SPT Energy Group Inc. — Proxy Solicitation & Information Statement 2016

Dec 16, 2016

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 Holdings Co. Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank manager, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

CHINA TRADITIONAL CHINESE MEDICINE HOLDINGS CO. LIMITED 中國中藥控股有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

(1) CONTINUING CONNECTED TRANSACTIONS; (2) RE-ELECTION OF A NON-EXECUTIVE DIRECTOR; AND

(3) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial adviser to China Traditional Chinese Medicine Holdings Co. Limited

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

A notice convening the extraordinary general meeting of China Traditional Chinese Medicine Holdings Co. Limited to be held at 2:00 p.m. on Friday, 6 January 2017 at Conference Room, 2nd Floor, No. 1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, the PRC is set out on pages EGM-1 and EGM-2 of this circular. Whether or not you intend to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of China Traditional Chinese Medicine Holdings 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.

19 December 2016

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Letter from Hercules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Appendix I – Particulars of the Director seeking for re-election. . . . . . . . . . . .	35
Appendix II – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Notice of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .EGM-1

– i –

DEFINITIONS

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

• “Agreements”

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

• “Annual Caps” the respective annual caps of the value of the Purchases and the Sales contemplated under the Agreements proposed for the three financial years ending 31 December 2017, 2018 and 2019

• “Articles of Association” the existing articles of association of the Company

• “Board” the board of Directors

• “CNPGC”

China National Pharmaceutical Group Corporation（中 國醫藥集團總公司）, a state-owned enterprise established in the PRC

• “CNPGC Group” CNPGC and its subsidiaries

• “Company”

• China Traditional Chinese Medicine Holdings Co. Limited （中國中藥控股有限公司）, a company incorporated in Hong Kong with limited liability, the issued Shares of which are listed on the Main Board of the Stock Exchange (stock code: 570)

• “connected person(s)”

has the meaning ascribed to it under the Listing Rules

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

“EGM”

the extraordinary general meeting of the Company to be convened to consider and, if thought fit, approve the Agreements and the transactions contemplated thereunder including the Annual Caps, and the re-election of Ms. HUANG He as a non-executive Director

• “Existing Master Purchase Agreement”

the existing master purchase agreement dated 11 December 2013 entered into between the Company and CNPGC in respect of the purchase of the Materials by the Group from the CNPGC Group

• “Existing Master Supply Agreement”

the existing master supply agreement dated 11 December 2013 entered into between the Company and CNPGC in respect of the sale of the Products by the Group to the CNPGC Group

– 1 –

DEFINITIONS

• “Group” the Company and its subsidiaries

• “Hercules”

• Hercules Capital Limited, a corporation licensed to carry out Type 6 (advising on corporate finance) regulated activity as defined under the SFO, and the independent financial adviser appointed by the Independent Board Committee to advise the Independent Board Committee and the Independent Shareholders in relation to the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements

• “Hong Kong”

• the Hong Kong Special Administrative Region of the PRC

• “Independent Board Committee”

• the committee of the Board comprising Mr. Zhou Bajun, Mr. Xie Rong and Mr. Lo Wing Yat, all being independent non-executive Directors, established for the purpose of giving a recommendation to the Independent Shareholders on the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements

• “Independent Shareholders”

• the Shareholders other than CNPGC and its associates

• “Latest Practicable Date”

• 15 December 2016, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

• “Listing Rules”

• the Rules Governing the Listing of Securities on the Stock Exchange

• “Materials”

• the TCM materials purchased by the Group from the CNPGC Group

• “New Master Purchase Agreement”

• the master purchase agreement dated 18 November 2016 entered into between the Company and CNPGC in respect of the Purchases

• “New Master Supply Agreement”

• the master supply agreement dated 18 November 2016 entered into between the Company and CNPGC in respect of the Sales

• “PRC”

• the People’s Republic of China, which for the purpose of this circular excludes Hong Kong, Macau Special Administrative Region and Taiwan

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DEFINITIONS

“Products”	various pharmaceutical products supplied by the Group	various pharmaceutical products supplied by the Group	various pharmaceutical products supplied by the Group
	to the CNPGC Group
“Purchases”	the purchases of the Materials contemplated under		the
	New Master Purchase Agreement
“Sales”	the sales of the Products contemplated under	the New
	Master Supply Agreement
“SFO”	the Securities and Futures Ordinance (Cap 571 of		the
	Laws of Hong Kong)
“Share(s)”	the ordinary share(s) in the share capital of		the
	Company
“Shareholder(s)”	the holder(s) of the issued Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“TCM”	traditional Chinese medicine
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

Unless the context requires otherwise, amounts denominated in RMB have been converted into HK$ at an exchange rate of RMB1: HK$1.13 in this circular for the purpose of illustration only. No representation is made that any amount in HK$ 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.

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LETTER FROM THE BOARD

CHINA TRADITIONAL CHINESE MEDICINE HOLDINGS CO. LIMITED 中國中藥控股有限公司

(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. DONG Zenghe Mr. ZHAO Dongji Ms. HUANG He Ms. TANG Hua

Independent non-executive Directors:

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

Mr. LO Wing Yat

19 December 2016

To the Shareholders

Dear Sir or Madam,

(1) CONTINUING CONNECTED TRANSACTIONS

AND

(2) RE-ELECTION OF A NON-EXECUTIVE DIRECTOR

INTRODUCTION

Reference is made to the announcement and the circular of the Company dated 12 December 2013 and 13 December 2013 respectively in relation to the purchases of the Materials and the sales of the Products contemplated under the Existing Master Purchase Agreement and the Existing Master Supply Agreement. As the term of each of the Existing Master Purchase Agreement and the Existing Master Supply Agreement and the respective annual caps will expire on 31 December 2016, the Company entered into the Agreements with CNPGC on 18 November 2016 to govern the terms of the Purchases and the Sales and to set the Annual Caps for each of the three financial years ending 31 December 2017, 2018 and 2019.

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LETTER FROM THE BOARD

Sinopharm Group Hongkong Co., Limited was interested in 1,614,313,642 Shares as at the Latest Practicable Date, representing approximately 36.43% of the total issued Shares, and was the controlling Shareholder. Sinopharm Group Hongkong Co., Limited is an indirect wholly-owned subsidiary of CNPGC and CNPGC is therefore a connected person of the Company as defined under the Listing Rules. The Purchases and the Sales constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements (including the Annual Caps) are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

The EGM will be convened at which resolutions will be proposed to seek approval from the Independent Shareholders for the Agreements and the transactions contemplated thereunder including the Annual Caps by way of poll. The Independent Board Committee has been established to give a recommendation to the Independent Shareholders on the Agreements and the transactions contemplated thereunder including the Annual Caps. Hercules has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

Ms. HUANG He, a non-executive Director who was appointed by the Board on 23 August 2016 to fill the casual vacancy, shall in accordance with the Articles of Association hold office until the EGM and will offer herself for re-election at the EGM.

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

THE NEW MASTER PURCHASE AGREEMENT

Date:

18 November 2016

Parties:

• (i) the Company; and

• (ii) CNPGC.

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LETTER FROM THE BOARD

Sinopharm Group Hongkong Co., Limited was interested in 1,614,313,642 Shares as at the Latest Practicable Date, representing approximately 36.43% of the total issued Shares, and is the controlling Shareholder. Sinopharm Group Hongkong Co., Limited is an indirect wholly-owned subsidiary of CNPGC and CNPGC is therefore a connected person of the Company as defined under the Listing Rules.

Terms:

Pursuant to the New Master Purchase Agreement, the Group conditionally agreed to purchase the Materials supplied by the CNPGC Group during the period from 1 January 2017 to 31 December 2019. The terms of the Purchases including the prices of the Materials, the discounts granted by the CNPGC Group to the Group, the credit period and payment terms will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available from independent third parties for similar materials.

Prices of the Materials:

In accordance with the Group’s procurement policy, for all proposed purchases of materials, the purchase department of the Group will obtain quotations from at least three suppliers in the market (if available) which are in the approved suppliers list of the Group. The quotes will be obtained from the suppliers through phone, email, face-to-face meeting or their official websites. The supplier which offers the best overall offer will be selected. For details of the internal control procedures for purchase of materials, please refer to the paragraph headed “Internal Controls” below.

Payment terms and delivery terms:

The credit period and delivery terms offered by the CNPGC Group to the Group will be no less favourable than those offered to its other customers. The credit period offered by the CNPGC Group to the Group normally ranges from three to six months which is determined by the purchase amount of the Materials and payment method. The cost of delivery is normally borne by the CNPGC Group.

The Materials:

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

Annual Caps:

Pursuant to the New Master Purchase Agreement, the value of the Purchases shall not exceed the Annual Caps of RMB45 million (equivalent to approximately HK$50.9 million) for each of the three financial years ending 31 December 2017, 2018 and 2019.

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LETTER FROM THE BOARD

Conditions precedent:

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

• (i) the passing of the resolution(s) by the Independent Shareholders at a general meeting approving the New Master Purchase Agreement and the transactions contemplated thereunder and the Annual Caps for the Purchases as required under the Listing Rules;

• (ii) the board of directors and/or shareholders of CNPGC having approved the New Master Purchase Agreement in accordance with its articles of association (if applicable); and

• (iii) other regulatory approval (if any) applicable to the Company and CNPGC in relation to the New Master Purchase Agreement having been obtained.

None of the above conditions can be waived. As at the Latest Practicable Date, condition (ii) and (iii) set out above had been fulfilled.

THE NEW MASTER SUPPLY AGREEMENT

Date:

18 November 2016

Parties:

• (i) the Company; and

• (ii) CNPGC.

Terms:

Pursuant to the New Master Supply Agreement, the Group conditionally agreed to sell the Products to the CNPGC Group during the period from 1 January 2017 to 31 December 2019. The terms of the Sales will be determined with reference to prevailing market terms and on terms no less favourable to the Group than those made available to independent third parties for similar Products.

Prices of the Products:

The prices of the Products sold to the distributors will be determined (i) by applying a discount to the prices set by the provincial level tender offices through tenders for those Products sold to hospitals; or (ii) based on the internal price list set by the Group which are applicable to all distributors (including the CNPGC Group and other third party distributors) for those Products sold by the distributors to pharmacies.

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LETTER FROM THE BOARD

In order to supply the Products to hospitals, the Group will first participate in tenders by submitting bids to the provincial level tender offices. If the Group is rewarded the tender, the Group will sell the Products at a discount, which normally ranges from 2% to 15%, to the tender price to the distributors, which will then distribute and sell the Products to the designated hospitals at the tender price. The tender price will only be updated until a new tender is conducted. The discount percentage is determined based on the sales amount, payment terms and distance of delivery. For details of the internal control procedures for sales of products, please refer to the paragraph headed “Internal Controls” below.

The Group also sells the Products to pharmacies via distributors. Such prices are determined based on a number of factors, such as production costs, market condition and marketing strategy. The Group maintains an internal price list set by the sales and marketing department and the internal price list is applicable to all distributors (including the CNPGC Group and other third party distributors).

Payment terms and delivery terms:

The credit period and delivery terms offered by the Group to the CNPGC Group will be no more favourable than those offered to other customers. The credit period offered by the Group to the CNPGC Group normally ranges from three to six months which is determined by the sales amount of the Products and payment method, and is in line with the credit period offered to other customers. The cost of delivery is normally borne by the Group.

The Products:

The Products to be supplied by the Group to the CNPGC Group are major products manufactured by the Group, including but not limited to Nifedipine Sustained-release tablet (Sheng Tong Ping) （硝苯地平舒緩釋片（聖通平））, Yu Ping Feng Granule （玉屏風顆粒）, Qiye Shenan Tablet（七葉神安片）, Bi Yan Kang Tablet（鼻炎康片）, VC Yingqiao Tablet（維C銀翹 片）, Cefodizime Sodium for injection (Gaode) （注射用頭孢地嗪鈉（高德））, Group A Streptococcus for injection (Sha Pei Lin) （注射用A群鏈球菌（沙培林））, Xianling Gubao Capsule and Tablet （仙靈骨葆膠囊/片劑）, Jingshu Granules （頸舒顆粒）, Moisturizing and Anti-Itching Capsules （潤燥止癢膠囊）, Zaoren Anshen Capsules （棗仁安神膠囊）, Fengshi Gutong Capsules（風濕骨痛膠囊）, Jiangyin Tianjiang concentrated TCM granules（天江藥業中 藥配方顆粒）and Guangdong Yifang concentrated TCM granules（廣東一方中藥配方顆粒）.

Annual Caps:

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

		Equivalent to
		approximately
Financial year ending	RMB’000	HK$’000
31 December 2017	800,000	904,000
31 December 2018	900,000	1,017,000
31 December 2019	1,000,000	1,130,000

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LETTER FROM THE BOARD

Conditions precedent:

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

• (i) the passing of the resolution(s) by the Independent Shareholders at a general meeting approving the New Master Supply Agreement and the transactions contemplated thereunder and the Annual Caps for the Sales as required under the Listing Rules;

• (ii) the board of directors and/or shareholders of CNPGC having approved the New Master Supply Agreement in accordance with its articles of association (if applicable); and

• (iii) other regulatory approval (if any) applicable to the Company and CNPGC in relation to the New Master Supply Agreement having been obtained.

None of the above conditions can be waived. As at the Latest Practicable Date, condition (ii) and (iii) set out above had been fulfilled.

ANNUAL CAPS

Annual Caps for Purchases

On 11 December 2013, the Company and CNPGC entered into the Existing Master Purchase Agreement pursuant to which the value of the purchases of the Materials by the Group shall not exceed an annual cap of RMB35 million (equivalent to approximately HK$39.6 million), RMB39 million (equivalent to approximately HK$44.1 million) and RMB45 million (equivalent to approximately HK$50.9 million) for each of the three financial years ending 31 December 2014, 2015 and 2016 respectively.

For the two years ended 31 December 2014 and 2015, purchases of the Materials by the Group from the CNPGC Group amounted to approximately RMB23.5 million (equivalent to approximately HK$26.6 million) and RMB14.9 million (equivalent to approximately HK$16.8 million) respectively. For the ten months ended 31 October 2016, purchases of the Materials by the Group from the CNPGC Group amounted to approximately RMB20 million (equivalent to approximately HK$22.6 million). The Company expects that the actual purchase amount of the Materials by the Group from the CNPGC Group for the year ending 31 December 2016 will reach approximately RMB25 million (equivalent to approximately HK$28.3 million).

Although there is an increase in the purchases of the Materials in 2016 when compared to 2015, the growth was hindered by a temporary suspension of production of its product, namely Angong Niuhuang Wan（安宮牛黄丸）, which used calculus bovis and musk as raw materials in the manufacturing process. The temporary suspension of production was due to the relocation of production facilities of Sinopharm Group Feng Liao Xing (Foshan) Medicinal Material & Slices Co., Ltd., an indirect wholly-owned subsidiary of the Company.

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LETTER FROM THE BOARD

For the purpose of determining the Annual Caps for the Purchases in 2017, 2018 and 2019, the Company has considered (i) the historical purchases of the Materials by the Group from the CNPGC Group; and (ii) the expected usage of the Materials to cater for the production needs of the Group for 2017, 2018 and 2019. The Annual Cap for the Purchases in 2017 represents a substantial growth as compared to the estimated amount of Purchases for the year ending 31 December 2016 as the Group expects the relocation of the production facilities of Sinopharm Group Feng Liao Xing (Foshan) Medicinal Material & Slices Co. Ltd. will be completed by the first quarter of 2017. It is expected that the production volume of Angong Niuhuang Wan, which is a major product of the Group, will increase substantially from approximately 71,000 boxes to 738,000 boxes due to the enhanced production capacity of the new production facilities. The increase in production volume will lead to a higher demand for calculus bovis and musk which are used as raw materials in the manufacturing process. The Company expects the Purchases of calculus bovis and musk will increase from RMB2.9 million for the ten months ended 31 October 2016 to RMB16.6 million for the year ended 31 December 2017.

The Annual Caps for the Purchases in 2018 and 2019 remain the same as that for 2017 as the Company considers the increased production capacity for Angong Niuhuang Wan will be substantially utilised and the production volume and Purchases will be stable in the coming years.

Annual Caps for Sales

On 11 December 2013, the Company and CNPGC entered into the Existing Master Supply Agreement pursuant to which the value of the sales of the Products by the Group shall not exceed an annual cap of RMB500 million (equivalent to approximately HK$565 million), RMB610 million (equivalent to approximately HK$689.3 million) and RMB740 million (equivalent to approximately HK$836.2 million) for each of the three financial years ending 31 December 2014, 2015 and 2016 respectively.

For the years ended 31 December 2014 and 2015, sales of the Products by the Group to the CNPGC Group amounted to approximately RMB453.6 million (equivalent to approximately HK$512.6 million) and RMB441.8 million (equivalent to approximately HK$499.2 million) respectively. For the ten months ended 31 October 2016, sales of the Products by the Group to the CNPGC Group amounted to approximately RMB173.7 million (equivalent to approximately HK$196.3 million). Based on the experience of the management of the Group, it is expected that the retail demand for pharmaceutical products in autumn and winter will be higher and thus the sales of Products by the Group to the CNPGC Group in the last quarter of 2016 are expected to increase correspondingly. The Company expects that the actual sales amount of the Products by the Group to the CNPGC Group for the year ending 31 December 2016 will be around RMB320 million (equivalent to approximately HK$361.6 million).

The decrease in sales of the Products by the Group to the CNPGC Group in 2016 was mainly due to the decline in the demand from distributors after the implementation of the “two-invoice system” and the overall decrease in the market price of the Products. Under the “two-invoice system”, primary distributors (such as the CNPGC Group) will be required to distribute the Products directly to the hospitals instead of through other distributors. As a

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LETTER FROM THE BOARD

result, purchases of the Products by certain distributors from the CNPGC Group decreased due to destocking, which in turn lowered the demand of the Products by the CNPGC Group. However, the Group expects the impact of destocking resulting from the implementation of the “two-invoice system” to be temporary and has been substantially reflected in 2016. These distributors may be eliminated and the Group expects that sales of Products to the CNPGC Group will be increased.

For the purpose of determining the Annual Caps for the Sales in 2017, although the historical sales of Products by the Group to the CNPGC Group is relatively low compared to the Annual Caps for the Sales in 2017, the Company has considered (i) the anticipated gradual increase in the demand of the Products driven by the aging population in the PRC. According to the Thirteenth Five-Year Plan for Chinese Medicine Industry Development published by the State Administration of Traditional Chinese Medicine of the PRC, the compound annual growth rate of revenue for enterprises in the TCM industry from 2010 to 2015 was approximately 19.9% and the expected compound annual growth rate from 2015 to 2020 is approximately 15.0%. Being one of the top enterprises in the TCM industry with a number of exclusive products on the National Essential Drug List, the Company expects the demand of its products will increase in line with the aforesaid growth rate in the TCM industry; (ii) the recent trend of consolidation in the pharmaceutical industry in the PRC as a result of the fierce competition and stricter regulations in the industry, whereby the CNPGC Group, as one of the largest pharmaceutical companies in the PRC, is expected to takeover other smaller distributors and gain a larger market share in the industry; (iii) the expected increase in sales of the Products through the sales network of the CNPGC Group as a result of the “two-invoice system”, under which small distributors may be eliminated and the sales of the Group previously made to less competitive distributors will be shifted to the CNPGC Group; and (iv) the potential sale of the products manufactured by 江陰天江藥業 有限公司 (Jiangyin Tianjiang Pharmaceutical Co. Ltd.) (“ Jiangyin Tianjiang* ”) and its subsidiaries (collectively, the “Jiangyin Tianjiang Group”) which were not on the list of products in the Existing Master Supply Agreement, as the acquisition of 87.3% of the registered capital of Jiangyin Tianjiang by the Group was completed in October 2015. The revenue of Jiangyin Tianjiang amounted to approximately RMB2,054.7 million for the six months ended 30 June 2016. After the products of Jiangyin Tianjiang Group are added to the list of products in the New Master Supply Agreement, the Company expects they will contribute a substantial growth to the Sales in coming years. The estimated sales of the products of Jiangyin Tianjiang Group to the CNPGC Group are approximately RMB76.7 million, RMB88.2 million and RMB101.5 million for each of the three years ending 31 December 2017, 2018 and 2019 respectively, which represents a year-on-year annual growth of 15.0%.

After taking into account the historical growth of approximately 19.9% and the expected future growth of approximately 15.0% in the TCM industry, and having considered the exclusive products on the National Essential Drug List, the consolidation in the pharmaceutical industry in the PRC as a result of the implementation of the “two-invoice system” and the expected growth of 15.0% in the sales of the products of Jiangyin Tianjiang Group to the CNPGC Group, the Company has incorporated an approximately 12.5% and 11.1% year-on-year increase of the Annual Caps for the Sales in 2018 and 2019.

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LETTER FROM THE BOARD

INTERNAL CONTROLS

Internal controls for purchase of materials

In accordance with the Group’s procurement policy, for all proposed purchases of materials (including purchases from related parties or independent third parties), the purchase department shall obtain quotations from at least three suppliers which are in the approved suppliers list. In order to qualified as an approved supplier in the last, supplier will be evaluated by the purchase department on various aspects of the suppliers, including but not limited to production capacity, financial strengths, qualifications and quality assurance. There are more than 400 suppliers in the approved suppliers list. To the best of the Directors’ knowledge, information and belief, save for the CNPGC Group, all the suppliers in the approved suppliers list are independent of the Company and its connected persons. Quotations received shall then be assessed by the purchase department based on a number of factors, such as price, quality, payment terms, delivery terms and length of business relationship, and the supplier with the best overall offer will be selected. After the purchase department approves the purchases, the finance department will review the terms of the purchases to ensure that the purchases are not made in less favourable terms to the Group than those offered by other suppliers. For those Materials that are exclusively supplied by the CNPGC Group, the Group will confirm with the CNPGC Group that the prices of the Materials offered by the CNPGC Group to the Group shall be no less favourable than those offered to its other customers which should be in accordance with the terms of the New Master Purchase Agreement.

The Directors consider the number of quotations to be obtained (i.e. no less than three) is sufficient for evaluation and the above policy will ensure that the terms offered by the selected supplier are no less favourable than those made available to the Group from other suppliers for similar materials. Accordingly, the Directors are of the view that (i) the Purchases will be conducted on normal commercial terms and will not be prejudicial to the interests of the Company and the Shareholders; and (ii) the above internal control procedures are adequate to safeguard the interest of the Company and the Independent Shareholders in the transactions contemplated under the New Master Purchase Agreement.

Internal controls for sales of products

In accordance with the Group’s pricing policy which are applicable to all distributors, the discount percentage to be offered to distributors which distribute the Products to hospitals shall be determined after taking into account a number of factors, including sales amount, payment terms and distance of delivery. The discount shall then be reviewed by the finance department to ensure that it is set in compliance with the pricing policy. For products sold to pharmacies via distributors, the prices are determined based on the internal price list set by the Group which is applicable to all distributors (including the CNPGC Group and other third party distributors). The internal price list is reviewed by the sales and marketing department and finance department annually or more frequently if market condition changes materially.

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LETTER FROM THE BOARD

Given that the Group’s pricing policy is applicable to all distributors (including the CNPGC Group and other third party distributors), the Directors consider that the above internal control procedures can ensure that the terms offered to the CNPGC Group are no more favourable than terms offered to other third party distributors. Accordingly, the Directors are of the view that (i) the Sales will be conducted on normal commercial terms and will not be prejudicial to the interests of the Company and the Shareholders as a whole; and (ii) the above internal control procedures are adequate to safeguard the interest of the Company and the Independent Shareholders in the transactions contemplated under the New Master Supply Agreement.

REASONS FOR THE AGREEMENTS

The principal activity of the Company is investment holding and the principal activities of its principal subsidiaries are the manufacture and sale of concentrated TCM granules 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.

The Agreements were entered into for the purpose of enabling the Group to continue the business relationship with the CNPGC Group in compliance with the Listing Rules as well as to capture the opportunities that may be brought about by the CNPGC Group to the Group. CNPGC is a state-owned enterprise in the PRC and is one of the largest state-owned pharmaceutical and healthcare groups administered directly by the State-owned Assets Supervision and Administration Commission of the State Council. Its principal activities are pharmaceutical distribution, pharmaceutical scientific research and manufacture of medical and biotech products. Members of the CNPGC Group have been the suppliers of the Materials and customers of the Products of the Group since 1998. The CNPGC Group is a reliable business partner of the Group which has a strong supply capability as well as a well-established distribution network. The New Master Purchase Agreement enables the Group to source stable and quality Materials from the CNPGC Group, while the New Master Supply Agreement enables the Group to tap into a larger market and approach a much wider clientele base with the support of the extensive sales and distribution network of the CNPGC Group in the PRC. As CNPGC is one of the largest pharmaceutical companies in the PRC and has a long-term relationship with the Group, the Directors considered that the partnership with the CNPGC Group can secure the distribution of the Products to hospitals and retail pharmacies in the PRC.

Based on the above, the Directors (including the independent non-executive Directors after considering the advice from Hercules) are of the view that the Agreements were entered into in the ordinary course of business and on normal commercial terms which are fair and reasonable, and in the interests of the Company and the Shareholders as a whole. The Directors do not consider there are any disadvantages for the Group to enter into the Agreements and conduct the Sales and Purchases with the CNPGC Group.

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LETTER FROM THE BOARD

RE-ELECTION OF A NON-EXECUTIVE DIRECTOR

According to Article 92 of the Articles of Association, the Directors have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy or as an addition to the Board. Any Director so appointed shall hold office only until the next following general meeting of the Company (in case of filling a casual vacancy) or until the next annual general meeting of the Company (in case of an addition to the existing Board), and shall then be eligible for re-election.

Pursuant to the Articles of Association, Ms. HUANG He (“ Ms. HUANG ”), who was appointed as a non-executive Director to fill a casual vacancy on 23 August 2016, shall hold office until the EGM. Ms. HUANG, being eligible, will offer herself for re-election at the EGM.

The biographical details of Ms. HUANG are set out in the Appendix I to this circular.

LISTING RULES IMPLICATIONS

Sinopharm Group Hongkong Co., Limited was interested in 1,614,313,642 Shares as at the Latest Practicable Date, representing approximately 36.43% of the total issued Shares and was the controlling Shareholder. Sinopharm Group Hongkong Co., Limited is an indirect wholly-owned subsidiary of CNPGC and CNPGC is therefore a connected person of the Company as defined under the Listing Rules. The Purchases and the Sales constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements and the Annual Caps are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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

• (i) Mr. Wu Xian is the director, general manager and deputy secretary of the Party Committee of China National Traditional Chinese Medicine Corporation (formerly named China National Corp. of Traditional & Herbal Medicine) which is a wholly-owned subsidiary of CNPGC and indirectly owns 36.43% of the total issued Shares;

• (ii) Mr. LIU Cunzhou is currently the chief expert of CNPGC;

• (iii) Mr. DONG Zenghe is currently the deputy general manager of CNPGC and the chairman of the board of China National Traditional Chinese Medicine Corporation;

• (iv) Mr. ZHAO Dongji is currently the manager of Investment Management Department and deputy general manager of China National Traditional Chinese Medicine Corporation;

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LETTER FROM THE BOARD

• (v) Ms. HUANG He is currently the director of operations and the manager of the human resources department of China National Traditional Chinese Medicine Corporation;

• (vi) Ms. TANG Hua is currently the financial controller and the manager of finance department of China National Traditional Chinese Medicine Corporation; and

• (vii) Mr. YU Tze Shan Hailson is currently an independent non-executive director of Sinopharm Group Co. Ltd. which is a subsidiary of CNPGC and a fellow subsidiary of the Company.

The above Directors are regarded as having a material interest in the Agreements by virtue of their positions held in the CNPGC Group or its associates. Each of them had abstained from voting at the Board meeting on the relevant resolutions for approving the Agreements (including the Annual Caps).

The EGM will be convened by the Company at which resolutions will be proposed to seek approval from the Independent Shareholders for the Agreements and the transactions contemplated under the respective Agreements (including the Annual Caps) by way of poll. CNPGC and its associates, who were interested in 1,614,313,642 Shares as at the Latest Practicable Date (representing approximately 36.43% of the total issued Shares), will abstain from voting on the relevant resolutions at the EGM. To the best knowledge of the Directors, save as disclosed above, no other Shareholder has a material interest in the Agreements and the transactions contemplated thereunder (including the Annual Caps). Accordingly, no other Shareholder will be required to abstain from voting at the EGM in respect of the ordinary resolutions relating to the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

The Independent Board Committee has been established to give a recommendation to the Independent Shareholders on the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements. The Independent Board Committee comprises Mr. Zhou Bajun, Mr. Xie Rong and Mr. Lo Wing Yat, all are independent non-executive Directors. The other independent non-executive Director, namely Mr. Yu Tze Shan Hailson, is deemed to have a material interest in the Agreements as he is also an independent non-executive director of Sinopharm Group Co. Ltd. (a subsidiary of CNPGC) and accordingly is not included as a member of the Independent Board Committee. Hercules has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

EGM

The EGM will be convened to consider and, if thought fit, approve the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements and the re-election of Ms. HUANG as a non-executive Director. A notice convening the EGM to be held at 2:00 p.m. on Friday, 6 January 2017 at Conference Room, 2nd Floor, No. 1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, the PRC is set out on pages EGM-1 and EGM-2 of this circular.

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LETTER FROM THE BOARD

A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of the Company at 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.

In order to determine the Shareholders who are entitled to attend the EGM, the Company’s register of members will be closed from Wednesday, 4 January 2017 to Friday, 6 January 2017 (both days inclusive). The Shareholders whose names appear on the register of members of the Company on Friday, 6 January 2017 are entitled to attend and vote at the EGM. Shareholders who wish to attend the EGM but have not registered the transfer documents are required to deposit the transfer documents together with the relevant share certificates at the registrar of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong no later than 4:30 p.m. on Tuesday, 3 January 2017.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 17 of this circular which contains its recommendation to the Independent Shareholders; and (ii) the letter of advice from Hercules set out on pages 18 to 34 of this circular containing its advice to the Independent Board Committee and the Independent Shareholders on the terms of the Agreements (including the Annual Caps) and the transactions contemplated under the respective Agreements.

Having considered the principal factors and reasons considered by and the advice of Hercules, the Independent Board Committee, considers that (i) the Purchases and Sales are conducted in the ordinary and usual course of business of the Group; and (ii) the terms of the Agreements (and the proposed Annual Caps thereunder) are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. We therefore recommend the Independent Shareholders to vote in favour of the resolutions to approve the transactions contemplated under the Agreements (and the Annual Caps thereunder) at the upcoming EGM.

The Board also recommends the Shareholders to vote in favour of the resolution to be proposed at the EGM to re-elect Ms. HUANG as a non-executive Director.

ADDITIONAL INFORMATION

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

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

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA TRADITIONAL CHINESE MEDICINE HOLDINGS CO. LIMITED 中國中藥控股有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

19 December 2016

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 19 December 2016 (the “Circular”), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter will have the same meanings as defined in the Circular.

We have been appointed by the Board as the Independent Board Committee to consider and to give recommendation to the Independent Shareholders on the Agreements and the Annual Caps. Hercules has been appointed as the independent financial adviser. We wish to draw your attention to the letter from the Board set out on pages 4 to 16 of the Circular and the letter from Hercules set out on pages 18 to 34 of the Circular.

Having considered the principal factors and reasons, considered by and the advice of Hercules, we consider that (i) the Purchases and Sales are conducted in the ordinary and usual course of business of the Group; and (ii) the terms of the Agreements (and the proposed Annual Caps thereunder) are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. We therefore recommend the Independent Shareholders to vote in favour of the resolutions to approve the transactions contemplated under the Agreements (and the Annual Caps thereunder) at the upcoming EGM.

Yours faithfully, Independent Board Committee

Mr. ZHOU Bajun Mr. XIE Rong Mr. LO Wing Yat Independent non-executive Directors

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LETTER FROM HERCULES

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

1503 Ruttonjee House 11 Duddell Street Central Hong Kong

19 December 2016

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the continuing connected transactions contemplated under the New Master Purchase Agreement and the New Master Supply Agreement (collectively, the “Continuing Connected Transactions”), details of which are set out in the Letter from the Board contained in the circular dated 19 December 2016 to the Shareholders (the “Circular”), of which this letter forms part. Capitalised terms used in this letter have the same meanings as defined elsewhere in the Circular unless the context otherwise requires.

On 18 November 2016, the Company entered into the New Master Purchase Agreement and the New Master Supply Agreement with CNPGC in relation to (i) the purchases of the Materials supplied by the CNPGC Group; and (ii) the sale of the Products to the CNPGC Group respectively for the period from 1 January 2017 to 31 December 2019.

As at the Latest Practicable Date, Sinopharm Group Hongkong Co., Limited was interested in 1,614,313,642 Shares, representing approximately 36.43% of the total issued share capital of the Company, and was the controlling Shareholder. Sinopharm Group Hongkong Co., Limited is an indirect wholly-owned subsidiary of CNPGC and CNPGC is therefore a connected person of the Company as defined under the Listing Rules. Accordingly, the Purchases and the Sales constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. As the applicable percentage ratios for the Annual Caps under each of the New Master Purchase Agreement and New Master

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LETTER FROM HERCULES

Supply Agreement exceed 5% and the Annual Caps exceed HK$10,000,000, the Agreements (including the Annual Caps) are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

As at the Latest Practicable Date, the following Directors held the following positions in the CNPGC Group or its associates:

• (i) Mr. WU Xian was the director, general manager and deputy secretary of the Party Committee of China National Traditional Chinese Medicine Corporation (formerly named China National Corp. of Traditional & Herbal Medicine), which is a wholly-owned subsidiary of CNPGC and indirectly owns 36.43% of the total issued share capital of the Company;

• (ii) Mr. LIU Cunzhou was the chief expert of CNPGC;

• (iii) Mr. DONG Zenghe was the deputy general manager of CNPGC and the chairman of the board of China National Traditional Chinese Medicine Corporation;

• (iv) Mr. ZHAO Dongji was the manager of investment management department and deputy general manager of China National Traditional Chinese Medicine Corporation;

• (v) Ms. HUANG He was the director of operations and the manager of the human resources department of China National Traditional Chinese Medicine Corporation;

• (vi) Ms. TANG Hua was the financial controller and the manager of finance department of China National Traditional Chinese Medicine Corporation; and

• (vii) Mr. YU Tze Shan Hailson was an independent non-executive director of Sinopharm Group Co. Ltd., which is a subsidiary of CNPGC and a fellow subsidiary of the Company.

The above Directors are regarded as having a material interest in the Agreements by virtue of their positions held in the CNPGC Group or its associates. Each of them abstained from voting at the Board meeting on the relevant resolutions for approving the Agreements (including the Annual Caps).

The EGM will be convened by the Company at which resolutions will be proposed to seek approval from the Independent Shareholders for the Agreements and the transactions contemplated thereunder (including the Annual Caps) by way of poll. CNPGC and its associates, who were interested in 1,614,313,642 Shares as at the Latest Practicable Date, representing approximately 36.43% of the total issued share capital of the Company, will abstain from voting on the relevant resolutions at the EGM.

The Independent Board Committee, comprising Mr. Zhou Bajun, Mr. Xie Rong and Mr. Lo Wing Yat, all are independent non-executive Directors, has been established to advise the Independent Shareholders as to whether the terms of the transactions contemplated under the

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LETTER FROM HERCULES

Agreements are fair and reasonable, such transactions are on normal commercial terms and in the ordinary and usual course of business of the Group, and, including the Annual Caps, are in the interests of the Company and the Shareholders as a whole. Another independent non-executive Director, namely Mr. Yu Tze Shan Hailson, is excluded as a member of the Independent Board Committee as he is deemed to have a material interest in the Agreements by virtue of his role as an independent non-executive director of Sinopharm Group Co. Ltd., a subsidiary of CNPGC. We, Hercules Capital Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the terms of the Agreement and how to vote on the resolutions to be proposed at the EGM.

We are not associated with the Group and its associates and do not have any shareholding in any member of the Group or right (whether legally enforceable or not) to subscribe for, or to nominate persons to subscribe for, securities in any member of the Group. We have not acted as a financial adviser or an independent financial adviser to the Company and its associates in the past two years. Apart from normal professional fees payable to us in connection with this appointment, no arrangements exist whereby we will receive any fee or benefit from the Group and its associates. We were not aware of any relationship or interest between us and the Company or any other parties that could be reasonably regarded as a hindrance to our independence as defined under Rule 13.84 of the Listing Rules to act as an independent financial adviser to the Independent Board Committee and the Independent Shareholders.

BASIS OF OUR OPINION

In formulating our opinion and recommendation, we have relied on the information and representations supplied, and the opinions expressed, by the Directors and management of the Company and have assumed that such information and statements, and representations made to us or referred to in the Circular are true, accurate and complete in all material respects as of the date hereof and will continue as such at the date of the EGM. The Directors have collectively and individually accepted full responsibility for the Circular, including particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group and having made all reasonable enquiries have confirmed that, to the best of their knowledge and belief, the information contained in the 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 in the Circular misleading.

We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We have no reasons to suspect that any material information has been withheld by the Directors or the management of the Company, or is misleading, untrue or inaccurate, and consider that they may be relied upon in formulating our opinion. We have not, however, for the purpose of this exercise, conducted any independent detailed investigation or audit into the businesses or affairs or future prospects of the Group and the related subjects of, and parties to, the Agreements. Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note

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LETTER FROM HERCULES

that subsequent developments (including any material change in market and economic conditions) may affect and/or change this opinion and that we do not have any obligation to update, revise or reaffirm this opinion.

PRINCIPAL FACTORS AND REASONS CONSIDERED

The principal factors and reasons that we have taken into consideration in assessing the Continuing Connected Transactions and arriving at our opinion are set out as follows:

1. Background and reasons for the Continuing Connected Transactions

(a) Background

The principal activity of the Company is investment holding and the principal activities of the Group are the manufacture and sale of concentrated TCM granules 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.

CNPGC is one of the largest state-owned pharmaceutical and healthcare groups administered directly by the State-owned Assets Supervision and Administration Commission of the State Council. Its principal activities are pharmaceutical distribution, pharmaceutical scientific research and manufacture of medical and biotech products. The Group has been purchasing the Materials from, and supplying the Products to, the CNPGC Group since 1998. The Existing Master Purchase Agreement and the Existing Master Supply Agreement shall expire on 31 December 2016. The Directors wish to continue the Continuing Connected Transactions with the CNPGC Group on an on-going basis after the expiry of the existing agreements. As such, the Company entered into the New Master Purchase Agreement and the New Master Supply Agreement with CNPGC on 18 November 2016.

(b) Reasons for entering into the Agreements

CNPGC, being one of the largest state-owned pharmaceutical and healthcare groups in the PRC, has strong supply capability as well as a well-established distribution network in the PRC.

Pursuant to the New Master Purchase Agreement, the Materials to be supplied by the CNPGC Group are major TCM materials used to manufacture pharmaceutical products of the Group including, but not limited to, calculus bovis（牛黃）, musk（麝香）, jiangbanxia（姜半夏）and cangerzi（蒼耳子）. We were advised by the management of the Company that purchase of the Materials from the CNPGC Group is necessary for the Group to secure a smooth operation as the CNPGC Group is the only supplier in the PRC supplying artificial musk （人工麝香）, one of the major materials of the Group’s products. Meanwhile, the CNPGC Group is a reliable business partner of the Group which is capable of providing the Materials that meet the needs and standard of

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LETTER FROM HERCULES

the Group. Therefore, the Directors consider that it is in the interest of the Company to maintain a long-term supplier relationship with the CNPGC Group for securing a stable supply of quality Materials, which are essential for the operations of the Group.

Pursuant to the New Master Supply Agreement, the Products to be supplied by the Group to the CNPGC Group are major products manufactured by the Group including, but not limited to, Nifedipine Sustained-release tablet (Sheng Tong Ping)（硝苯地平舒緩 釋片(聖通平)）, Yu Ping Feng Granule（玉屏風顆粒）, Qiye Shenan Tablet（七葉神安片）, Bi Yan Kang Tablet（鼻炎康片）, VC Yingqiao Tablet（維C銀翹片）, Cefodizime Sodium for injection (Gaode) （注射用頭孢地嗪鈉(高德)）, Group A Streptococcus for injection (Sha Pei Lin)（注射用A群鏈球菌(沙培林)）, Xianling Gubao Capsule and Tablet（仙靈骨葆 膠囊/片劑）, Jingshu Granules（頸舒顆粒）, Moisturizing and Anti-Itching Capsules（潤燥 止癢膠囊）, Zaoren Anshen Capsules（棗仁安神膠囊）, Fengshi Gutong Capsules（風濕骨痛 膠囊）, Jiangyin Tianjiang concentrated TCM granules （天江藥業中藥配方顆粒） and Guangdong Yifang concentrated TCM granules（廣東一方中藥配方顆粒）. We understand from the management of the Company that CNPGC is one of the largest pharmaceutical companies in the PRC and has a long-term relationship with the Group. The Directors considered that the partnership with the CNPGC Group can secure the distribution of the Products to hospitals and retail pharmacies in the PRC and enable the Group to tap into a larger market and approach a much wider clientele base with the support of the extensive sales and distribution network of the CNPGC Group in the PRC.

Having considered that (i) the CNPGC Group is one of the largest pharmaceutical companies in the PRC manufacturing medical and biotech products and distributing pharmaceutical with well-established distribution network in its ordinary and usual course of business; (ii) the Group has established a long-term business relationship with the CNPGC Group and is satisfied with the quality of Materials provided by the CNPGC Group; (iii) the Group needs to purchase the Materials for its daily operation from time to time; (iv) the Purchases can stabilize the supply channels of quality Materials for the Group; and (v) the Sales are carried out in the ordinary and usual course of business of the Group and provide additional turnover to the Group, we concur with the view of the Directors that the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Group and it is in the interests of the Company and the Shareholders as a whole.

2. Principal Terms of the Continuing Connected Transactions

(a) The New Master Purchase Agreement

Pursuant to the New Master Purchase Agreement, the Group conditionally agreed to purchase the Materials, being major TCM materials used to manufacture pharmaceutical products of the Group including, but not limited to, calculus bovis（牛黃）, musk（麝香）, jiangbanxia（姜半夏）and cangerzi（蒼耳子）, supplied by the CNPGC Group during the period from 1 January 2017 to 31 December 2019. The specific terms of the Purchases, including the prices of the Materials, the discounts granted by the CNPGC Group to the Group, the credit period and payment terms, will

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LETTER FROM HERCULES

be determined with reference to the prevailing market terms and on terms no less favourable to the Group than those made available by independent third parties for similar materials.

We understand from the management of the Company that in order to ensure the terms offered by the CNPGC Group to the Group are on terms no less favourable to the Group than those made available by independent third parties for similar materials, the Group has established internal control measures on purchases of materials. According to the Group’s procurement policy, for all proposed purchases of materials (including purchases from related parties or independent third parties), the purchase department shall obtain quotations from at least three suppliers which are in the approved supplier list of the Group, either through phone, email, face-to-face meeting or their official websites. Suppliers in the approved suppliers list are qualified suppliers after evaluation by the purchase department on various aspects of the suppliers including, but not limited to, production capacity, financial strengths, qualifications and quality assurance. Quotations received shall then be assessed by the purchase department based on a number of factors, such as price, quality, payment terms, delivery terms and length of business relationship with the Group. The supplier with the best overall offer will be selected. After the purchase department approves the purchases, the finance department will review the terms of the purchases to ensure the purchases are not made in less favourable terms to the Group than those offered by other suppliers. The Directors consider the number of quotations to be obtained is sufficient for evaluation and the above policy will ensure the terms offered by the selected supplier are no less favourable than terms made available to the Group from other suppliers for similar products. The credit period and delivery terms offered by the CNPGC Group to the Group will be no less favourable than those offered to its other customers. The credit period offered by the CNPGC Group to the Group normally ranges from 3 to 6 months depending on the purchase amount of the Materials and payment method while the cost of delivery is normally borne by the CNPGC Group.

We have reviewed five samples of purchase approval forms regarding the purchase of materials, which we considered are representative, and noted that the procedures mentioned above are properly followed. We have also reviewed five sets of samples of invoices issued by each of the CNPGC Group and independent suppliers to the Group in relation to the purchases of the Materials including calculus bovis and jiangbanxia, which we considered are representative, and noted that the terms offered by the CNPGC Group were comparable to those offered by independent third parties.

As advised by the management of the Company, artificial musk was classified as national secret medicine by the Ministry of Health in 1994 and is restricted to be manufactured solely by an authorized manufacturer in the PRC. The CNPGC Group is the exclusive distributor in the PRC market supplying artificial musk. Therefore, the Group is unable to source artificial musk from other independent suppliers. We also understand from the management of the Company that the Group will confirm with the CNPGC Group that the prices of the Materials offered by the CNPGC Group to the Group shall be no less favourable than those offered to its other customers which should be in accordance with the terms of the New Master Purchase Agreement.

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LETTER FROM HERCULES

We have reviewed five samples of invoices issued by the CNPGC Group to the Group and independent third parties in relation to the purchases of artificial musk, which we considered are representative, and noted that the prices charged to the Group and independent third parties were the same and other terms such as credit terms and payment terms offered by the CNPGC Group to the Group were comparable to those offered to independent third parties.

The management of the Company confirmed us that the abovementioned internal control and pricing policy was, and would be, consistently applied to all transactions in respect of the Purchases and on terms no less favourable to the Group than those made available from independent third parties.

Having considered that (i) the terms of the transactions contemplated under the Existing Master Purchase Agreement for those products with comparable market prices offered by the CNPGC Group to the Group were comparable to those offered by the independent third parties; (ii) adequate measures have been implemented by the Group to ensure the terms offered by the CNPGC Group regarding artificial musk are not less favorable than those offered to any other independent third party; and (iii) the Directors have confirmed that the existing pricing policy adopted under the Existing Master Purchase Agreement would be consistently applied to all transactions in respect of the Purchases and on terms no less favourable to the Group than those made available from independent third parties, we consider that the terms of the New Master Purchase Agreement are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned.

(b) The New Master Supply Agreement

Pursuant to the New Master Supply Agreement, the Group conditionally agreed to sell the Products to the CNPGC Group during the period from 1 January 2017 to 31 December 2019. The Products to be supplied by the Group to the CNPGC Group are major products manufactured by the Group including, but not limited to, Nifedipine Sustained-release tablet (Sheng Tong Ping) （硝苯地平舒緩釋片(聖通平)）, Yu Ping Feng Granule（玉屏風顆粒）, Qiye Shenan Tablet（七葉神安片）, Bi Yan Kang Tablet （鼻炎康片）, VC Yingqiao Tablet（維C銀翹片）, Cefodizime Sodium for injection (Gaode) （注射用頭孢地嗪鈉(高德)）, Group A Streptococcus for injection (Sha Pei Lin)（注射用A群 鏈球菌(沙培林)）, Xianling Gubao Capsule and Tablet （仙靈骨葆膠囊/片劑）, Jingshu Granules （頸舒顆粒）, Moisturizing and Anti-Itching Capsules （潤燥止癢膠囊）, Zaoren Anshen Capsules （棗仁安神膠囊）, Fengshi Gutong Capsules （風濕骨痛膠囊）, Jiangyin Tianjiang concentrated TCM granules （天江藥業中藥配方顆粒） and Guangdong Yifang concentrated TCM granules （廣東一方中藥配方顆粒）. The specific terms of the Sales will be determined with reference to the prevailing market terms and on terms no less favourable to the Group than those made available to independent third parties for similar Products.

We were advised by the management of the Company that the prices of the products sold to the distributors will be determined (i) by applying a discount to the prices set by the provincial level tender offices through tenders for those products sold to hospitals; or (ii) based on the internal price list set by the Group which are

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LETTER FROM HERCULES

applicable to all distributors (including the CNPGC Group and other third party distributors) for those products sold by the distributors to pharmacies. In order to supply the products to hospitals, the Group will first participate in tender by submitting bids to the provincial level tender offices. If the Group is awarded the tender, the Group will sell the products at a discount, which normally ranges from 2% to 15%, to the tender price to the distributors, which will then distribute and sell the products to the designated hospitals at the tender price. The tender price will only be updated until a new tender is conducted. According to the Group’s pricing policy which is applicable to all distributors, the percentage of discount to be offered shall be determined after taking into account a number of factors, including sales amount, payment terms and distance of delivery. The discount shall then be reviewed by the finance department to ensure that it is set in compliance with the pricing policy. For the products sold to pharmacies through distributors, the prices of the products are determined based on the internal price list set by the sales and marketing department of the Group, which is applicable to all distributors (including CNPGC Group and other third party distributors) and is reviewed by the sales and marketing department and finance department annually or more frequently if market condition changes materially. The Directors consider that the above internal control procedures can ensure the terms offered to the CNPGC Group are no more favourable than terms offered to other third party distributors as the Group’s pricing policy is applicable to all distributors (including the CNPGC Group and other third party distributors). The credit period and delivery terms offered by the Group to the CNPGC Group will be no more favourable than those offered to other customers. The credit period offered by the Group to the CNPGC Group normally ranges from 3 to 6 months depending on the sales amount of the Products and payment method, and is in line with the credit period offered to other customers. The cost of delivery is normally borne by the Group.

We have reviewed ten samples of invoices issued by the Group to the CNPGC Group, which we considered are representative, and the price list of the Group for the relevant period and noted that the prices charged by the Group were not lower than the pre-set minimum prices under the price list of the Group. We have also reviewed ten sets of samples of invoices issued by the Group to each of the CNPGC Group and independent customers in relation to the sales of Products, which we considered are representative, and noted that the terms offered by the Group to the CNPGC Group were comparable to those offered to independent third parties in respect of the same product.

The management of the Company confirmed us that the pricing policy was, and would be, consistently applied to all transactions in respect of the Sales and on terms no less favourable to the Group than those made available to independent third parties.

Given that (i) the terms of the transactions contemplated under the Existing Master Supply Agreement offered by the Group to the CNPGC Group were comparable to those offered to the independent third parties; and (ii) the existing pricing policy adopted under the Existing Master Supply Agreement would be consistently applied to all transactions in respect of the Sales under the New Master Supply Agreement and on terms no less favourable to the Group than those made available to independent third

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parties, we consider that the terms of the New Master Supply Agreement are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned.

3. Annual Caps for the Continuing Connected Transactions

(a) Historical transaction amounts and Annual Caps

The historical transaction amounts of the Continuing Connected Transactions are summarized as follows:

Purchases of the Materials Sales of the Products	Historical Transaction For the year ended 31 December 2014 2015 RMB’ million RMB’ million 23.5 14.9 453.6 441.8	Amounts For the ten months ended 31 October 2016 RMB’ million 20.0 173.7	Annual caps (utilization rate) For the year ending 31 December 2014 2015 2016 RMB’ million RMB’ million RMB’ million 35.0 39.0 45.0 (67.1%) (38.2%) (44.4%) 500.0 610.0 740.0 (90.7%) (72.4%) (23.5%)

The proposed Annual Caps are summarized as follows:

Purchases of the Materials Sales of the Products	Annual Caps For the year ending 31 December 2017 2018 2019 RMB’ million RMB’ million RMB’ million 45.0 45.0 45.0 800.0 900.0 1,000.0

(b) Purchases of the Materials

For the purpose of determining the Annual Caps for the Purchases in 2017, 2018 and 2019, the Company has considered (i) the historical transaction amount of purchases of the Materials by the Group from the CNPGC Group; and (ii) the expected demand of the Materials to cater for the production needs of the Group for 2017, 2018 and 2019.

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LETTER FROM HERCULES

To assess whether the basis of the Annual Caps for the Purchases are fair and reasonable, we have discussed with the management of the Company and reviewed the historical average costs and purchase volume of the Materials purchased from the CNPGC Group, the development plans of the Group for the three years ending 31 December 2019 and the expected average costs and purchase volume of the Materials for the three years ending 31 December 2019 and considered the following factors:

(i) Historical transaction amounts

As shown in the above table, the transaction amount of purchases of Materials from the CNPGC Group for the year ended 31 December 2015 decreased substantially by approximately 36.6% as compared to the previous year. We have reviewed the breakdown of the historical transactions between the Group and CNPGC Group for the purchases of Materials in 2014 and 2015 and noted that the major Materials purchased from the CNPGC Group by the Group were calculus bovis (including vitro cultivation calculus bovis（體外培育牛黃)）, artificial musk and jiangbanxia, which accounted for over 80% of the total purchases from the CNPGC Group for each of the year ended 31 December 2014 and 31 December 2015.

The management of the Company explained to us that the CNPGC Group had a shortage in stock of calculus bovis and jiangbanxia in 2015 and thus it could not satisfy the demand of the Group at the relevant time. Therefore, the Company started to source calculus bovis and jiangbanxia from independent suppliers. As the Group shifted its purchases of calculus bovis and jiangbanxia from the CNPGC Group to other independent suppliers, the transaction amounts of purchases of calculus bovis and jiangbanxia from the CNPGC Group for the year ended 31 December 2015 decreased by an amount of approximately RMB4.0 million and RMB2.5 million respectively, representing a decrease of approximately 47.3% and 51.3% respectively, as compared to the previous year. Due to the significant drop in transaction amount of purchases of calculus bovis and jiangbanxia from the CNPGC Group, the total transaction amount of purchases of Materials from the CNPGC Group for the year ended 31 December 2015 decreased substantially although the transaction amount of purchases of major Materials other than calculus bovis and jiangbanxia from the CNPGC Group remained stable in 2015.

In late 2015, Sinopharm Group Feng Liao Xing (Foshan) Medicinal Material & Slices Co., Ltd (“Feng Liao Xing”), an indirect wholly-owned subsidiary of the Company which is specialised in producing Angong Niuhuang Wan（安宮牛黃丸）, the major raw materials of which comprises artificial musk and calculus bovis, planned to relocate its production facilities in 2016. Therefore, it increased the production volume of Angong Niuhuang Wan in 2015 so as to cope with the demand in 2016. In mid-2016, Feng Liao Xing started to relocate its production facilities and certain productions have been temporarily suspended. Meanwhile,

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the Group continued to source jiangbanxia from independent suppliers. Therefore, no calculus bovis and jiangbanxia, and smaller amount of artificial musk, were purchased from the CNPGC Group for the ten months ended 31 October 2016.

On the other hand, upon the completion of the acquisition of 87.3% of the registered capital of 江陰天江藥業有限公司 (Jiangyin Tianjiang Pharmaceutical Co. Ltd.*) (“Jiangyin Tianjiang”), a company (together with its subsidiaries) principally engaged in the research, development, manufacture and sale of concentrated TCM granules （中藥配方顆粒）, by the Group in October 2015, the transactions between Jiangyin Tianjiang and its subsidiaries (collectively, “Jiangyin Tianjiang Group”) and the CNPGC Group thereafter were treated as connected transactions and the transaction amount of which were included as part of the transaction amount of purchases of Materials by the Group from the CNPGC Group. As a result, the purchases of Materials from the CNPGC Group increased from approximately RMB14.9 million for the year ended 31 December 2015 to approximately RMB20.0 million for the ten months ended 31 October 2016. The Company expects that the total purchase amount of the Materials from the CNPGC Group for the year ending 31 December 2016 will reach approximately RMB25.0 million subject to the then circumstances.

(ii) Projected purchase volume of the Materials

We noted that the Annual Caps in respect of the Purchases for the three years ending 31 December 2019 are substantially larger than the historical transaction amounts. We were advised by the management of the Company that the purchase volume of calculus bovis and artificial musk from the CNPGC Group is expected to increase substantially in 2017 as the production volume of the products of the Group, in particular those manufactured by Feng Liao Xing will increase significantly in 2017. The relocation of production facilities of Feng Liao Xing is expected to be completed by the first quarter of 2017. Following the completion of relocation, the production of Feng Liao Xing will be resumed with enhanced capacity. The annual production capacity will increase from 70.3 million pills to 110.0 million pills, 230 tones of pellets to 560 tones of pellets, 116.9 million tablets to 280.0 million tablets, 36.4 million packs of powder to 56.0 million packs of powder, 1,070 tones of medicinal wine to 3,600 tones of medicinal wine and 0.5 million ointments to 5.0 million ointments. It is expected that the production volume of Angong Niuhuang Wan will increase from approximately 71,000 in 2016 to approximately 738,000 for each of the three years ending 31 December 2019 as the existing inventory level of Angong Niuhuang Wan is relatively low owing to the temporary suspension of production in 2016 and the Group needs to replenish the stock of Feng Liao Xing in 2017 and to cope with the demand in the coming three years. As a result, the purchase volume of calculus bovis and artificial musk, being the major raw materials of Angong Niuhuang Wan, from the CNPGC Group is expected to increase substantially for the year ended 31 December 2017 in order to meet Feng Liao Xing’s production needs.

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LETTER FROM HERCULES

We were advised by the management of the Company that it is expected that the purchases of Materials from the CNPGC Group will remain constant for the three years ending 31 December 2019 in view of the increased production volume of the products of Feng Liao Xing, in particular Angong Niuhuang Wan, in 2017 and the relatively stable demand of Angong Niuhuang Wan during the three years ending 31 December 2019.

(iii) Projected prices of the Materials

We were given to understand that the prices of the major Materials sourced from the CNPGC Group are relatively stable, save for calculus bovis (excluding vitro cultivation calculus bovis) and pangolin scales （炮山甲）, whose prices fluctuated upwards and downwards during 2014 to 2016. For calculus bovis and pangolin scales, neither a specific trend in their historical pricing movement could be identified nor there was any industry consensus for the forecast on their future prices. Therefore, the management of the Company adopted the weighted average historical prices of calculus bovis and pangolin scales purchased from the CNPGC Group for the past three years as the projected prices of calculus bovis and pangolin scales for the calculation of the Annual Caps for the Purchases. On the other hand, as the historical prices of other major Materials were quite stable, the prevailing prices of those materials are used for the calculation of the Annual Caps for the Purchases.

Based on the above, we consider that the Annual Caps in respect of the Purchases proposed by the Directors are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

(c) Sales of the Products

For the purpose of determining the Annual Caps for the Sales in 2017, although the historical sales of Products by the Group to the CNPGC Group is relatively low as compared to the Annual Caps for the Sales in 2017, the Company has considered (i) the anticipated gradual increase in the demand of the Products driven by the aging population in the PRC; (ii) the recent trend of consolidation in the pharmaceutical industry in the PRC as a result of the fierce competition and more stringent regulations in the industry, whereby the CNPGC Group, as one of the largest pharmaceutical companies in the PRC, is expected to takeover other smaller distributors and gain a larger market share in the industry; (iii) the expected increase in sales of the Products through the sales network of the CNPGC Group as a result of the “two-invoice system”, details of which are set out in section headed “Effect of the “two-invoice system” herein; and (iv) the potential sale of the products manufactured by Jiangyin Tianjiang Group which were not on the list of products under the Existing Master Supply Agreement. A year-on-year increase of the Annual Caps for the Sales of approximately 12.5% and 11.1% were projected in 2018 and 2019 after taking into account the historical growth and expected future growth of the pharmaceutical industry, the exclusive products of the Company which are on the National Essential Drug List and other factors as mentioned above.

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LETTER FROM HERCULES

To assess whether the basis of the Annual Caps for the Sales are fair and reasonable, we have reviewed the historical average selling prices and sales volume of the Products in relation to the Sales, the development plans of the Group for the three years ending 31 December 2019 and the expected average selling prices and sales volume of the Products in relation to the Sales for the three years ending 31 December 2019 and considered the following factors:

(i) Historical transaction amounts

We noted that the major Products sold to the CNPGC Group were Xianling Gubao Capsule and Tablet（仙靈骨葆膠囊/片劑）, Yu Ping Feng Granule（玉屏風顆 粒）, Jingshu Granules（頸舒顆粒）, Moisturizing and Anti-Itching Capsules（潤燥止 癢膠囊）, Jiangyin Tianjiang concentrated TCM granules （天江藥業中藥配方顆粒） and Guangdong Yifang concentrated TCM granules （廣東一方中藥配方顆粒） (collectively, the “Major Products”), which accounted for over 70% of the total sales to the CNPGC Group for each of the year ended 31 December 2014 and 31 December 2015 and ten months ended 31 October 2016.

We also noted that the historical transaction amounts of the Sales dropped significantly from approximately RMB441.8 million for the year ended 31 December 2015 to approximately RMB173.7 million for the ten months ended 31 October 2016. We were advised by the management of the Company that such decrease was mainly attributable to the decrease in sales volume of finished drugs as a result of the decline in the demand from sub-distributors of the CNPGC Group after the implementation of the “two-invoice system” in 2016. Under the “two-invoice system”, primary distributors (such as the CNPGC Group) are required to distribute medicines and drugs directly to the hospitals, instead of through other sub-distributors. As a result, purchases of the Products by certain sub-distributors of the CNPGC Group decreased due to destocking, which in turn lowered the demand of the Products of the Group. The Group expects the impact of destocking resulting from the implementation of the “two invoice system” to be temporary and has been substantially reflected in 2016. The Company expects that the actual sales amount of the Products by the Group to the CNPGC Group for the year ending 31 December 2016 will be approximately RMB320.0 million. Based on the experience of the management of the Group, it is expected that the retail demand for pharmaceutical products in autumn and winter will be higher and thus the sales of Products by the Group to the CNPGC Group in the last quarter of 2016 are expected to increase correspondingly.

(ii) Projected sales volume of the Products

We noted that the Annual Cap in respect of the Sales for the year ending 31 December 2017 is substantially larger than the historical transaction amount and there would be an increase in an annual growth rate of approximately 12.5% and 11.1% in the Annual Caps for the years ending 31 December 2018 and 2019 respectively. The increases in Annual Caps were mainly attributable to the increases in the expected sales volume of the Products. Based on the discussions between the Group and the CNPGC Group and the factors set out below, the sales

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LETTER FROM HERCULES

volume of the major finished drugs to the CNPGC Group is projected to increase from approximately 4.2 million boxes for the ten months ended 31 October 2016 to approximately 17.8 million boxes for the year ending 31 December 2017 while concentrated TCM granules to the CNPGC Group is projected to increase from approximately 7.5 million packs for the ten months ended 31 October 2016 to approximately 54.9 million packs for the year ending 31 December 2017 and the sales volume of both major finished drugs and concentrated TCM granules to the CNPGC Group were projected to further increase by approximately 15% for each of the two years ending 31 December 2019 in view of the following factors:

Outlook of the TCM Industry

In May 2015, the General Office of State Council published the “Development Plan of TCM Healthcare Services (2015-2020)”（中醫藥健康服 務發展規劃2015-2020年）, which sets out seven major tasks for the development of the TCM industry, including (i) to support TCM healthcare institutions for development of TCM services for preserving longevity; (ii) to encourage investment in TCM healthcare services by all sources of funding; (iii) to promote TCM rehabilitation services; (iv) to support the development of TCM nursing home for the elderly where medical treatment and care services are combined; (v) to nurture TCM culture and healthcare-related tourism; (vi) to back up the research and development, manufacturing and utilization of TCM-related healthcare products; and (vii) to promote TCM healthcare services trading in order to attract more TCM-related consumption in the PRC and to facilitate the overseas markets of TCM healthcare services. It is considered that the publication of this development plan indicates the National government’s support of the TCM industry.

According to the Thirteenth Five-Year Plan for Chinese Medicine Industry Development published by the State Administration of Traditional Chinese Medicine of the PRC, the revenue of enterprises above designated size in the TCM industry （中藥工業規模以上企業主營業務收入） amounted to approximately RMB786.7 billion in 2015, representing a compound annual growth rate of approximately 19.9% from 2010 to 2015. It is expected that the revenue of enterprises above designated size in the TCM industry will continue to grow at a compound annual growth rate of approximately 15.0% from 2015 to approximately RMB1,582.3 billion in 2020.

Given the aging population in the PRC and the continued support of the PRC Government on the development and growth of the TCM industry, the management of the Company expects, and we concur with its view, that in the absence of any unforeseeable adverse factors that may have a substantial negative impact on the economy of the PRC, the demand of TCM products in the PRC will continue to increase and the market outlook of the TCM industry in the PRC shall remain positive in the foreseeable future.

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LETTER FROM HERCULES

Growth of the business of the Group

According to the 2015 annual report of the Company, the revenue of the Group increased by approximately 40.0% from approximately RMB2,650.5 million for the year ended 31 December 2014 to approximately RMB3,709.4 million for the year ended 31 December 2015. The revenue of the Group further increased to approximately RMB3,199.3 million for the six months ended 30 June 2016 as compared to approximately RMB1,422.1 million for the previous corresponding period. Such increases were mainly attributable to the completion of the acquisition of 87.3% of the registered capital Jiangyin Tianjiang in October 2015. The revenue from Jiangyin Tianjiang Group amounted to approximately RMB978.9 million for the year ended 31 December 2015 and approximately RMB2,054.7 million for the six months ended 30 June 2016.

As disclosed in the 2016 interim report of the Company, it is one of the development strategies of the Group to pay equal efforts on organic and exogenous growth. The Group completed the acquisition of the entire equity interest in 華頤藥業有限公司 (Huayi Pharmaceutical Co., Ltd.), which is a company (together with its subsidiary) principally engaged in the production, sale, research and development of TCM, in April 2016. On 27 September 2016, the Group entered into agreements to acquire the entire registered capital of 貴州同濟堂中藥飲片有限公司 (Guizhou Tongjitang Herbal Co., Ltd.) and 上海同濟堂藥業有限公司 (Shanghai Tongjitang Pharmaceutical Co., Ltd.*), being companies principally engaged in the manufacture and sale of TCM decoction pieces in Guizhou and Shanghai, the PRC respectively. It is expected that the acquisitions will be completed by the end of 2016. As at the Latest Practicable Date, the acquisitions have not been completed yet. It is expected that the mergers and acquisitions carried/to be carried out by the Group will further increase the sales volume of the Products.

The management of the Company expected that the sale of concentrated TCM granules manufactured by Jiangyin Tianjiang Group to the CNPGC Group would be amounted to RMB76.7 million for the year ending 31 December 2017 as the Group intends to increase the sale of concentrated TCM granules through the CNPGC Group.

Trend of consolidation in the pharmaceutical industry in the PRC

The management of the Company advised us that the healthcare industry in the PRC has been undergoing consolidation in the recent years, where the small pharmaceutical companies have been acquired by or merged with larger pharmaceutical companies. CNPGC advised the Company that CNPGC would continue to expand its distribution network through new set-ups and/or acquisitions of companies so as to further increase its market share. As CNPGC is one of the largest pharmaceutical companies in the

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LETTER FROM HERCULES

PRC, the Directors consider that the consolidation of the industry in the PRC will enhance the role of the CNPGC Group as a business partner of the Group to distribute the Products to the hospitals and retail pharmacies.

Effect of the “two-invoice system”

As advised by the management of the Company, primary distributors (such as the CNPGC Group) are required to distribute the Products directly to the hospitals, instead of through other sub-distributors, under the “two-invoice system”. According to the management of the Company, approximately 60% to 65% of the sales of the Group were made to the hospitals, of which approximately 50% was distributed through primary distributors while the remaining was sold through the sub-distributors before the implementation of the “two-invoice system”. After the release of the “two-invoice system” policy in 2016, many of the sub-distributors (mostly small distributors with less competitive advantages) were eliminated by the market. Up to the end of November 2016, the “two-invoice system” has been implemented in some provinces in the PRC such as Anhui and Fujian while Shaanxi and Guangdong provinces will implement the “two-invoice system” policy in 2017. It is expected that more provinces will adopt the “two-invoice system” policy in the coming years. The Company expected that the sale of Products to the hospitals through the CNPGC Group will increase for the three years ending 31 December 2019 as the Group intends to shift the distribution of products from the sub-distributors to the primary distributors, including the CNPGC Group.

Based on the above, we consider that the projected sales volume of the Products to the CNPGC Group for the year ending 31 December 2017 is fair and reasonable. Furthermore, having considered (i) the actual growth of the Group’s revenue of approximately 40.0% and 125.0% for the year ended 31 December 2015 and the six months ended 30 June 2016 respectively; and (ii) the expected compound annual growth rate of approximately 15.0% from 2015 to 2020 for the revenue of enterprises above designated size in the TCM industry as set out in the Thirteenth Five-Year Plan for Chinese Medicine Industry Development, we consider that the expected growth rate of approximately 15% for each of the two years ending 31 December 2019 in respect of the sales volume of the Products to the CNPGC Group are fair and reasonable.

(iii) Projected selling prices of the Products

We understand from the management of the Company that the price control imposed by the PRC government on TCM products has been abolished in 2015. The management of the Company considers that the prices of the Products have been adjusted following the abolishment of the control policy in 2015 and the room for significant price adjustment in the coming years is little. Therefore, the management of the Company expected that the selling prices of the Products for the three years ending 31 December 2019 will remain stable at the prevailing

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LETTER FROM HERCULES

level in preparing the Annual Caps for the Sales. We have reviewed the selling prices of the Products in 2016 and noted that there were no material differences from those of 2015. Therefore, we consider that the expected selling prices of the Products adopted by the Company in determining the Annual Caps for the Sales are fair and reasonable.

Based on the above, we consider that the Annual Caps in respect of the Sales proposed by the Directors are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we consider that (i) the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Group; and (ii) the terms of the Agreements (and the proposed Annual Caps thereunder) are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. We therefore recommend the Independent Board Committee to advise the Independent Shareholders, as well as the Independent Shareholders, to vote in favour of the resolutions to approve the transactions contemplated under the Agreements (and the Annual Caps thereunder) at the upcoming EGM.

Yours faithfully, For and on behalf of Hercules Capital Limited

Louis Koo Amilia Tsang Managing Director Director

Notes:

1. Mr. Louis Koo is a licensed person under the SFO to engage in Type 6 (advising on corporate finance) regulated activities and has over 20 years of experience in investment banking and corporate finance.

2. Ms. Amilia Tsang is a licensed person under the SFO to engage in Type 6 (advising on corporate finance) regulated activities and has over 15 years of experience in corporate finance, investment and corporate management.

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PARTICULARS OF THE DIRECTOR SEEKING FOR RE-ELECTION

APPENDIX I

In accordance with Articles 92 of the Articles of Association, the following Director (being a Director appointed by the Board to fill a casual vacancy during the year) shall hold office until the EGM and, being eligible, will offer herself for re-election at the EGM.

Ms. HUANG He , aged 37, was appointed as a non-executive Director on 23 August 2016. Ms. HUANG graduated from Renmin University of China with a bachelor degree in International Accounting in July 2001 and a master degree in Accounting in July 2004. Ms. HUANG is an auditor and a senior human resources officer. She was the accountant of the finance department, the vice manager of the operation and audit department and the manager of the strategic planning department of Traditional & Herbal Medicine Company from July 2004 to December 2007; the manager of the audit department, the employee supervisor of the board of supervisors and the manager of the human resources department of China National Corporation of Traditional and Herbal Medicine from January 2008 to December 2013; the director of human resources and the manager of the human resources department of China National Traditional Chinese Medicine Corporation from January 2014 to January 2015. Currently, Ms. HUANG is the director of operations and the manager of the human resources department of China National Traditional Chinese Medicine Corporation.

Save as disclosed above, Ms. HUANG has not held directorship in other listed companies in the past three years or any other positions within the Company and other members of the Group.

As at the Latest Practicable Date, Ms. HUANG has no interest in the Shares, relevant shares or debentures of the Company and/or its associates within the meaning of Part XV of the SFO.

Save as disclosed above, Ms. HUANG does not have any relationship with any other Directors, senior management, substantial Shareholders or controlling Shareholders.

Ms. HUANG has entered into an appointment letter with the Company in relation to her appointment for an initial term of two years. Upon her re-election at the EGM, she is also subject to retirement by rotation and re-election in accordance with the Articles of Association thereafter. The director’s fee of Ms. HUANG was determined with reference to her duties and responsibilities with the Company, the Company’s performance and the prevailing market condition. For the year ending 31 December 2016, it is expected that Ms. HUANG will not receive any director’s fee.

Save as disclosed above, Ms. HUANG is not aware of any other matters that need to be brought to the attention of the Shareholders in relation to her re-election as a non-executive Director and any other information required to be disclosed pursuant to any of the requirements of Rule 13.51(2) of the Listing Rules.

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GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

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

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

			Approximate
			percentage of the
	Capacity/Nature of		issued share capital
Name of Directors	Interest	Number of Shares	of the Company
			(Note 3)
Mr. Wang Xiaochun	Interest in controlled	376,735,042	8.50%
(“Mr. Wang”)	corporation	(long position)
		(Note 1)
Mr. Yang Bin	Interest in controlled	376,735,042	8.50%
(“Mr. Yang”)	corporation	(long position)
		(Note 2)

Notes:

1. The 376,735,042 Shares are held by Hanmax Investment Limited (“Hanmax”) which is wholly owned by Mr. Wang.

2. The 376,735,042 Shares are held by Profit Channel Development Limited (“Profit Channel”) which is wholly owned by Mr. Yang.

3. Based on 4,431,505,630 Shares in issue as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX II

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

(ii) Interests of substantial Shareholders

			Approximate	Approximate
			**percentage **	of the
	Capacity/		issued share capital
Name	Nature of Interest	Number of Shares	of the Company
			(Note 5)
Sinopharm Group	Beneficial owner	1,614,313,642	36.43%
Hongkong Co.,		(long position)
Limited		(Note 1)
CNPGC	Interest of controlled	1,614,313,642	36.43%
	corporations	(long position)
		(Note 1)
Profit Channel	Beneficial owner	376,735,042		8.50%
		(long position)
		(Note 2)
Hanmax	Beneficial owner	376,735,042		8.50%
		(long position)
		(Note 3)
GIC Private	Investment Manager	100,532,000		2.27%
Limited		(long position)
		(Note 4)
	Interest of controlled	213,674,000		4.82%
	corporation	(long position)
		(Note 4)

Notes:

1. 1,614,313,642 Shares are held by Sinopharm Group Hongkong Co., Limited which is indirectly wholly owned by CNPGC.

2. The 376,735,042 Shares are held by Profit Channel which is wholly owned by Mr. Yang.

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GENERAL INFORMATION

APPENDIX II

1. The 376,735,042 Shares are held by Hanmax which is wholly owned by Mr. Wang.

2. The number of Shares held by GIC Private Limited is based on the information of Corporate Substantial Shareholder Notice (Form 2) dated 22 January 2016 which is available on the website of the Stock Exchange.

3. Based on 4,431,505,630 Shares in issue as at the Latest Practicable Date.

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

3. COMPETING INTERESTS

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

4. DIRECTORS’ SERVICE CONTRACTS

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

5. EXPERT AND CONSENT

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

Hercules Capital Limited

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

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

As at the Latest Practicable Date, Hercules was not beneficially interested in the share capital of any member of the Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group. In addition, Hercules did not have any interest, either directly or indirectly, in any assets which have been, since 31 December 2015 (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.

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GENERAL INFORMATION

APPENDIX II

6. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2015 (the date to which the latest published audited consolidated financial statements of the Company were made up).

7. DIRECTORS’ INTERESTS IN ASSETS OF THE GROUP

Save for the 50% interest in 上海同濟堂藥業有限公司 (Shanghai Tongjitang Pharmaceutical Co., Ltd*) which was acquired by the Group from Mr. Wang Xiaochun, an executive Director, the acquisition of which is expected to be completed by the end of 2016, 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 2015 (the date to which the latest published audited consolidated financial statements of the Company were made up) up to the Latest Practicable Date.

8. DIRECTORS’ INTERESTS IN CONTRACTS OR ARRANGEMENTS

As at the Latest Practicable Date,

• (i) Mr. Wu Xian is the director, general manager and deputy secretary of the Party Committee of China National Traditional Chinese Medicine Corporation.

• (ii) Mr. LIU Cunzhou is currently the chief expert of CNPGC;

• (iii) Mr. DONG Zenghe is currently the deputy general manager of CNPGC and the chairman of the board of China National Traditional Chinese Medicine Corporation;

• (iv) Mr. ZHAO Dongji is currently the manager of Investment Management Department and deputy general manager of China National Traditional Chinese Medicine Corporation;

• (v) Ms. HUANG He is currently the director of operations and the manager of the human resources department of China National Traditional Chinese Medicine Corporation;

• (vi) Ms. TANG Hua is currently the financial controller and the manager of finance department of China National Traditional Chinese Medicine Corporation; and

• (vii) Mr. YU Tze Shan Hailson is currently an independent non-executive director of Sinopharm Group Co. Ltd. which is a subsidiary of CNPGC and a fellow subsidiary of the Company.

The aforesaid Directors are considered to be interested in the Agreements by virtue of their positions held in the CNPGC Group or its associates. Save as disclosed above, none of the Directors was materially interested in any contract or arrangement subsisting at the Latest Practicable Date which was significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX II

9. DOCUMENTS AVAILABLE FOR INSPECTION

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

• (a) the Articles of Association;

• (b) the New Master Purchase Agreement;

• (c) the New Master Supply Agreement;

• (d) the letter from the Independent Board Committee, the text of which is set out on page 17 of this circular;

• (e) the letter of advice from Hercules to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 18 to 34 of this circular; and

• (f) the written consent as referred to in the paragraph headed “Expert and Consent” in this appendix.

10. MISCELLANEOUS

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

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NOTICE OF THE EGM

CHINA TRADITIONAL CHINESE MEDICINE HOLDINGS CO. LIMITED 中國中藥控股有限公司

(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 Holdings Co. Limited (the “ Company ”) will be held at 2:00 p.m. on Friday, 6 January 2017 at Conference Room, 2nd Floor, No. 1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, the PRC for the purpose of considering and, if thought fit, passing the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

1. “ THAT :

2. (a) the New Master Purchase Agreement (as defined in the circular to the shareholders of the Company dated 19 December 2016 (the “ Circular ”)) and the transactions contemplated thereunder be and are hereby approved;

3. (b) the annual caps in relation to the transactions contemplated under the New Master Purchase Agreement for the three financial years ending 31 December 2017, 2018 and 2019 be and are hereby approved; and

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

5. “ THAT :

6. (a) the New Master Supply Agreement (as defined in the Circular) and the transactions contemplated thereunder be and are hereby approved;

7. (b) the annual caps in relation to the transactions contemplated under the New Master Supply Agreement for the three financial years ending 31 December 2017, 2018 and 2019 be and are hereby approved; and

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NOTICE OF THE EGM

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

• “ THAT :

Ms. HUANG He be and is hereby re-elected as a non-executive director of the Company.”

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

19 December 2016

Notes:

1. In order to determine the Shareholders who are entitled to attend the EGM, the Company’s register of Shareholders will be closed from Wednesday, 4 January 2017 to Friday, 6 January 2017 (both days inclusive). The Shareholders whose names appear on the register of members of the Company on Friday, 6 January 2017 are entitled to attend and vote at the EGM. Shareholders who wish to attend the EGM but have not registered the transfer documents are required to deposit the transfer documents together with the relevant share certificates at the registrar of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong no later than 4:30 p.m. on Tuesday, 3 January 2017.

2. 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/her proxy to attend and vote instead of him/her. A member who is the holder of two or more shares may appoint more than one proxy to represent him/her and vote on his/her behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company.

3. 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 Hennessy 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.

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