sale Shares for the First Consideration. The First Sale Shares represent approximately 40.52% of the registered capital of the Target Company.

First Consideration

The First Consideration will be the First Vendors’ aggregate shareholding percentage in the Target Company (i.e. approximately 40.52%) times the Total Valuation. The Total Valuation shall be equal to 15 times the 2014 Net Operating Profit but in any event not less than RMB9.2 billion (equivalent to approximately HK$11.5 billion) and not more than RMB10.2 billion (equivalent to approximately HK$12.8 billion).

Based on the accountant’s report of the Target Group in Appendix II to this circular, the Company and the Vendors have agreed that the 2014 Net Operating Profit for the purpose of determining the Total Valuation in accordance with the terms of the Acquisition Agreements is RMB651,720,000 (equivalent to approximately HK$814.7 million). Accordingly, the Total Valuation shall be RMB9,775,800,000 (equivalent to approximately HK$12.2 billion) and the First Consideration shall be RMB3,961.2 million (equivalent to approximately HK$4,951.5 million).

– 11 –

LETTER FROM THE BOARD

Each of the First Vendors shall receive consideration equivalent to their respective shareholding percentage in the Target Company times the Total Valuation as follows:

Vendor A Vendor B Vendor C Vendor D Total	RMB 2,330,335,652 945,632,686 573,946,994 111,297,483 3,961,212,815	HK$ equivalent 2,912,919,566 1,182,040,857 717,433,742 139,121,854
		4,951,516,019

The Company will settle the First Consideration in cash in the following manner:

(i) a total sum of RMB200,000,000 (equivalent to HK$250.0 million) (the “ First Vendors First Payment ”) was paid into an escrow account with a bank as agreed between the Company and the First Vendors within 10 Business Days after the date of the First Acquisition Agreement, of which RMB195,384,107 (equivalent to HK$244.2 million) (the “ First Vendors Release Amount ”) was released on 22 April 2015 to Guangdong Medi-World for the payment of the Fifth Sale Shares Deposits (as described in the section headed “Fifth Consideration” below) and the remaining amount of RMB4,615,893 (equivalent to HK$5.8 million) will be released to the First Vendors on the Completion Date;
(ii) a total sum of RMB2,768,974,400 (equivalent to approximately HK$3,461.2 million) plus the First Vendors Release Amount (the “ First Vendors Second Payment ”) will be paid to the First Vendors on the Completion Date;
(iii) a total sum of RMB270,070,600 (equivalent to approximately HK$337.6 million) (the “ Vendor C Trustee Payment ”) will be paid into an escrow account as agreed among the Company, Vendor C and the Trustee on the Completion Date; and
(iv) the remaining consideration (equivalent to the First Consideration minus the First Vendors First Payment, the First Vendors Second Payment and the Vendor C Trustee Payment) will be paid to the First Vendors within 10 Business Days after the later of the Registration Completion Date and the date when the figure of the 2014 Net Operating Profit is available.

Vendor C Subscription

Pursuant to the First Acquisition Agreement, Vendor C shall cause the Trustee to enter into the Vendor C Trustee Subscription Agreement with the Company in the form as provided under the First Acquisition Agreement before the Completion Date. Please refer to the section headed “The Vendor C Trustee Subscription Agreement” below for further details.

– 12 –

LETTER FROM THE BOARD

Conditions of the First Acquisition Agreement

Completion of the First Acquisition Agreement 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 of the First Sale Shares 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 this circular by the Stock Exchange;
(ii) the necessary resolutions approving the acquisition of the First Sale Shares and the related fund-raising exercises having been passed by the Shareholders at the EGM;
(iii) the Company, the First Vendors and the Target Company having duly executed all documents required for the acquisition of the First Sale Shares;
(iv) all representations and warranties collectively or individually given or made by the First Vendors as set out in the First Acquisition Agreement remaining true and accurate in all material respects as at the Completion Date;
(v) the First Vendors and the Target Company having duly performed and observed all of the obligations and agreements required to be performed and observed by them on or prior to the Completion Date;
(vi) each of the First Vendors (that are not individuals) and the Target Company having obtained and having duly produced to the Company copies of all its requisite board and/or shareholders’ approvals or consents in accordance with applicable laws for the execution, delivery and performance of the First Acquisition Agreement and the transactions contemplated thereunder, including, in the case of the Target Company, its board resolutions and unanimous shareholder resolution approving the acquisition of the First Sale Shares and adopting the amended articles of association of the Target Company reflecting the Company as the new owner of the First Sale Shares;
(vii) all necessary approvals, authorisations and consents from any governmental or regulatory authorities having been obtained, and all necessary notifications, filings or registration requirements having been completed in accordance with the relevant laws and regulations in the PRC for completion of the transactions contemplated under the First Acquisition Agreement;
(viii) the consent from the shareholders of the Target Company (other than the First Vendors) to the acquisition of the First Sale Shares and not to exercise any pre-emptive rights, tag-along rights and/or any other shareholders rights under any relevant laws and regulations, the Target Company’s articles of association or any relevant agreement; and any third party consent and/or notification which may be

– 13 –

LETTER FROM THE BOARD

required to be obtained or completed under any relevant laws and regulations, agreements and/or articles of association of any of the First Vendors, members of the Target Group or any of their assets having been obtained or completed;

(ix) 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, the First Vendors, the Target Company or any members of the Target Group in order to restrict, prohibit or oppose the acquisition of the First Sale Shares, the relevant financing transactions or the consummation of any other transactions contemplated in the First 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 First Acquisition Agreement;
(x) since the date of signing of the First 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;
(xi) the First Vendors having collectively delivered a completion certificate (signed by Vendor C and in a form reasonably satisfactory to the Company);
(xii) the First Vendors having delivered the PRC legal opinion issued by their PRC legal advisors and dated the Completion Date in the form and substance as agreed in the First Acquisition Agreement; and
(xiii) the auditor having issued the auditor’s report in respect of the Target Group’s balance sheets, income statements and cash flow statements for the years ended 31 December 2011, 2012 and 2013 and the nine months ended 30 September 2014 with an unqualified audit opinion.

The Company may at any time waive any of the above conditions (except for the conditions referred to in (i), (ii) and (vii) above) by written notice to the First Vendors.

As at the Latest Practicable Date, the conditions referred to in (iii), (viii) and (xiii) had been fulfilled. With respect to the condition referred to in (xiii), the Company has waived the requirement for the Target Group’s balance sheet, income statement and cash flow statement for the year ended 31 December 2011 and the nine months ended 30 September 2014 because as at the Latest Practicable Date, the Company has received the auditor’s report in respect of the Target Group’s balance sheets, income statements and cash flow statements for the years ended 31 December 2012, 2013 and 2014 with an unqualified audit opinion. Other than that, as at the Latest Practicable Date, the Company does not have any intention to waive any other conditions.

– 14 –

LETTER FROM THE BOARD

Termination of the First Acquisition Agreement

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

(i) by the Company, if any of the First Vendors materially breaches any of the warranties and representations as set out in the First Acquisition Agreement, or in the event that any of the First Vendors or the Target Company materially breaches any other undertakings in the First Acquisition Agreement;
(ii) jointly by the First Vendors, if the Company materially breaches any of the warranties and representations as set out in the First Acquisition Agreement, or in the event that the Company materially breaches any other undertakings in the First Acquisition Agreement, which breach may not be rectified or has not been rectified by the Company within 30 days of receipt of notice by the First Vendors;
(iii) by either the Company or the First Vendors jointly, if any condition of the First Acquisition Agreement fails to be satisfied or waived in accordance with the First Acquisition Agreement on or before 31 December 2015 (however, if any condition of the First Acquisition Agreement relating to necessary approvals from any governmental authorities has not yet been obtained by 31 December 2015, then the long stop date would be automatically postponed to 28 June 2016); or
(iv) by consent among all the parties to the First Acquisition Agreement.

Undertakings from the First Vendors

Each of the First Vendors has undertaken to the Company that they shall not, for a period of five years after the Registration Completion Date, directly or indirectly: (i) recruit, solicit or instigate (or intend to recruit, solicit or instigate) any customers, distributors or agents of the Company, any members of the Target Group or any of their respective associates; or (ii) change, reduce or terminate any business relationship between any such customers, distributors or agents and the Company, any members of the Target Group or any of their respective associates.

Vendor C has further undertaken to the Company that, for a period of five years after the Registration Completion Date, he shall not, without the prior written approval of the Company or through the Company or the Company’s associates (including any members of the Target Group): (i) directly or indirectly engage in activities in a Competing Business, or directly or indirectly hold interests in any person which is engaged in a Competing Business; (ii) directly or indirectly be employed by any person which is engaged in a Competing Business; and (iii) provide to any person any technology, business or professional opinion relating to a Competing Business to assist any such person to directly or indirectly engage in a Competing Business. However, the foregoing does not restrict Vendor C from directly or indirectly holding any securities issued by the Company or less than 5% of any securities issued by any other publicly listed companies.

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LETTER FROM THE BOARD

THE SECOND ACQUISITION AGREEMENT

Date

15 January 2015

Parties

(i) the Company, as purchaser of approximately 8.62% of the registered capital of the Target Company; and
(ii) Vendor E, as vendor of approximately 8.62% of the registered capital of the Target Company.

Assets to be acquired

Pursuant to the Second Acquisition Agreement, the Company has conditionally agreed to acquire, and Vendor E has conditionally agreed to sell, the Second Sale Shares for the Second Consideration. The Second Sale Shares represent approximately 8.62% of the registered capital of the Target Company.

Second Consideration

The Second Consideration will be Vendor E’s shareholding percentage in the Target Company (i.e. approximately 8.62%) times the Total Valuation. The Total Valuation shall be equal to 15 times the 2014 Net Operating Profit but in any event not less than RMB9.2 billion (equivalent to approximately HK$11.5 billion) and not more than RMB10.2 billion (equivalent to approximately HK$12.8 billion).

Based on the accountant’s report of the Target Group in Appendix II to this circular, the Company and the Vendors have agreed that the 2014 Net Operating Profit for the purpose of determining the Total Valuation in accordance with the terms of the Acquisition Agreements is RMB651,720,000 (equivalent to approximately HK$814.7 million). Accordingly, the Total Valuation shall be RMB9,775,800,000 (equivalent to approximately HK$12.2 billion) and the Second Consideration shall be RMB842.1 million (equivalent to approximately HK$1,052.6 million).

The Company will settle the Second Consideration in cash in the following manner:

(i) a total sum of RMB43,072,500 (equivalent to approximately HK$53.8 million) (the “ Vendor E First Payment ”) was paid into an escrow account with a bank as agreed between the Company and Vendor E within 10 Business Days after the date of the Second Acquisition Agreement, of which RMB42,091,175 (equivalent to HK$52.6 million) (the “ Vendor E Release Amount ”) was released on 22 April 2015 to Guangdong Medi-World for the payment of the Fifth Sale Shares Deposits (as described in the section headed “Fifth Consideration” below) and the remaining amount of RMB981,325 (equivalent to HK$1.2 million) will be released to Vendor E on the Completion Date;

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(ii) a total sum of RMB249,820,500 (equivalent to approximately HK$312.3 million) plus the Vendor E Release Amount (the “ Vendor E Second Payment ”) will be paid to Vendor E on the Completion Date;
(iii) a total sum of RMB396,267,000 (equivalent to approximately HK$495.3 million) (the “ Vendor E Trustee Payment ”) will be paid into an escrow account as agreed among the Company, Vendor E and the Trustee on the Completion Date; and
(iv) the remaining consideration (equivalent to the Second Consideration minus the Vendor E First Payment, the Vendor E Second Payment and the Vendor E Trustee Payment) will be paid to Vendor E within 10 Business Days after the later of the Registration Completion Date and the date when the figure of the 2014 Net Operating Profit is available.

Vendor E Subscription

Pursuant to the Second Acquisition Agreement, Vendor E shall cause the Trustee to enter into the Vendor E Trustee Subscription Agreement with the Company in the form as provided under the Second Acquisition Agreement before the Completion Date. Please refer to the section headed “The Vendor E Trustee Subscription Agreement” below for further details.

Conditions of the Second Acquisition Agreement

The conditions to completion of the Second Acquisition Agreement is the same as those of the First Acquisition Agreement as described under the section headed “Conditions of the First Acquisition Agreement” except that all references to the First Acquisition Agreement, the First Vendors and the First Sale Shares shall be replaced by the Second Acquisition Agreement, Vendor E and the Second Sale Shares, respectively.

As at the Latest Practicable Date, the conditions referred to in (iii), (vi), (viii) and (xiii) had been fulfilled. With respect to the condition referred to in (xiii), the Company has waived the requirement for the Target Group’s balance sheet, income statement and cash flow statement for the year ended 31 December 2011 and the nine months ended 30 September 2014 because as at the Latest Practicable Date, the Company has received the auditor’s report in respect of the Target Group’s balance sheets, income statements and cash flow statements for the years ended 31 December 2012, 2013 and 2014 with an unqualified audit opinion. Other than that, as at the Latest Practicable Date, the Company does not have any intention to waive any other conditions.

Termination of the Second Acquisition Agreement

The circumstance and provisions under which the Second Acquisition Agreement or any of the rights and obligations as set out in the Second Acquisition Agreement may be terminated are the same as those described under the section headed “Termination of the First Acquisition Agreement” above except that the references to “31 December 2015” shall be replaced by “15 January 2016” and the reference to “28 June 2016” shall be replaced by “13 July 2016”.

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Undertakings from Vendor E

The undertakings from Vendor E to the Company are the same as those made by the First Vendors and Vendor C as described under the section headed “Undertakings from the First Vendors” except that all references to the First Acquisition Agreement and the First Vendors or Vendor C shall be replaced by the Second Acquisition Agreement and Vendor E, respectively.

THE THIRD ACQUISITION AGREEMENT

Date

15 January 2015

Parties

(i) the Company, as purchaser of approximately 32.34% of the registered capital of the Target Company;
(ii) Vendor F, as vendor of approximately 19.71% of the registered capital of the Target Company; and
(iii) Vendor G, as vendor of approximately 12.63% of the registered capital of the Target Company.

Assets to be acquired

Pursuant to the Third Acquisition Agreement, the Company has conditionally agreed to acquire, and the Third Vendors have conditionally agreed to sell, the Third Sale Shares for the Third Consideration. The Third Sale Shares represent approximately 32.34% of the registered capital of the Target Company.

Third Consideration

The Third Consideration will be the Third Vendors’ aggregate shareholding percentage in the Target Company (i.e. approximately 32.34%) times the Total Valuation, plus a control premium in the sum of RMB100 million (equivalent to HK$125 million). The Total Valuation shall be equal to 15 times the 2014 Net Operating Profit but in any event not less than RMB9.2 billion (equivalent to approximately HK$11.5 billion). As part of the control premium to the Third Vendors, for the purpose of calculating the Third Consideration, the Total Valuation shall be taken as RMB10.0 billion (equivalent to HK$12.5 billion) if the 2014 Net Operating Profit is RMB650 million (equivalent to HK$812.5 million) or more.

The amount of control premium payable to the Third Vendors under the Third Acquisition Agreement was determined after arm’s length negotiations among the Company and the Third Vendors. Having considered that the Third Vendors together hold the largest

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shareholding in the Target Company and are entitled to certain veto rights under the shareholders’ agreement in relation to the Target Company, the Company considers that the payment of the control premium is justifiable.

Based on the accountant’s report of the Target Group in Appendix II to this circular, the Company and the Vendors have agreed that the 2014 Net Operating Profit for the purpose of determining the Total Valuation in accordance with the terms of the Acquisition Agreements is RMB651,720,000 (equivalent to approximately HK$814.7 million). Since the Net Operating Profit is more than RMB650 million, the Total Valuation for the purpose of calculating the Third Consideration is taken as RMB10.0 billion (equivalent to HK$12.5 billion) and the Third Consideration shall be RMB3,334.2 million (equivalent to approximately HK$4,167.8 million).

Each of the Third Vendors shall receive consideration equivalent to their respective shareholding percentage in the Target Company times the Total Valuation, plus their respective shareholding percentage in the Target Company times the control premium in the sum of RMB100 million (equivalent to HK$125 million) divided by the Third Vendors’ aggregate shareholding percentage in the Target Company.

The amounts of consideration received by Vendor F and Vendor G are as follows:

Vendor F Vendor G Total	RMB 2,032,055,075 1,302,184,925 3,334,240,000	HK$ equivalent 2,540,068,844 1,627,731,156
		4,167,800,000

The Company will settle the Third Consideration in cash in the following manner:

(i) a total sum of RMB333,424,000 (equivalent to approximately HK$416.8 million) (the “ Third Vendors First Payment ”) was paid into an escrow account with a bank as agreed between the Company and the Third Vendors within 10 Business Days after the date of the Third Acquisition Agreement, of which RMB329,739,718 (equivalent to HK$412.2 million) (the “ Third Vendors Release Amount ”) was released on 22 April 2015 to Guongdong Medi-World for the payment of the Fifth Sale Shares Deposits (as described in the section headed “Fifth Consideration” below) and the remaining amount of RMB3,684,282 (equivalent to HK$4.6 million) will be released to the Third Vendors on the Completion Date;
(ii) a total sum of RMB2,425,680,000 (equivalent to approximately HK$3.0 billion) plus the Third Vendors Release Amount (the “ Third Vendors Second Payment ”) will be paid to the Third Vendors on the Completion Date; and

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(iii) the remaining consideration (equivalent to the Third Consideration minus the Third Vendors First Payment and the Third Vendors Second Payment) will be paid to the Third Vendors within 10 Business Days after the later of the Registration Completion Date and the date when the figure of the 2014 Net Operating Profit is available.

Conditions of the Third Acquisition Agreement

Completion of the Third Acquisition Agreement 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 of the Third Sale Shares 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 this circular by the Stock Exchange;
(ii) the necessary resolutions approving the acquisition of the Third Sale Shares and the related fund-raising exercises having been passed by the Shareholders at the EGM;
(iii) all representations and warranties collectively or individually given or made by the Third Vendors as set out in the Third Acquisition Agreement remaining true and accurate in all material respects as at the Completion Date;
(iv) the Third Vendors and the Target Company having duly performed and observed all of the obligations and agreements required to be performed and observed by them on or prior to the Completion Date;
(v) each of the Third Vendors and the Target Company having obtained and having duly produced to the Company copies of all its requisite board and/or shareholders’ approvals or consents in accordance with applicable laws for the execution, delivery and performance of the Third Acquisition Agreement and the transactions contemplated thereunder, including, in the case of the Target Company, its board resolutions and unanimous shareholder resolution approving the acquisition of the First Sale Shares, the Second Sale Shares and the Third Sale Shares and other acquisitions and adopting the amended articles of association of the Target Company reflecting the Company as the new owner of the First Sale Shares, the Second Sale Shares and the Third Sale Shares;
(vi) all necessary approvals, authorisations and consents from any governmental or regulatory authorities having been obtained, and all necessary notifications, filings or registration requirements having been completed in accordance with the relevant laws and regulations in the PRC for completion of the transactions contemplated under each of the Acquisition Agreements;
(vii) the consent from the shareholders of the Target Company (other than the Third Vendors) to the acquisition of the Third Sale Shares and not to exercise any pre-emptive rights, tag-along rights and/or any other shareholders rights under any

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relevant laws and regulations, the Target Company’s articles of association or any relevant agreement; and any third party consent and/or notification which may be required to be obtained or completed under any relevant laws and regulations, agreements and/or articles of association of any of the Third Vendors, members of the Target Group or any of their assets having been obtained or completed;

(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, the Third Vendors, any other Vendors, the Target Company or any members of the Target Group in order to restrict, prohibit or oppose the acquisition of the Third Sale Shares, any other acquisition, the relevant financing transactions or the consummation of any other transactions contemplated in the Third 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 Third Acquisition Agreement;
(ix) since the date of signing of the Third Acquisition Agreement, there being no material adverse change in the business, operation, assets, financial position, revenue or condition of the Target Group; and
(x) the auditor having issued the auditor’s report in respect of the Target Group’s balance sheets, income statements and cash flow statements for the years ended 31 December 2012, 2013 and 2014 with an unqualified audit opinion.

The Company may at any time waive any of the above conditions (except for the conditions referred to in (i), (ii) and (vi) above) by written notice to the Third Vendors.

As at the Latest Practicable Date, the conditions referred to in (v), (vii) and (x) had been fulfilled, and the Company does not have any intention to waive any conditions referred to above.

Termination of the Third Acquisition Agreement

The circumstance and provisions under which the Third Acquisition Agreement or any of the rights and obligations as set out in the Third Acquisition Agreement may be terminated are the same as those described under the section headed “Termination of the Second Acquisition Agreement” above.

THE FOURTH ACQUISITION AGREEMENT

Date

17 March 2015

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Parties

(i) the Company, as purchaser of approximately 0.32% of the registered capital of the Target Company; and
(ii) Vendor H, as vendor of approximately 0.32% of the registered capital of the Target Company.

Assets to be acquired

Pursuant to the Fourth Acquisition Agreement, the Company has conditionally agreed to acquire, and Vendor H has conditionally agreed to sell, the Fourth Sale Shares for the Fourth Consideration. The Fourth Sale Shares represent approximately 0.32% of the registered capital of the Target Company.

Fourth Consideration

The Fourth Consideration will be Vendor H’s shareholding percentage in the Target Company (i.e. approximately 0.32%) times the Total Valuation. The Total Valuation shall be equal to 15 times the 2014 Net Operating Profit but in any event not less than RMB9.2 billion (equivalent to approximately HK$11.5 billion) and not more than RMB10.2 billion (equivalent to approximately HK$12.8 billion).

Based on the accountant’s report of the Target Group in Appendix II to this circular, the Company and the Vendors have agreed that the 2014 Net Operating Profit for the purpose of determining the Total Valuation in accordance with the terms of the Acquisition Agreements is RMB651,720,000 (equivalent to approximately HK$814.7 million). Accordingly, the Total Valuation shall be RMB9,775,800,000 (equivalent to approximately HK$12.2 billion) and the Fourth Consideration shall be RMB31.4 million (equivalent to approximately HK$39.3 million).

The Company will settle the Fourth Consideration in cash in the following manner:

(i) a total sum of RMB25,712,000 (equivalent to approximately HK$32.1 million) (the “ Vendor H First Payment ”) will be paid to Vendor H on the Completion Date; and
(ii) the remaining consideration (equivalent to the Fourth Consideration minus the Vendor H First Payment) will be paid to Vendor H within 10 Business Days after the later of the Registration Completion Date and the date when the figure of the 2014 Net Operating Profit is available.

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Conditions of the Fourth Acquisition Agreement

The conditions to completion of the Fourth Acquisition Agreement is the same as those of the First Acquisition Agreement as described under the section headed “Conditions of the First Acquisition Agreement” except that all references to the First Acquisition Agreement, the First Vendors and the First Sale Shares shall be replaced by the Fourth Acquisition Agreement, Vendor H and the Fourth Sale Shares, respectively.

Termination of the Fourth Acquisition Agreement

The circumstance and provisions under which the Fourth Acquisition Agreement or any of the rights and obligations as set out in the Fourth Acquisition Agreement may be terminated are the same as those described under the section headed “Termination of the First Acquisition Agreement” above except that the references to “31 December 2015” shall be replaced by “16 March 2016” and the reference to “28 June 2016” shall be replaced by “12 September 2016”.

Undertakings from Vendor H

The undertakings from Vendor H to the Company are the same as those made by the First Vendors and Vendor C as described under the section headed “Undertakings from the First Vendors” except that all references to the First Acquisition Agreement and the First Vendors or Vendor C shall be replaced by the Fourth Acquisition Agreement and Vendor H, respectively.

THE FIFTH ACQUISITION AGREEMENT

Date

18 March 2015

Parties

(i) Guangdong Medi-World, a wholly-owned subsidiary of the Company, as purchaser of approximately 5.50% of the registered capital of the Target Company; and
(ii) Vendor D, as vendor of approximately 5.50% of the registered capital of the Target Company.

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Assets to be acquired

Pursuant to the Fifth Acquisition Agreement, Guangdong Medi-World has conditionally agreed to acquire, and Vendor D has conditionally agreed to sell, the Fifth Sale Shares for the Fifth Consideration. The Fifth Sale Shares represent approximately 5.50% of the registered capital of the Target Company.

Subsequent to the signing of the First Acquisition Agreement, the Second Acquisition Agreement and the Third Acquisition Agreement, the Company was notified by the First Vendors, Vendor E and the Third Vendors (collectively, the “ Initial Vendors ”) that they have respectively received a notice dated 12 January 2015 (the “ Notice ”) from the Jiangsu Exchange, stating that Jiangyin Technology, a then shareholder of the Target Company holding approximately 5.50% of the registered capital of the Target Company, had offered the Fifth Sale Shares for sale by way of auction at the Jiangsu Exchange (the “ Auction ”) and the Jiangsu Exchange has received a final bid at the price of RMB566,500,000 (equivalent to approximately HK$708.1 million) from a bidder (the “ Competitor ”). As stated in the Notice, the then existing shareholders of the Target Company (other than Jiangyin Technology) shall have the pre-emptive right to acquire the Fifth Sale Shares on the same terms as the bid from the Competitor (plus the payment of a handling fee of RMB715,000 to the Jiangsu Exchange) within 30 Business Days from the date of receipt of the Notice (the “ Fifth Sale Shares Pre-emptive Right ”).

It was the intention of the Company to acquire additional interest in the Target Company. After being informed of the status of the Auction and the Notice by the Initial Vendors, the Company negotiated with the Initial Vendors and Vendor D agreed to exercise the Fifth Sale Shares Pre-emptive Right to acquire the Fifth Sale Shares from Jiangyin Technology at the consideration of RMB566,500,000 plus the handling fee of RMB715,000 paid by Vendor D to the Jiangsu Exchange.

On 13 March 2015, Vendor D entered into the Jiangyin Agreement with Jiangyin Technology to acquire the Fifth Sale Shares. Jiangyin Completion took place on 13 May 2015. As at the Latest Practicable Date, Vendor D holds approximately 6.64% of the registered capital of the Target Company.

Fifth Consideration

The Fifth Consideration amounts to RMB567,215,000 (equivalent to approximately HK$709.0 million) and is equivalent to the sum of (i) the consideration of RMB566,500,000 (equivalent to approximately HK$708.1 million) paid by Vendor D to Jiangyin Technology for the Fifth Sale Shares pursuant to the Jiangyin Agreement; and (ii) the handling fee of RMB715,000 paid by Vendor D to the Jiangsu Exchange.

Guangdong Medi-World has settled the Fifth Consideration in the following manner:

(i) a deposit of RMB55,000,000 (equivalent to approximately HK$68.8 million) (the “ First Deposit ”) in cash was paid into a bank account designated by both parties on 18 March 2015 (being the date of the Fifth Acquisition Agreement); and

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(ii) a deposit of RMB512,215,000 (equivalent to approximately HK$640.3 million) (the “ Second Deposit ”, together with the First Deposit, the “ Fifth Sale Shares Deposits ”) in cash was paid into an escrow account designated by both parties on 22 April 2015.

The Fifth Sale Shares Deposits are refundable if the Fifth Acquisition Agreement is terminated (please refer to the section headed “Termination of the Fifth Acquisition Agreement” below for further details) and will be used to set off against the Fifth Consideration at completion of the Fifth Acquisition Agreement.

Pursuant to the First Acquisition Agreement, the Second Acquisition Agreement and the Third Acquisition Agreement, the Company has already paid a total of approximately RMB576.5 million (being the sum of the First Vendors First Payment, the Vendor E First Payment and the Third Vendors First Payment) into an escrow account, which amount will be released to the First Vendors, Vendor E and the Third Vendors on the Completion Date. In order to facilitate the payment of the Fifth Sale Shares Deposits by Guangdong Medi-World to Vendor D under the Fifth Acquisition Agreement, the First Vendors, Vendor E and the Third Vendors have respectively agreed to release the First Vendors Release Amount, the Vendor E Release Amount and the Third Vendors Release Amount (the aggregate amount of which is equivalent to the Fifth Sale Shares Deposits (i.e. RMB567,215,000)) from the escrow account to Guangdong Medi-World for the payment of the Fifth Sale Shares Deposits.

Conditions of the Fifth Acquisition Agreement

Completion of the Fifth Acquisition Agreement is conditional upon the fulfilment of the following conditions:

(i) Guangdong Medi-World having completed all internal approval procedures and obtained all necessary regulatory approvals in respect of the Fifth Acquisition Agreement; and
(ii) Vendor D having completed the registration for changes in shareholding in the Target Company in respect of the transactions contemplated under the Fifth Acquisition Agreement with the relevant industry and commerce authority and produced the documents certifying Guangdong Medi-World as the beneficial owner of the Fifth Sale Shares.

As at the Latest Practicable Date, the conditions referred to above had not yet been fulfilled, and the Company does not have any intention to waive any of the above conditions.

Security

On 15 May 2015, Vendor D entered into an agreement to pledge the Fifth Sale Shares with Guangdong Medi-World (the “ Share Pledge ”) as security against its repayment obligations for the Deposits in the event the Fifth Acquisition Agreement is terminated.

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Termination of the Fifth Acquisition Agreement

(i) At any time prior to completion, the Fifth Acquisition Agreement may be terminated by mutual agreement between Guangdong Medi-World and Vendor D. In such event, Vendor D shall return the Fifth Sale Shares Deposits already paid in cash within three days from the date of termination.
(ii) If Guangdong Medi-World has not obtained all necessary regulatory approvals in respect of the Fifth Acquisition Agreement within 40 Business Days from the date of Jiangyin Completion, Guangdong Medi-World may give written notice to Vendor D requiring Vendor D to return the Fifth Sale Shares Deposits. Vendor D shall return the Deposits already paid in cash within ten Business Days from the date of receipt of such notice. In the event that Vendor D fails to return the Fifth Sale Shares Deposits in cash, Guangdong Medi-World may exercise its right under the Share Pledge to foreclose the Fifth Sale Shares. Guangdong Medi-World shall have no further claim on Vendor D after such foreclosure.

TOTAL CONSIDERATION

The Total Consideration shall be approximately RMB8,736.2 million (equivalent to approximately HK$10.9 billion), which comprises:

First Consideration Second Consideration Third Consideration Fourth Consideration Fifth Consideration Total	RMB 3,961,212,815 842,136,291 3,334,240,000 31,419,421 567,215,000 8,736,223,527	HK$ equivalent 4,951,516,019 1,052,670,364 4,167,800,000 39,274,277 709,018,750
		10,920,279,409

The Total Consideration was determined after arm’s length negotiations among the Company and the Vendors, having taken into account, among other things:

(i) the Target Group has a proven profitability track record with a growing trend. For the three years ended 31 December 2012, 2013 and 2014, the Target Group recorded net profit after tax of approximately RMB516.9 million, RMB543.4 million and RMB651.7 million respectively;
(ii) the Total Valuation is calculated based on the 2014 Net Operating Profit and the price-to-earnings ratio of 15 times, which is considered to be in line with market practice in evaluating pharmaceutical companies. The price-to-earnings ratio of 15 times was determined with reference to (i) the price-to-earnings ratios ranging from approximately 14 to 25 times implied by the series of transactions conducted by Tianjin Chase Sun Pharmaceutical Co., Ltd. (a TCM company listed on Shenzhen Stock Exchange) during 2010 to 2012 to acquire a total of 100% equity interest in Beijing Tcmages Pharmaceutical Co., Ltd. (one of the six enterprises

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approved by China Food and Drug Administration (“ CFDA ”) to manufacture concentrated TCM granules in the PRC); and (ii) the forward price-to-earnings ratios for 2014 of TCM companies listed on the Stock Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange (the “ Comparable Companies ”) ranging from approximately 12.8 to 46.4 times with mean and median of approximately 27.9 and 27.4 times as extracted from a research report issued by an international financial institution in early December 2014;

(iii) the Fifth Consideration is equivalent to the sum of the consideration paid by Vendor D to Jiangyin Technology plus the handling fee paid by Vendor D to the Jiangyin Exchange;
(iv) the Target Group has built up a reputable brand name in the concentrated TCM granules market from its long operating history since 1992. Certain of the products manufactured by the Target Group are included in the Drugs List for Basic Medical Insurance of a number of provinces in the PRC;
(v) the Target Group has a well-established customer base with over 5,000 hospitals in the PRC and extensive distribution network. The products of the Target Group are being sold in all provinces in the PRC except Tibet Autonomous Region;
(vi) the Group expects to realise synergies as a result of the Acquisition through, among others, (a) the sharing of resources in overall management, research and development, raw materials and production, marketing, sales and distribution; (b) the potential cross-selling benefits derived from the respective customer base of the Group and the Target Group; (c) expanded management expertise; and (d) additional negotiation power relative to both customer and supplier relationships; and
(vii) the size of the concentrated TCM granules market is expected to enjoy a significant growth in the coming years. The Target Group as the largest manufacturer of concentrated TCM granules in the PRC will be able to take advantage of its leading position in the industry and capture the growth potential of the concentrated TCM granules market.

The Company intends to finance the Total Consideration as to (i) approximately HK$8.2 billion by the proceeds from the Sinopharm Subscription, the Yang Subscription, the Wang Subscription and the Investors Subscriptions; (ii) approximately HK$0.8 billion by the proceeds from the Vendors Subscriptions; (iii) approximately HK$0.7 billion of deposit paid by the internal resources of the Company; and (iv) approximately HK$1.5 billion through bank borrowings.

COMPLETION

Completion of the First Acquisition Agreement, the Second Acquisition Agreement, the Third Acquisition Agreement, the Fourth Acquisition Agreement and the Fifth Acquisition Agreement are not inter-conditional. However, the Company expects that completion of the Acquisition Agreements will take place on the same day and simultaneously in the third

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quarter of 2015. The long stop date under each of the Acquisition Agreements are 365 days from the date of signing (and which may be postponed by a further 180 days). As the Acquisition Agreements are entered into on different dates, the long stop dates varied from 31 December 2015 to 12 September 2016. In the event that any of the Acquisition Agreements was not approved by the Shareholders, the Company will still proceed with the Acquisition pursuant to the other Acquisition Agreements.

Completion shall take place on the eighth Business Day following the issue of a written notice by the Company to each of the relevant Vendors on or before the second Business Day after all conditions of the relevant Acquisition Agreements are satisfied or waived in accordance with the relevant Acquisition Agreements, or such other dates as the parties to the relevant Acquisition Agreements may agree.

If completion of the First Acquisition Agreement does not take place on or before 31 December 2015 (which may be postponed to 28 June 2016 pursuant to the First Acquisition Agreement), the Company or the First Vendors (collectively but not individually) may terminate the First Acquisition Agreement. If completion of the Second Acquisition Agreement and/or the Third Acquisition Agreement does not take place on or before 15 January 2016 (which may be postponed to 13 July 2016 pursuant to the relevant agreements), the Company or Vendor E (in respect of the Second Acquisition Agreement) or the Third Vendors (collectively but not individually, in respect of the Third Acquisition Agreement) may terminate the relevant Acquisition Agreements. If completion of the Fourth Acquisition Agreement does not take place on or before 16 March 2016 (which may be postponed to 12 September 2016 pursuant to the Fourth Acquisition Agreement), the Company or Vendor H may terminate the Fourth Acquisition Agreement.

Following Completion, the Target Company will become a 87.30%-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. As at the Latest Practicable Date, the Company did not have any intention to acquire further stakes in the Target Company.

Shareholders and potential investors of the Company should note that Completion is subject to the satisfaction (or, if applicable, waiver) of the conditions to the First Acquisition Agreement, the Second Acquisition Agreement, the Third Acquisition Agreement, the Fourth Acquisition Agreement and the Fifth Acquisition Agreement. As the acquisition of the First Sale Shares, the Second Sale Shares, the Third Sale Shares, the Fourth Sale Shares and the Fifth Sale Shares may or may not proceed, Shareholders and potential investors of the Company are reminded to exercise caution when dealing in the securities of the Company.

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INFORMATION ON THE TARGET GROUP

Group Structure

The Target Company was established in the PRC with limited liability. The Target Group comprises six members, namely the Target Company, GD Yifang, LX Yifang, Tianxiang, TJ Chinese Medical and Sichuan Tianhao. The following diagram depicts the group structure of the Target Group as at the Latest Practicable Date:

==> picture [364 x 226] intentionally omitted <==

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

Vendor A Vendor B Vendor C Vendor D
23.84% 9.67% 5.87% 6.64%
The remaining
shareholder
Vendor E Vendor F Vendor G Vendor H
(Note)
8.62% 19.71% 12.63% 0.32% 12.70%
Target Company
100% 100% 100% 51%
GD Yifang Tianxiang TJ Chinese Sichuan
Medical Tianhao
100%
LX Yifang
----- End of picture text -----

Note: To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, the remaining shareholder of the Target Company and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons.

The Target Company is based in Jiangsu Province, the PRC and is principally engaged in the research, development, manufacture and sale of concentrated TCM granules（中藥配方顆粒）. It was one of the first “experimental manufacturing enterprises of concentrated TCM granules” approved by CFDA, an “experimental unit of reform of TCM decoction pieces” approved by State Administration of Traditional Chinese Medicine of the PRC and the first manufacturer of concentrated TCM granules that received the State Good Manufacturing Practice (GMP) for Pharmaceutical Products of the PRC certification. Currently, the Target Company produces approximately 700 types of single-herb concentrated granules.

GD Yifang was established in the PRC with limited liability. It is based in Guangdong Province, the PRC and is principally engaged in the research, development, manufacture and sale of concentrated TCM granules. It was also one of the first “experimental manufacturing enterprises of concentrated TCM granules” approved by the CFDA and an “experimental production base of reform of TCM decocting pieces”. Currently, GD Yifang produces approximately 600 types of single-herb concentrated granules. GD Yifang was acquired by the Target Company in 2008 and is now a wholly-owned subsidiary of the Target Company.

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LETTER FROM THE BOARD

LX Yifang, a wholly-owned subsidiary of GD Yifang, was established in the PRC with limited liability. It is principally engaged in the production of TCM extracts and raw materials, which are supplied to GD Yifang.

Tianxiang was established in the PRC with limited liability. It is principally engaged in the production of TCM extracts and raw materials, which are supplied to the Target Company.

TJ Chinese Medical was established in the PRC with limited liability. It is principally engaged in the provision of diagnosis of Chinese medicine and medical laboratory in Jiangyin City, Jiangsu Province, the PRC.

Sichuan Tianhao, a 51%-owned subsidiary of the Target Company, was established in the PRC with limited liability. Its principal activities are plantation, purchase and sales of TCM and other agricultural products.

Business

The Target Group is the largest manufacturer of concentrated TCM granules in the PRC in terms of market share by revenue in 2013. Concentrated TCM granules are a form of TCM where medicinal herbs are subject to modern extraction and concentration technologies to create concentrated granules of the medicinal herb extracts. TCM practitioners prescribe an individualized combination of various single-herb concentrated granules to treat a particular patient according to the patient’s condition. The patient dissolves the prescribed combination of the single-herb concentrated granules in water and drinks the solution. Concentrated TCM granules can serve as an alternative to the traditional method of boiling a prescribed mixture of medicinal herbs (decoction pieces) and drinking the resulting medicinal soup being prescribed in a form which is more convenient to consume for the patient. The concentrated TCM granules of the Target Group are marketed under three categories (medicines, food, and wellness products) and are sold within the PRC and overseas. In China, certain patients purchase concentrated TCM granules as medicines at pilot hospitals with the prescriptions from medical doctors. Customers may also buy certain kinds of concentrated TCM granules which have been approved as food or wellness products by the CFDA in supermarkets or retail pharmacies.

In 2001, the CFDA issued “中藥配方顆粒管理暫行規定” (Interim Regulations on the Management of concentrated TCM granules) (the “ Regulations ”) which only allows selected enterprises to conduct research and development of and produce concentrated TCM granules, as well as to sell concentrated TCM granules in pilot hospitals. Since then, there have been only six enterprises approved under the Regulations by the CFDA, including the Target Company and GD Yifang.

Certain of the products manufactured by the Target Group are included in the provincial Drugs List for Basic Medical Insurance of a number of provinces in China, which are entitled to reimbursement from the social medical insurance fund. However, there is currently no price control imposed by the PRC government on concentrated TCM granules.

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LETTER FROM THE BOARD

Hospitals select suppliers based on quality and price of the products. As such, manufacturers with a leading position in the industry like the Target Group will have an advantage in pricing their products.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, the Target Group has the necessary licenses and patents for its operations and does not have any non-compliance record.

Production facilities and suppliers

Set out below are the details of the manufacturing facilities of the Target Group:

		Annual production
		capacity of TCM
Location	Major functions	herb extraction
Jiangsu Jiangyin	TCM herb extraction and	5,000 tons
	granule manufacturing
Guangdong Foshan	TCM herb extraction and	7,200 tons
	granule manufacturing
Guangdong Foshan	TCM herb extraction and	14,400 tons
	granule manufacturing
Anhui Bozhou	TCM herb extraction	5,000 tons
Gansu Longxi	TCM herb extraction	25,000 tons

The major suppliers of the Target Group are farmers, herb trading companies and TCM decoction pieces producers located in various regions in the PRC, such as Gansu, Anhui, Hubei, Shandong and Yunan. The Target Group purchases herbs from these suppliers as raw materials for the production of concentrated TCM granules.

Management

Vendor C and Vendor E (being the key management of the Target Group) will be retained by the Company to continue to manage the business operations of the Target Group. The Directors who possess substantial experience in the TCM industry also have sufficient knowledge and expertise to oversee and manage the Target Group’s business.

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LETTER FROM THE BOARD

Financial information

Set out below is a summary of the audited consolidated financial information of the Target Company for the each of the three years ended 31 December 2012, 2013 and 2014 prepared under the Hong Kong Financial Reporting Standards:

	For the year	For the year	ended	For the year	For the year	ended	For the year	For the year	ended
	31 December 2012			31 December 2013			31 December 2014
		equivalent			equivalent			equivalent
			to			to			to
			approx.			approx.			approx.
	RMB’		HK$’	RMB’		HK$’	RMB’		HK$’
	million		million	million		million	million		million
Revenue	1,891.6		2,364.5	2,496.9		3,121.1	3,128.8		3,911.0
Profit before
taxation	604.7		755.9	639.0		798.8	762.2		952.8
Profit and total
comprehensive
income for the
year	516.9		646.1	543.4		679.3	651.7		814.6
	As	at		As	at		As	at
	31 December 2012			31 December 2013			31 December 2014
		equivalent			equivalent			equivalent
			to			to			to
			approx.			approx.			approx.
	RMB’		HK$’	RMB’		HK$’	RMB’		HK$’
	million		million	million		million	million		million
Total assets	1,981.4		2,476.8	2,736.9		3,421.1	3,437.4		4,296.8
Total equity	1,534.5		1,918.1	2,017.8		2,522.3	2,569.5		3,211.9

Details of the audited financial information of the Target Group are set out in Appendix II to this circular.

INFORMATION ON THE VENDORS

Vendor A is a company established in the PRC with limited liability and its shares are listed on Shanghai Stock Exchange (stock code: 600315). Vendor A holds approximately 23.84% registered capital of the Target Company. It is principally engaged in the research, development, manufacture and distribution of daily-use cosmetics products.

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LETTER FROM THE BOARD

Vendor B is a company established in the PRC with limited liability and its shares are listed on the Shanghai Stock Exchange (stock code: 600499). Vendor B holds approximately 9.67% registered capital of the Target Company. It is principally engaged in the manufacture and distribution of machinery products.

Vendor C is a key member of the management team of GD Yifang and holds approximately 5.87% registered capital of the Target Company. As at the Latest Practicable Date, Vendor C held 3,237,780 Shares, representing approximately 0.08% of the issued Shares.

Vendor D is a company established in the PRC with limited liability and is principally engaged in investment holding. It holds approximately 6.64% registered capital of the Target Company.

Vendor E is the founder of the Target Company and holds approximately 8.62% registered capital of the Target Company.

Vendor F is a company established in the PRC with limited liability and is principally engaged in investment holding. It holds approximately 19.71% registered capital of the Target Company.

Vendor G is a company established in the PRC with limited liability and is principally engaged in investment holding. It holds approximately 12.63% registered capital of the Target Company.

Vendor H is a company established in the PRC with limited liability and is principally engaged in investment holding. It holds approximately 0.32% of the registered capital of the Target Company.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, each of the Vendors and their respective ultimate beneficial owner(s) are third parties independent of the Company and its connected persons.

FINANCIAL EFFECTS OF THE ACQUISITION

Following Completion, the Target Company will become a 87.30%-owned subsidiary of the Company and the financial results, assets and liabilities of the Target Company will be consolidated into the financial statements of the Group.

The Board expects that the Acquisition will have the following financial effects on the Group:

Earnings

For the financial year ended 31 December 2014, the Group recorded audited net profit attributable to the equity holders of the Company of approximately RMB413.1 million (equivalent to approximately HK$516.4 million). As set out in the accountant’s report on the Target Group in Appendix II to this circular, the consolidated net profit before and after taxation of the Target Group for the year ended 31 December 2014 amounted to approximately RMB762.2 million (equivalent to approximately HK$952.8 million) and RMB651.7 million (equivalent to approximately HK$814.6 million), respectively. After Completion, the financial results of the Target Group will be consolidated into the Group’s

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LETTER FROM THE BOARD

consolidated financial statements. 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.

Assets and liabilities

Appendix III to this circular contains the unaudited pro forma consolidated balance sheet of the Enlarged Group which has been prepared for the purpose of illustrating the effects of the Acquisition on the assets and liabilities of the Group as if Completion had taken place on 31 December 2014. As set out in Appendix III to this circular, the total assets and total liabilities of the Group would increase by approximately RMB1,840.5 million (equivalent to approximately HK$2,300.6 million) and RMB867.9 million (equivalent to approximately HK$1,084.9 million), respectively, while the net assets attributable to the Shareholders would be increased by approximately RMB646.3 million (equivalent to approximately HK$807.9 million) to RMB3,830.1 million (equivalent to approximately HK$4,787.6 million).

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, the aggregate balance of cash and cash equivalents and deposit with banks of the Enlarged Group would be decreased to a negative balance of approximately RMB7,392.6 million (equivalent to approximately HK$9,240.8 million) and the Enlarged Group would record net current liabilities of approximately RMB5,407.5 million (equivalent to approximately HK$6,759.4 million) assuming Completion had taken place on 31 December 2014. Such balances have not reflected the net proceeds raised from the Sinopharm Subscription, the Yang Subscription, the Wang Subscription and the Investors Subscriptions which were completed after 31 December 2014 and were intended to be used to fund the Acquisition. The Directors expect that the Enlarged Group will record a positive cash balance and net current assets when taking into account the net proceeds of approximately HK$2,798.4 million from the Sinopharm Subscription (which was completed on 12 May 2015), the net proceeds of approximately HK$199.8 million from the Yang Subscription (which was completed on 12 May 2015), the net proceeds of approximately HK$199.8 million from the Wang Subscription (which was completed on 12 May 2015), the net proceeds of approximately HK$4,955.8 million from the Investors Subscriptions (which were completed on 12 and 14 May 2015), and the potential bank borrowings of approximately RMB1.2 billion (equivalent to approximately HK$1.5 billion) to fund the Total Consideration. The Company has obtained a term sheet from a state-owned commercial bank in the PRC pursuant to which the bank conditionally agreed to grant a banking facility of RMB2 billion to the Company for the purpose of financing the Acquisition. Based on the above, the Directors are of the view that the Enlarged Group will have sufficient funding and 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, a goodwill of approximately RMB6,493 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 Completion. The Directors are of the view that the goodwill of approximately RMB6,493 million is solely derived from applicable accounting standards which would not have any

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future impact on the cashflows 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 brand name, customer base and distribution network, and relationship with existing stakeholders.

For the purpose of preparing the unaudited pro forma financial information of the Enlarged Group, the Directors have conducted assessment of impairment loss on goodwill in accordance with the applicable accounting standards, including but not limited to assessment on the future cashflows and profits of the Target Group, recent economic and legal environment in which the Target Group operates and the carrying amount of the assets and liabilities of the Target Group.

In addition, the Directors consider it common that the fair values of pharmaceutical companies are higher than their net asset values. As at the Latest Practicable Date, the Comparable Companies were trading at price-to-book ratios ranging from approximately 1.2 to 21.4 times with mean and median of approximately 6.6 and 5.2 times. The price-to-book ratio implied by the Total Consideration of approximately RMB8,736 million and the audited net asset value attributable to shareholders of the Target Company as at 31 December 2014 of approximately RMB2,570 million was approximately 3.4 times, which is below the mean and median of the price-to-book ratios of the Comparable Companies.

Based on the Directors’ assessment of impairment loss on goodwill in accordance with the applicable accounting standards and assessment of the valuation multiples of the Comparable Companies and taking into account the basis of determining the Total Consideration as set out in the paragraph headed “Total Consideration” above, the Directors consider that there is no indication of impairment on the goodwill and are of the view that the Total Consideration is fair and reasonable.

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 the applicable accounting standards. The Company’s auditor will perform the 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(c) to the pro forma financial information, the amount of goodwill of the Target Group and the 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 Completion Date. In addition, intangible assets of the Target Group which were not otherwise recognised in the historical financial information may be recognised at their fair value upon Completion. Therefore, the amounts of goodwill and of other assets and liabilities of the Target Group may be different from the estimates used in the preparation of the unaudited pro forma financial information in Appendix III to this circular.

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LETTER FROM THE BOARD

THE VENDOR C TRUSTEE SUBSCRIPTION AGREEMENT

Date

15 May 2015

Parties

(i) The Company, as issuer; and
(ii) the Trustee, as subscriber.

The Trustee is a company incorporated in the PRC with limited liability and is principally engaged in fund trust, management of investment funds and provision of various financial services. Pursuant to an agreement between Vendor C and the Trustee, the Trustee shall conditionally subscribe for the Vendor C Shares in accordance with the Vendor C Trustee Subscription Agreement for the benefit of Vendor C using its status as a Qualified Domestic Institutional Investor under the PRC foreign exchange regulations.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, (i) Vendor C, the Trustee and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons (as defined under the Listing Rules); and (ii) save for the 8,278,000 Shares (representing approximately 0.19% of the issued Shares) held by the Trustee and the 3,237,780 Shares (representing approximately 0.08% of the issued Shares) held by Vendor C, Vendor C, the Trustee and their respective associates did not hold any Shares as at the Latest Practicable Date.

Subject matters

Pursuant to the Vendor C Trustee Subscription Agreement, the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor C for, 80,149,157 Vendor C Shares at the total subscription price equivalent to the Vendor C Trustee Payment in the amount of RMB270,070,600 (equivalent to approximately HK$337.6 million) at the Issue Price of HK$4.212 per Vendor C Share. The exchange rate at which the Vendor C Trustee Payment is converted into HK$ is fixed at RMB1: HK$1.25. The Vendor C Trustee Payment will be released from the escrow account as agreed among the Company, Vendor C and the Trustee to the Company on the date of completion of the Vendor C Subscription.

The Vendor C Shares

Assuming that there is no change in the number of issued Shares other than the allotment and issue of the Vendor C Shares and the Vendor E Shares since the Latest Practicable Date up to the date of completion of the Vendors Subscriptions, the 80,149,157 Vendor C Shares represent:

(i) approximately 1.87% of the issued Shares as at the Latest Practicable Date;

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LETTER FROM THE BOARD

(ii) approximately 1.84% of the issued Shares as enlarged by the allotment and issue of the Vendor C Shares; and
(iii) approximately 1.79% of the issued Shares as enlarged by the allotment and issue of the Vendor C Shares and the Vendor E Shares.

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

Conditions precedent

Completion of the Vendor C Subscription is subject to the fulfilment or waiver (as the case may be) of the following conditions:

(i) the Company having obtained all necessary approvals and consents from the Stock Exchange and other relevant regulatory authorities in Hong Kong in relation to the Vendor C Subscription, including but not limited to the approval of the Stock Exchange for the issue of the circular in relation to the Vendor C Subscription;
(ii) the resolution(s) approving the Vendor C Subscription having been passed by the independent Shareholders at the EGM;
(iii) the Listing Committee of the Stock Exchange having granted the listing of, and permission to deal in, the Vendor C Shares;
(iv) all representations and warranties given by the Trustee in the Vendor C Trustee Subscription Agreement remaining true and accurate in all material respects on the date of completion of the Vendor C Subscription;
(v) the Company having executed and delivered to the Trustee the Vendor C Trustee Subscription Agreement;
(vi) the representations and warranties given by the Company in the Vendor C Trustee Subscription Agreement remaining true and accurate in all material respects on the date of completion of the Vendor C Subscription; and
(vii) completion of the First Acquisition Agreement having taken place and the Vendor C Trustee Payment having been paid into an escrow account as agreed among the Company, Vendor C and the Trustee.

The Company may at any time waive the condition referred to in (iv) above by written notice to the Trustee. The Trustee may at any time waive the conditions referred to in (v) and (vi) above by written notice to the Company. The Company and the Trustee may at any time jointly waive the condition referred to in (vii) above.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, condition (v) has been satisfied, and the Company does not have any intention to waive any conditions referred to above.

Completion

The Company shall serve a written notice to the Trustee to request for completion of the Vendor C Subscription when all of the conditions precedent as set out above (other than those conditions precedent which are expressed to be satisfied upon completion of the Vendor C Subscription) have been fulfilled or waived (as the case may be). Completion of the Vendor C Subscription shall then take place on the sixth Business Day following the issue of such written notice (or such other earlier date as the parties may agree).

It is intended that completion of the Vendor C Trustee Subscription Agreement will take place simultaneously with completion of the Vendor E Trustee Subscription Agreement and the Acquisition Agreements.

Lock-up

The Trustee undertakes to the Company that it will not transfer any Vendor C Shares and will not allow Vendor C to transfer his rights and interests under the trust arrangement between Vendor C and the Trustee till the expiration of 24 months from the date of completion of the Vendor C Subscription.

THE VENDOR E TRUSTEE SUBSCRIPTION AGREEMENT

Date

15 May 2015

Parties

(i) The Company, as issuer; and
(ii) the Trustee, as subscriber.

The Trustee is a company incorporated in the PRC with limited liability and is principally engaged in fund trust, management of investment funds and provision of various financial services. Pursuant to an agreement between Vendor E and the Trustee, the Trustee shall conditionally subscribe for the Vendor E Shares in accordance with the Vendor E Trustee Subscription Agreement for the benefit of Vendor E using its status as a Qualified Domestic Institutional Investor under the PRC foreign exchange regulations.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, (i) Vendor E, the Trustee and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons (as defined under the Listing Rules); and (ii) save for the 8,278,000 Shares (representing approximately 0.19% of the issued Shares) held by the Trustee, Vendor E, the Trustee and their respective associates did not hold any Shares as at the Latest Practicable Date.

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LETTER FROM THE BOARD

Subject matters

Pursuant to the Vendor E Trustee Subscription Agreement, the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor E for, 117,600,605 Vendor E Shares at the total subscription price equivalent to the Vendor E Trustee Payment in the amount of RMB396,267,000 (equivalent to approximately HK$495.3 million) at the Issue Price of HK$4.212 per Vendor E Share. The exchange rate at which the Vendor E Trustee Payment is converted into HK$ is fixed at RMB1: HK$1.25. The Vendor E Trustee Payment will be released from the escrow account as agreed among the Company, Vendor E and the Trustee to the Company on the date of completion of the Vendor E Subscription.

The Vendor E Shares

(iv) approximately 2.74% of the issued Shares as at the Latest Practicable Date;
(v) approximately 2.67% of the issued Shares as enlarged by the allotment and issue of the Vendor E Shares; and
(vi) approximately 2.62% of the issued Shares as enlarged by the allotment and issue of the Vendor C Shares and the Vendor E Shares.

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

Conditions precedent

Completion of the Vendor E Subscription is subject to the fulfilment or waiver (as the case may be) of the following conditions:

(i) the Company having obtained all necessary approvals and consents from the Stock Exchange and other relevant regulatory authorities in Hong Kong in relation to the Vendor E Subscription, including but not limited to the approval of the Stock Exchange for the issue of the circular in relation to the Vendor E Subscription;
(ii) the resolution(s) approving the Vendor E Subscription having been passed by the independent Shareholders at the EGM;

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LETTER FROM THE BOARD

(iii) the Listing Committee of the Stock Exchange having granted the listing of, and permission to deal in, the Vendor E Shares;
(iv) all representations and warranties given by the Trustee in the Vendor E Trustee Subscription Agreement remaining true and accurate in all material respects on the date of completion of the Vendor E Subscription;
(v) the Company having executed and delivered to the Trustee the Vendor E Trustee Subscription Agreement;
(vi) the representations and warranties given by the Company in the Vendor E Trustee Subscription Agreement remaining true and accurate in all material respects on the date of completion of the Vendor E Subscription; and
(vii) completion of the Second Acquisition Agreement having taken place and the Vendor E Trustee Payment having been paid into an escrow account as agreed among the Company, Vendor E and the Trustee.

As at the Latest Practicable Date, condition (v) has been satisfied, and the Company does not have any intention to waive any conditions referred to above.

Completion

The Company shall serve a written notice to the Trustee to request for completion of the Vendor E Subscription when all of the conditions precedent as set out above (other than those conditions precedent which are expressed to be satisfied upon completion of the Vendor E Subscription) have been fulfilled or waived (as the case may be). Completion of the Vendor E Subscription shall then take place on the sixth Business Day following the issue of such written notice (or such other earlier date as the parties may agree).

It is intended that completion of the Vendor E Trustee Subscription Agreement will take place simultaneously with completion of the Vendor C Trustee Subscription Agreement and the Acquisition Agreements.

Lock-up

The Trustee undertakes to the Company that it will not transfer any Vendor E Shares and will not allow Vendor E to transfer her rights and interests under the trust arrangement between Vendor E and the Trustee till the expiration of 24 months from the date of completion of the Vendor E Subscription.

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LETTER FROM THE BOARD

THE ISSUE PRICE

The Issue Price of HK$4.212 per Share represents:

(i) a discount of approximately 36.18% to the closing price of HK$6.60 per Share as quoted on the Stock Exchange on the Latest Practicable Date;
(ii) a discount of approximately 28.37% to the closing price of HK$5.88 per Share as quoted on the Stock Exchange on 15 May 2015, being the Last Trading Day;
(iii) a discount of approximately 28.61% to the average of the closing prices per Share 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$5.90;
(iv) a discount of approximately 28.97% to the average of the closing prices per Share as quoted on the Stock Exchange for the last thirty consecutive full trading days up to and including the Last Trading Day of approximately HK$5.93; and
(v) a premium of approximately 48.8% over the consolidated net asset value per Share of the Group attributable to the Shareholders of approximately HK$2.831 (based on the audited consolidated net asset value of the Group attributable to the Shareholders as at 31 December 2014 of approximately RMB3,183,756,000 (equivalent to approximately HK$3,979.7 million) and adjusted by the aggregate net proceeds of HK$8,153.8 million from the Subscriptions and the Investors Subscriptions completed on 12 May 2015 and 14 May 2015, and 4,285,997,868 Shares in issue as at the Latest Practicable Date).

Pursuant to the First Acquisition Agreement and the Second Acquisition Agreement, the Issue Price for the Vendor C Shares and the Vendor E Shares shall be equal to 90% of the lowest price at which the Company issues new Shares to any person for the purpose of financing the Acquisition after the date of the various Acquisition Agreements and before the date of completion of the Acquisition (other than any new Shares issued pursuant to the conversion of any convertible securities of the Company or any employee share option schemes or similar plans). Accordingly, the Issue Price was fixed at HK$4.212 per Share (i.e. 90% of HK$4.68 per Share, which is the lowest price at which the Company issued new Shares for the purpose of financing the Acquisition). Vendor C and Vendor E are the key management of the Target Group and will be retained by the Company to continue to manage the business operations of the Target Group. The Company considers it in the interest of the Company for Vendor C and Vendor E to become Shareholders such that their interests in the Company will align with other Shareholders. In addition, as the Vendor C Shares and the Vendor E Shares will be subject to a lock-up period of 24 months, the Directors consider it reasonable to set the Issue Price at a discount to the lowest price at which the Company issued new Shares for the purpose of financing the Acquisition.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE OF THE COMPANY

The table below illustrates the shareholding structures of the Company (i) as at the Latest Practicable Date; and (ii) immediately after completion of the Trustee Subscription Agreements:

Sinopharm Mr. Yang Bin and Profit Channel Development Limited (Note 1) Mr. Wang Xiaochun and Hanmax Investment Limited (Note 2) Sub-total The Trustee (Note 3) Public Shareholders Total	(i) As at the Latest Practicable Date No. of Shares % 1,614,313,642 37.66 376,735,042 8.79 376,735,042 8.79 2,367,783,726 55.24 8,278,000 0.19 1,909,936,142 44.57 4,285,997,868 100.00	(ii) Immediately after completion of the Trustee Subscription Agreements No. of Shares % 1,614,313,642 36.01 376,735,042 8.40 376,735,042 8.40 2,367,783,726 52.81 206,027,762 4.59 1,909,936,142 42.60 4,483,747,630 100.00	(ii) Immediately after completion of the Trustee Subscription Agreements No. of Shares % 1,614,313,642 36.01 376,735,042 8.40 376,735,042 8.40 2,367,783,726 52.81 206,027,762 4.59 1,909,936,142 42.60 4,483,747,630 100.00
			52.81 4.59 42.60
			100.00

Notes:

Profit Channel Development Limited is wholly owned by Mr. Yang who is an executive Director and the managing director of the Company.
Hanmax Investment Limited is wholly owned by Mr. Wang who is an executive Director.
As at the Latest Practicable Date, 8,278,000 Shares were held by the Trustee. Immediately after completion of the Trustee Subscription Agreements, 8,278,000 Shares will be held by the Trustee directly, 80,149,157 Shares will be held by the Trustee on behalf of and for the benefit of Vendor C pursuant to the Vendor C Trustee Subscription Agreement and 117,600,605 Shares will be held by the Trustee on behalf of and for the benefit of Vendor E pursuant to the Vendor E Trustee Subscription Agreement.

EQUITY FUND RAISING ACTIVITIES OVER THE PAST 12 MONTHS

		Estimated net
Date of		proceeds to be	Intended use of net
announcement	Fund raising activity	raised	proceeds	Actual use of net proceeds
30 March 2015	Subscription of	HK$2,798.4 million	To finance part of the	The proceeds have not been
	598,290,598 new Shares		consideration for the	utilised as the Acquisition
	by Sinopharm		Acquisition or other	has not yet been completed
			potential investments in the
			TCM industry

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LETTER FROM THE BOARD

		Estimated net
Date of		proceeds to be	Intended use of net
announcement	Fund raising activity	raised	proceeds	Actual use of net proceeds
30 March 2015	Subscription of	HK$199.8 million	To finance part of the	The proceeds have not been
	42,735,042 new Shares		consideration for the	utilised as the Acquisition
	by Mr. Yang		Acquisition or other	has not yet been completed
			potential investments in the
			TCM industry
30 March 2015	Subscription of	HK$199.8 million	To finance part of the	The proceeds have not been
	42,735,042 new Shares		consideration for the	utilised as the Acquisition
	by Mr. Wang		Acquisition or other	has not yet been completed
			potential investments in the
			TCM industry
30 March 2015	Subscription of	HK$3,964.4 million	To finance part of the	The proceeds have not been
	854,664,000 new Shares		consideration for the	utilised as the Acquisition
	by 25 professional and		Acquisition or other	has not yet been completed
	institutional investors		potential investments in the
			TCM industry
14 April 2015	Subscription of	HK$991.4 million	To finance part of the	The proceeds have not been
	213,674,000 new Shares		consideration for the	utilised as the Acquisition
	by City-Scape Pte. Ltd.		Acquisition or other	has not yet been completed
			potential investments in the
			TCM industry

Save as disclosed above, the Company has not conducted any equity fund raising activities in the 12 months immediately preceding the date of the announcement regarding the Vendors Subscriptions.

REASONS FOR AND BENEFITS OF THE ACQUISITION AND THE VENDORS SUBSCRIPTIONS

The principal business activities of the Group are the manufacture and sale of TCM and pharmaceutical products in the PRC with a focus on respiratory system drugs, nasal preparations, cerebro-cardiovascular drugs, rheumatic diseases and bone injury drugs, and orthopaedic drugs. A number of its products are listed on the new edition of National Essential Drugs List and/or the National Drugs List for Basic Medical Insurance in the PRC, some of which are exclusively produced by the Group.

The principal business activity of the Target Group is the production and sale of concentrated TCM granules. According to a third party research report, the market size of the concentrated TCM granules grew from approximately RMB228 million in 2006 to approximately RMB4,200 million in 2013, representing a compound annual growth rate of over 50% for the period from 2006 to 2013. According to “2013-2018年中國現代中藥配方顆粒行業發展趨勢及投資預測報告” (2013-2018 PRC Concentrated TCM Granules Industry Trends and Investment Forecast Report*) published by 中商情報網 (askci Corporation), concentrated TCM granules are expected to maintain an annual growth rate of approximately 30% in the coming years and the overall size of the market is expected to exceed RMB11 billion and RMB18.8 billion in 2016 and 2018, respectively.

for identification only

– 43 –

LETTER FROM THE BOARD

Currently, the market size of concentrated TCM granules is significantly smaller than that of 中藥飲片 (TCM decoction pieces) and 中成藥 (ready-prepared TCM). However, the Directors believe that the market development and customer acceptance of concentrated TCM granules are underway given the effectiveness, compatibility and convenience of concentrated TCM granules and that this market will eventually capture a portion of the market shares of the TCM decoction pieces and ready-prepared TCM, which have market sizes of approximately RMB100 billion and RMB200 billion, respectively.

As mentioned above, the Target Company and GD Yifang are two of the six enterprises approved by the CFDA to manufacture concentrated TCM granules in the PRC, and together they have a market share of over 50% in terms of revenue in 2013 in the PRC. Since the Target Group’s commencement of the concentrated TCM granules business in 1992, the Target Group has accumulated valuable experience, knowledge, technology and expertise in the industry and possesses a well-established customer network, especially with over 5,000 hospitals in the PRC. In view of the growing prospects of the concentrated TCM granules industry, the Directors believe that the Acquisition allows the Group to gain access to the concentrated TCM granules market in the PRC and take advantage of the expected industry growth. In addition, the Group expects to realise synergies as a result of the Acquisition through, among others, (i) the sharing of resources in overall management, research and development, raw materials and production, marketing, sales and distribution; (ii) the cross-selling benefits derived from the customer base of the Group and the Target Group; (iii) expanded management expertise; and (iv) additional negotiation power relative to both customer and supplier relationships.

The gross proceeds from the Vendor C Subscription will be approximately RMB270.1 million (equivalent to approximately HK$337.6 million). Taking into account the estimated expenses incidental to the Vendor C Subscription of approximately HK$0.1 million, the net proceeds from the Vendor C Subscription will be HK$337.5 million. Accordingly, the net price per Vendor C Share will be approximately HK$4.211.

The gross proceeds from the Vendor E Subscription will be approximately RMB396.3 million (equivalent to approximately HK$495.3 million). Taking into account the estimated expenses incidental to the Vendor E Subscription of approximately HK$0.1 million, the net proceeds from the Vendor E Subscription will be HK$495.2 million. Accordingly, the net price per Vendor E Share will be approximately HK$4.211.

The Company intends to apply the proceeds from the Vendors Subscriptions to finance part of the Total Consideration. Vendor C and Vendor E are the key management of the Target Group. The undertakings to lock up the Vendor C Shares and the Vendor E Shares demonstrate a long-term commitment and support from Vendor C and Vendor E to the continuous development of the Target Group.

After conducting assessment of impairment loss on goodwill in accordance with the applicable accounting standards and assessment of the valuation multiples of the Comparable Companies and taking into account the basis of determining the Total Consideration as set out in the paragraph headed “Total Consideration” above, the Directors consider that there is no indication of impairment on the goodwill and are of the view that the Total Consideration is fair and reasonable.

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LETTER FROM THE BOARD

Based on the above, the Directors consider that the terms of the Acquisition Agreements and the Trustee Subscription Agreements are fair and reasonable and the Acquisition and the Vendors Subscriptions are in the interests of the Company and the Shareholders as a whole.

LISTING RULES IMPLICATIONS

As more than one of the applicable percentage ratios (as defined under the Listing Rules) exceed 100%, the Acquisition constitutes a very substantial acquisition for the Company under the Listing Rules. The Acquisition will be subject to the reporting, announcement and shareholders’ approval requirements under the Listing Rules.

The Vendor C Shares and the Vendor E Shares will be issued under specific mandates to be sought for approval from the Shareholders by way of poll at the EGM.

The EGM will be convened and held for the purpose of considering and, if thought fit, approving the resolutions in respect of the Acquisition Agreements, the Trustee Subscription Agreements and the transactions contemplated thereunder.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, as at the Latest Practicable Date, the Trustee held 8,278,000 Shares and Vendor C held 3,237,780 Shares, representing approximately 0.19% and 0.08% of the issued Shares, respectively. Vendor C and its associates shall abstain from voting on the resolutions to be proposed at the EGM approving the First Acquisition Agreement, the Vendor C Trustee Subscription Agreement and the transactions contemplated thereunder. The Trustee and its associates shall abstain from voting on the resolutions to be proposed at the EGM approving the First Acquisition Agreement, the Second Acquisition Agreement, the Vendor C Trustee Subscription Agreement, the Vendor E Trustee Subscription Agreement and the transactions contemplated thereunder.

EGM

A notice convening the EGM to be held at Conference Room, 4th Floor, No.1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China, on Monday, 13 July 2015 at 2:30 p.m. is set out on pages EGM-1 and EGM-5 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 Room 1601, Emperor Group Centre, 288 Hennessy Road, Wanchai, 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

Having considered the reasons for and benefits of the Acquisition and the Vendors Subscriptions as discussed above, the Directors consider that the Acquisition and the Vendors Subscriptions are fair and reasonable and in the interests of the Company and the

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LETTER FROM THE BOARD

Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the EGM approving the Acquisition and the Vendors Subscriptions.

GENERAL

Your attention is drawn to the additional information set out in the appendices to this circular and the EGM Notice.

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

– 46 –

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 2012, 2013 and 2014 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 2012 published on 18 April 2013 (pages 47 to 112);
annual report of the Company for the year ended 31 December 2013 published on 28 April 2014 (pages 55 to 138); and
annual report of the Company for the year ended 31 December 2014 published on 28 April 2015 (pages 54 to 132).

2. MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

FOR THE YEAR ENDED 31 DECEMBER 2014

Group overview

The Group is a leading pharmaceutical company in China with excellent brands. It has a total of 332 products and 526 product specifications, 63 of which are national exclusive products. The Group has 58 products being listed on the 2012 edition of EDL, 7 of which are exclusive products, namely Xianling Gubao Capsule/Tablet（仙靈骨葆膠囊╱片）, Yu Ping Feng Granule （玉屏風顆粒）, Bi Yan Kang Tablet （鼻炎康片）, Jingshu Granule （頸舒顆粒）, Moisturising & Anti-Itching Capsule （潤燥止癢膠囊）, Fengshi Gutong Capsule （風濕骨痛膠囊） and Zaoren Anshen Capsule （棗仁安神膠囊）. The Group has over 200 products being listed on National Drugs List for Basic Medical Insurance, 26 of which are exclusive products. The Group has accumulated extensive technical experience in extraction of Chinese medicinal herbs, preparation of modern Chinese medicine, sustained or controlled release preparation, manufacturing of traditional Big Candid Pills（大蜜丸）and enhancement of quality.

The Group has 11 manufacturing facilities in Foshan of Guangdong Province, Guiyang and Kaili of Guizhou Province, Xuancheng of Anhui Province, Jining of Shandong Province and Xining of Qinghai Province, with over 49 GMP (2010 edition) certified production lines and annual production capacity of 870 million packs of granules, 5.65 billion tablets and 3.2 billion capsules, as well as 22,000 tonnes of Chinese medicine preprocessing and extraction.

During the year under review, sales of TCM accounted for approximately 88.5% of the Group’s turnover, sales of chemical medicine made up approximately 10.0% of the turnover, and sales of bio-medicine accounted for approximately 1.5%.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Industry overview

More Emphasis on Healthcare at Grass-Roots Level

The reform of healthcare system of the State focus on strengthening healthcare protection at grass-roots level. The key points include expanding the scope and raising the level of medical insurance coverage, improving the overall capability of primary hospitals and reinforcing the use of essential drugs.

On 28 May 2014, the General Office of State Council promulgated the “Notice of Key Tasks in Intensifying Reform of Healthcare System in 2014”（深化醫藥衛生體制改革 2014年重點工作任務的通知）. It highlighted the comprehensive reform of public hospital at county level and initiated the second pilot scheme of the reform, aiming at covering over 50% of the counties and 500 million rural residents in China.

On 17 July 2014, the National Health and Family Planning Commission (“Health Commission”) issued the “Notice on Several Key Tasks of New Rural Cooperative Medical System” (“NCMS”), （《關於做好新型農村合作醫療幾項重點工作的通知》）, proposing raising the financing and protection level of NCMS in 2014, and increasing the subsidy to NCMS by all levels of government to RMB320 per person per year, and the average payment by individuals to RMB90 per person per year, respectively. Each region should adjust and optimize the compensation plan. The reimbursement ratio of in-patient care under NCMS coverage should be over 75%, and the medication expenses reimbursement ratio of out-patient should be raised to around 50%.

On 26 August 2014, the Health Commission published the “Notice on Enhancing the Overall Capability of Hospitals at County Level”（《全面提升縣級醫院綜合能力工作方案的通知》）, proposing to build up the capability of hospitals at county level with focuses on talent, technology and key specialist. It specified that in stage 1, from 2014 to 2017, 500 hospitals at county level would be chosen among those under the pilot scheme of reform of public hospital at county level based on the infrastructure and medical service capability, aiming to improve the overall capability of such 500 hospitals. In stage 2 (2018-2020), the overall capability of all hospitals at county level should be enhanced.

On 23 January 2015, the Health Commission published the “Key Tasks of Healthcare and Family Planning Work in 2015”（《2015年衛生計生工作要點》）, with the key points of 1) to formulate and carry out the “Opinion on the Full-Scale Implementation of Overall Reform of Public Hospitals at County Level”（《關於全面推廣縣級公立醫院綜合改革的實施意見》）in order to expand the reform to all counties in the country; 2) to improve the national medical insurance system and increase government subsidy to urban resident medical insurance and NCMS; 3) to enhance the essential drug system and its operation at primary healthcare institutions by strengthening the stocking and prescription of essential drugs; 4) to improve the supply system of drugs and to link the sourcing mechanisms of essential drugs and non-essential drugs; 5) to promote impartiality in public basic healthcare service; 6) to push forward the system of tiered medical service by producing guidance and pilot scheme and to start trial of tiered medical service in the region undertaking urban public hospital reform; 7) to

– I-2 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

develop healthcare service sector, with focus on optimizing the macro-environment of private hospitals, regulating the reform of public hospitals, carrying forward the pilot scheme of reform for hospitals owned by SOE, and improving policies of foreign investment on healthcare.

The Group has 7 exclusive products listed on the 2012 edition EDL, and always keeps track of the primary healthcare institution market, including penetrating into hospitals at county level and rural/community hospitals with a strong sales and marketing team of over 1,600 staff. The Group will benefit from government’s increasing focus and allocation of more resources in the primary healthcare sector, and is confident to achieve rapid growth in the primary healthcare market.

Flourishing Chinese Medicine Industry

The culture of Chinese medicine is an indispensible element in Chinese civilization, and is a treasure for Chinese people. TCM are made from natural substances with minimal toxic side effect and drug resistance, and the expenses of treatment are relatively lower. TCM has unique efficacy in rebalancing bodily functions of human being, prevention of illness, and treatment of chronic diseases. As the aging population in China has created huge demand for healthcare products and services, it is high time to carry forward and promote Chinese medicine.

On 24 July 2014, the Legal Affairs Office of the State Council published the notice of invitation for public opinion on “Chinese Medicine Law of the People’s Republic of China (Draft for Comments)” （《中華人民共和國中醫藥法（徵求意見稿）》）, citing the key points of: 1) Chinese medicine, i.e. TCM, is the collective name of the medicines of all nationalities in China. It has specific theories and systems with the characteristics of Chinese culture, which is different from western medicine; 2) the government encourages TCM practitioners to coach apprentices in order to nurture TCM physicians and technicians, while engaging in TCM practices; 3) when making up TCM preparations, healthcare institutions should acquire “Dispensing Permit for Medical Organization” （《醫療機構製劑許可證》）according to the stipulations of “Law on the Administration of Pharmaceuticals of the People’s Republic of China” （《中華人民共和國藥品管理法》）. An organization should make filing at the local drug administration authority when entrusting subcontractors to make up TCM preparations.

On 29 July 2014, China Food and Drug Administration (“CFDA”) issued the “Notice on Strengthening the Supervision and Administration of Extraction and Extracts during the Production of TCM”（《加強中藥生產中提取和提取物監督管理的通知》） , requiring: 1) TCM manufacturers must possess extraction ability which is appropriate to the type of products and scale of production. Starting from 1 January 2016, TCM extraction by subcontractors will be forbidden, with the exception of setting up extraction workshop at different location or sharing extraction workshop between companies with shareholding relationship. 2) The “Detailed Rules for Implementing the Administration of Filing of TCM Extracts”（《中藥提取物備案管理實施細則》）specify the scope, procedures and requirement of the filing, impose the responsibility of quality on the users of TCM extracts, i.e. producers of finished products. No further approval is needed for those TCM extracts for which fillings have been made.

– I-3 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

With an aging population, the trend of “combining medical service with care for the old” is inevitable. For those elderly who are incapable of taking care of themselves in particular, combining care service with medical treatment provides a good solution to their demand. At the end of 2014, Jiangsu Province selected sites in 6 cities to build up TCM nursing home in order to set up models for others. The TCM nursing homes will be owned or managed by TCM hospitals so that the elderly could benefit from TCM ways of keeping good health.

Through TCM legislations and regulating TCM products, the government strengthens the supervision of TCM industry and enhances the quality of TCM products, this will benefit large companies with operation in scale. With focus on TCM business, the Group has always been emphasizing on operation management and product quality, and has accumulated rich experience in the areas of TCM herb sourcing, extracting and finished products manufacturing. While investing on research and development of new drugs, the Group applied the method of evidence-based medicine to its existing key TCM products, and carried out several phase IV clinical trails with the aim to collect more scientific data to support market promotion. The Group is an industry consolidator, and will be the leader of TCM industry in China.

Reform of Pricing System of Drugs

On 8 May 2014, National Development and Reform Commission (“NDRC”) released the “Notice of the Issues Related to Improving the Pricing System of Low-Price Drugs” （《關於改進低價藥品價格管理有關問題的通知》）, publishing the list of low-price drugs of which the pricing is controlled by NDRC. It also requested the price administration authority of each province to release, before 1 July 2014, the list of low-price drugs of which the pricing is controlled by the local authority.

It is reported that NDRC issued a draft for comments to the pricing departments of each province at the end of October 2014 to discuss the liberalization of drug pricing control. The document proposed that by the end of 2014, it would first liberalize the pricing control of four categories of drugs, namely plasma-based products, preventative and immunity drugs and contraceptive drugs and devices under centralized sourcing by the government, class one psychotropic and anaesthetic drugs, and patented drugs. Regarding the price adjustment of the drugs on the National Drugs List for Basic Medical Insurance, NDRC proposed that the mechanism should be changed to allow medical insurance department, together with other government authorities, to fix the reimbursement standards, and the actual purchase and selling prices would then be determined by market competition.

The reform of pricing system of drugs will promote the market-based pricing mechanism for pharmaceutical products, which will benefit pharmaceutical companies with good quality and good services to win competition advantages. Setting up a medical insurance reimbursement standard will change the current trend of focusing on price only during the tender process. Doctors and patients will have more freedom in the selection of drugs, and manufacturers will focus on the quality and efficacy of their products, rather than making every effort to cut cost to reduce price. The introduction of the low-price drug list will allow pharmaceutical companies more room to improve

– I-4 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

their product quality and to enhance market promotion. The Group has over 100 products being included in NDRC’s low-price drug list, including the exclusive EDL product Bi Yan Kang Tablet（鼻炎康片）. The Group will further verify the applicable symptoms and diseases of the existing major products by means of in-depth clinical trials, so that to get well prepared for the forthcoming changes brought by the reform of pricing system of drugs.

Business review

Sales of Products

During the year under review, the Group’s turnover increased by 92.9% from RMB1,394,613,000 for the corresponding period last year to RMB2,690,173,000, which was mainly attributable to the full-year consolidation of the financial statements of Tongjitang. At the same time, the Group’s 7 exclusive products listed on the National Essential Drug List recorded satisfactory growth in sales revenue.

Analysis by TCM, Chemical and Bio-medicine:

TCM Chemical medicine Bio-medicine Total	For the year ended 31 December 2014 Percentage to turnover 2013 Percentage to turnover RMB’000 RMB’000 2,380,766 88.5% 1,160,708 83.2% 269,688 10.0% 195,424 14.0% 39,719 1.5% 38,481 2.8% 2,690,173 100.0% 1,394,613 100.0%	Change 105.1% 38.0% 3.2%
		92.9%

– I-5 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Sales Analysis of Top Ten Products:

Xianling Gubao （仙靈骨葆） Bi Yan Kang Tablet （鼻炎康片） Yu Ping Feng Granule （玉屏風顆粒） Jingshu Granule （頸舒顆粒） Moisturising & Anti-Itching Capsule （潤燥止癢膠囊） Sheng Tong Ping （聖通平） Gao De （高德） Feng Liao Xing Medicinal Wine （馮了性藥酒） Zaoren Anshen Capsule （棗仁安神膠囊） Fengshi Gutong Capsule （風濕骨痛膠囊） Other products Total	For the year ended 31 December 2014 Percentage to turnover 2013 Percentage to turnover RMB’000 RMB’000 850,358 31.6% 207,340 14.9% 255,841 9.5% 215,338 15.4% 250,049 9.3% 218,459 15.7% 200,534 7.5% 38,238 2.7% 158,455 5.9% 30,942 2.2% 87,303 3.2% 90,231 6.5% 87,113 3.2% 61,066 4.4% 81,585 3.0% 85,102 6.1% 57,909 2.2% 8,364 0.6% 52,790 2.0% 8,212 0.6% 608,236 22.6% 431,321 30.9% 2,690,173 100.0% 1,394,613 100.0%	Change 310.1% 18.8% 14.5% 424.4% 412.1% -3.2% 42.7% -4.1% 592.4% 542.8% 41.0%
		92.9%

Xianling Gubao （仙靈骨葆）, Jingshu Granule （頸舒顆粒）, Moisturising & Anti-Itching Capsule （潤燥止癢膠囊）, Zaoren Anshen Capsule （棗仁安神膠囊） and Fengshi Gutong Capsule（風濕骨痛膠囊）are main products of Tongjitang. The turnover of Tonjitang’s products in November and December 2013 was consolidated since the completion of acquisition.

Research and Development

In 2014, the Group passed the on-site inspection by CFDA regarding Fexofenadine/Pseudophedrine Sustained-release capsule（非索偽麻緩釋膠囊）, a class 3.2 drug, and obtained the new drug certificate and approval for production at the

– I-6 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

beginning of 2015. During the year under review, the Group also received notice of on-site inspection from CFDA regarding a TCM class 6 new drug-Wuwei Huoxiang Tablet （五味藿香片）which is for curing medium and mild depression. It is expected that the on-site inspection will be carried out in mid 2015.

During the year under review, the Group actively pushed forward the project of “Yu Ping Feng Granule （玉屏風顆粒）Re-evaluation”, which will provide more solid medical theoretical foundation for prescribing Yu Ping Feng Granule（玉屏風顆粒）to suitable patients, and in turn will help the academic promotion of this product in healthcare institutions at all levels. The projects which have already started include the study on the efficacy of bi-directional immunological regulation with Shanghai Institute of Pharmaceutical Industry（上海醫工院）, the multi-centre clinical trial for the treatment of COPD led by Dr. Zhong Nanshan, the multi-centre clinical trial for curing child repeated infection of upper respiratory tract, and the multi-centre clinical trial for the treatment of child asthma with high IgE and eosinophils increase and the study on molecular biology mechanism. The revaluation project is expected to last for several years, and may draw subsidy from CNPGC and government.

The Group will focus on investing in R&D projects of new drugs for neural degradation diseases, cerebro-cardiovascular drugs and drugs for diseases of the ageing population.

Progress of Investment Projects

Acquisition of Tianjiang Pharmaceutical

On 31 December 2014 and 15 January 2015, the Company entered into agreements with various vendors, pursuant to which the Company conditionally agreed to acquire approximately 81.48% equity interest in Tianjiang Pharmaceutical, with a total consideration between RMB7,595,900,000 and RMB8,346,000,000. The consideration will be paid in cash generated from equity finance, debt finance and internal resources. Details of the acquisition are set out in the announcement of the Company dated 27 January 2015.

Tianjiang Pharmaceutical is the largest manufacturer of concentrated TCM granules in China. The acquisition will allow the Company to get prompt access to the market of concentrated TCM granules with a leading position. Moreover, there is potential to achieve synergy between the Company and Tianjiang Pharmaceutical in terms of raw material purchasing, production, R&D and distribution network.

The transaction has not yet been completed till now.

Guizhou Zhongtai

On 27 January 2015 the Group and （中國生物技術股份有限公司） (China Biotechnology Co., Ltd.) (“China Biotechnology Co”) entered into an agreement to conditionally sell 31% equity interest in Guizhou Zhongtai Biological Technology Company Limited and its subsidiaries (“Guizhou Zhongtai”) to China Biotechnology

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Co for a consideration of RMB139,500,000. The Group considered that the main business of Guizhou Zhongtai was R&D, production and sale of plasma-based biopharmaceutical products, which was not the core business of the Group. The disposal of Guizhou Zhongtai will allow the Group to allocate more resources to focus on the development of TCM business.

The transaction can only be completed after all conditions specified in the agreement are met. Upon completion of the transaction, the Group will hold 20% equity interest of Guizhou Zhongtai, which will subsequently be sold to China Biotechnology Co at an appropriate price under certain conditions. As the controlling shareholder of China Biotechnology Co is CNPGC, this transaction constitutes a connected transaction.

For the year under review, turnover of Guizhou Zhongtai was approximately RMB39,719,000, and its loss was approximately RMB7,187,000.

Construction of Headquarters Building

On 19 April 2014, the Group acquired a land parcel at the south part of Kui Qi Road and the east part of Ling Nan Road, Chan Cheng Area, Foshan City of Guangdong Province. The Group will construct its headquarters, R&D center and ancillary facilities on the land parcel. The Group is working with an independent third party to develop the project. The allocation of the space of the buildings will be based on the amount of investment from each of the two parties. During the year under review, construction work was started. The Group expects the project to be completed in 2016.

Manufacturing Facilities at Guiyang Economic & Technology Development Zone

During the year under review, the construction work for the manufacturing base located at Guiyang Economic & Technology Development Zone, Guizhou Province (new factory of Tongjitang) has been started. It is expected the project will be completed in 2016. The new facilities will be in full compliance with new GMP requirements and, upon operational, will significantly improve the production capacity of the Group and meet the business expansion needs.

Financial review

Turnover

During the year under review, the Group’s turnover amounted to RMB2,690,173,000, representing an increase of 92.9% from RMB1,394,613,000 of last year. The growth of turnover was mainly attributable to the full-year consolidation of Tongjitang’s financial statements. In addition, synergy from the integration of the sales force also facilitated the growth of turnover.

– I-8 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Cost of sales and gross profit margin

During the year under review, the Group’s cost of sales was RMB1,035,850,000, representing an increase of 82.1% as compared to RMB568,834,000 for last year. Direct raw materials, direct labor and production overhead accounted for 74.8%, 9.6% and 15.6% of the total cost of sales, respectively, as compared to 74.3%, 13.0% and 12.7% for last year. Gross profit for the year was RMB1,654,323,000, or an increase of RMB828,544,000 from RMB825,779,000 of last year. Gross profit margin also rose to 61.5% from 59.2% of last year.

Other revenue

During the year under review, the Group’s other revenue was RMB38,413,000, representing an increase of 143.6% compared to RMB15,769,000 for last year.

Interest income Government grants Rental income Total	For the year ended 31 December 2014 2013 RMB’000 RMB’000 1,694 7,748 35,708 7,390 1,011 631 38,413 15,769	Change -78.1% 383.2% 60.2%
		143.6%

Interest income decreased, which was because the interest compensation for land premium of the land for headquarter was received in the last year, and the remaining interest income was confirmed as non-recurring income, which was terminated this year. The increase in government grants was mainly due to the construction of the headquarter building, which brought in a local government incentive of RMB22,000,000, as the project met the conditions.

Other net (expenses)/income

During the year under review, the Group’s other net expenses were RMB3,516,000 (2013: other net income of RMB8,146,000). The change from other net income to other net expenses was mainly due to the net income derived from the sale of equity investments in the market last year, which was a non-recurring income and was terminated in the year. In addition, there was an exchange loss due to the change in exchange rate in the year.

– I-9 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Selling and distribution costs

During the year under review, the Group’s sales and distribution costs amounted to RMB903,493,000 (2013: RMB404,629,000).

Advertising, promotion and traveling expenses Salary expenses of sales and marketing staff Distribution costs Other sales and distribution costs Total	For the year ended 31 December 2014 2013 RMB’000 RMB’000 499,424 227,509 244,012 109,440 27,817 13,263 132,240 54,417 903,493 404,629	Change 119.5% 123.0% 109.7% 143.0%
		123.3%

Selling and distribution costs increased by 123.3% as compared to that of last year, as after the acquisition of Tongjitang, the size of sales and marketing teams of the Group increased significantly. At the same time, the Group strengthened the promotion of its products and brands, such that the related expenses increased. During the year under review, selling and distribution costs as a percentage to turnover was 33.6%, as compared to 29.0% for last year.

Administrative Expenses

During the year under review, the Group’s administrative expenses amounted to RMB240,337,000 (2013: RMB172,308,000).

Staff salary Depreciation and amortisation Expenses for product research and development Office rental cost and other expenses Total	For the year ended 31 December 2014 2013 RMB’000 RMB’000 64,731 52,099 20,895 15,412 67,875 45,947 86,836 58,850 240,337 172,308	Change 24.2% 35.6% 47.7% 47.6%
		39.5%

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Administrative expenses increased to RMB240,337,000 after full-year consolidating Tongjitang’s financial statements, representing an increase of 39.5% as compared to RMB172,308,000 for last year. However, the Group effectively controlled expenses and improved efficiency by post-merger integration. Administrative expenses as a percentage to turnover decreased from 12.4% for last year to 8.9% for the year.

Profit from Operations

During the year under review, the Group’s profit from operations was RMB545,390,000, representing an increase of 100.0% as compared to RMB272,757,000 for last year, while operating profit margin (defined as profit from operations divided by turnover) increased to 20.3% from 19.6% for last year.

Finance Costs

During the year under review, the Group’s finance costs amounted to RMB64,217,000 (2013: RMB35,182,000), and the higher finance costs as compared with last year was attributable to the bank loans for the acquisition projects in 2013. As at 31 December 2014, long-term bank loans of the Group was RMB670,565,000. In addition, the full-year consolidation of Tongjitang’s financial statements increased the interest expenses by RMB8,486,000. During the year under review, the effective interest rate for loans was 5.04% (2013: 5.17%).

Earnings per share

During the year under review, the basic earnings per share was RMB16.30 cents, representing an increase of 68.4% as compared to RMB9.68 cents for last year. Basic earnings per share increased because of the acquisition of Tongjitang which generated good performance and synergy effect. Profit attributable to equity shareholders of the Company for the year increased by 108.1% to RMB413,090,000 (2013: RMB198,463,000).

Liquidity and Financial Resources

As at 31 December 2014, the Group’s current assets amounted to RMB2,094,478,000 (31 December 2013: RMB1,778,150,000), which included cash, cash equivalents and deposits with banks of RMB439,721,000 (31 December 2013: RMB349,650,000), as well as trade and other receivables of RMB1,236,400,000 (31 December 2013: RMB1,016,832,000). Current liabilities amounted to RMB1,133,841,000 (31 December 2013: RMB1,264,388,000). Net current assets aggregated to RMB960,637,000 (31 December 2013: RMB513,762,000). The Group’s current ratio was 1.8 (31 December 2013: 1.4). The gearing ratio (defined as bank and other loans divided by equity attributable to equity shareholders of the Company) decreased to 0.37 from 0.45 as at 31 December 2013. Gearing ratio decreased as the Group repaid part of the bank loans with its cash surplus from operating activities, and retained profits increased as well.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Bank and other Loans and Pledge of Assets

As at 31 December 2014, the balance of the Group’s bank and other loans was RMB1,172,213,000 (31 December 2013: RMB1,251,896,000), of which RMB409,547,000 (31 December 2013: RMB338,928,000) was secured by the Group’s assets with book value of RMB302,526,000 (31 December 2013: RMB189,003,000) in total and guaranteed by a shareholder. Bank loans decreased as the Group repaid part of the bank loans with its cash surplus from operating activities, so as to reduce finance costs.

Contingent Liabilities

The Group did not have any contingent liabilities as at 31 December 2014 (31 December 2013: nil).

Employee and Remuneration Policies

As at 31 December 2014, the Group had a total of 6,791 (31 December 2013: 6,719) employees (including directors of the Company), of which the number of sales staff, manufacturing staff and those engaged in R&D, administration and senior management were 3,813, 2,098 and 880 respectively. Remuneration packages are mainly comprised of salary and discretionary bonus based on individual performance. The Group’s total remuneration amount during the year was RMB414,778,000 (2013: RMB226,272,000).

Final dividend

The Board has not recommended the payment of a final dividend for the year ended 31 December 2014 (2013: nil).

FOR THE YEAR ENDED 31 DECEMBER 2013

Group overview

The Group is a leading pharmaceutical company in China with excellent brands. It has a total of 332 products and 526 product specifications, 68 of which are national exclusive products. The Group has 58 products being listed on the new edition of National Essential Drugs List, 7 of which are exclusive products, namely Xianling Gubao Capsule/Tablet（仙靈骨葆膠囊╱片）, Yu Ping Feng Granule（玉屏風顆粒）, Bi Yan Kang Tablet （鼻炎康片）, Jingshu Granule （頸舒顆粒）, Moisturising & Anti-Itching Capsule （潤燥止癢膠囊）, Fengshi Gutong Capsule （風濕骨痛膠囊） and Zaoren Anshen Capsule （棗仁安神膠囊）. The Group has over 150 products being listed on National Drugs List for Basic Medical Insurance, 26 of which are exclusive products. Furthermore, the Group has been advocating for TCM manufacturing for over 400 years, and is in possession of a range of TCM 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 extraction of Chinese medicinal herbs, 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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APPENDIX I

The Group has 11 manufacturing facilities in Foshan of Guangdong Province, Guiyang and Kaili of Guizhou Province, Xuancheng of Anhui Province, Jining of Shandong Province and Xining of Qinghai Province, with over 50 GMP certified production lines and annual production capacity of 800 million packs of granules, 5.5 billion tablets, 3 billion capsules, 14 million bottles of medicinal wine, and 100 million jabs of antibiotics and oncology powder for injection, as well as 22,000 tonnes of Chinese medicine preprocessing and extraction.

In retrospect, sales of TCM accounted for approximately 83.2% of the turnover of the Group, sales of chemical medicine made up approximately 14.0% of the turnover, and sales of bio-medicine was approximately 2.8% 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

New Edition of National Essential Drugs List

On 15 March 2013, central government launched the new edition of National Essential Drugs List, which contains 317 chemical and bio-medicines and 203 TCM. Following the issue of the new edition of 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.

With the tendering system of essential drugs, the government authorities focus on both quality and price. Passing the new GMP certification is a vital benchmark for quality assessment, while exclusive products have clear advantage at price negotiation. The Group has been making efforts to maintain and to improve quality standard of its products. 7 of the 11 facilities have passed the new GMP certification, and the remaining 4 are expected to pass it in 2014. Furthermore, most of the revenues of the Group are generated by its exclusive products on National Essential Drug List, which provides the Group with a favourable position.

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

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

Opportunity for 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.

Government has always been granting support to the development of TCM industry. On 17 April 2013, the State Administration of Traditional Chinese Medicine issued “Notice Regarding the Key Aspects in Administration of Traditional Chinese Medicine for the Year 2013”（關於印發2013年中醫醫政工作要點的通知）, which encouraged reform of public TCM hospital, promoted and regulated additional Chinese medicines supplemented to National Essential Drug List, amended the Guidelines for Clinical Application of Chinese medicines in National Essential Drug List, strengthened the training and examination for practitioners in respect of the use of Chinese medicines, continued optimizing TCM policy in medical insurance mechanism, continued supervising local governments to extend the coverage of Basic Medical Insurance to qualified TCM diagnosis, treatment and medicines (including Chinese herbal slice, Chinese medicines and preparations), raised the reimbursement level of TCM under the New Rural Cooperative Medical System, enhanced the basic functions of TCM hospitals at county level and improved the medical service quality.

On 9 July 2013, National Health and Family Planning Commission issued “Notice regarding Fully Exploiting Advantage of the Characteristics of Traditional Chinese Medicine 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 encouraged prescribing Chinese medicines to patients covered by medical insurance, extended 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 raised 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.

Policies of Hospital Reform

On 14 October 2013, the State Council issued “Opinions on Promoting the Development of Health Service Industry”（關於促進健康服務業發展的若干意見）, which suggested accelerating the opening of health service industry. It proposed that the industry should open for private investment to the extent as long as it is not prohibited by laws. Besides, it advocated introducing new financing channel and encouraging

– I-14 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

financial institutions to develop financial tools and products specifically designed for health service industry, and strongly supporting listing of and debt issue by qualified health service enterprise. In addition, it also suggested more support from fiscal and land planning policy, and proposed, for the first time, to include private health service enterprise for the purpose of government subsidy.

On 9 January 2014, National Health and Family Planning Commission issued “Opinions on Encouraging Establishment of Private Hospital”（關於加快發展社會辦醫的若干意見）, which suggested that (1) the development scale of public hospital be strictly controlled and private funding be allowed to invest in public hospital; (2) provincial government be authorized for the approval of foreign-owned and sino-foreign joint-venture hospitals; (3) limitation for service providers from Hong Kong, Macau and Taiwan to set up wholly-owned hospital in the Mainland be extended. National Health and Family Planning Commission undertook that private hospital would enjoy equal status with public hospital in respect of medical insurance mechanism.

Business review

The Group changed its presentation currency from Hong Kong dollars to RMB on 25 November 2013, as RMB is the functional currency of the Group’s major subsidiaries in the PRC. The consolidated financial statements for the year ended 31 December 2012 with an additional statement of financial position as at 31 December 2011 have been re-translated into RMB from HKD.

Sales of Products

During the year under review, the Group’s turnover increased by 35.2% from approximately RMB1,031,766,000 for the corresponding period last year to approximately RMB1,394,613,000, which was mainly attributable to the sales and marketing strategy of key products, for instance, Yu Ping Feng Granule, to expand the coverage of primary healthcare institutions, and the price increase for certain products. Moreover, Tongjitang contributed satisfactory results in November and December of 2013.

Analysis by TCM, Chemical and Bio-medicine:

TCM Chemical medicine Bio-medicine Total	For the year ended 31 December 2013 Percentage to turnover 2012 Percentage to turnover RMB’000 RMB’000 1,160,708 83.2% 854,727 82.8% 195,424 14.0% 177,039 17.2% 38,481 2.8% – – 1,394,613 100.0% 1,031,766 100.0%	Change 35.8% 10.4% Nil
		35.2%

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Sales Analysis of Top Ten Products:

Yu Ping Feng Granule （玉屏風顆粒） Bi Yan Kang Tablet （鼻炎康片） Xianling Gubao （仙靈骨葆） Sheng Tong Ping （聖通平） Feng Liao Xing Medicinal Wine （馮了性藥酒） Gao De（高德） Jingshu Granule （頸舒顆粒） Moisturising & Anti-Itching Capsule （潤燥止癢膠囊） Albumin Prepared from Human Plasma （人血白蛋白） Shedan Chuanbei San （蛇膽川貝散） Other Products Total	For the year ended 31 December 2013 Percentage to turnover 2012 Percentage to turnover RMB’000 RMB’000 (Restated) 218,459 15.7% 167,316 16.2% 215,338 15.4% 221,482 21.5% 207,340 14.9% – – 90,231 6.5% 88,787 8.6% 85,102 6.1% 86,793 8.4% 61,066 4.4% 56,224 5.4% 38,238 2.7% – – 30,942 2.2% – – 29,994 2.2% – – 25,086 1.8% 15,272 1.5% 392,817 28.1% 395,892 38.4% 1,394,613 100.0% 1,031,766 100.0%	Change 30.6% –2.8% Nil 1.6% –1.9% 8.6% Nil Nil Nil 64.3% –0.8%
		35.2%

Remark: the sales amount of Xianling Gubao, Jingshu Granule and Moisturising & Anti-Itching Capsule, which are products of Tongjitang, is the revenue achieved in November and December of 2013. The sales amount of Albumin Prepared from Human Plasma, which is a product of Guizhou Zhongtai Biological Technology Company Limited (“Guizhou Zhongtai”) and its subsidiaries, is the revenue achieved in the year of 2013.

– I-16 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Research and Development

The Group applied the knowhow of controlling sustained-release by multi-layers of films in developing Nifedipine Sustained-release Tablet (30mg), and received the approval of production from China Food & Drug Administration in December 2013. The new product has clear cost advantage over the same product in the market from competitors, which will place the Group in a favourable position at tenders of essential drugs. The Group is formulating the sales and marketing plan of 2014 for the new product.

The Group also applied to China Food & Drug Administration for the approval of production for Fexofenadine/Pseudophedrine Sustained-release capsule（非索偽麻緩釋膠囊）, and expects receiving such approval in 2014.

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.

At the end of 2013 and the beginning of 2014, the Group entered into several contracts with Shanghai Institute of Pharmaceutical Industry (上海醫藥工業研究院 or “SIPI”) and other research institutes for R&D of new products and further study of existing products, including 3 new TCM products and first version of 5 generic drugs. Based on the assessment on the trend of demand, as well as the characteristics of the current product portfolio, the Group will focus on R&D projects related to diseases of aging population, such as cerebro-cardiovascular drugs.

Progress of Investment Projects

Guizhou Zhongtai and its subsidiaries

On 6 March 2014, the Group entered into a termination agreement with Foshan Shunde Hefeng Investment Co., Ltd. （佛山市順德區合峰投資有限公司） (“Shunde Hefeng”) to terminate the disposal agreement signed on 26 August 2013 between the two parties, ceasing the sale of 51% equity capital of Guizhou Zhongtai. The Group expects the performance of Guizhou Zhongtai being improved significantly in the foreseeable future. As compared to selling off the company, retaining Guizhou Zhongtai as a subsidiary will bring in more benefit for shareholders of the Group.

In 2013, Guizhou Zhongtai and its subsidiaries achieved turnover of approximately RMB38,481,000, and turned loss into profit of approximately RMB844,000.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Construction of Headquarter Building

On 14 August 2013, the Group acquired a land parcel at the south part of Kui Qi Road and the east part of Ling Nan Road, Chan Cheng Area, Foshan City of Guangdong Province. The Group will construct its headquarter, R&D center and annex buildings on the land parcel. The Group is working with an independent third party to develop the project. The allocation of the space of the buildings will be based on the amount of investment from each of the two parties. The construction plan is under review by government authorities. The Group expects the project to be completed in 2016.

Manufacturing Facilities at Guiyang Economic & Technology Development Zone

In 2013, the Group acquired a land parcel of 330 mus at Guiyang Economic & Technology Development Zone, Guizhou Province, for building up an orthopedic Chinese medicine manufacturing base (new factory of Guizhou Tongjitang Pharmaceutical Co., Ltd.). The project is under planning, and the construction work will be started in 2014. The facilities will be in full compliance with new GMP requirements and, upon putting in use, will significantly improve the production capacity of the Group. It is expected the project will be completed in the first half of 2016.

Financial review

Turnover

During the reporting period, the Group’s turnover amounted to RMB1,394,613,000, or an increase of 35.2% from RMB1,031,766,000 of the same period last year. The growth of turnover was attributable to a combination of factors, including optimization of product mix and a new pricing policy being implemented to some products. The prices of the products concerned were increased, resulting in a growth of turnover. In addition, Tongjitang’s business, which was acquired during the year, also raised the turnover of the Group.

Cost of sales and gross profit margin

During the reporting period, the Group’s cost of sales was approximately RMB568,834,000, representing an increase of 21.6% as compared to approximately RMB467,753,000 for the corresponding period last year. Direct raw materials, direct labor and production overhead accounted for approximately 74.3%, 13.0% and 12.7% of the total cost of sales, respectively, as compared to 71.4%, 10.8% and 17.8% for the corresponding period last year. Gross profit for the period was approximately RMB825,779,000, or an increase of RMB261,766,000 from approximately RMB564,013,000 of the same period last year, Gross profit margin also rose to 59.2% from 54.7% of the same period last year.

– I-18 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Other revenue

During the year under review, the Group’s other revenue was approximately RMB15,769,000, representing an decrease of approximately 37.2% compared to approximately RMB25,118,000 for the corresponding period last year.

Interest income Government grants Rental income Total	For the year ended 31 December 2013 2012 RMB’000 RMB’000 (Restated) 7,748 20,265 7,390 4,035 631 818 15,769 25,118	Change -61.8% 83.1% -22.9%
		-37.2%

Interest income decreased, which was mainly because the major interest income in 2012 from the compensation for land premium of the land for headquarters and interest income from Guizhou Zhongtai were non-recurrent income, and were terminated respectively during the year under review. The increase in government grants was mainly due to the relevant income of approximately RMB3,978,000 from Tongjitang after the acquisition.

Other net income

During the year under review, the Group’s other net income was approximately RMB8,146,000, representing an increase of 4,035.0% as compared to approximately RMB197,000 for the corresponding period last year. Other net income rose mainly because of the selling of stock investment in the market in order to optimise resource allocation, and to spin-off non-core business. The net income obtained was approximately RMB9,621,000.

– I-19 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Sales and distribution costs

During the year under review, the Group’s sales and distribution costs amounted to approximately RMB404,629,000 (2012: RMB235,661,000).

Advertising, promotion and traveling expenses Salary expenses of sales and marketing staffs Distribution costs Other sales and distribution costs Total	For the year ended 31 December 2013 2012 RMB’000 RMB’000 (Restated) 227,509 132,790 109,440 68,972 13,263 11,547 54,417 22,352 404,629 235,661	Change 71.3% 58.7% 14.9% 143.4%
		71.7%

The increase of 71.7% of sales and distribution costs was due to the increase in staff and advertising expenses for market expansion during the year under review, as well as the related expenses incurred after the acquisition of Tongjitang.

Administrative Expenses

During the year under review, the Group’s administrative expenses amounted to approximately RMB172,308,000 (2012: RMB117,872,000).

Staff salary Depreciation and amortisation Expenses for product research and development Office rental cost and other expenses Total	For the year ended 31 December 2013 2012 RMB’000 RMB’000 (Restated) 52,099 33,006 15,412 10,967 45,947 34,873 58,850 39,026 172,308 117,872	Change 57.8% 40.5% 31.8% 50.8%
		46.2%

The increase in administrative expenses was mainly due to the expenses incurred by the companies acquired during the year, of which approximately RMB22,433,000 was attributable to Guizhou Zhongtai and its subsidiaries and approximately RMB16,890,000 was attributable to Tongjitang.

– I-20 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Profit from Operations

During the year under review, the Group’s profit from operations was approximately RMB272,757,000, representing an increase of 15.7% as compared to approximately RMB235,795,000 for the same period last year, while operating profit margin (defined as profit from operations divided by total turnover) decreased to 19.6% from 22.9% for the same period last year.

Finance Costs

During the year under review, the Group’s finance costs amounted to approximately RMB35,182,000 (2012: RMB19,389,000), and the higher finance costs as compared with the corresponding period last year was attributable to the impact of the acquisition projects, resulting in all increase of the Group’s bank and other borrowings to approximately RMB1,251,896,000 (31 December 2012: RMB414,420,000). Moreover, the interest expense of approximately RMB5,250,000 was capitalized in the corresponding period last year as work-in-progress. After the projects was completed during this period, no more capitalization treatment was carried out. The effective interest rate for the loans was 5.17% (31 December 2012: 6.75%).

Earnings per share

During the year under review, the basic earnings per share was RMB9.68 cents, representing an increase of 2.4% as compared to RMB9.45 cents for the corresponding period last year. During the year a total of 750,488,379 additional new shares were issued successively, so that the number of shares increased from 1,783,410,807 shares of the corresponding period last year to 2,533,899,186 shares, and the weighted average number of shares was increased to 2,050,558,456. However basic earnings per share increase because the good business acquired generated excellent results in the year which offset the impact. Profit attributable to equity shareholders for the year increased by 17.8% to approximately RMB198,463,000 (2012: RMB168,526,000).

Liquidity and Financial Resources

As at 31 December 2013, the Group’s current assets amounted to approximately RMB1,778,150,000 (31 December 2012: RMB814,491,000), which included cash, cash equivalents and deposits with banks of approximately RMB349,650,000 (31 December 2012: RMB133,883,000), as well as trade and other receivable of approximately RMB1,016,832,000 (31 December 2012: RMB442,786,000). Current liabilities amounted to approximately RMB1,264,388,000 (31 December 2012: RMB649,252,000). Net current assets aggregated to approximately RMB513,762,000 (31 December 2012: RMB165,239,000). The Group’s current ratio was 1.4 (31 December 2012: 1.3). The gearing ratio (defined as bank loans divided by total equity attributable to equity shareholders of the Company) decreased to 45.4% from 50.0% as at 31 December 2012. The gearing ratio decreased because the increase of equity through the issue of new shares for the acquisition projects exceeded the additional liabilities funded by bank loans.

– I-21 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Bank and other Loans and Pledge of Assets

As at 31 December 2013, the balance of the Group’s bank and other loans was approximately RMB1,251,896,000 (31 December 2012: RMB414,420,000), of which approximately RMB338,928,000 (31 December 2012: RMB254,420,000) was secured by the Group’s assets with book value of approximately RMB189,003,000 (31 December 2012: RMB189,366,000) and guaranted by a shareholder. The increase of bank loans was mainly due to paying the consideration of the acquisition of Tongjitang and the retention of the existing bank loans of Tongjitang.

Contingent Liabilities

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

Employee and Remuneration Policies

As at 31 December 2013, the Group employed a total of 6,719 (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 R&D, administration and senior management were 3,714, 2,169and 836 respectively. Remuneration packages principally comprised salary and discretionary performance bonus based on individual merits. The Group’s total remuneration for the period was approximately RMB226,272,000 (31 December 2012: RMB150,192,000).

Final dividend

The Board has not recommended and the payment of a final dividend for the year ended 31 December 2013 (2012: nil).

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 TCM. 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 TCM, 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 TCM manufacturing for

– I-22 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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）, 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.

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, 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 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

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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 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.

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APPENDIX I

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 investment to include Chinese medicine into the insurance system as well as improving such system, such as to extend medical insurance coverage to qualified Chinese medical institutions, Chinese medical diagnosis and treatment, Chinese medicine and 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.

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APPENDIX I

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.

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 TCM 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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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

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 TCM and chemical medicine:

TCM 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%

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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 TCM decoction pieces business, high-end quality TCM 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 TCM 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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APPENDIX I

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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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Dezhong Gaoming TCM Extraction 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 TCM materials pre-processing and extraction. It is a modern TCM 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 TCM materials and 80 million packets of TCM 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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FINANCIAL INFORMATION OF THE GROUP

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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FINANCIAL INFORMATION OF THE GROUP

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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FINANCIAL INFORMATION OF THE GROUP

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).

3. INDEBTEDNESS STATEMENT

At the close of business on 30 April 2015, 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 RMB1,543,338,000 (equivalent to HK$1,929.2 million). As at 30 April 2015, bank loans amounting to approximately RMB568,295,000 (equivalent to HK$710.4 million) were secured by the Enlarged Group’s interests in leasehold land, buildings, product protection rights and bank acceptance bills with an aggregate carrying value of approximately RMB495,659,000 (equivalent to HK$619.6 million. The other loan of RMB3,000,000 (equivalent to HK$3.8 million) was guaranteed by Mr. Yang who is an executive Director.

Save as disclosed above, at the close of business on 30 April 2015, 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 no material change in the indebtedness and contingent liabilities of the Enlarged Group since 30 April 2015 up to the Latest Practicable Date.

4. WORKING CAPITAL

The Directors, after due and careful consideration and taking into account the proceeds from the Sinopharm Subscription, the Yang Subscription, the Wang Subscription, the Investors Subscriptions, the Vendors Subscriptions and the banking facilities of approximately HK$2.5 billion to finance the Acquisition, 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.

5. FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

With complex economic conditions in the past few months of 2015, there has been an apparent slow-down in the growth of various industries, including healthcare. The ongoing change in government policy and the intense competition during the process of industry consolidation, together with the impact of new technology on the market, have increased uncertainties faced by pharmaceutical companies. However, the Company has a firm state-owned enterprise background with CNPGC being its controlling shareholder, while maintaining flexible and down-to-earth business strategies for a private enterprise. With established corporate governance mechanism and sustainable business model, as well as benefiting from the efficient capital market in Hong Kong, the Company will be able to maintain a continuous growth in its revenue size and profitability.

– I-35 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Company will fully leverage on the strong brand of “Sinopharm” to develop and flourish such historical and well-known brands as “Dezhong”, “Fengliaoxing” and “Tongjitang”, with a view to establishing and strengthening the advantageous position held by the Company in the market and the industry. The Company possesses production approvals for more than 500 TCM and chemical drugs, including over 60 exclusive products and specifications. The Company has 26 exclusive products which are listed on the National Drugs List for Basic Medical Insurance, among which, Xianling Gubao Capsule/Tablet（仙靈骨葆膠囊/片）, Yu Ping Feng Granule（玉屏風顆粒）, Bi Yan Kang Tablet（鼻炎康片）, Jingshu Granule （頸舒顆粒）, Moisturising & Anti-Itching Capsule （潤燥止癢膠囊）, Fenshi Gutong Capsule（風濕骨痛膠囊）and Zaoren Anshen Capsule（棗仁安神膠囊）are exclusive products on the National Essential Drug List. The Company has achieved healthy business growth in the past few years and is confident in maintaining such momentum.

The Company has established its base in the TCM sector and maintains a staunch stand in its strategy of organic growth and mergers and acquisitions. On the foundation of a sustainable growth of its existing TCM business and the entry into the concentrated TCM granules market, the Company will continue to seek for resources in the relevant sector in order to support the development in the above two businesses and to enhance the value chain of TCM manufacturing. Meanwhile, the Company will explore entering into TCM service sector in accordance with the characteristics of TCM theory and practice, with a view to expand its business scope and leverage on its superior resources in the sector.

On 27 January 2015, Guangdong Medi-World entered into an agreement with 中國生物技術股份有限公司 (China Biotechnology Co., Ltd) to sell 31% equity interest of 貴州中泰生物科技有限公司 (Guizhou Zhongtai Biological Technology Company Limited) to China Biotechnology Co., Ltd at a cash consideration of RMB139.5 million. The Company considered that the main business of Guizhou Zhongtai Biological Technology Company Limited was research and development, production and sale of plasma-based biopharmaceutical products, which was not the core business of the Group. The Directors consider it an opportune time to dispose of 31% equity interest of Guizhou Zhongtai Biological Technology Company Limited and thus allowing the Group to dedicate more resources to and focus on the development of TCM and pharmaceutical product business.

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

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial and trading position of the Group since 31 December 2014 (being the date to which the latest published audited financial statements of the Group were made up).

* For identification purpose only

– I-36 –

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 independent reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong.

==> picture [67 x 52] intentionally omitted <==

==> picture [69 x 32] intentionally omitted <==

24 June 2015

The Board of Directors China Traditional Chinese Medicine Co. Limited

Dear Sirs,

We set out below our report on financial information relating to Jiangyin Tianjiang Pharmaceutical Company Limited （江陰天江藥業有限公司） (the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the “Target Group”) for each of the three years ended 31 December 2014 (the “Relevant Periods”) (the “Target Group Financial Information”) for inclusion in the circular of China Traditional Chinese Medicine Co. Limited (the “Company”) dated 24 June 2015 (the “Circular”) in connection with the proposed acquisition of up to 87.30% of registered capital of the Target Company pursuant to the Acquisition Agreements as defined in the Circular.

The Target Company is a limited liability company established in the People’s Republic of China (the “PRC”). The Target Group is principally engaged in production and sale of concentrated Traditional Chinese Medicine (“TCM”) granules.

The Target Company and its subsidiaries adopted 31 December as the financial year end date. The statutory financial statements of the Target Company were prepared in accordance with the relevant accounting policies and financial regulations applicable to enterprises established in the PRC. The statutory financial statements of the Target Company for each of the three years ended 31 December 2014 were audited by Jiangyin Chengxin Certified Public Accountants Co., Ltd.

– II-1 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

During the Relevant Periods and at the date of this report, the Target Company has equity interests in the following subsidiaries:

Name of subsidiary
Place and date
establishment
and operation
Issued and fully
paid registered
capital at the
date of this
report
Guangdong Yifang Pharmaceutical
Co., Ltd.#
（廣東一方製藥有限公司）(“GD
Yifang”) (note a)
PRC
10 February
1993
Renminbi
(“RMB”)
64,491,680
Shanghai Tianjiang Hengfeng
Management Consulting Co., Ltd.#
（上海天江恒豐管理諮詢有限公司）
(“Hengfeng”) (note a)
PRC
20 November
2011
RMB100,000
Anhui Tianxiang Pharmaceutical
Co., Ltd.#
（安徽天祥藥業有限公司）
(“Tianxiang”) (note a)
PRC
20 December
2010
RMB30,000,000
Jiangyin Tianjiang Chinese Medical
Clinics Ltd.#
（江陰天江中醫門診有限公司）(“TJ
Chinese Medical”) (note a)
PRC
3 November
2011
RMB2,000,000
Longxi Yifang Pharmaceutical Co.,
Ltd.#（隴西一方製藥有限公司）
(“LX Yifang”) (note a)
PRC
19 September
2006
RMB30,000,000

Attributable equity interest held
by the Target Company as at
Principal activities
during the Relevant
Periods
31 December
At date of
this report
2012
2013
2014
100%
100%
100%
100%
Manufacturing and sale
of TCM granules
100%
100%
100%
–
Provision of consulting
and marketing services
100%
100%
100%
100%
Manufacturing and sale
of TCM granules
100%
100%
100%
100%
Provision of traditional
Chinese medical
consultation services
100%
100%
100%
100%
Manufacturing and sale
of TCM granules

The English name is for identification purpose only.

Note:

(a) The statutory financial statements of GD Yifang, Hengfeng, Tianxiang, TJ Chinese Medical and LX Yifang were prepared in accordance with the relevant accounting principles and financial regulations applicable to enterprises established in the PRC. They were audited by the following firms of certified public accountants registered in the PRC:

Name of subsidiary	Periods covered	Certified Public Accountants
GD Yifang	31 December 2012, 2013 and 2014	ZhangXi Certified Public Accountants
		(Special General Partnership)
Hengfeng	31 December 2012, 2013 and 2014	Jiangyin Chengxin Certified Public
		Accountants Co., Ltd.
Tianxiang	31 December 2012, 2013 and 2014	Jiangyin Chengxin Certified Public
		Accountants Co., Ltd.
TJ Chinese Medical	31 December 2012, 2013 and 2014	Jiangyin Chengxin Certified Public
		Accountants Co., Ltd.
LX Yifang	31 December 2012, 2013 and 2014	ZhangXi Certified Public Accountants
		(Special General Partnership)

– II-2 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

As at 31 December 2012, 2013 and 2014, GD Yifang, Tianxiang, TJ Chinese Medical and Hengfeng are direct subsidiaries of the Target Company and LX Yifang is an indirect subsidiary of the Target Company. As at the date of this report, Hengfeng was deregistered.

For the purpose of the preparation of this report, the directors of the Target Company have prepared the consolidated financial statements of the Target Group for the Relevant Periods in accordance with the Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (the “Underlying Financial Statements”). We have carried out an independent audit on the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing (“HKSA”) issued by the HKICPA and examined the Underlying Financial Statements for the Relevant Periods in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The Target Group Financial Information for the Relevant Periods set out in this report has been prepared from the Underlying Financial Statements. No adjustment was considered necessary to the Underlying Financial Statements in preparation of this report for inclusion in the Circular. The directors of the Target Company are responsible for preparing the Underlying Financial Statements who approved their issue. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibilities to compile the Target Group Financial Information set out in this report from the Underlying Financial Statements, to form an independent opinion on the Target Group Financial Information and to report our opinion to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the content of this report.

In our opinion, the Target Group Financial Information together with the notes thereon gives, for the purpose of this report, a true and fair view of the state of affairs of the Target Group as at 31 December 2012, 2013 and 2014, and of the consolidated results and consolidated cash flows of the Target Group for the Relevant Periods.

– II-3 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

A. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

NOTES
Revenue
5
Cost of sales
Gross profit
Investments and other income
6
Other gains and losses
7
Distribution and selling costs
Administrative expenses
Finance costs
8
Other expenses
Profit before taxation
9
Income tax expenses
10
Profit and total comprehensive
income for the year

Year ended 31 December
2012
2013
2014
RMB’000
RMB’000
RMB’000
1,891,550
2,496,931
3,128,766
(787,078) (1,176,120) (1,461,927)
1,104,472
1,320,811
1,666,839
12,125
25,116
19,037
(15,727)
(16,259)
(25,769)
(372,710)
(505,670)
(674,338)
(121,993)
(179,474)
(219,742)
–
–
(670)
(1,426)
(5,570)
(3,138)
604,741
638,954
762,219
(87,834)
(95,597)
(110,499)
516,907
543,357
651,720

– II-4 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

NOTES NON-CURRENT ASSETS Property, plant and equipment 14 Prepaid lease payments 15 Prepayments for acquisition of property, plant and equipment Goodwill 16 Other intangible assets Investment in a joint venture 17 Deferred tax assets 18 CURRENT ASSETS Inventories 19 Trade and other receivables 20 Prepaid lease payments 15 Other financial assets 21 Pledged bank deposits 22 Cash and bank balances 22 CURRENT LIABILITIES Trade and other payables 23 Bank borrowings 24 Deferred revenue 25 Tax payable NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 319,999 611,784 774,686 53,209 88,766 96,647 5,608 16,842 26,320 2,189 2,189 2,189 184 79 20 – 1,200 – 8,808 15,855 22,363 389,997 736,715 922,225 473,715 697,159 740,168 662,956 927,854 1,244,524 1,022 4,984 1,973 256,000 316,300 271,000 440 – 1,273 197,290 53,906 256,254 1,591,423 2,000,203 2,515,192 352,039 619,397 735,061 – – 14,000 2,515 410 – 44,780 47,745 44,411 399,334 667,552 793,472 1,192,089 1,332,651 1,721,720 1,582,086 2,069,366 2,643,945	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 319,999 611,784 774,686 53,209 88,766 96,647 5,608 16,842 26,320 2,189 2,189 2,189 184 79 20 – 1,200 – 8,808 15,855 22,363 389,997 736,715 922,225 473,715 697,159 740,168 662,956 927,854 1,244,524 1,022 4,984 1,973 256,000 316,300 271,000 440 – 1,273 197,290 53,906 256,254 1,591,423 2,000,203 2,515,192 352,039 619,397 735,061 – – 14,000 2,515 410 – 44,780 47,745 44,411 399,334 667,552 793,472 1,192,089 1,332,651 1,721,720 1,582,086 2,069,366 2,643,945
		922,225
		740,168 1,244,524 1,973 271,000 1,273 256,254
		2,515,192
		735,061 14,000 – 44,411
		793,472
		1,721,720
		2,643,945

– II-5 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

NOTES CAPITAL AND RESERVES Registered capital 26 Reserves TOTAL EQUITY NON-CURRENT LIABILITIES Bank borrowings 24 Deferred revenue 25	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 94,556 94,556 94,556 1,439,910 1,923,267 2,474,987 1,534,466 2,017,823 2,569,543 30,000 30,000 – 17,620 21,543 74,402 47,620 51,543 74,402 1,582,086 2,069,366 2,643,945	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 94,556 94,556 94,556 1,439,910 1,923,267 2,474,987 1,534,466 2,017,823 2,569,543 30,000 30,000 – 17,620 21,543 74,402 47,620 51,543 74,402 1,582,086 2,069,366 2,643,945
		2,569,543
		– 74,402
		74,402
		2,643,945

– II-6 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Equity	attributable to owners of	attributable to owners of	the Target Company	the Target Company	the Target Company
			Statutory
	Registered	Capital	surplus		Retained	Total
	capital	reserve	reserve		earnings	equity
	RMB’000	RMB’000	RMB’000		RMB’000	RMB’000
		(note a)	(note b)
At 1 January 2012	94,556	424,078	79,524		479,401	1,077,559
Profit and total
comprehensive
income for the year	–	–	–		516,907	516,907
Dividends declared	–	–	–		(60,000)	(60,000)
At 31 December 2012	94,556	424,078	79,524		936,308	1,534,466
Profit and total
comprehensive
income for the year	–	–	–		543,357	543,357
Dividends declared	–	–	–		(60,000)	(60,000)
At 31 December 2013	94,556	424,078	79,524	1,419,665		2,017,823
Profit and total
comprehensive
income for the year	–	–	–		651,720	651,720
Appropriations (note b)	–	–	6,416		(6,416)	–
Dividends declared	–	–	–		(100,000)	(100,000)
At 31 December 2014	94,556	424,078	85,940	1,964,969		2,569,543

Notes:

(a) The balance of capital reserve represented the aggregated capital injection to the Target Group by its equity holders in addition to registered capital prior to the Relevant Periods.
(b) According to the PRC Company Law and the Articles of Association of the Target Company and its PRC subsidiaries, these companies are required to transfer 10% of their respective after-tax profits, calculated in accordance with PRC GAAP, to the statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The statutory surplus reserve can be utilised, upon approval of the relevant authorities, to offset accumulated losses or to increase registered capital of these companies, provided that such fund is maintained at a minimum of 25% of the registered capital.

– II-7 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

OPERATING ACTIVITIES
Profit for the year
Adjustments for:
Income tax expense recognised in profit or
loss
Depreciation of property, plant and equipment
Impairment loss recognised on inventories
Impairment loss recognised on trade and other
receivables
Amortisation of intangible assets
Interest and other investment income
Loss (gain) on disposal of property, plant and
equipment
Gain on disposal of prepaid lease payments
Amortisation of deferred revenue
Proceeds from government grants in relation
to research and development expenses
Amortisation of prepaid lease payments
Finance costs
Operating cash flows before movements in
working capital
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Cash generated from operations
Income tax paid
NET CASH GENERATED FROM OPERATING
ACTIVITIES

Year ended 31 December
2012
2013
2014
RMB’000
RMB’000
RMB’000
516,907
543,357
651,720
87,834
95,597
110,499
17,560
21,765
39,976
449
2,378
3,660
15,327
22,345
25,573
26
105
80
(5,421)
(11,482)
(11,317)
278
(6,869)
184
–
(1,051)
–
(4,500)
(10,170)
(5,587)
2,510
4,408
5,971
1,226
2,056
2,270
–
–
670
632,196
662,439
823,699
(184,633)
(225,822)
(46,669)
(254,489)
(287,243)
(342,243)
123,818
181,369
164,979
316,892
330,743
599,766
(81,229)
(99,679)
(120,341)
235,663
231,064
479,425

– II-8 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

INVESTING ACTIVITIES
Purchase of property, plant and equipment
Purchase of other financial assets
Proceeds from disposal of other financial assets
upon maturity
Investment in a joint venture
Proceeds from disposal of a joint venture
Deposits paid for acquisition of property, plant
and equipment
Payments for acquisition of land use rights
Purchase of intangible assets
Interest and other investment income received
Proceeds from government grants in relations to
property, plant and equipment
Proceeds from disposal of property, plant and
equipment
Proceeds from disposal of land use rights
Placements of pledged bank deposits
Withdrawals of pledged bank deposits
NET CASH USED IN INVESTING
ACTIVITIES
FINANCING ACTIVITIES
Interest paid
Proceeds from borrowings
Repayments of borrowings
Dividends paid
NET CASH USED IN FINANCING
ACTIVITIES
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR, represented
by cash and bank balances

Year ended 31 December
2012
2013
2014
RMB’000
RMB’000
RMB’000
(171,948)
(229,678)
(254,397)
(1,159,390) (1,997,173) (2,582,000)
903,390
1,936,873
2,627,300
–
(1,200)
–
–
–
1,200
(5,608)
(16,842)
(26,320)
(255)
(43,079)
(7,140)
(210)
–
(21)
5,421
11,482
11,317
7,300
7,580
52,065
2,759
13,323
20,213
–
2,555
–
(4,952)
(540)
(7,256)
4,512
980
5,983
(418,981)
(315,719)
(159,056)
(339)
(2,029)
(2,021)
30,000
–
–
(9,739)
–
(16,000)
(60,000)
(56,700)
(100,000)
(40,078)
(58,729)
(118,021)
(223,396)
(143,384)
202,348
420,686
197,290
53,906
197,290
53,906
256,254

– II-9 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

NOTES TO FINANCIAL INFORMATION

1. GENERAL

The Target Company is a company established in the PRC with limited liability. The address of the registered office and the principal place of business of the Target Company is 1 Xinsheng Road, High-tech Zone, Jiangyin City, Jiangsu Province, PRC.

The Target Company and its subsidiaries are principally engaged in the manufacturing and sales of TCM granules in the PRC.

The Target Group Financial Information is presented in Renminbi (“RMB”), the currency of the primary economic environment in which the Target Company and its principal subsidiaries operate.

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS

For the purpose of preparing and presenting the Target Group Financial Information of the Relevant Periods, the Target Group has consistently applied all the HKFRSs which are effective for the Target Group’s accounting periods beginning on 1 January 2014 throughout the Relevant Periods.

At the date of this report, the Target Group has not early applied the following new and revised HKFRSs that have been issued but are not yet effective during the Relevant Periods:

HKFRS 9	Financial instruments1
HKFRS 14	Regulatory deferral accounts2
HKFRS 15	Revenue from contracts with customers3
Amendments to HKFRS 11	Accounting for acquisitions of interests in joint operations5
Amendments to HKAS 1	Disclosure initiative5
Amendments to HKAS 16 and HKAS 38	Clarification of acceptable methods of depreciation and
	amortisation5
Amendments to HKAS 19	Defined benefit plans: Employee contributions4
Amendments to HKFRSs	Annual improvements to HKFRSs 2010-2012 cycle6
Amendments to HKFRSs	Annual improvements to HKFRSs 2011-2013 cycle4
Amendments to HKFRSs	Annual improvements to HKFRSs 2012-2014 cycle5
Amendments to HKAS 16 and HKAS 41	Agriculture: Bearer plants5
Amendments to HKAS 27	Equity method in separate financial statements5
Amendments to HKFRS 10 and HKAS 28	Sale or contribution of assets between an investor and
	its associate or joint venture5
Amendments to HKFRS 10, HKFRS 12	Investment entities: Applying the consolidation exception5
and HKAS 28

1 Effective for annual periods beginning on or after 1 January 2018.

2 Effective for first annual HKFRS financial statements beginning on or after 1 January 2016.

3 Effective for annual periods beginning on or after 1 January 2017.

4 Effective for annual periods beginning on or after 1 July 2014.

5 Effective for annual periods beginning on or after 1 January 2016. 6 Effective for annual periods beginning on or after 1 July 2014, with limited exceptions.

HKFRS 9 Financial Instruments

HKFRS 9 issued in 2009 introduced new requirements for the classification and measurement of financial assets. HKFRS 9 was subsequently amended in 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and further amended in 2013 to include the new requirements for general hedge accounting. Another revised version of HKFRS 9 was issued in 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.

– II-10 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

In relation to the impairment of financial assets, HKFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under HKAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.

The directors of the Target Company anticipate that the adoption of HKFRS 9 in the future may affect the amounts reported in respect of the Target Group’s financial assets, however, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

HKFRS 15 Revenue from Contracts with Customers

In July 2014, HKFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. HKFRS 15 will supersede the current revenue recognition guidance including HKAS 18 Revenue, HKAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of HKFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Under HKFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i. e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in HKFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by HKFRS 15.

The directors of the Target Company anticipate that the application of HKFRS 15 in the future may impact the amounts reported and/or disclosures made in the Target Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of HKFRS 15 until the Target Group performs a detailed review.

3. SIGNIFICANT ACCOUNTING POLICES

The Target Group Financial Information has been prepared in accordance with the following accounting policies which conform to HKFRSs. These policies have been consistently applied throughout the Relevant Periods. In addition, the Target Group Financial Information included applicable disclosures required by the Listing Rules and by the Hong Kong Companies Ordinance which for the Relevant Periods continue to be those of the predecessor Companies Ordinance (Cap. 32), in accordance with transitional and saving arrangements for Part 9 of the Hong Kong Companies Ordinance (Cap. 622), “Accounts and Audit”, which are set out in sections 76 to 87 of Schedule 11 to that Ordinance.

The Target Group Financial Information has been prepared on the historical cost basis except for certain financial instruments that are measured at fair values at the end of each reporting period, as explained in the accounting policies below.

Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

– II-11 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Target Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.

The principal accounting policies adopted are set out as follows:

Basis of consolidation

The Target Group Financial Information incorporate the financial statements of the Target Company and its subsidiaries. Control is achieved when the Target Company:

has power over the investee;
is exposed, or has rights, to variable returns from its involvement with the investee; and
has the ability to use its power to affect its returns.

The Target Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

Consolidation of a subsidiary begins when the Target Group obtains control over the subsidiary and ceases when the Target Group loses control of the subsidiary. Specially, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Target Group gains control until the date when the Target Group ceases to control the subsidiary.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Target Group’s accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Target Group are eliminated in full on consolidation.

Goodwill

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (see the accounting policy above) less accumulated impairment losses, if any.

For the purposes of impairment testing, goodwill is allocated to each of the Target Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying

– II-12 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Investments in joint ventures

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

An investment in a joint venture is accounted for using the equity method from the date on which the investee becomes a joint venture. On acquisition of the investment in a joint venture, any excess of the cost of the investment over the Target Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Target Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired.

The requirements of HKAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Target Group’s investment in a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with HKAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount, any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases.

The Target Group discontinues the use of the equity method from the date when the investment ceases to be a joint venture, or when the investment is classified as held for sale. The difference between the carrying amount of the joint venture at the date the equity method was discontinued and any proceeds from disposal of the joint venture is included in the determination of the gain or loss on disposal of the joint venture.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

Revenue from the sale of goods is recognised when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

the Target Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
the Target Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Target Group; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.

– II-13 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Target Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.

Property, plant and equipment

Property, plant and equipment including buildings held for use in the production or supply of goods or services, or for administrative purposes, other than construction in progress, are stated in the statement of financial position at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Construction in progress for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Costs include professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Target Group’s accounting policy. Such items are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other items, commences when the assets are ready for their intended use.

Depreciation is recognised so as to write off the cost of items of property, plant and equipment, other than construction in progress, less their residual values over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

Impairment losses on tangible assets

At the end of the reporting period, the Target Group reviews the carrying amounts of its tangible assets with finite useful lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Recoverable amount is the higher of fair value less costs of disposal 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 for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Foreign currencies

In preparing the Target Group Financial Information of the Target Group, transactions in currencies other than the functional currency of the Target Group (foreign currencies) are recorded in the functional currency (i.e. the currency of the primary economic environment in which the Target Company operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise.

– II-14 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Target Group as lessee under operating leases

Operating lease payments are recognised on a straight-line basis over the term of the relevant lease.

Leasehold land

Interest in leasehold land that is accounted for as an operating lease is included in “prepaid lease payment” in the consolidated statement of financial position and is amortised over the lease term on a straight-line basis.

Borrowing costs

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

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

Government grants

Government grants are not recognised until there is reasonable assurance that the Target Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised in profit or loss on a systematic basis over the periods in which the Target Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Target Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

Retirement benefit costs

Payments to state-managed retirement benefit schemes are recognised as an expense when employees have rendered service entitling them to the contributions.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from “profit before taxation” as reported in the statement of profit or loss and other comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Target Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Target Group Financial Information and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities

– II-15 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and interest in a joint venture, except where the Target Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Target Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax are recognised in profit or loss.

Intangible assets

Research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
how the intangible asset will generate probable future economic benefits;
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognised for internally-generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses (if any), on the same basis as intangible assets that are acquired separately.

Intangible assets acquired in a business combination are recognised separately from goodwill and are initially recognised at their fair value at the acquisition date (which is regarded as their costs).

– II-16 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Derecognition of intangible assets

An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains and losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the assets, are recognised in profit or loss when the asset is derecognised.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost of inventories are determined on a weighted average method. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

Financial instruments

Financial assets and financial liabilities are recognised in the statement of financial position when an entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss (“FVTPL”) are recognised immediately in profit or loss.

Financial assets

The Target Group’s financial assets are classified as loans and receivables and financial assets at fair value through profit or loss. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

– II-17 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

it forms part of a contract containing one or more embedded derivatives, and HKAS 39 “Financial instruments: Recognition and measurement” permits the entire combined contract to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any income earned on the financial asset and is included in the ’investment and other income’ line item. Fair value is determined in the manner described in note 21.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including trade and other receivables, pledged bank deposits and cash and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses.

Impairment of loans and receivables

Loans and receivables are assessed for indicators of impairment at the end of the reporting period. Loans and receivables are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the loans and receivables, the estimated future cash flows of the loans and receivables have been affected.

For all other financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, such as default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

The amount of impairment loss recognised is the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the loans and receivables’ original effective interest rate.

If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity instruments

Debt and equity instruments issued by an entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the reporting entity after deducting all of its liabilities. Equity instruments issued by the Target Company are recognised at the proceeds received, net of direct issue costs.

– II-18 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Interest expense is recognised on an effective interest basis.

Financial liabilities

Financial liabilities including trade and other payables and bank borrowings are subsequently measured at amortised cost, using the effective interest method.

Derecognition

The Target Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss.

The Target Group derecognises financial liabilities when the Target Group’s obligations are discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

4. KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Target Group’s accounting policies, which are described in note 3, the directors of the Target Group are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an on-going 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.

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Inventories

Inventories are stated at the lower of cost or net realisable value. Management of the Target Group periodically reviews inventories for slow moving, obsolescence or declines in market value.

This review requires the management of the Target Group to estimate the net realisable value based upon assumptions about future demand and market conditions. If the estimate of net realisable value is below the cost of inventory, the Target Group will record a write-down of inventories for the difference between cost and net realisable value, which will result in a corresponding increase in cost of sales.

The carrying amounts of the Target Group’s inventories as at 31 December 2012, 2013 and 2014 were RMB473,715,000, RMB697,159,000 and RMB740,168,000, respectively.

– II-19 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Useful lives of property, plant and equipment

In applying the accounting policy on property, plant and equipment with respect to depreciation, management estimates the useful lives of various categories of property, plant and equipment according to the industrial experiences over the usage of property, plant and equipment and also by reference to the relevant industrial norm. If the actual or expected useful lives of property, plant and equipment is less than the original estimated useful lives or revision of estimated useful lives due to changes in commercial and technological environment, such difference will impact the depreciation charge for the remaining period. As at 31 December 2012, 2013 and 2014, the carrying amounts of property, plant and equipment are RMB319,999,000, RMB611,784,000, RMB774,686,000, respectively. Details of the estimated useful lives of the Target Group’s property, plant and equipment are disclosed in note 14.

Estimated impairment of trade and other receivables

When there is objective evidence of impairment loss, the Target Group takes into consideration the estimation of future cash flows. The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). Where the actual future cash flows are less than expected, a material impairment loss may arise. As at 31 December 2012, 2013 and 2014, the carrying amounts of trade and other receivables are RMB662,956,000, RMB927,854,000, RMB1,244,524,000, respectively.

5. REVENUE AND SEGMENT INFORMATION

(a) The principal activities of the Target Group are manufacture and sale of concentrated TCM granules. Revenue represents the sales amount of TCM granules sold to customers during the Relevant Periods. An analysis of the Target Group’s revenue for the Relevant Periods is as follows:

			Year	ended 31 December	ended 31 December
			2012	2013	2014
			RMB’000	RMB’000	RMB’000
Sales	of	goods	1,891,550	2,496,931	3,128,766

Information reported to the directors of the Target Company, who are identified as the chief operating decision maker (the “CODM”) of the Target Group, in order to allocate resources and to assess performance, focuses on the operating results of the Target Group as a whole as the Target Group’s resources are integrated and no discrete operating segment financial information is available. Accordingly, no operating segment information is presented.

All of the Target Group’s operations are located in the PRC. The Target Group’s revenue from external customers and all of its non-current assets are located in PRC based on geographical location of assets.

No revenue from individual external customer contributing over 10% of total revenue of the Target Group.

– II-20 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

6. INVESTMENTS AND OTHER INCOME

Bank interest income Government grants related to – Income (note) – Research and development expenses (note 25) – Other assets (note 25) Investment income from other financial assets Others	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,228 1,643 642 1,561 3,275 1,720 4,500 6,895 4,780 – 3,275 807 4,193 9,839 10,675 643 189 413 12,125 25,116 19,037	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,228 1,643 642 1,561 3,275 1,720 4,500 6,895 4,780 – 3,275 807 4,193 9,839 10,675 643 189 413 12,125 25,116 19,037
		19,037

Note: These government grants are unconditional government subsidies received by the Target Group from relevant government bodies for the purpose of giving immediate financial support to the Target Group’s operation.

7. OTHER GAINS AND LOSSES

Net foreign exchange losses (Loss) gain on disposals of property, plant and equipment Impairment losses (recognised) reversed on financial assets – Trade receivables – Other receivables	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 (122) (783) (12) (278) 6,869 (184) (14,370) (22,577) (24,982) (957) 232 (591) (15,727) (16,259) (25,769)	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 (122) (783) (12) (278) 6,869 (184) (14,370) (22,577) (24,982) (957) 232 (591) (15,727) (16,259) (25,769)
		(25,769)

8. FINANCE COSTS

Interest on bank borrowings wholly repayable within five years Less: amounts capitalised in the cost of qualifying assets	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 339 2,029 2,021 (339) (2,029) (1,351) – – 670	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 339 2,029 2,021 (339) (2,029) (1,351) – – 670
		670

Borrowing costs capitalised during the Relevant Periods arose from the general borrowing pool and are calculated by applying a capitalisation rate of 6.77% per annum to expenditure on qualifying assets for each of the year ended 31 December 2012, 2013 and 2014.

– II-21 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

9. PROFIT BEFORE TAXATION

Profit before taxation has been arrived at after charging: Directors’ emoluments (see note 11) Salaries and other benefits Retirement benefits contributions Total staff costs Auditors’ remuneration Depreciation of property, plant and equipment Amortisation of prepaid lease payments Amortisation of intangible assets Cost of inventories recognised as expenses (included in cost of sale) Allowance for inventories (included in cost of sale)	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,125 1,506 2,120 83,070 118,552 137,087 10,892 14,152 16,497 95,087 134,210 155,704 352 205 1,712 17,560 21,765 39,976 1,226 2,056 2,270 26 105 80 786,629 1,173,742 1,458,267 449 2,378 3,660	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 1,125 1,506 2,120 83,070 118,552 137,087 10,892 14,152 16,497 95,087 134,210 155,704 352 205 1,712 17,560 21,765 39,976 1,226 2,056 2,270 26 105 80 786,629 1,173,742 1,458,267 449 2,378 3,660
		155,704
		1,712 39,976 2,270 80 1,458,267 3,660

10. INCOME TAX EXPENSES

PRC Enterprise Income Tax – current year – prior years under (over) provision Current tax Deferred tax (note 18) Income tax expenses	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 91,451 102,517 119,113 (671) 127 (2,106) 90,780 102,644 117,007 (2,946) (7,047) (6,508) 87,834 95,597 110,499	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 91,451 102,517 119,113 (671) 127 (2,106) 90,780 102,644 117,007 (2,946) (7,047) (6,508) 87,834 95,597 110,499
		117,007 (6,508)
		110,499

The income tax expenses for the Relevant Periods can be reconciled to profit before taxation as follows:

Profit before taxation Taxation at PRC Enterprise Income Tax rate of 15% Tax effect of concession reduction on research and development expenditures (note) Tax effect of expenses not deductible for tax purpose Tax effect of tax loss and deductible temporary differences not recognised Under (over) provision in prior years Effect of different tax rates of subsidiaries Income tax expenses for the year	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 604,741 638,954 762,219 90,711 95,843 114,333 (3,103) (1,945) (2,671) 983 2,371 1,097 15 21 – (671) 127 (2,106) (101) (820) (154) 87,834 95,597 110,499	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 604,741 638,954 762,219 90,711 95,843 114,333 (3,103) (1,945) (2,671) 983 2,371 1,097 15 21 – (671) 127 (2,106) (101) (820) (154) 87,834 95,597 110,499
		114,333 (2,671) 1,097 – (2,106) (154)
		110,499

– II-22 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

Pursuant to the Corporate Income Tax Law of PRC, the statutory tax rate applicable to the Target Company and its PRC subsidiaries is 25% except for: 1) The Target Company and GD Yifang, which were recognised as qualified advanced and new technology enterprises to enjoy a preferential enterprise income tax rate of 15% during the Relevant Periods by relevant PRC tax bureau and finance bureau; 2) LX Yifang was recognised as a qualified enterprise located in the western region of the PRC to enjoy a preferential enterprise income tax rate of 15% during the Relevant Periods.

Note: Pursuant to the relevant tax rules and regulations, the Target Company, GD Yifang and LX Yifang are entitled to claim PRC income tax credits on additional 50% of the qualified research and development expenses in the PRC. Such PRC income tax credits are allowed, and are accounted for, as deduction from current income tax expenses when relevant conditions are fulfilled and tax approval is obtained from the tax bureau.

11. DIRECTORS’ AND EMPLOYEES’ REMUNERATIONS

(a) Directors’ emoluments

Details of the emoluments paid or payable to the directors of the Target Group during the Relevant Periods are as follows:

Year ended 31 December 2012 Mrs. Zhou Jia Lin Mr. Tang Deng Ping Year ended 31 December 2013 Mrs. Zhou Jia Lin Mr. Tang Deng Ping Year ended 31 December 2014 Mrs. Zhou Jia Lin Mr. Tang Deng Ping	Directors’ fees RMB’000 – – – – – – – – –	Salaries and allowances Discretionary performance related payments Retirement benefit scheme contributions RMB’000 RMB’000 RMB’000 606 8 – 438 73 – 1,044 81 – 632 8 – 448 418 – 1,080 426 – 904 8 – 698 510 – 1,602 518 –	Total RMB’000 614 511
			1,125

			640 866
			1,506

			912 1,208
			2,120

– II-23 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

(b) Employees’ emoluments

Of the five individuals with the highest emoluments in the Target Group, 2 were Directors for the year ended 31 December 2012, 2013 and 2014 whose emoluments are included in the disclosures above. The emoluments of the remaining 3 individuals for the Relevant Periods are as follows:

Salaries and allowances Discretionary performance related payments Retirement benefit schemes contributions	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 886 872 1,027 293 434 646 86 100 59 1,265 1,406 1,732	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 886 872 1,027 293 434 646 86 100 59 1,265 1,406 1,732
		1,732

The number of highest paid employees who were not directors of the Target Group and whose remunerations fell within the following band is as follows:

Nil to RMB1,000,000	Year ended 31 December 2012 2013 2014 3 3 3

During the Relevant Periods, no remuneration was paid by the Target Group to any of the five individuals with the highest emoluments in the Target Group as an inducement to join or upon joining the Target Group or as compensation for loss of office.

12. DIVIDENDS

During the Relevant Periods, the Target Group had the following distributions to its owners.

Dividends recognised as distributions during the year	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 60,000 60,000 100,000

13. EARNINGS PER SHARE

No earnings per share information is presented as its inclusion, for the purpose of this report, is not considered meaningful.

– II-24 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

14. PROPERTY, PLANT AND EQUIPMENT

COST At 1 January 2012 Additions Disposals Transfer from construction in progress At 31 December 2012 Additions Disposals Transfer from construction in progress At 31 December 2013 Additions Disposals Transfer from construction in progress At 31 December 2014 ACCUMULATED DEPRECIATION At 1 January 2012 Provided for the year Eliminated on disposals At 31 December 2012 Provided for the year Eliminated on disposals At 31 December 2013 Provided for the year Eliminated on disposals At 31 December 2014 CARRYING VALUES At 31 December 2012 At 31 December 2013 At 31 December 2014	Buildings Plant and machinery Office equipment RMB’000 RMB’000 RMB’000 111,405 88,829 11,534 6,042 13,942 2,093 – (5,072) (171) – 2,888 210 117,447 100,587 13,666 219 13,390 21,650 (2,297) (6,336) (87) 490 10,978 789 115,859 118,619 36,018 307 14,120 46,025 (42,340) (25,657) (2,219) 400,463 84,500 4,139 474,289 191,582 83,963 29,682 43,002 5,231 5,191 9,278 2,314 – (4,635) (163) 34,873 47,645 7,382 5,213 11,653 4,104 (407) (4,076) (83) 39,679 55,222 11,403 11,035 9,985 18,081 (25,379) (22,365) (2,092) 25,335 42,842 27,392 82,574 52,942 6,284 76,180 63,397 24,615 448,954 148,740 56,571	Motor vehicles Construction in progress RMB’000 RMB’000 4,977 26,751 833 155,150 – (2,591) – (3,098) 5,810 176,212 625 284,121 (480) (2,286) – (12,257) 5,955 445,790 1,584 161,239 (504) – – (489,102) 7,035 117,927 3,046 – 777 – – – 3,823 – 795 – (465) – 4,153 – 875 – (487) – 4,541 – 1,987 176,212 1,802 445,790 2,494 117,927	Total RMB’000 243,496 178,060 (7,834) – 413,722 320,005 (11,486) – 722,241 223,275 (70,720) – 874,796 80,961 17,560 (4,798) 93,723 21,765 (5,031) 110,457 39,976 (50,323) 100,110 319,999 611,784 774,686

– II-25 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

The above items of property, plant and equipment, except for construction in progress are depreciated on a straight-line basis over their estimated useful lives and after taking into account of their estimated residual value based on the following estimated useful lives:

Buildings	20 – 30 years
Plant and machinery	3 – 10 years
Office equipment	3 – 5 years
Motor vehicles	4 – 5 years

15. PREPAID LEASE PAYMENTS

The Target Group’s prepaid lease payments comprised leasehold land interests in the PRC under medium-term land use rights.

Analysed for reporting purposes as: Current asset Non-current asset	As 2012 RMB’000 1,022 53,209 54,231	at 31 December 2013 2014 RMB’000 RMB’000 4,984 1,973 88,766 96,647 93,750 98,620	at 31 December 2013 2014 RMB’000 RMB’000 4,984 1,973 88,766 96,647 93,750 98,620
			98,620

16. GOODWILL

								RMB’000
COST
Balance	at	31	December	2012,	2013	and	2014	2,189

The Target Group’s goodwill arose from acquisition of GD Yifang by the Target Company. For the purposes of impairment testing, goodwill has been allocated to the Target Group as a whole which is considered as one cash generating unit (“CGU”)

At the end of each of the Relevant Periods, management of the Target Group determined that there was no impairment of its CGU containing goodwill.

The recoverable amount of the CGU has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets of two years approved by management and discount rate of 15% for the Relevant Periods. Cash flows beyond the budgeted period are extrapolated using a 3% growth rate. Other key assumptions for the value in use calculation related to the estimation of cash inflows/ outflows which include budgeted sales and operating expenses. Such assumptions are based on the unit’s past performance and management’s expectations for the market development. Management believes that any reasonably possible change in any of these assumptions would not cause the aggregate carrying amount of CGU to exceed the aggregate recoverable amount of its CGU.

17. INVESTMENT IN A JOINT VENTURE


								As	at	31 December
								2012		2013	2014
								RMB’000		RMB’000	RMB’000
Cost	of	investment	in	a	joint	venture,	unlisted	–		1,200	–

– II-26 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

(b) Details of the Target Group’s joint venture at the end the Relevant Periods are as follow:

Name of joint venture Place of establishment and operation Inner Mongolia Tiansheng Chinese Medicine Plantation Co., Ltd. （內蒙古天盛中藥種植有限責任公司）(“Inner Mongolia Tiansheng”) PRC	Proportion of equity interest and voting power attributable to the Target Company
	At 31 December Principal activities 2012 2013 2014 – 40% – Plantation and sale of TCM materials and other agricultural products

On 5 March 2013, the Target Group invested RMB1,200,000 to establish a joint venture, Inner Mongolia Tiansheng. The joint venture was established in PRC and its proposed principal activities are plantation and sale of TCM materials and other agricultural products. The joint venture is accounted for using equity method in the Target Group Financial Information. The Target Group disposed its investment in the joint venture on 13 August 2014 at its carrying amount to an independent third party. The joint venture was inactive from establishment to its disposal in August 2014. There was no gain or loss recognised from the disposal.

18. DEFERRED TAXATION

The following are the major deferred tax assets recognised and movements thereon during the Relevant Periods:

Allowance for inventories RMB’000 At 1 January 2012 929 Credit (charge) for the year 68 At 31 December 2012 997 Credit (charge) for the year 356 At 31 December 2013 1,353 Credit for the year 550 At 31 December 2014 1,903	Allowance for doubtful debts Unrealised inter-group profit RMB’000 RMB’000 4,153 348 2,283 (41) 6,436 307 3,176 (15) 9,612 292 3,802 1,260 13,414 1,552	Tax losses RMB’000 – 315 315 2,030 2,345 408 2,753	Accrued staff costs RMB’000 432 321 753 1,500 2,253 488 2,741	Total RMB’000 5,862 2,946
				8,808 7,047
				15,855 6,508
				22,363

19. INVENTORIES

Raw materials Work in progress Finished goods	As 2012 RMB’000 64,771 193,958 214,986 473,715	at 31 December 2013 2014 RMB’000 RMB’000 124,218 118,952 276,544 271,079 296,397 350,137 697,159 740,168	at 31 December 2013 2014 RMB’000 RMB’000 124,218 118,952 276,544 271,079 296,397 350,137 697,159 740,168
			740,168

– II-27 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

20. TRADE AND OTHER RECEIVABLES

Trade receivables Less: allowance for doubtful debts Bills receivables Prepayments Other receivables	As 2012 RMB’000 664,518 (41,785) 622,733 9,328 12,743 18,152 662,956	at 31 December 2013 2014 RMB’000 RMB’000 914,801 1,204,352 (63,197) (87,952) 851,604 1,116,400 41,360 55,365 17,875 12,489 17,015 60,270 927,854 1,244,524	at 31 December 2013 2014 RMB’000 RMB’000 914,801 1,204,352 (63,197) (87,952) 851,604 1,116,400 41,360 55,365 17,875 12,489 17,015 60,270 927,854 1,244,524
			1,116,400
			55,365 12,489 60,270
			1,244,524

The Target Group has a policy of allowing an average credit period of 30 to 120 days from the invoice dates to its trade customers.

The following is an aged analysis of trade receivables presented based on the invoice dates, at the end of the reporting period:

0 – 120 days 121 – 270 days 271 – 365 days 1 – 2 year 2 – 3 year Over 3 years Total	As 2012 RMB’000 450,190 130,512 27,173 13,010 1,848 – 622,733	at 31 December 2013 2014 RMB’000 RMB’000 579,474 750,629 202,512 290,829 35,914 22,971 31,663 47,776 2,041 4,195 – – 851,604 1,116,400	at 31 December 2013 2014 RMB’000 RMB’000 579,474 750,629 202,512 290,829 35,914 22,971 31,663 47,776 2,041 4,195 – – 851,604 1,116,400
			1,116,400

Before accepting any new customer, the Target Group assesses the potential customer’s credit quality and defines credit limits by customer.

Trade receivables disclosed above include amounts (see below for aged analysis) which are past due at the end of the reporting period for which the Target Group has not recognised an allowance for doubtful debts because there has not been a significant change in credit quality and the amounts are still considered by the directors of the Target Company to be recoverable.

– II-28 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Ageing of trade receivables which are past due but not impaired

0 – 150 days 151 – 240 days 241 – 365 days Over 1 year Total	As 2012 RMB’000 114,702 27,173 4,423 26,244 172,542	at 31 December 2013 2014 RMB’000 RMB’000 202,512 290,829 35,914 22,971 10,765 16,244 22,939 35,727 272,130 365,771	at 31 December 2013 2014 RMB’000 RMB’000 202,512 290,829 35,914 22,971 10,765 16,244 22,939 35,727 272,130 365,771
			365,771

The Target Group does not hold any collateral over the balances which are past due.

Movement in allowance for doubtful debts

Balance at the beginning of the year Impairment losses recognised on receivables Amounts written-off during the year Balance at the end of the year	As 2012 RMB’000 27,521 14,370 (106) 41,785	at 31 December 2013 2014 RMB’000 RMB’000 41,785 63,197 22,577 24,982 (1,165) (227) 63,197 87,952	at 31 December 2013 2014 RMB’000 RMB’000 41,785 63,197 22,577 24,982 (1,165) (227) 63,197 87,952
			87,952

In determining the recoverability of a trade receivable, the Target Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period. The concentration of credit risk is limited due to the customer base being large and unrelated. There are no single customer who represents more than 5% of the total balance of trade receivables.

21. OTHER FINANCIAL ASSETS

Investments in financial products	As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 256,000 316,300 271,000

Other financial assets represent structured bank deposits (“SBDs”) placed by the Target Group with a number of banks for a term of 30 days to 180 days. The SBDs have expected rate of returns ranging from 2.1% to 5.2%, 2.25% to 6% and 2.25% to 4.6% per annum as at 31 December 2012, 2013 and 2014, respectively, with reference to the performance of the underlying investments of the respective SBDs, including investments in foreign currency or interest rate linked products, investment funds, entrusted investment funds, money market, bonds or equity investments. The other financial assets are designated as financial assets at FVTPL at initial recognition. In the opinion of the directors of the Target Company, the fair value of these financial assets does not differ materially from their carrying amounts as at the reporting date because of their short periods to maturity.

There were no significant changes in the counterparties’ credit risk and therefore there were no significant gains or losses attributed to changes in credit risk for these financial assets designated at fair value through profit or loss during the Relevant Periods.

– II-29 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

22. PLEDGED BANK DEPOSITS AND CASH AND BANK BALANCES

Cash and bank balances of the Group comprise cash and short-term bank deposits with an original maturity of three months or less.

Bank balances carry interest at market rates within range from 0.01% to 0.40%, 0.01% to 0.35% and 0.01% to 0.39% per annum as at 31 December 2012, 2013 and 2014, respectively. The pledged deposits carry interest rates which range from 2.85% to 5.10%, 0.35% to 3.25% and 0.35% to 3.30% per annum as at 31 December 2012, 2013 and 2014, respectively.

Pledged bank deposits and cash and bank balances were all denominated in RMB. RMB is not a freely convertible currency in the international market. The exchange rate of RMB is regulated by the government of the PRC and the remittance of these funds out of the PRC is subject to exchange restrictions imposed by the government of the PRC. Pledged bank deposits represent deposit pledged to banks to secure banking facilities granted to the Target Group.

23. TRADE AND OTHER PAYABLES

Trade payables Other tax payables Payroll and welfare payables Income received in advance from customers Dividend payable Advances from staff (note) Payables in respect of construction materials Others	As 2012 RMB’000 266,229 18,261 8,751 11,316 – 18,441 2,620 26,421 352,039	at 31 December 2013 2014 RMB’000 RMB’000 425,777 501,315 25,463 31,531 17,866 25,201 14,518 15,507 3,300 3,300 9,943 73,888 85,309 35,994 37,221 48,325 619,397 735,061	at 31 December 2013 2014 RMB’000 RMB’000 425,777 501,315 25,463 31,531 17,866 25,201 14,518 15,507 3,300 3,300 9,943 73,888 85,309 35,994 37,221 48,325 619,397 735,061
			735,061

Note: Balances represent amounts received from sale team of GD Yifang in respect of delivery of goods to customers. Such amounts are non-interest bearing and repayable to the salesmen upon their termination of employment.

The following is an aged analysis of trade payables presented based on the invoice dates at the end of the reporting period.

0 – 120 days 121 – 270 days 271 – 365 days Over 1 year	As 2012 RMB’000 233,806 29,018 1,943 1,462 266,229	at 31 December 2013 2014 RMB’000 RMB’000 385,488 387,118 28,231 94,543 10,769 14,666 1,289 4,988 425,777 501,315	at 31 December 2013 2014 RMB’000 RMB’000 385,488 387,118 28,231 94,543 10,769 14,666 1,289 4,988 425,777 501,315
			501,315

Trade payables are non-interest bearing and are normally granted a credit term ranging from 30 to 120 days.

– II-30 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

24. BORROWINGS

Bank borrowings

Bank loans, secured Carrying amount repayable: Within one year In more than one year but not more than two years In more than two years but not more than five years Carrying amount of bank loans that are repayable within one year from the end of the reporting period and do not contain a repayable on demand clause (shown under current liabilities) Amounts shown under non-current liabilities	As 2012 RMB’000 30,000 – – 30,000 30,000 – – 30,000	at 31 December 2013 2014 RMB’000 RMB’000 30,000 14,000 – 14,000 30,000 – – – 30,000 14,000 – 14,000 – 14,000 30,000 –	at 31 December 2013 2014 RMB’000 RMB’000 30,000 14,000 – 14,000 30,000 – – – 30,000 14,000 – 14,000 – 14,000 30,000 –

			14,000 – –
			14,000

			14,000
			14,000
			–

During the year ended 31 December 2014, the Target Group early repaid an amount of RMB16,000,000 on the bank borrowings, which was repayable in October 2015 per the contractually scheduled repayment terms.

Bank borrowings as at the end of each of the Relevant Periods were secured by the pledge of assets as set out in note 28.

The ranges of effective interest rates (which are also equal to contracted interest rates) on the Target Group’s borrowings are as follows:

Effective interest rate: Variable-rate borrowings	As at 31 December 2012 2013 6.77% 6.77%	2014 6.6% – 6.77%

– II-31 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

25. DEFERRED REVENUE

At 1 January 2012 Government grant received Released to profit or loss At 31 December 2012 Government grant received Released to profit or loss At 31 December 2013 Government grant received Released to profit or loss At 31 December 2014 Analysed for reporting purpose as: Current liabilities Non-current liabilities	In relation to plant, property and equipment RMB’000 7,910 7,300 – 15,210 7,580 (3,275) 19,515 52,065 (807) 70,773 As 2012 RMB’000 2,515 17,620 20,135	In relation to research and development expenses Total RMB’000 RMB’000 6,915 14,825 2,510 9,810 (4,500) (4,500) 4,925 20,135 4,408 11,988 (6,895) (10,170) 2,438 21,953 5,971 58,036 (4,780) (5,587) 3,629 74,402 at 31 December 2013 2014 RMB’000 RMB’000 410 – 21,543 74,402 21,953 74,402	Total RMB’000 14,825 9,810 (4,500)
			20,135 11,988 (10,170)
			21,953 58,036 (5,587)
			74,402

			74,402

Government subsidies in respect of i) construction and acquisition of property, plant and equipment are included in the consolidated statement of financial position as deferred revenue and credited to the profit or loss on a systematic basis over the useful lives of the related assets; and ii) compensations of research and development expenses to be incurred are recognised as deferred revenue and are credited to profit or loss in the period when such expenses are actually incurred.

26. REGISTERED CAPITAL

At 1 January 2012, 31 December 2012, 2013 and 2014	Registered capital RMB’000 94,556	Paid-up capital RMB’000 94,556

The Target Company’s registered capital is RMB94,556,000, which had been fully paid.

– II-32 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

27. FINANCIAL INSTRUMENTS

a. Categories of financial instruments

Financial assets Loans and receivables (including cash and cash equivalent) Financial assets at FVTPL Financial liabilities Amortised cost	As 2012 RMB’000 847,943 256,000 352,462	at 31 December 2013 2014 RMB’000 RMB’000 963,885 1,489,562 316,300 271,000 609,416 702,023	at 31 December 2013 2014 RMB’000 RMB’000 963,885 1,489,562 316,300 271,000 609,416 702,023

			702,023

b. Financial risk management objectives and policies

The Target Group’s major financial instruments include trade and other receivables, other financial assets, pledged bank deposits, cash and bank balances, trade and other payables and bank borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Market risk

The Target Group’s activities expose primarily to the market risks of changes in interest rates and foreign currency exchange rates.

There has been no significant change to the Target Group’s exposure to market risks or the manner in which it manages and measures the risk.

(i) 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.

(ii) Interest rate risk

The Target Group is exposed to cash flow interest rate risk due to fluctuations in the prevailing market interest rates on bank balances, pledged bank deposits and borrowings which carry interest at variable interest rates.

The Target Group’s cash flow interest rate risk relates primarily to variable rate borrowings. It is the Target Group’s policy to keep its borrowings at floating rate of interest so as to minimise the fair value interest rate risk. The Target Group currently does not have an interest rate hedging policy. However, the management of the Target Group monitors interest rate exposure and will consider hedging significant interest rate exposure should the need arises.

Interest rate sensitivity analyses

The sensitivity analyses below have been determined based on the exposure to benchmark interest rates promulgated by the People’s Bank of China (“PBOC”) for its bank borrowings at the end of each reporting period. The sensitivity analyses below have been

– II-33 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

determined based on the exposure to interest rates for variable interest rate bank borrowings. Bank balances and pledged bank deposits are excluded from the sensitivity analyses as a reasonably possible change in the interest rate would not have a significant effect on the Target Group’s post-tax profit during the Relevant Periods.

The analyses are prepared assuming the variable interest rate bank borrowings outstanding at the end of each reporting period were outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates on variable interest rate borrowings had been 50 basis points higher and all other variables were held constant, there would be no impact on the post-tax profit for the years ended 31 December 2012 and 2013 as the impact would be fully reflected as an adjustment to the capitalisation of borrowing costs to the qualifying assets. The potential impact on post-tax profit for the year ended 31 December 2014, after taking into account the effect of interest capitalisation, is as follows:

Post-tax profit would decrease by	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 – – 60

There would be an equal and opposite impact on the above post-tax results, should the aforesaid interest rates be lower in the above sensitivity analyses.

(iii) Price risk

The Target Group is exposed to price risk through its other financial assets. The directors of the Target Company considered the price risk is insignificant as the Target Group only invests in principal protected short term investment products which are issued by banks with good reputation.

Credit risk

The Target Group’s maximum exposure to credit risk which will cause a financial loss to the Target Group due to failure to discharge an obligation by the counterparties is arising from the carrying amounts of the respective recognised financial assets as stated in the consolidated statements of financial position.

In order to minimise the credit risk, the management of the Target Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. The amounts presented in the consolidated statements of financial position are net of allowances for doubtful receivables, if any, estimated by the Target Group’s management based on prior experience and the current economic environment. The Target Group reviews the recoverable amount of each individual debt at the end of each reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Target Group considers that the Target Group’s credit risk is significantly reduced.

The management of the Target Group considered that credit risk on liquid funds and other financial assets are limited because the counterparties are authorised banks in the PRC.

Other than those described above, the Target Group has no significant concentration of credit

risk.

– II-34 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

Liquidity risk

In the management of the liquidity risk, the Target Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Target Group’s operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of bank borrowings.

The following table sets out the Target Group’s remaining contractual maturity for its non-derivative financial liabilities as at the end of each reporting period. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Target Group can be required to pay.

Liquidity table

Weighted average interest rate % 2014 Trade and other payables – Bank borrowings – variable interest rate 6.77 2013 Trade and other payables – Bank borrowings – variable interest rate 6.77 2012 Trade and other payables – Bank borrowings – variable interest rate 6.6 – 6.77	On demand or less than 6 months RMB’000 688,023 – 688,023 579,416 – 579,416 322,462 – 322,462	6 months to 1 year RMB’000 – 14,951 14,951 – – – – – –	1-5 years Total undiscounted cash flows RMB’000 RMB’000 – 688,023 – 14,951 – 702,974 – 579,416 34,212 34,212 34,212 613,628 – 322,462 36,535 36,535 36,535 358,997	Carrying amounts RMB’000 688,023 14,000
				702,023

				579,416 30,000
				609,416

				322,462 30,000
				352,462

c. Fair value of financial instruments

The fair value of financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The management of the Target Group considers that the carrying amounts of financial assets and financial liabilities recognised in the statements of financial position at amortised cost approximate their fair values at the end of each reporting period.

The other financial assets of the Target Group are stated as Level 3 fair value measurement. Fair value of other financial assets is determined in accordance with generally accepted pricing models based on discounted cash flow analysis. Future cash flows are estimated based on expected interest rates. Details of the terms of the other financial assets are set out in note 21.

– II-35 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

Fair value of the Target Group’s other financial assets measured at fair value on a recurring basis

The Target Group’s other financial assets are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these other financial assets are determined (in particular, the valuation technique(s) and inputs used).

							Relationship of
				Fair		Significant	unobservable
	Fair value	as at 31	December	value		unobservable	input with fair
Financial assets	2012	2013	2014	hierarchy	Valuation technique	inputs	value
	RMB’000	RMB’000	RMB’000
Other financial assets	256,000	316,300	271,000	Level 3	Income approach – in	Expected rate of	The higher the
(see note 21)					this approach, the	returns and	expected return,
					discounted cash flow	discount rate	the higher the fair
					method was used to		value. The higher
					capture the present		the discount rate,
					value of the expected		the lower the fair
					cash flows to be		value.
					received from these
					investments.

Reconciliation of Level 3 fair value measurements

At 1 January 2012 Total gains recognised in profit or loss Cash settlements Purchases Disposals At 31 December 2012 Total gains recognised in profit or loss Cash settlements Purchases Disposals At 31 December 2013 Total gains recognised in profit or loss Cash settlements Purchases Disposals At 31 December 2014	Other financial assets RMB’000 – 4,193 (4,193) 1,159,390 (903,390) 256,000 9,839 (9,839) 1,997,173 (1,936,873) 316,300 10,675 (10,675) 2,582,000 (2,627,300) 271,000

– II-36 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

28. PLEDGE OF ASSETS

The following assets were pledged to secure bank loans and other banking facilities granted to the Target Group at the end of each of the Relevant Periods:

Pledged bank deposits Prepaid lease payments	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 440 – 1,273 24,603 24,072 20,339 25,043 24,072 21,612	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 440 – 1,273 24,603 24,072 20,339 25,043 24,072 21,612
		21,612

29. CAPITAL RISK MANAGEMENT

The Target Group manages its capital to ensure that the Target Group will be able to continue as a going concern while maximising the return to equity owners through the optimisation of the debt and equity balance. The Target Group’s overall strategy remains unchanged throughout the Relevant Periods.

The capital structure of the Target Group consists of bank borrowings disclosed in note 24, cash and cash equivalents and equity attributable to owners of the Target Company, comprising paid-in capital and reserves.

The management of the Target Group reviews the capital structure regularly. As part of this review, the management considers the cost of capital and the risks associated with each class of capital, and will balance its overall capital structure through the payment of dividends, new capital injection as well as the issue of new debt or the redemption of existing debt.

30. OPERATING LEASES

The Target Group as lessee

Minimum lease payments under operating leases during the Relevant Periods:

Factory and office premises Land (note)	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 612 1,756 1,776 1,093 2,259 2,514 1,705 4,015 4,290	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 612 1,756 1,776 1,093 2,259 2,514 1,705 4,015 4,290
		4,290

Note: During the year ended 31 December 2012, the Target Company entered into a lease agreement with an independent third party for rental of a piece of land for a term of 14 years for the purpose of future cultivation. The lease agreement was terminated on 1 January 2015.

– II-37 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

At the end of each of the Relevant Periods, the Target Group had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 2,509 3,377 732 2,854 2,202 1,477 5,363 5,579 2,209	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 2,509 3,377 732 2,854 2,202 1,477 5,363 5,579 2,209
		2,209

Leases are negotiated for a term ranging from 1 year to 4 years for the Relevant Periods. Rentals are fixed at the date of signing of lease agreements.

31. CAPITAL COMMITMENTS

Capital expenditure in respect of acquisition of property, plant and equipment, contracted for but not provided in the Target Group Financial Information	Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 167,374 87,582 25,300

32. RETIREMENT BENEFITS SCHEMES

The employees of the Target Group are members of state-managed retirement benefit Schemes operated by the PRC government. The Target Group is required to contribute certain percentage of payroll costs to the retirement benefit schemes to fund the benefit. The only obligation of the Target Group with respect to the retirement benefit schemes is to make the specific contributions.

B. EVENT AFTER THE RELEVANT PERIODS

(a) On 22 January 2015, the Target Company established a 51% owned subsidiary in the PRC, Sichuan Tianhao Pharmaceutical Company Limited（四川天濠药业有限公司）(“Sichuan Tianhao”), together with an independent third party company. The principal activities of Sichuan Tianhao are plantation, purchase and sales of TCM and other agricultural products. The registered capital of Sichuan Tianhao is RMB10,000,000 and RMB5,100,000 is attributable to the Target Company.
(b) The Target Group deregistered Hengfeng in January 2015.

C. SUBSEQUENT FINANCIAL INFORMATION

No audited financial statements have been prepared by the companies comprising the Target Group subsequent to 31 December 2014.

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

– II-38 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

2. MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

For the year ended 31 December 2014

Business review

The Target Group is principally engaged in the business of developing, producing and marketing concentrated TCM granules. For the year ended 31 December 2014, the Target Group continuously carried out the sales and marketing of concentrated TCM granules, its principal products, to province-level and city-level TCM hospitals and general hospitals across the PRC. It also increased its marketing activities through customer-friendly marketing methods, and developing potential value of major clients in terms of sales amount, academic influence and profitability. The Target Group also made good use of its talents and social resources to foster diversity in its development modes and attain higher market share.

Results

For the year ended 31 December 2014, the Target Group recorded turnover of approximately RMB3,129 million, representing an increase of approximately 25.31% as compared with the previous year. Such increase was mainly attributable to the increase in demand of its principal products. Impetus of the industry’s rapid development came from two sources: first, it was the comeback of TCM in modern society after a rediscovery of its efficacy, and, second, it was the edge of concentrated TCM granules over TCM decoction pieces in usage, efficacy and portability. Both of the above fueled the momentum of the growth of the concentrated TCM granule business.

The Target Group recorded gross profit of approximately RMB1,667 million, representing an increase of approximately 26.19% as compared with the previous year as a result of the increase in turnover as described above.

For the year ended 31 December 2014, the Target Group’s net profit from continuing operations was approximately RMB652 million, representing an increase of approximately 20.07% as compared with the previous year.

Liquidity and financial position

As at 31 December 2014, the Target Group’s current assets amounted to approximately RMB2,515 million, which included cash and cash equivalents of approximately RMB258 million. Current liabilities amounted to approximately RMB793 million. Net current assets amounted to approximately RMB1,722 million. The Target Group’s current ratio was approximately 3.17.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.005 as at 31 December 2014.

– II-39 –

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

As at 31 December 2014, the Target Group recorded trade receivables of approximately RMB1,116.4 million. The increase in trade receivables was mainly due to the increase in the business scale of the Target Group.

As at 31 December 2014, the Target Group recorded trade payables of approximately RMB501.3 million. The increase in trade payables was mainly due to the increase in the business scale of the Target Group.

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 2014, the capital requirement of the Target Group was funded by internal resources and debts.

As at 31 December 2014, the Target Group had bank loans of approximately RMB14.00 million (all of which are subject to variable interest rate) which were repaid as at March 2015. Save as disclosed, no other asset was pledged by the Target Group.

Contingent liabilities

As at 31 December 2014, the Target Group did not have any contingent liability.

Employees and remuneration policies

As at 31 December 2014, the Target Group had 2,214 full-time employees, whose total emoluments for the year ended 31 December 2014 were approximately RMB155.7 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 2014, the Target Group invested RMB400 million in a 3,000 tonnes project of concentrated TCM granule industrialization facilities at 1, Xinsheng Road, Jiangyin, RMB200 million in a 10,000 tonnes/year project of TCM materials extraction for Tianxiang, and RMB20 million in Tianxiang to increase its registered capital for higher liquidity.

GD Yifang invested a total of RMB280 million in the construction of a new plant at the south side of Jinfeng Road, Lishui Town, Nanhai District, Foshan, in the vicinity of Heshun Chengqu. LX Yifang invested RMB120 million in an expansion project to construct new processing facilities and extraction and production lines at Binhe Road.

– II-40 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Material acquisition and disposal of subsidiaries and associated companies

For the year ended 31 December 2014, the Target Group divested without any loss all of its investment in 內蒙古天盛中藥種植有限責任公司 (Inner Mongolia Tiansheng Chinese Medicine Plantation Co., Ltd.*), amounting to RMB1.20 million.

Future plan for material investments

In 2015, with a view to developing the market in Sichuan Province, the Target Group plans to invest jointly with 四川天雄藥業有限公司 (Sichuan Tianxiong Pharmaceutical Co., Ltd.) (“Sichuan Tianxiong”) a total of RMB10 million to establish 四川天濠藥業有限公司 (Sichuan Tianhao Pharmaceutical Co., Ltd.) in An County of Sichuan Province, and establish a TCM materials extraction project with an annual capacity of 1,500 tonnes. In such investment, the Target Group and Sichuan Tianxiong will contribute RMB5.10 million and RMB4.90 million, representing a shareholding of 51% and 49%, respectively.

For the year ended 31 December 2013

Business review

The Target Group is principally engaged in the business of developing, producing and marketing concentrated TCM granules. For the year ended 31 December 2013, the Target Group continuously carried out the sales and marketing of concentrated TCM granules, its principal products, to province-level and city-level TCM hospitals and general hospitals across the PRC. It also increased its marketing activities through customer-friendly marketing methods, and developing potential value of major clients in terms of sales amount, academic influence and profitability. The Target Group also made good use of its talents and social resources to foster diversity in its development modes and attain higher market share.

Results

For the year ended 31 December 2013, the Target Group recorded turnover of approximately RMB2,497 million, representing an increase of approximately 31.98% as compared with the previous year. Such increase was mainly attributable to the increase in demand of its principal products. Impetus of the industry’s rapid development came from two sources: first, it was the comeback of TCM in modern society after a rediscovery of its efficacy, and, second, it was the edge of concentrated TCM granules over TCM decoction pieces in usage, efficacy and portability. Both of the above fueled the momentum of the growth of the concentrated TCM granule business.

The Target Group recorded gross profit of approximately RMB1,321 million, representing an increase of approximately 19.66% as compared with the previous year as a result of the increase in turnover as described above. Gross profit margin decreased from approximately 58.35% in 2012 to 52.90%, which was mainly due to the significant hike in the price of TCM materials which was not timely reflected in selling prices.

– II-41 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

For the year ended 31 December 2013, the Target Group’s net profit from continuing operations was approximately RMB543 million, representing an increase of approximately 5.03% as compared with the previous year, which was mainly due to improved economies of scale.

Liquidity and financial position

As at 31 December 2013, the Target Group’s current assets amounted to approximately RMB2 billion, which included cash and cash equivalents and deposits with banks of approximately RMB54 million. Current liabilities amounted to approximately RMB668 million. Net current assets amounted to approximately RMB1,333 million. The Target Group’s current ratio was approximately 2.99.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.015 as at 31 December 2013.

As at 31 December 2013, the Target Group recorded trade receivables of approximately RMB851.6 million. The increase in trade receivables is mainly due to the increase in the business scale of the Target Group.

As at 31 December 2013, the Target Group recorded trade payables of approximately RMB425.8 million. The increase in trade payables is mainly due to the increase in the business scale of the Target Group.

Capital structure and pledge of assets

As at 31 December 2013, the capital requirement of the Target Group was funded by internal resources and debts.

As at 31 December 2013, the Target Group had bank loans of RMB30 million (subject to variable interest rate) which were repayable on demand and secured by the Target Group’s land. Save as disclosed, no other asset was pledged by the Target Group.

Contingent liabilities

As at 31 December 2013, the Target Group did not have any contingent liability.

– II-42 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Employees and remuneration policies

As at 31 December 2013, the Target Group had 1,967 full-time employees, whose total emoluments for the year ended 31 December 2013 were approximately RMB134.2 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 2013, the Target Group invested RMB400 million in a 3,000 tonnes project of concentrated TCM granule industrialization facilities at 1, Xinsheng Road, Jiangyin and RMB200 million in a 10,000 tonnes/year project of TCM materials extraction for Tianxiang.

Material acquisition and disposal of subsidiaries and associated companies

As at 31 December 2013, the Target Group invested RMB1.20 million in establishing 內蒙古天盛中藥種植有限責任公司 (Inner Mongolia Tiansheng Chinese Medicine Plantation Co., Ltd.*), holding 40% shares therein. 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 2013.

For the year ended 31 December 2012

Business review

The Target Group is principally engaged in the business of developing, producing and marketing concentrated TCM granules. For the year ended 31 December 2012, the Target Group continuously carried out the sales and marketing of concentrated TCM granules, its principal products, mainly to TCM hospitals and general hospitals of different levels across the PRC. It also increased its marketing activities through customer-friendly marketing methods, and developing potential value of major clients in terms of sales amount, academic influence and profitability. The Target Group also made good use of its talents and social resources to foster diversity in its development modes and attain higher market share.

Results

For the year ended 31 December 2012, the Target Group recorded turnover of approximately RMB1,892 million, representing an increase of approximately 51.72% as compared with the previous year. Such increase was mainly attributable to the increase in demand of its principal products. Impetus of the industry’s rapid development came from two sources: first, it was the comeback of TCM in modern society after a rediscovery of its

– II-43 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET GROUP

efficacy, and, second, it was the edge of concentrated TCM granules over TCM decoction pieces in usage, efficacy and portability. Both of the above fueled the momentum of the growth of the concentrated TCM granule business.

The Target Group recorded gross profit of approximately RMB1,104 million, representing an increase of approximately 62.35% as compared with the previous year as a result of the increase in turnover as described above. Gross profit margin increased from 54.53% in 2011 to 58.35%, which was mainly due to the higher production volume and lower production costs as compared with the previous year.

For the year ended 31 December 2012, the Target Group’s net profit from continuing operations was approximately RMB517 million, representing an increase of approximately 76.45% as compared with the previous year, mainly due to the higher sales volume for 2012.

Liquidity and financial position

As at 31 December 2012, the Target Group’s current assets amounted to approximately RMB1,591 million, which included cash and cash equivalents and deposits with banks of approximately RMB198 million. Current liabilities amounted to approximately RMB399 million. Net current assets amounted to approximately RMB1,192 million. The Target Group’s current ratio was approximately 3.99.

The gearing ratio (defined as bank loans divided by the equity attributable to equity shareholders of the Target Company) was approximately 0.020 as at 31 December 2012.

Capital structure and pledge of assets

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 RMB30 million (subject to variable interest rate) which were repayable on demand and secured by the Target Group’s land. Save as disclosed, no other asset was pledged by the Target Group.

Contingent liabilities

As at 31 December 2012, the Target Group did not have any contingent liability.

– II-44 –

FINANCIAL INFORMATION OF THE TARGET GROUP

APPENDIX II

Employees and remuneration policies

As at 31 December 2012, the Target Group had 1,649 full-time employees, whose total emoluments for the year ended 31 December 2012 were approximately RMB95.1 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 invested RMB400 million in a 3,000 tonnes project of concentrated TCM granule industrialization facilities at 1, Xinsheng Road, Jiangyin, RMB200 million in a 10,000 tonnes/year project of TCM materials extraction for Tianxiang, and RMB155 million in GD Yifang to increase its registered capital.

As at 31 December 2012, GD Yifang invested a total of RMB280 million in the construction of a new plant at the south side of Jinfeng Road, Lishui Town, Nanhai District, Foshan, in the vicinity of Heshun Chengqu, and invested RMB25 million into LX Yifang to increase the registered capital thereof from RMB5 million to RMB30 million primarily for higher liquidity.

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.

– II-45 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a report received from the reporting accountants, KPMG, Certified Public Accountants, Hong Kong, in respect of the Enlarged Group’s pro forma financial information for the purpose of inclusion in this circular.

A. Independent reporting accountants’ assurance report on the compilation of pro forma financial information

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

24 June 2015

To the Directors of China Traditional Chinese Medicine Co. Limited

We have completed our assurance engagement to report on the compilation of pro forma financial information of China Traditional Chinese Medicine Co. 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 31 December 2014 and the unaudited pro forma consolidated income statement and pro forma consolidated cash flow statement for the year ended 31 December 2014 and related notes as set out on pages 4 to 12 of Appendix III to the circular dated 24 June 2015 (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 of 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 the 87.30% equity interest in Jiangyin Tianjiang Pharmaceutical Co. Ltd. (the “Acquisition”) and the proposed subscription of new shares of the Company by Mr. Tan Dengping (the Vendor C) and Ms. Zhou Jialin (the Vendor E) (the “Vendors Subscriptions”) on the Group’s financial position as at 31 December 2014 and the Group’s financial performance and cash flows for the year ended 31 December 2014 as if the Acquisition and the Vendors Subscriptions had taken place at 31 December 2014. As part of this process, information about the Group’s financial position as at 31 December 2014 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.

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”).

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

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 31 December 2014 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
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.

– III-2 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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 Hong Kong

– III-3 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

B. Unaudited Pro Forma Financial Information of the Enlarged Group

1. Introduction

The unaudited pro forma financial information of the Enlarged Group comprising the unaudited pro forma consolidated statement of financial position as at 31 December 2014, the unaudited pro forma consolidated income statement and the unaudited pro forma consolidated cash flow statement for the year ended 31 December 2014, has been prepared to illustrate the effects of the Acquisition and the Vendors Subscriptions. Details of the Acquisition and the Vendors Subscriptions are set out in the section headed “Letter from the Board” contained in this Circular.

The unaudited 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 for illustrative purposes only.

The unaudited pro forma financial information of the Enlarged Group is prepared based upon: (i) the Group’s financial position as at 31 December 2014 and the Group’s financial performance and cash flows for the year ended 31 December 2014 which have been extracted from the Group’s annual report for the year ended 31 December 2014; (ii) the Target Group’s financial position as at 31 December 2014 and the Target Group’s financial performance and cash flows for the year ended 31 December 2014 as extracted from the accountant’s report set out in Appendix II to this Circular, and (iii) adjusted on a pro forma basis to reflect the effects of the Acquisition and the Vendors Subscriptions. These pro forma adjustments are (i) directly attributable to the Acquisition and the Vendors Subscriptions and not relating to other future events and decision; (ii) factually supportable based on the terms of the agreements dated 31 December 2014, 15 January 2015, 17 March 2015 and 18 March 2015 respectively entered into among the Company and its subsidiaries and the Target Company (the “Acquisition Agreements”); and (iii) factually supportable based on the terms of the relevant agreements dated 15 May 2015 entered into among the Company and the Vendor C and Vendor E (the “Trustee Subscription Agreements”).

The financial information of the Group and the Target Group as mentioned above have been prepared in accordance with the Hong Kong Financial Reporting Standards (“HKFRSs”) issued by HKICPA. No material adjustment is required to be made to conform the accounting policies of the Target Group to those of the Group. In addition, the relevant balances extracted from the Target Group’s financial information have been reclassified to conform with the presentation format adopted by the Group.

The unaudited pro forma financial information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. 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 Vendors Subscriptions been completed on 31 December 2014; and (ii) the actual results and cash flows of the Enlarged Group that would have been attained had the Acquisition and the Vendors Subscriptions been completed on 1 January 2014. The unaudited 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

Non-current assets Fixed assets – Investment properties – Other 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 assets Deferred tax assets Current assets Other financial assets Inventories Trade and other receivables Deposits with banks Cash and cash equivalents Current liabilities Trade and other payables Bank and other loans Current taxation Current portion of deferred government grants Net current assets/(liabilities) Total assets less current liabilities	The Group as at 31 December 2014 (Audited) RMB’000 2,651 674,696 282,893 76,074 12,569 1,048,883 948,005 1,191,052 1,010 48,424 3,237,374 - - - - - - - - 662 417,695 1,236,400 305 439,416 2,094,478 - - - - - - - - 540,113 501,648 47,743 44,337 1,133,841 - - - - - - - - 960,637 - - - - - - - - -------------------------------- 4,198,011 - - - - - - - - --------------------------------	The Target Group as at 31 December 2014 (Audited) RMB’000 – 656,759 96,647 117,927 26,320 897,653 20 2,189 – 22,363 922,225 - - - - - - - - 271,000 740,168 1,246,497 1,273 256,254 2,515,192 - - - - - - - - 735,061 14,000 44,411 – 793,472 - - - - - - - - 1,721,720 - - - - - - - - -------------------------------- 2,643,945 - - - - - - - - --------------------------------	Pro forma adjustments (Unaudited) RMB’000 – – – – – – – 6,493,013 – – 6,493,013 - - - - - - - - – – – – (8,736,224) (8,736,224) - - - - - - - - – – – – – - - - - - - - - (8,736,224) - - - - - - - - -------------------------------- (2,243,211) - - - - - - - - --------------------------------	Pro forma adjustments (Unaudited) RMB’000 – – – – – – – – – – – - - - - - - - - – – – – 666,338 666,338 - - - - - - - - – – – – – - - - - - - - - 666,338 - - - - - - - - -------------------------------- 666,338 - - - - - - - - --------------------------------	Pro forma adjustments Notes (Unaudited) RMB’000 – – – – – – – – 5c – – – - - - - - - - - – – – – (20,000) 5a, b and e (20,000) - - - - - - - - – – – – – - - - - - - - - (20,000) - - - - - - - - -------------------------------- (20,000) - - - - - - - - --------------------------------	The Enlarged Group (Unaudited) RMB’000 2,651 1,331,455 379,540 194,001 38,889
						1,946,536 948,025 7,686,254 1,010 70,787
						10,652,612 - - - - - - - - 271,662 1,157,863 2,482,897 1,578 (7,394,216)
						(3,480,216) - - - - - - - - 1,275,174 515,648 92,154 44,337
						1,927,313 - - - - - - - - (5,407,529) - - - - - - - - -------------------------------- 5,245,083 - - - - - - - - --------------------------------

– III-5 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Non-current liabilities Deferred tax liabilities Deferred government grants Bank loans NET ASSETS/(LIABILITES) CAPITAL AND RESERVES Share capital: nominal value Other statutory capital reserves Share capital and other statutory capital reserves Other reserves Total equity attributable to equity shareholders of the Company Non-controlling interests Total equity	The Group as at 31 December 2014 (Audited) RMB’000 245,022 25,302 670,565 940,889 - - - - - - - - -------------------------------- 3,257,122 – – 2,542,246 641,510 3,183,756 73,366 3,257,122	The Target Group as at 31 December 2014 (Audited) RMB’000 – 74,402 – 74,402 - - - - - - - - -------------------------------- 2,569,543 – – 518,634 2,050,909 2,569,543 – 2,569,543	Pro forma adjustments (Unaudited) RMB’000 – – – – - - - - - - - - -------------------------------- (2,243,211) – – (518,634) (2,050,909) (2,569,543) 326,332 (2,243,211)	Pro forma adjustments (Unaudited) RMB’000 – – – – - - - - - - - - -------------------------------- 666,338 – – 666,338 – 666,338 – 666,338	Pro forma adjustments Notes (Unaudited) RMB’000 – – – – - - - - - - - - -------------------------------- (20,000) – – – 5b and d (20,000) 5d and e (20,000) – 5c (20,000)	The Enlarged Group (Unaudited) RMB’000 245,022 99,704 670,565
						1,015,291 - - - - - - - - -------------------------------- 4,229,792

						– –
						3,208,584 621,510
						3,830,094 399,698
						4,229,792

– 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 2014

Turnover Cost of sales Gross profit Other revenue Other net (expenses)/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 (Audited) RMB’000 2,690,173 (1,035,850) 1,654,323 38,413 (3,516) (903,493) (240,337) 545,390 (64,217) 481,173 (69,627) 411,546 413,090 (1,544) 411,546	The Target Group (Audited) RMB’000 3,128,766 (1,461,927) 1,666,839 7,949 7,754 (674,338) (245,315) 762,889 (670) 762,219 (110,499) 651,720 651,720 – 651,720	Pro forma adjustments Notes (Unaudited) RMB’000 – – – – – – (20,000) 5e (20,000) – 5f (20,000) – (20,000) (20,000) – (20,000)	The Enlarged Group (Unaudited) RMB’000 5,818,939 (2,497,777) 3,321,162 46,362 4,238 (1,577,831) (505,652) 1,288,279 (64,887) 1,223,392 (180,126) 1,043,266 1,044,810 (1,544) 1,043,266

– 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 2014

Operating activities Cash generated from operations PRC enterprise income tax paid Net cash generated from operating activities Investing activities Payment for the purchase of property, plant and equipment and construction in process Payment for the purchase of intangible assets Payment for the purchase of leasehold land held for own use under operating leases Proceeds from disposal of fixed assets Change in deposits with banks Payment for purchase of other financial assets Proceeds from disposal of other financial assets Proceeds from disposal of a joint venture Interest received Cash consideration paid for the acquisition of subsidiaries, net of cash acquired Transaction costs for acquisition of subsidiaries Net cash used in investing activities Financing activities Proceeds from new bank and other loans Proceeds from issuance of shares Repayment of proceeds from a related party Repayment of bank loans Interest paid Other borrowing costs paid Dividend paid	The Group (Audited) RMB’000 417,843 (92,844) 324,999 - - - - - - - - - (94,604) (644) (11,174) 14,572 3,934 (5,000) 10,000 – 1,694 – – (81,222) - - - - - - - - - 749,648 – (5,000) (821,884) (64,217) (8,231) –	The Target Group (Audited) RMB’000 599,766 (120,341) 479,425 - - - - - - - - - (228,652) (21) (7,140) 20,213 (1,273) (2,582,000) 2,627,300 1,200 11,317 – – (159,056) - - - - - - - - - – – – (16,000) (2,021) – (100,000)	Pro forma adjustments (Unaudited) RMB’000 – – – - - - - - - - - - – – – – – – – – – (8,682,318) – (8,682,318) - - - - - - - - - – – – – – – –	Pro forma adjustments (Unaudited) RMB’000 – – – - - - - - - - - - – – – – – – – – – – – – - - - - - - - - - – 666,338 – – – – –	Pro forma adjustments (Unaudited) RMB’000 – – – - - - - - - - - - – – – – – – – – – – (20,000) (20,000) - - - - - - - - - – – – – – – –	Notes 5a 5e 5b	The Enlarged Group (Unaudited) RMB’000 1,017,609 (213,185)
							804,424 - - - - - - - - - (323,256) (665) (18,314) 34,785 2,661 (2,587,000) 2,637,300 1,200 13,011 (8,682,318) (20,000)
							(8,942,596) - - - - - - - - - 749,648 666,338 (5,000) (837,884) (66,238) (8,231) (100,000)

– III-8 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Net cash (used in)/ generated from financing activities Net increase/(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	The Group (Audited) RMB’000 (149,684) - - - - - - - - - 94,093 345,411 (88) 439,416	The Target Group (Audited) RMB’000 (118,021) - - - - - - - - - 202,348 53,906 – 256,254	Pro forma adjustments (Unaudited) RMB’000 – - - - - - - - - - (8,682,318) (53,906) – (8,736,224)	Pro forma adjustments (Unaudited) RMB’000 666,338 - - - - - - - - - 666,338 – – 666,338	Pro forma adjustments Notes (Unaudited) RMB’000 – - - - - - - - - - (20,000) – 5a – (20,000)	The Enlarged Group (Unaudited) RMB’000 398,633 - - - - - - - - - (7,739,539) 345,411 (88) (7,394,216)

Note: Reconciliation of profit before taxation to cash generated from operations:

Profit before taxation Adjustments for: Depreciation and amortisation Impairment loss recognised on/(written back) – trade receivables – other receivables Finance costs Interest income Loss on disposal of fixed assets Unrealised loss on equity securities (at fair value) Foreign exchange loss/(gain) Increase in inventories Increase in trade and other receivables (Decrease)/increase in trade and other payables Transaction costs for acquisition of subsidiaries Cash generated from operations	The Group (Audited) RMB’000 481,173 119,098 5,627 (1,327) 64,217 (1,694) 559 502 1,688 (12,191) (223,624) (16,185) – 417,843	The Target Group (Audited) RMB’000 762,219 42,326 24,982 591 670 (11,317) 184 – – (43,009) (342,243) 165,363 – 599,766	Pro forma adjustments Notes (Unaudited) RMB’000 (20,000) 5e – – – – – – – – – – – 20,000 5e –	The Enlarged Group (Unaudited) RMB’000 1,223,392 161,424 30,609 (736) 64,887 (13,011) 743 502 1,688 (55,200) (565,867) 149,178 20,000 1,017,609

– III-9 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

5. Notes to the unaudited pro forma financial information of the Enlarged Group

a. Pursuant to the terms of the Acquisition Agreements to acquire the 87.30% of equity interest in the Target Group, the total consideration for the Acquisition shall be not less than RMB8,192,720,000 and not more than RMB8,946,020,000 through cash payment. For the purpose of this pro forma financial information, the Directors assume all the Acquisition Agreements will be completed and the total consideration amounts to RMB8,736,224,000.

Analysis of the net cash outflow in respect of the Acquisition assuming the completion of the Acquisition as at 1 January 2014:

Cash payment Less: Cash and cash equivalent of the Target Group as at 1 January 2014 Net cash outflow	RMB’000 8,736,224 (53,906) 8,682,318

b. On 15 May 2015, the Company and Mr. Tan Dengping (Vendor C) and Ms. Zhou Jialin (Vendor E), entered into a Trustee Subscription Agreement pursuant to which Vendor C and Vendor E agreed, subject to fulfillment of certain conditions including approval from the shareholders at an extraordinary general meeting to be held, to subscribe for 197,749,762 shares at HK$4.212 per share for a total amount of RMB666,338,000.

The estimated related expenses directly attributable to the abovementioned Vendors Subscriptions are insignificant.

The proceeds have been reflected as pro forma adjustments in the pro forma statement of financial position of the Enlarged Group.

c. 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 purposes of the unaudited 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 31 December 2014. As a result, the

– III-10 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

unaudited 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 31 December 2014 Add: Net identifiable assets of the Target Group attributable to the non-controlling interests Goodwill	RMB’000 8,736,224 (2,569,543) 326,332 6,493,013

The amount of goodwill of the Target Group and the 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. In addition, intangible assets of the Target Group which were not otherwise recognised in the historical financial information may be recognised at their fair value upon completion of the Acquisition. Therefore, the amounts of goodwill and of other assets and liabilities of the Target Group may be different from the estimates used in the preparation of the unaudited pro forma financial information presented above. The actual depreciation and amortization (and related deferred tax thereron) 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 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.

d. The adjustments represent the elimination of (i) the share capital and capital reserves of the Target Group amounting to RMB518,634,000, and (ii) the pre-acquisition reserves of the Target Group amounting to RMB2,050,909,000 on consolidation.
e. The adjustments represent estimated transaction costs for the Acquisition of approximately RMB20,000,000 which are expensed in the unaudited pro forma consolidated income statement as incurred. These adjustments are not expected to have a continuing effect on the Enlarged Group.

– III-11 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

f. The Group will fund the Acquisition with its existing cash resources, share issuance and new bank loan facilities. The Group is currently discussing with several commercial banks and other financial institutions in relation to borrowing funds to cover funding requirements in relation to the Acquisition. In addition to the equity issuance as disclosed in note 5(b), the Company considers that no other equity issuance will be taken into account in the pro forma financial information. 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.

– III-12 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

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

2. SHARE CAPITAL

The Company has no authorised share capital and its Shares have no par value. The issued share capital of the Company as at the Latest Practicable Date were and upon Completion will be as follows:

Issued and fully paid or to be issued

Shares in issue as at the Latest Practicable Date Shares to be issued under the Vendor C Trustee Subscription Agreement Shares to be issued under the Vendor E Trustee Subscription Agreement	4,285,997,868 80,149,157 117,600,605
	4,483,747,630

– IV-1 –

GENERAL INFORMATION

APPENDIX IV

3. DISCLOSURE OF INTERESTS

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

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

			Approximate
Name of	Capacity/Nature of		percentage of the
Directors	Interest	Number of Shares	issued Shares
			(Note 5)
Mr. Wang	Interest in controlled	376,735,042	8.79%
Xiaochun	corporation	(long position)
(“Mr. Wang”)		(Note 1)
	Interest in controlled	150,000,000	3.50%
	corporation	(short position)
		(Note 2)
Mr. Yang Bin	Interest in controlled	376,735,042	8.79%
(“Mr. Yang”)	corporation	(long position)
		(Note 3)
	Interest in controlled	71,037,863	1.66%
	corporation	(short position)
		(Note 4)

Notes:

The 376,735,042 Shares are held by Hanmax Investment Limited (“Hanmax”), which is wholly owned by Mr. Wang.
On 26 March 2014, 150,000,000 Shares were charged to Design Time Limited by Hanmax as security to guarantee the liabilities of a private company wholly owned by Mr. Wang under an agreement dated 3 March 2014.
The 376,735,042 Shares are held by Profit Channel Development Limited (“Profit Channel”), which is wholly owned by Mr. Yang.
Profit Channel pledged 71,037,863 Shares to CNPGC as security in connection with the Company’s bank borrowing to finance the Company’s acquisition of Tongjitang Chinese Medicines Company.
Based on 4,285,997,868 Shares in issue as at the Latest Practicable Date.

– IV-2 –

GENERAL INFORMATION

APPENDIX IV

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.

(ii) Interests of substantial Shareholders

			Approximate
	Capacity/		percentage of the
Name	Nature of Interest	Number of Shares	issued Shares
			(Note 7)
Sinopharm	Beneficial owner	1,614,313,642	37.66%
		(long position)
		(Note 1)
CNPGC	Interest of controlled	1,614,313,642	37.66%
	corporations	(long position)
		(Note 1)
	Security interest	71,037,863	1.66%
		(long position)
		(Note 2)
Profit Channel	Beneficial owner	376,735,042	8.79%
		(long position)
	Beneficial owner	71,037,863	1.66%
		(short position)
		(Note 2)
Hanmax	Beneficial owner	376,735,042	8.79%
		(long position)
		(Note 3)
	Beneficial owner	150,000,000	3.50%
		(short position)
		(Note 3)

– IV-3 –

APPENDIX IV

GENERAL INFORMATION

			Approximate
	Capacity/		percentage of the
Name	Nature of Interest	Number of Shares	issued Shares
			(Note 7)
China Construction	Person having a security	150,000,000	3.50%
Bank Corporation	interest in shares	(long position)
	(Notes 4 and 5)
	Interest of controlled	74,786,000	1.74%
	corporations	(long position)
	(Notes 4 and 5)
Central Huijin	Person having a security	150,000,000	3.50%
Investment Ltd.	interest in shares	(long position)
	(Notes 4 and 5)
	Interest of controlled	74,786,000	1.74%
	corporations	(long position)
	(Notes 4 and 5)
GIC Private	Beneficial owner	104,326,000	2.43%
Limited		(long position)
	Interest of controlled	213,674,000	4.99%
	corporations	(long position)
	(Note 6)

Notes:

1,614,313,642 Shares are held by Sinopharm, which is indirectly wholly owned by CNPGC.
Profit Channel (wholly owned by Mr. Yang) pledged 71,037,863 Shares to CNPGC as security in connection with the Company’s bank borrowing to finance the Company’s acquisition of Tongjitang Chinese Medicines Company.
The 376,735,042 Shares are held by Hanmax which is wholly owned by Mr. Wang. On 26 March 2014, 150,000,000 Shares were charged to Design Time Limited by Hanmax as security to guarantee the liabilities of a private company wholly owned by Mr. Wang under an agreement dated 3 March 2014.
The interests of Central Huijin Investment Ltd. and China Construction Bank Corporation relate to the same block of Shares.

– IV-4 –

GENERAL INFORMATION

APPENDIX IV

Central Huijin Investment Ltd. is the holding company of China Construction Bank Corporation and is deemed to be interested in the Shares in which China Construction Bank Corporation is interested through interests of corporations controlled by its as follows:

Name of	Name of	Percentage
Controlled Corporation	Controlling Shareholder	Control
China Construction Bank	Central Huijin Investment Ltd.	57.26%
Corporation
CCB International Group	China Construction Bank Corporation	100%
Holdings Limited
CCB Financial Holdings Limited	CCB International Group Holdings	100%
	Limited
CCB International (Holdings)	CCB Financial Holdings Limited	100%
Limited
CCBI Investments Limited	CCB International (Holdings) Limited	100%
Design Time Limited	CCBI Investments Limited	100%

213,674,000 Shares are held by City-Scape Pte. Ltd., which is an investment vehicle managed by GIC Special Investments Pte. Ltd., which is wholly owned by GIC Private Limited.
Based on 4,285,997,868 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.

(iii) 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) Other interests

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 2014 (the date to which the latest published audited consolidated financial statements of the Company were made up) up to the Latest Practicable Date. There was no contract or arrangement subsisting at the Latest Practicable Date in which a Director is materially interested which is significant in relation to the business of the Group.

– IV-5 –

GENERAL INFORMATION

APPENDIX IV

4. 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).

5. 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.

6. 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:

(i) the placing agreement dated 23 May 2013 entered into among the Company and three placing agents in relation to the placing of 225,000,000 new Shares allotted and issued by the Company at the issue price of HK$3.10 per Share, raising net proceeds of approximately HK$697.5 million;
(ii) the subscription agreement dated 23 May 2013 entered into between the Company and 華寶信託有限責任公司 (Hwabao Trust Co., Ltd) (“Sinopharm Fund Trustee”), which acts in its capacity as the trustee of 上海國藥股權投資基金合夥企業（有限合夥） (Shanghai Sinopharm Equity Investment Fund Partnership (Limited Partnership)) (“Sinopharm Fund”) and for the benefit of Sinopharm Fund, pursuant to which the Company conditionally agreed to allot and issue, and Sinopharm Fund Trustee conditionally agreed to subscribe for 125,000,000 Shares at the issue price of HK$3.10 per Share;
(iii) the agreement dated 23 May 2013 entered into among the Company, Mr. Wang, Hanmax and Fosun Industrial Co., Limited (“Fosun”) pursuant to which the Company conditionally agreed to acquire the entire equity issued share capital of Tongjitang Chinese Medicines Company (“Tongjitang”) owned by Hanmax and Fosun respectively for an aggregate consideration of RMB2,640 million;
(iv) the subscription agreement dated 23 May 2013 entered into between the Company and Mr. Yang, pursuant to which the Company conditionally agreed to allot and issue, and Mr. Yang conditionally agreed to subscribe for 66,488,379 Shares at the issue price of HK$3.10 per Share;

– IV-6 –

APPENDIX IV

GENERAL INFORMATION

(v) an agreement dated 13 August 2014 entered into between the Target Company and 赤峰市久盛創新科技投資有限公司 (Chifeng City Jiusheng Innovative Technology Investments Co., Ltd.) (“Chifeng Jiusheng”) in relation to the transfer of 40% equity interests in the registered capital of 內蒙古天盛中藥種植有限責任公司 (Inner Mongolia Tiansheng Chinese Medicine Plantation Co., Ltd.) held by the Target Company to Chifeng Jiusheng at the consideration of RMB1.2 million;
(vi) 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 Biological Technology Company Limited at the consideration of approximately RMB100.9 million;
(vii) 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 for a plot of land located at the east of Lingnan Road and south of Kuiqi Road, Chancheng District, Foshan City, Guangdong Province, the PRC at the consideration of RMB234.05 million;
(viii) the termination agreement dated 6 March 2014 entered into between Guangdong Medi-World and Foshan Shunde Hefeng Investment Co., Ltd.（佛山市順德區合峰投資有限公司）(“Shunde Hefeng”) to terminate the disposal agreement signed on 26 August 2013 between the two parties, ceasing the disposal of 51% equity capital of 貴州中泰生物科技有限公司 (Guizhou Zhongtai Biological Technology Company Limited*) (“Guizhou Zhongtai”);
(ix) the First Acquisition Agreement;
(x) the Second Acquisition Agreement;
(xi) the Third Acquisition Agreement;
(xii) an agreement dated 27 January 2015 entered into among Guangdong Medi-World and a company established in the PRC with limited liability (the “Other Vendor”) as vendors and 中國生物技術股份有限公司 (China Biotechnology Co., Ltd.*) as purchaser in relation to the disposal of 31% and 49% of the registered capital of Guizhou Zhongtai respectively for an aggregate consideration of RMB360.0 million, of which RMB139.5 million is attributable to the 31% registered capital held by Guangdong Medi-World and RMB220.5 million is attributable to the 49% registered capital held by the Other Vendor;
(xiii) a cooperation agreement dated 2 February 2015 entered into among the Target Company, 四川天雄藥業有限公司 (Sichuan Tianxiong Pharmaceutical Co., Ltd.) (“Sichuan Tianxiong”) and 安縣人民政府 (Anxian People’s Government) in relation to the establishment of a joint venture by the Target Company and

– IV-7 –

GENERAL INFORMATION

APPENDIX IV

Sichuan Tianxiong for the construction of planting-bases of TCM materials (including manufacturing plants, warehouses, ancillary buildings and dormitories) at a total investment amount of RMB200 million;

(xiv) the Fourth Acquisition Agreement;
(xv) the Fifth Acquisition Agreement;
(xvi) the Sinopharm Subscription Agreement;
(xvii) the Yang Subscription Agreement;

(xviii) the Wang Subscription Agreement;

(xix) the Investors Subscription Agreements;
(xx) the Vendor C Trustee Subscription Agreement; and
(xxi) the Vendor E Trustee Subscription Agreement.

7. EXPERTS AND CONSENTS

The following is the qualifications of the experts who have given opinion or advice which is contained or referred to in this circular:

Deloitte Touche Tohmatsu Certified Public Accountants

KPMG Certified Public Accountants

Deloitte Touche Tohmatsu and KPMG have given and have not withdrawn their written consent to the issue of this circular with inclusion of their opinion or letters and references to their name in the form and context in which they are included.

As at the Latest Practicable Date, Deloitte Touche Tohmatsu and KPMG were not beneficially interested in the share capital of any member of the Group nor have any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group. In addition, Deloitte Touche Tohmatsu and KPMG did not have any interest, either directly or indirectly, in any assets which have been, since 31 December 2014 (the date to which the latest published audited consolidated financial statements of the Company were made up), acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

8. MISCELLANEOUS

(i) The registered office and principal place of business of the Company is situated at Room 1601, Emperor Group Centre, 288 Hennessy Road, Wanchai, Hong Kong.

– IV-8 –

GENERAL INFORMATION

APPENDIX IV

(ii) 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.
(iii) 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.
(iv) In the event of any inconsistency, the English text of this circular and the accompanying form of proxy shall prevail over the Chinese text.

9. DOCUMENTS AVAILABLE FOR INSPECTION

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

(i) the memorandum of association of the Company;
(ii) the published annual reports of the Company for each of the three financial years ended 31 December 2012, 2013 and 2014;
(iii) the accountants’ report on the Target Group, the text of which is set out in Appendix II to this circular;
(iv) 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;
(v) the material contracts referred to in the section headed “Material Contracts” in this appendix; and
(vi) the letters of consent from Deloitte Touche Tohmatsu and KPMG referred to in the section headed “Experts and Consents” in this appendix.

– IV-9 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

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

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of China Traditional Chinese Medicine Co. Limited (the “ Company ”) will be held at Conference Room, 4th Floor, No.1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China on Monday, 13 July 2015 at 2:30 p.m. for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT :
(a) the conditional sale and purchase agreement dated 31 December 2014 (the “ First Acquisition Agreement ”) entered into between 上海家化聯合股份有限公司 (Shanghai Jiahua United Co., Ltd.), 廣東科達潔能股份有限公司 (Guangdong Keda Clean Energy Co., Ltd.), 譚登平先生 (Mr. Tan Dengping) (“ Vendor C ”) and 無錫國聯卓成創業投資有限公司 (Wuxi Guolian Zhuocheng Venture Capital Co., Ltd.) (“ Vendor D ”) (collectively, the “ First Vendors ”) and the Company (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), pursuant to which the First Vendors have conditionally agreed to sell, and the Company has conditionally agreed to acquire, RMB38,314,580 of the registered capital of 江陰天江藥業有限公司 (Jiangyin Tianjiang Pharmaceutical Co. Ltd.) (the “ Target Company* ”), representing approximately 40.52% of the registered capital of the Target Company, for an aggregate consideration of RMB3,961,212,815 on the terms and conditions of the First Acquisition Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed; and
(b) the directors of the Company (the “ Directors ”) acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they

– EGM-1 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the First Acquisition Agreement and the transactions contemplated thereunder.”

“ THAT :
(a) the conditional sale and purchase agreement dated 15 January 2015 (the “ Second Acquisition Agreement ”) entered into between 周嘉琳女士 (Ms. Zhou Jialin) (“ Vendor E* ”) 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), pursuant to which Vendor E has conditionally agreed to sell, and the Company has conditionally agreed to acquire, RMB8,145,500 of the registered capital of the Target Company, representing approximately 8.62% of the registered capital of the Target Company, for an aggregate consideration of RMB842,136,291 on the terms and conditions of the Second Acquisition Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed; and
(b) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Second Acquisition Agreement and the transactions contemplated thereunder.”
“ THAT :
(a) the conditional sale and purchase agreement dated 15 January 2015 (the “ Third Acquisition Agreement ”) entered into between 中金佳泰（天津）股權投資基金合夥企業（有限合夥） (CICC Jiatai (Tianjin) Equity Investment Fund Partnership (Limited Partnership)) and 中金佳天（天津）股權投資合夥企業（有限合夥） (CICC Jiatian (Tianjin) Equity Investment Partnership (Limited Partnership)) (collectively, the “ Third Vendors ”) and the Company (a copy of which has been produced to the meeting marked “C” and signed by the chairman of the meeting for the purpose of identification), pursuant to which the Third Vendors have conditionally agreed to sell, and the Company has conditionally agreed to acquire, RMB30,581,349 of the registered capital of the Target Company, representing approximately 32.34% of the registered capital of the Target Company, for an aggregate consideration of RMB3,334,240,000 on the terms and conditions of the Third Acquisition Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed; and
(b) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf

– EGM-2 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Third Acquisition Agreement and the transactions contemplated thereunder.”

“ THAT :
(a) the conditional sale and purchase agreement dated 17 March 2015 (the “ Fourth Acquistion Agreement ”) entered into between 上海冠策投資諮詢事務所 (Shanghai Guance Investment Consultancy Firm) (“ Vendor H* ”) and the Company (a copy of which has been produced to the meeting marked “D” and signed by the chairman of the meeting for the purpose of identification), pursuant to which Vendor H has conditionally agreed to sell, and the Company has conditionally agreed to acquire, RMB303,927 of the registered capital of the Target Company, representing approximately 0.32% of the registered capital of the Target Company, for an aggregate consideration of RMB31,419,421 on the terms and conditions of the Fourth Acquisition Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed; and
(b) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Fourth Acquisition Agreement and the transactions contemplated thereunder.”
“ THAT :
(a) the conditional sale and purchase agreement dated 18 March 2015 (the “ Fifth Acquisition Agreement ”) entered into between Vendor D and 廣東環球製藥有限公司 (Guangdong Medi-World Pharmaceutical Company Limited) (“ Guangdong Medi-World* ”, a wholly-owned subsidiary of the Company) (a copy of which has been produced to the meeting marked “E” and signed by the chairman of the meeting for the purpose of identification), pursuant to which Vendor D has conditionally agreed to sell, and Guangdong Medi-World has conditionally agreed to acquire, RMB5,200,000 of the registered capital of the Target Company, representing approximately 5.50% of the registered capital of the Target Company, for an aggregate consideration of RMB567,215,000 on the terms and conditions of the Fifth Acquisition Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed; and
(b) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Fifth Acquisition Agreement and the transactions contemplated thereunder.”

– EGM-3 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

“ THAT :
(a) the trustee subscription agreement dated 15 May 2015 (the “ Vendor C Trustee Subscription Agreement ”) entered into between the Company and 華寶信託有限責任公司 (Hwabao Trust Co., Ltd.) (the “ Trustee ”) (a copy of which has been produced to the meeting marked “F” and signed by the chairman of the meeting for the purpose of identification), pursuant to which the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor C for, 80,149,157 new shares of the Company (the “ Vendor C Shares* ”) at the total subscription price of RMB270,070,600 (equivalent to approximately HK$337.6 million) at the issue price of HK$4.212 per Vendor C Share subject to the terms and conditions of the Vendor C Trustee Subscription Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed;
(b) the Directors be and are hereby authorised and granted a specific mandate (the “ Vendor C Specific Mandate ”) to allot and issue to the Trustee, the Vendor C Shares in accordance with the terms and conditions of the Vendor C Trustee Subscription Agreement; and
(c) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Vendor C Trustee Subscription Agreement, the Vendor C Specific Mandate and the transactions contemplated thereunder.”
“ THAT :
(a) the trustee subscription agreement dated 15 May 2015 (the “ Vendor E Trustee Subscription Agreement ”) entered into between the Company and the Trustee (a copy of which has been produced to the meeting marked “G” and signed by the chairman of the meeting for the purpose of identification), pursuant to which the Company has conditionally agreed to allot and issue, and the Trustee has conditionally agreed to subscribe on behalf of and for the benefit of Vendor E for, 117,600,605 new shares of the Company (the “ Vendor E Shares ”) at the total subscription price of RMB396,267,000 (equivalent to approximately HK$495.3 million) at the issue price of HK$4.212 per Vendor E Share Share subject to the terms and conditions of the Vendor E Trustee Subscription Agreement, and the transactions contemplated thereunder be and is hereby approved, ratified and confirmed;
(b) the Directors be and are hereby authorised and granted a specific mandate (the “ Vendor E Specific Mandate ”) to allot and issue to the Trustee, the Vendor E Shares in accordance with the terms and conditions of the Vendor E Trustee Subscription Agreement; and

– EGM-4 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(c) the Directors acting together or by committee, or any Director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Vendor E Trustee Subscription Agreement, the Vendor E Specific Mandate and the transactions contemplated thereunder.”
for identification only

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

24 June 2015

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 Room 1601, Emperor Group Centre, 288 Henessy Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting.

As at the date of this notice, the Board comprises eleven Directors, of which Mr. WU Xian, Mr. YANG Bin and Mr. WANG Xiaochun are executive Directors; Mr. LIU Cunzhou, Mr. ZHANG Jianhui, Mr. DONG Zenghe and Mr. ZHAO Dongji are non-executive Directors; and Mr. ZHOU Bajun, Mr. XIE Rong, Mr. YU Tze Shan Hailson and Mr. LO Wing Yat are independent non-executive Directors.

– EGM-5 –

AI assistant

SPT Energy Group Inc. — Proxy Solicitation & Information Statement 2015

49801_rns_2015-06-23_d51e722e-60df-4ea4-a4d1-0bee5708d55b.pdf

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

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF 87.30% OF THE REGISTERED CAPITAL OF JIANGYIN TIANJIANG PHARMACEUTICAL CO., LTD.; SUBSCRIPTION OF NEW SHARES BY THE VENDORS UNDER SPECIFIC MANDATE; AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial adviser to China Traditional Chinese Medicine Co. Limited

Optima Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

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

VERY SUBSTANTIAL ACQUISITION IN RELATION TO ACQUISITION OF 87.30% OF THE REGISTERED CAPITAL OF JIANGYIN TIANJIANG PHARMACEUTICAL CO., LTD. AND SUBSCRIPTION OF NEW SHARES BY THE VENDORS UNDER SPECIFIC MANDATE

INTRODUCTION

LETTER FROM THE BOARD

THE FIRST ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

First Consideration

LETTER FROM THE BOARD

Vendor C Subscription

Conditions of the First Acquisition Agreement

Termination of the First Acquisition Agreement

Undertakings from the First Vendors

THE SECOND ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

Second Consideration

Vendor E Subscription

Conditions of the Second Acquisition Agreement

Termination of the Second Acquisition Agreement

Undertakings from Vendor E

THE THIRD ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

Third Consideration

LETTER FROM THE BOARD

Conditions of the Third Acquisition Agreement

Termination of the Third Acquisition Agreement

THE FOURTH ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

Fourth Consideration

Conditions of the Fourth Acquisition Agreement

Termination of the Fourth Acquisition Agreement

Undertakings from Vendor H

THE FIFTH ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

Fifth Consideration

LETTER FROM THE BOARD

Conditions of the Fifth Acquisition Agreement

Security

Termination of the Fifth Acquisition Agreement

TOTAL CONSIDERATION

LETTER FROM THE BOARD

COMPLETION

LETTER FROM THE BOARD

INFORMATION ON THE TARGET GROUP

Group Structure

LETTER FROM THE BOARD

Business

LETTER FROM THE BOARD

Production facilities and suppliers

Management

LETTER FROM THE BOARD

Financial information

INFORMATION ON THE VENDORS

FINANCIAL EFFECTS OF THE ACQUISITION

Earnings

Assets and liabilities

SPT Energy Group Inc. Proxy Solicitation & Information Statement 2015