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

Oct 24, 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)

(i) DISCLOSEABLE AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF SHANGHAI TONGJITANG; AND

(ii) 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 1:30 p.m. on Friday, 11 November 2016 at Conference Room, 2nd Floor, No.1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China is set out on pages EGM-1 to 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.

25 October 2016

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Letter from Guotai Junan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Notice of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

• “Acquisition”

• the acquisition of the entire registered capital of Shanghai Tongjitang by Feng Liao Xing from the Vendors pursuant to the Acquisition Agreement

• “Acquisition Agreement” the sale and purchase agreement dated 27 September 2016 entered into among Feng Liao Xing and the Vendors in respect of the Acquisition

• “associate(s)” has the meaning ascribed to it under the Listing Rules

• “Board” the board of Directors

• “Company” China Traditional Chinese Medicine Holdings Co. Limited, 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 and held to consider and, if thought fit, approve the Acquisition

• “Feng Liao Xing” 國藥集團馮了性（佛山）藥材飲片有限公司 (Sinopharm Group Feng Liao Xing (Foshan) Medicinal Material & Slices Co., Ltd.), a company established in the PRC with limited liability and an indirect wholly-owned subsidiary of the Company

• “Group” the Company and its subsidiaries

• “Guizhou Tongjitang” 貴州同濟堂中藥飲片有限公司 (Guizhou Tongjitang Herbal Co., Ltd.*)

• “Guotai Junan” Guotai Junan Capital Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition

• “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “Independent Board Committee”

• the independent committee of the Board comprising all the independent non-executive Directors established for the purpose of giving recommendations to the Independent Shareholders in respect of the Acquisition

– 1 –

DEFINITIONS

“Independent Shareholder(s)”	any Shareholder(s) other than Mr. Wang	any Shareholder(s) other than Mr. Wang	and	his
	associates
“Latest Practicable Date”	20 October 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
“Mr. Wang”	Mr. Wang Xiaochun, one of the Vendors		and	an
	executive Director
“PRC”	The People’s Republic of China which, for	the	purpose
	of this circular, excludes Hong Kong,	the	Macau
	Special Administrative Region and Taiwan
“SFO”	Securities and Futures Ordinance (Chapter	571 of		the
	Laws of Hong Kong)
“Shanghai Tongjitang”	上海同濟堂藥業有限公司 (Shanghai	Tongjitang
	Pharmaceutical Co., Ltd.*)
“Shareholder(s)”	the holder(s) of the issued Share(s)
“Share(s)”	the ordinary share(s) in the share capital		of	the
	Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“TCM”	traditional Chinese medicine
“Vendors”	collectively, Mr. Hu Yong and Mr. Wang
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

• For identification purpose only

Unless the context requires otherwise, amounts in RMB in this circular have been translated into HK$ at the rate of RMB1 = HK$1.16. No representation is made that any amounts in HK$ and RMB have been or could be converted at the above rate or at any other rates or at all.

– 2 –

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

25 October 2016

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF SHANGHAI TONGJITANG

INTRODUCTION

Reference is made to the announcement of the Company dated 27 September 2016 in relation to, among other things, the Acquisition.

On 27 September 2016 (after the Stock Exchange trading hours), Feng Liao Xing (an indirect wholly-owned subsidiary of the Company) entered into the Acquisition Agreement with the Vendors and Shanghai Tongjitang. Pursuant to the Acquisition Agreement, Feng Liao Xing conditionally agreed to acquire, and the Vendors conditionally agreed to sell, the entire registered capital of Shanghai Tongjitang for a consideration of RMB510 million (subject to downward adjustment).

– 3 –

LETTER FROM THE BOARD

As one or more of the applicable percentage ratios (as defined under the Listing Rules) are greater than 5% but less than 25%, the Acquisition constitutes a discloseable transaction for the Company under the Listing Rules. Since Mr. Wang, being one of the Vendors, is an executive Director, he is a connected person and therefore the Acquisition also constitutes a connected transaction under the Listing Rules. Accordingly, the Acquisition is subject to the reporting, announcement and the independent shareholders’ approval requirements under the Listing Rules.

The EGM will be convened and held for the purpose of considering and, if thought fit, approving the Acquisition. The Independent Board Committee which comprises all the independent non-executive Directors, namely Mr. Zhou Bajun, Mr. Xie Rong, Mr. Yu Tze Shan Hailson and Mr. Lo Wing Yat, has been established to advise the Independent Shareholders in respect of the Acquisition and Guotai Junan has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

The purpose of this circular is to provide you with, among other things, (i) details of the Acquisition, the letter of recommendation from the Independent Board Committee; (ii) the letter of advice from Guotai Junan; (iii) other information required to be disclosed under the Listing Rules; (iv) the notice of the EGM; and (v) a form of proxy for the EGM.

THE ACQUISITION AGREEMENT

Date

27 September 2016

Parties

• (i) Feng Liao Xing, as purchaser;

• (ii) Mr. Hu Yong, being one of the Vendors;

• (iii) Mr. Wang, being one of the Vendors; and

• (iv) Shanghai Tongjitang.

Mr. Wang is an executive Director and is therefore a connected person of the Company. As at the Latest Practicable Date, Hanmax Investment Limited (a company wholly owned by Mr. Wang) held 376,735,042 Shares, representing approximately 8.5% of the issued share capital of the Company. Save as disclosed above, to the best of the Director’s knowledge, information and belief, having made all reasonable enquiry, both the Vendors and Shanghai Tongjitang are third parties independent of the Company and its connected persons.

– 4 –

LETTER FROM THE BOARD

Assets to be acquired

Pursuant to the Acquisition Agreement, Feng Liao Xing conditionally agreed to acquire, and the Vendors conditionally agreed to sell, the entire registered capital of Shanghai Tongjitang. Shanghai Tongjitang is a manufacturer of TCM decoction pieces based in Shanghai, the PRC (please refer to the paragraph headed “Information on Shanghai Tongjitang” below for further details).

Consideration

The consideration for the Acquisition is RMB510 million (equivalent to approximately HK$591.6 million) (subject to downward adjustment as detailed in the paragraph headed “Consideration adjustment” below) and was determined after arm’s length negotiations among Feng Liao Xing and the Vendors having taken into account: (i) the profit after tax of approximately RMB29.8 million (equivalent to approximately HK$34.6 million) recorded by Shanghai Tongjitang for the year ended 31 December 2015, which implied a price-to-earnings ratio of approximately 17.1 times; (ii) the Target Profits (as defined below) of not less than RMB43 million (equivalent to approximately HK$49.9 million) for each of the two years ending 31 December 2016 and 2017 (as detailed in the paragraph headed “Consideration adjustment” below), which implied a price-to-earnings ratio of approximately 11.86 times; (iii) both of the aforesaid implied price-to-earnings ratios being lower than the average of the price-to-earnings ratios of comparable companies of approximately 19.22 times on the date of the Acquisition Agreement; (iv) the profit after tax of approximately RMB22.7 million (equivalent to approximately HK$26.3 million) recorded by Shanghai Tongjitang for the six months ended 30 June 2016, which represents more than half of the Target Profits (as defined below); and (v) the synergies to be realised as a result of the Acquisition.

– 5 –

LETTER FROM THE BOARD

To the best of the Directors’ knowledge, the Company has identified an exhaustive list of comparable companies based on the following criteria: (i) companies engaged in the manufacture and/or sales of TCM products in the PRC and listed on the Stock Exchange; and (ii) companies with recognised profit for the most recent financial year as follows:

		Price-to-
		earnings
Company (stock code)	Principal activities	ratio
Guangzhou Baiyunshan	Research and development,	16.98
Pharmaceutical Holdings Co.	manufacture and sales of Chinese
Ltd. (874)	patent medicine, wholesale, retail,
	import and export of western and
	Chinese pharmaceutical products and
	medical apparatus; research and
	development of natural medicine and
	biological medicine
Tong Ren Tang Technologies	Manufacture and sales of Chinese	30.23
Co. Ltd. (1666)	patent medicine in the forms of
	granules, pills, tablets and soft
	capsules
China Shineway Pharmaceutical	Research and development,	8.67
Group Limited (2877)	manufacture and trading of Chinese
	pharmaceutical products
Zhongzhi Pharmaceutical	Manufacture and sale of	13.29
Holdings Limited (3737)	pharmaceutical products in the PRC
Beijing Tong Ren Tang Chinese	Manufacturing, retail and wholesale of	26.95
Medicine Company Limited	Chinese medicine products and
(8138)	healthcare products and provision of
	Chinese medical consultation and
	treatments
	Average	19.22

Source: Website of the Stock Exchange

The paid-in capital contributed by the Vendors to Shanghai Tongjitang, which represents their investment costs, amounted to RMB80 million (equivalent to approximately HK$92.8 million). Although the consideration represents a premium over the investment costs of the Vendors, the Board considers it is more appropriate to compare the consideration with prevailing market benchmarks rather than the historical investment costs contributed by the Vendors years ago. Having taken into account the implied price-to-earnings ratio is below the average of the price-to-earnings ratio of the above comparable companies, the Board considers the consideration is fair and reasonable.

– 6 –

LETTER FROM THE BOARD

The consideration for the Acquisition shall be payable by Feng Liao Xing to the Vendors in proportion to their disposal interest in Shanghai Tongjitang in cash and in the following manner:

• (i) as to RMB150 million (equivalent to approximately HK$174.0 million) within 15 business days from the date of fulfillment of all the conditions precedent of the Acquisition Agreement as set out in the paragraph headed “Conditions precedent” below;

• (ii) as to RMB350 million (equivalent to approximately HK$406.0 million) (a) within 15 business days from the date of completion of the change of industrial and commercial registration; and (b) within three business days from the date of physical delivery of company seals, licence, information and other assets of Shanghai Tongjitang to Feng Liao Xing, whichever is the later; and

• (iii) as to the remaining balance of RMB10 million (equivalent to approximately HK$11.6 million) (the “ Balance Payment ”) within 15 business days after finalisation of the audited results of Shanghai Tongjitang for the year ending 31 December 2017 if the Target Profits (as defined below) are achieved.

Consideration adjustment

The Vendors have guaranteed that the audited net profit after tax (excluding non-recurring gains and losses) of Shanghai Tongjitang for each of the two years ending 31 December 2016 and 2017 shall be not less than RMB43 million (equivalent to approximately HK$49.9 million) (the “ Target Profits ”). The Target Profits were determined after taking into account the audited profit after tax of Shanghai Tongjitang for the six months ended 30 June 2016 of approximately RMB22.7 million (equivalent to approximately HK$26.3 million).

In the event that the audited net profit after tax (excluding non-recurring gains and losses) for any of the two years ending 31 December 2016 and 2017 is less than the Target Profits, the consideration for the Acquisition will be adjusted to RMB500 million (equivalent to approximately HK$580 million) and the Balance Payment will not be payable by Feng Liao Xing to the Vendors. The Company will accordingly issue an announcement in compliance with the disclosure requirements under Rule 14A.63 of the Listing Rules.

– 7 –

LETTER FROM THE BOARD

Given that the profit after tax recorded by Shanghai Tongjitang for the six months ended 30 June 2016 represents more than half of the Target Profits, the Board considers that the basis of determining the Target Profits is fair and reasonable and it is unlikely that adjustment will be made to the consideration. In the event that the Target Profits cannot be achieved, the consideration for the Acquisition will only be reduced by RMB10 million. Nevertheless, the Board is of the view that the adjustment mechanism is a favourable term to the Group and is in the interest of the Company.

Conditions precedent

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

• (i) the passing of resolution by the shareholders of Shanghai Tongjitang to approve the transactions under the Acquisition Agreement;

• (ii) the issue of written confirmation by each of the shareholders of Shanghai Tongjitang confirming that the pre-emptive rights to acquire the shares of Shanghai Tongjitang to be disposed of by the other shareholder would not be exercised;

• (iii) the signing of employment contracts, non-competition undertakings and confidentiality agreements on terms specified by Feng Liao Xing and with term of not less than two years by the core management members of Shanghai Tongjitang (i.e. Mr. Hu Yong, Mr. Hu Bin, Ms. Chen Jianru and Mr. Zhang Zhongquan); and

• (iv) the passing of a resolution by the Independent Shareholders approving the Acquisition at the EGM.

If any of the conditions precedent above is not fulfilled due to the fault of Shanghai Tongjitang or the Vendors, Feng Liao Xing has the right to claim Shanghai Tongjitang and the Vendors for any losses incurred. Feng Liao Xing may at any time waive condition (iii) by written notice to the Vendors. For the avoidance of doubt, condition (i), (ii) and (iv) are not waivable. As at the Latest Practicable Date, condition (i), (ii) and (iii) have been fulfilled.

– 8 –

LETTER FROM THE BOARD

Completion

Shanghai Tongjitang shall apply to the competent industry and commerce authority for the change of shareholders and legal representative within three business days from the date of payment by Feng Liao Xing of the first installment of the consideration. Completion shall take place on the date of completion of the change of industrial and commercial registration.

Upon completion, Shanghai Tongjitang will become an indirect wholly-owned subsidiary of the Company and its results, assets and liabilities will be consolidated into the financial statements of the Company. A goodwill will be recognised as a result of the Acquisition in the event that the fair value of the consideration is in excess of the net fair value of Shanghai Tongjitang’s identifiable assets and liabilities measured at the date of completion. The Directors are of the view that the goodwill is solely derived from applicable accounting standards which would not have any future impact on the cashflows of the Group. The Directors will conduct assessment of impairment loss on goodwill in accordance with the applicable accounting standards.

As at the Latest Practicable Date, based on the Directors’ assessment in accordance with the applicable accounting standards and taking into account the basis of determining the consideration as set out in the paragraph headed “Consideration” above, the Directors consider that there is no indication of impairment on the goodwill.

Non-competition undertakings

Each of Mr. Hu Yong and Mr. Wang undertakes that after completion of the Acquisition, he will not directly or indirectly engaged in any businesses or activities (including but not limited to joint venture, co-operation, joint operation, entrusted management, equity investment) in the PRC or outside the PRC which compete with Shanghai Tongjitang, or attempt to hold interest in any entities which compete with Shanghai Tongjitang for an indefinite period of time, save for Mr. Hu Yong’s employment under Shanghai Tongjitang and Mr. Wang’s interest in the Company.

Mr. Hu Yong and Mr. Wang further undertake to procure each of the core management members of Shanghai Tongjitang (i.e. Mr. Hu Yong (the general manager), Mr. Hu Bin (the deputy general manager of the procurement department), Ms. Chen Jianru (the deputy general manager of the production and administration department) and Mr. Zhang Zhongquan (the deputy general manager of the sales department)) to enter into a deed of non-competition undertaking, pursuant to which he/she undertakes that during the employment period and until two years after resignation from his/her position in Shanghai Tongjitang, he/she will not directly or indirectly engaged in any businesses or activities in the PRC or outside the PRC which compete with Shanghai Tongjitang, or attempt to hold interest in any entities which compete with Shanghai Tongjitang.

– 9 –

LETTER FROM THE BOARD

INFORMATION ON SHANGHAI TONGJITANG

Shanghai Tongjitang is a company established in the PRC by Mr. Wang and Mr. Hu Yong in 2002 with limited liability. As at the Latest Practicable Date, the registered capital of Shanghai Tongjitang was owned as to 50% by Mr. Hu Yong and 50% by Mr. Wang. Mr. Wang’s total investment cost in Shanghai Tongjitang, being the paid-in capital contributed by him, was RMB40 million (equivalent to approximately HK$46.4 million). Shanghai Tongjitang is principally engaged in the manufacture and sale of TCM decoction pieces in Shanghai, the PRC. It also provides TCM dispensation and decoction services. Its products are mainly sold to hospitals.

A summary of the financial information of Shanghai Tongjitang prepared in accordance with International Financial Reporting Standards is set out below:

For 31 Revenue Profit before tax Profit after tax Net assets	the year ended December 2014 For 31 (RMB’000) (audited) 174,678 25,341 24,345	the year ended December 2015 For the six months ended 30 June 2016 (RMB’000) (RMB’000) (audited) (audited) 195,957 104,118 29,542 22,799 29,763 22,673 As at 30 June 2016 (RMB’000) (audited) 178,342	For the six months ended 30 June 2016 (RMB’000) (audited) 104,118 22,799 22,673

The revenue and profit after tax of Shanghai Tongjitang for the six months ended 30 June 2016 represent approximately 53.1% and approximately 76.2% of that for the year ended 31 December 2015. The increase in revenue for the first half of 2016 (when annualised) was mainly attributable to the expansion of a production line of Shanghai Tongjitang and the increased number of customers, which also had a positive impact on profit after tax. Besides, Shanghai Tongjitang incurred one-off expenses for social security contributions in 2015 due to the under-provision in 2013 and 2014, resulting in a lower net profit margin for the year ended 31 December 2015 when compared to that for the six months ended 30 June 2016.

REASONS FOR THE ACQUISITION

The principal business 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

– 10 –

LETTER FROM THE BOARD

diseases and bone injury drugs, and orthopaedic drugs. Feng Liao Xing, being an indirectly wholly-owned subsidiary of the Company, is principally engaged in the manufacture and sale of Chinese pharmaceutical products.

As the flagship of China National Pharmaceutical Group Corporation in the Chinese medicine industry, the development strategy of the Company is, based on its solid existing businesses, to enter into different sectors of Chinese medicine industry in accordance with market conditions and the Company’s own characteristics, with the aim to covering the entire industry value chain by upstream and downstream consolidation.

The Acquisiton is in line with the Group’s development strategy to become leader in the TCM industry. The acquisition will allow the Group to expand its product mix, consolidate upstream resources and extend its coverage in the industry value chain. Shanghai Tongjitang which is strategically located in East China will provide a stable source of supply of raw materials for the manufacture of the Group’s downstream products at a lower production cost. Synergies will be realised by collaborative development of distribution and sales network for the Group’s different products. As Shanghai Tongjitang has established reputable products in the pharmaceutical market and extensive distribution networks in Shanghai, the Board considers that the Acquisition would allow the Group to strengthen its presence and increase its market share in the TCM market in Shanghai. The Group can also take advantage of the extensive sales force and marketing and distribution network of Shanghai Tongjitang to enhance its negotiation power for both customers and suppliers relationship.

Based on the above, the Directors consider that the terms of the Acquisition Agreement are fair and reasonable and the Acquisition is in the interests of the Company and the Shareholders as a whole.

As disclosed in the announcement of the Company dated 27 September 2016, Feng Liao Xing also entered into another agreement to acquire Guizhou Tongjitang which is engaged in the manufacture and sale of TCM decoction pieces in Guizhou Province, the PRC. Shanghai Tongjitang and Guizhou Tongjitang were both controlled by Mr. Wang since they were established in 2002. Mr. Wang ceased to be a shareholder of Guizhou Tongjitang in 2006 by disposing of his shareholding interest to a third party. The vendors of Guizhou Tongjitang, who subsequently acquired their interests in Guizhou Tongjitang in 2010 and 2014 respectively, are third parties independent of Mr. Wang. There is no current relationship between Shanghai Tongjitang and Guizhou Tongjitang in terms of ownership, management and operations despite that they bear the brand name of “Tongjitang”. As at the Latest Practicable Date, the Company does not have any intention to further acquire any companies which use the brand name of “Tongjitang”.

– 11 –

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

As one or more of the applicable percentage ratios (as defined under the Listing Rules) are greater than 5% but less than 25%, the Acquisition constitutes a discloseable transaction for the Company under the Listing Rules. Since Mr. Wang, being one of the Vendors, is an executive Director, he is a connected person and therefore the Acquisition also constitutes a connected transaction under the Listing Rules. Accordingly, the Acquisition is subject to the reporting, announcement and the independent shareholders’ approval requirements under the Listing Rules. Mr. Wang has abstained from voting on the Board resolution approving the Acquisition.

The EGM will be convened and held for the purpose of considering and, if thought fit, approving the Acquisition. The Independent Board Committee which comprises all the independent non-executive Directors, namely Mr. Zhou Bajun, Mr. Xie Rong, Mr. Yu Tze Shan Hailson and Mr. Lo Wing Yat, has been established to advise the Independent Shareholders in respect of the Acquisition and Guotai Junan has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. Mr. Wang and his associates will be required to abstain from voting on the resolution approving the Acquisition at the EGM. Mr. Wang indirectly and beneficially owned 376,735,042 Shares as at the Latest Practicable Date.

EGM

A notice convening the EGM to be held at 1:30 p.m. on Friday, 11 November 2016 at Conference Room, 2nd Floor, No. 1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China is set out on pages EGM-1 to EGM-2 of this circular. A form of proxy for use by the Shareholders at the EGM is enclosed. Whether or not you intend to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the registered office of the Company at Room 1601, Emperor Group Centre, 288 Hennessy Road, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment of it, if you so wish.

RECOMMENDATION

The Independent Board Committee, having taken into account the advice of Guotai Junan, considers that although the Acquisition is not in the ordinary and usual course of business of the Group, the terms of the Acquisition Agreement are fair and reasonable and on normal commercial terms, and the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to approve the Acquisition.

The Directors (including the independent non-executive Directors) are of the view that although the Acquisition is not in the ordinary and usual course of business of the Group, the terms of the Acquisition Agreement are fair and reasonable and on normal commercial

– 12 –

LETTER FROM THE BOARD

terms, and the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the resolution approving the Acquisition to be proposed at the EGM.

Your attention is drawn to the letter from the Independent Board Committee set out on page 14 of this circular which contains its recommendation to the Independent Shareholders and the letter of advice from Guotai Junan set out on pages 15 to 26 of this circular containing its advice to the Independent Board Committee and the Independent Shareholders on the Acquisition.

By order of the Board

China Traditional Chinese Medicine Holdings Co. Limited Wu Xian Chairman

– 13 –

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)

25 October 2016

To the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF SHANGHAI TONGJITANG

We have been appointed as the Independent Board Committee to advise the Independent Shareholders in respect of the Acquisition, details of which are set out in the letter from the Board contained in the circular of the Company (the “ Circular ”) dated 25 October 2016. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used in this letter.

We wish to draw your attention to the letter from the Board on pages 3 to 13 of the Circular and the letter from Guotai Junan to the Independent Board Committee and the Independent Shareholders containing its advice on the Acquisition on pages 15 to 26 of the Circular.

Having taken into account the advice of, and the principal factors and reasons considered by, Guotai Junan in relation to the Acquisition as stated in its letter, we consider that although the Acquisition is not in the ordinary and usual course of business of the Group, the terms of the Acquisition Agreement are fair and reasonable and on normal commercial terms, and the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to approve the Acquisition.

ZHOU Bajun

Yours faithfully, For and on behalf of Independent Board Committee XIE Rong YU Tze Shan Hailson LO Wing Yat Independent Non-executive Director

– 14 –

LETTER FROM GUOTAI JUNAN

The following is the letter of advice to the Independent Board Committee and the Independent Shareholders from Guotai Junan for the purpose of inclusion into this circular.

==> picture [108 x 39] intentionally omitted <==

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

25 October 2016

• To: the Independent Board Committee and the Independent Shareholders

Dear Sir/Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF SHANGHAI TONGJITANG

I. INTRODUCTION

We refer to our engagement as the independent financial adviser to make recommendation to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition Agreement, pursuant to which the Company conditionally agreed to acquire and the Vendors conditionally agreed to sell, the entire registered capital of Shanghai Tongjitang. Details of the Acquisition Agreement are set out in the letter from the Board (the “ Letter ”) contained in the circular of the Company to the Shareholders dated 25 October 2016 (the “ Circular ”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless otherwise defined.

Since one of more of the applicable percentage ratios as defined under the Listing Rules in respect of the Acquisition exceed 5% but less than 25%, the Acquisition constitutes a discloseable transaction for the Company under Chapter 14 of the Listing Rules. Mr. Wang, being one of the Vendors, is also an executive Director of the Company. Accordingly, Mr. Wang is a connected person of the Company under Rule 14A.07(1) and the Acquisition also constitutes a connected transaction of the Company under the Listing Rules. Accordingly, the Acquisition is subject to the reporting, announcement and the independent shareholders’ approval requirements under the Listing Rules.

The EGM will be convened by the Company at which an ordinary resolution will be proposed to seek approval from the Independent Shareholders by way of poll for the Acquisition. Mr. Wang and its associates will be required to abstain from voting on the resolution approving the Acquisition at the EGM. As at the Latest Practicable Date, Mr. Wang indirectly and beneficially owned 376,735,042 Shares, representing approximately 8.5% of the issued share capital of the Company.

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LETTER FROM GUOTAI JUNAN

II. THE INDEPENDENT BOARD COMMITTEE

The Independent Board Committee, comprising all of the four independent non-executive Directors, namely Mr. Zhou Bajun, Mr. Xie Rong, Mr. Yu Tze Shan Hailson and Mr. Lo Wing Yat, has been established to make recommendation to the Independent Shareholders regarding the Acquisition. We have been appointed to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned and whether the entering into of the Acquisition Agreement is in the ordinary and usual course of business of the Company and is in the interest of the Company and the Shareholders as a whole.

Independent Shareholders should note that, within the past two years from the Latest Practicable Date, Mr. Wilson Lo, for and on behalf of Guotai Junan, signed the opinion letter as the independent financial adviser engaged by the Company for two occasions (i.e. one is related to a very substantial acquisition and connected transaction in relation to acquisition of Tongjitang Chineses Medicines Company involving issue of new shares as part of acquisition consideration under specific mandate and the other one is related to a connected transaction on subscription of new shares by Sinopharm, Mr. Yang and Mr. Wang under specific mandate) as detailed in the circular of the Company dated on 18 September 2013 and 20 April 2015 respectively. Under the past engagements, we received normal professional fees from the Company and we were required to express our opinion on and give recommendations to the Independent Board Committee and the Independent Shareholders in respect of the transactions. Apart from the normal professional fees payable to us in connection with these previous appointments and this engagement described above, no arrangement exists whereby we will receive any fees or benefits from the Group, Mr. Wang, the Vendors or where applicable, any of their respective substantial shareholders, directors or chief executive, or any of their respective associates pursuant to Rule 13.84 of the Listing Rules, and are accordingly qualified to give independent advice to the Independent Board Committee and Independent Shareholders on the Acquisition.

III. BASIS OF OUR OPINION

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

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LETTER FROM GUOTAI JUNAN

Our review and analysis were based upon, among others, the information provided by the Company including the Acquisition Agreement, the annual reports of the Company for the year ended 31 December 2014 (the “ 2014 Annual Report ”) and 31 December 2015 (the “ 2015 Annual Report ”), the interim report of the Company for the six months ended 30 June 2016 (the “ 2016 Interim Report ”), the Circular and certain published information of the Company.

We have also discussed with the Directors and/or the management of the Company with respect to the terms of and reasons for the entering into of the Acquisition Agreement, and consider that we have reviewed sufficient information to reach an informed view and to provide a reasonable basis for our opinion.

IV. PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion on whether the terms of the Acquisition Agreement are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the following principal factors and reasons:

1. Business and financial information of the Group

The Company is an investment holding company incorporated in Hong Kong with limited liability and through its subsidiaries is principally engaged in research and development, production and sale of TCM and pharmaceutical products in the PRC with focuses on respiratory system drugs and nasal preparations, cerebro-cardiovascular drugs, rheumatic diseases, bone injury drugs and orthopaedic drugs.

The Group commenced engaging in the pharmaceutical business since late 2006 and it is a leading TCM manufacturer in China. In the past ten years, the Group has delivered satisfactory results and has a number of well-known TCM brands (e.g. Dezhong, Fengliaoxing and Tongjitang). According to the 2015 Annual Report, the Group has over 700 concentrated TCM granules products and over 500 finished drugs, including over 200 finished drugs being listed on National Drugs List for Basic Medical Insurance. The Group has over 100 finished drugs being listed on the National Essential Drug List (the “ EDL ”), 7 of which are exclusive products.

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LETTER FROM GUOTAI JUNAN

A summary of the financial performance of the Group are set out below for the two financial years ended 31December 2014 and 2015 and the six months ended 30 June 2015 and 2016 extracted from the relevant reports:

Revenue Gross profit Gross profit margin Profit before taxation Profit after taxation Profit for the year attributable to equity Shareholders	For the year ended 31 December 2014 2015 RMB’000 RMB’000 (audited) (audited) 2,650,454 3,709,406 1,643,389 2,193,953 62.00% 59.15% 489,119 769,370 418,733 651,042 413,090 621,692	For the six months ended 30 June 2015 2016 RMB’000 RMB’000 (unaudited) (unaudited) 1,422,067 3,199,290 856,705 1,833,689 60.24% 57.32% 291,202 665,345 244,229 545,076 234,592 490,776	For the six months ended 30 June 2015 2016 RMB’000 RMB’000 (unaudited) (unaudited) 1,422,067 3,199,290 856,705 1,833,689 60.24% 57.32% 291,202 665,345 244,229 545,076 234,592 490,776
			1,833,689 57.32% 665,345 545,076
			490,776

2015 compared to 2014

As stated in the 2015 Annual Report, the Group recorded an increase in revenue from approximately RMB2,650.5 million in the year 2014 to approximately RMB3,709.4 million in the year 2015 (representing an increase of approximately 40.0%). The increase in revenue was mainly attributable to the revenue contributed by the newly acquired concentrated TCM granules business through the completion of the acquisition of Jiangyin Tianjiang Pharmaceutical Co., Ltd. (the “ Tianjiang Pharmaceutical Acquisition ”) in October 2015. However, the Group’s gross profit margin dropped slightly from 62.0% in 2014 to 59.2% in 2015, due to more sales was recorded for the concentrated TCM granules business which has lower profit margin than that of finished drug business and the enhancement of procurement standards of TCM medicinal herbs for further improvement of product quality.

The profit for the year attributable to the equity Shareholders increased from approximately RMB413.1 million in the year 2014 to approximately RMB621.7 million in the year 2015 (representing an increment of approximately 50.5%), mainly contributed by the increase in interest income from new fund raised from share placement in 2015 deposited in banks and the other net income from gain on forward exchange contracts as well as foreign exchange gain due to changes in exchange rates.

30 June 2016 compared to 30 June 2015

As stated in the 2016 Interim Report, the Group recorded an increase in revenue from approximately RMB1,422.1 million for the six months ended 30 June 2015 to approximately RMB3,199.3 million for the corresponding period in 2016 (representing

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LETTER FROM GUOTAI JUNAN

an increase of approximately 125.0%), which was mainly attributable to the newly acquired concentrated TCM granules business through the completion of Tianjiang Pharmaceutical Acquisition in October 2015. Gross profit margin for the period dropped slightly by 2.9% from 60.2% for the six months ended 30 June 2015 to 57.3% for the same period in 2016, which was mainly due to the increase in fixed unit production cost for the finished drug business and the fair value adjustment of identifiable assets arising from the Tianjiang Pharmaceutical Acquisition and allocated to cost of sales for the period as compared with the same period of last year.

As a result of the substantial increase in gross profit, the Group recorded an increment in profit attributable to equity Shareholders from approximately RMB234.6 million for the period ended 30 June 2015 to approximately RMB490.8 million for the corresponding period in 2016 (representing an increase of approximately 109.2%).

2. Business and financial information on Shanghai Tongjitang

Shanghai Tongjitang is a company established in the PRC in 2002 with limited liability. It is principally engaged in the manufacture and sale of TCM decoction pieces in Shanghai, the PRC. It also provides TCM dispensation and decoction services. Its products are mainly sold to hospitals.

Set out below is a summary of the financial performance of Shanghai Tongjitang for the year ended 31 December 2014 and 2015 and for the six months ended 30 June 2016 prepared under International Financial Reporting Standards:

	For the year	For the year		For the six
	ended	ended		months
	31 December	31 December		ended
	2014	2015	Increase %	30 June 2016
	(RMB’000)	(RMB’000)		(RMB’000)
	(audited)	(audited)		(audited)
Revenue	174,678	195,957	12.2%	104,118
Profit before tax	25,341	29,542	16.6%	22,799
Profit after tax	24,345	29,763	22.3%	22,673
				As at
				30 June 2016
				(RMB’000)
				(audited)
Net assets				178,342

As discussed with the management of the Group, we understand that the major products of Shanghai Tongjitang is TCM decoction pieces, and the growth in financial performance during 2014 to mid 2016 was mainly driven by the dispensation service and decoction service of Shanghai Tongjitang.

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LETTER FROM GUOTAI JUNAN

3. Reasons for and benefits of the Acquisition

Industry prospects

The PRC government has placed increasing attention at the development and growth of TCM industry in view of the aging population in the PRC. Pursuant to the “Development Plan of TCM Healthcare Services (2015-2020)” published by the General Office of State Council on 8 May 2015, which indicated the seven key jobs to be focused by the PRC government, among which include developing of TCM service for preserving longevity by supporting TCM healthcare institutions and encouraging the investment on TCM healthcare services by all sources of funding. Also, the draft Chinese Medicine Law approved on 9 December 2015 requested the PRC government to provide corresponding protection policies by including TCM decoction pieces and TCM finished drugs by health care institution in the medical insurance reimbursement, which further demonstrated the importance of decoction products in the PRC Medicine Market. It is believed that such government policy would continue to nurture the development of the TCM industry in the PRC.

In line with the Group’s core strategies

According to the 2015 Annual Report, the development strategy of the Company, being a flagship of China National Pharmaceutical Group Corporation in the Chinese medicine industry, is to enter into different sectors of Chinese medicine industry in accordance with market conditions and the Company’s own characteristics based on its solid existing businesses, with the aim to covering the entire industrial value chain by upstream and downstream consolidation.

As advised by the management of the Group, Shanghai Tongjitang has about 800 types of TCM decoction pieces. The Acquisition provides an opportunity for the Group to enlarge its product coverage and to increase its market share in the TCM market. We note that the Acquisition is consistent with the core strategies of the Group.

Furthermore, as advised by the management of the Group, the sales of TCM decoction pieces in Shanghai represented substantial portion of the total revenue of Shanghai Tongitang. Its major customers include public hospitals (in which 19 of them are third-tier hospitals, 25 of them are second-tier hospitals and 60 of them are first-tier hospitals). After the Acquisition, the Group will be able to further penetrate into the public hospital sector in Shanghai.

Potential synergetic effects

The Group has completed the acquisition of Tongjitang Chinese Medicines Company and its subsidiaries in 2013 which allows the Group to own the brand name of “Tongjitang” and boost the product list to over 500 products. We have discussed with the management of the Group and understand that the Acquisition is expected to bring synergetic effects through (i) optimisation of capacity as the Acquisition will allow the Group to expand its sales channel and intrude into the public hospital sector in the eastern part of China; (ii) internal cost savings from the transferable skills of the

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LETTER FROM GUOTAI JUNAN

management from Shanghai Tongjitang and expanded portfolio and coverage which may enhance the Group’s financial and operation performance; (iii) extended management expertise and additional negotiating power for both customer and supplier relationship; and (iv) the Acquisition will expand the income source of the Group especially given the historical profitable record of Shanghai Tongjitang.

As Shanghai Tongjitang has a long and successful history of operations and has established reputable products and strong distribution networks in the Shanghai market, the Board considers that the Acquisition would allow the Group to further penetrate into the TCM decoction market in the PRC.

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

4. Terms of the Acquisition

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

Basis for the consideration

As stated in the Letter, the consideration of the Acquisition was determined after arm’s length negotiations among Feng Liao Xing and the Vendors having taking into account: (i) the profit after tax of approximately RMB29.8 million (equivalent to approximately HK$34.6 million) recorded by Shanghai Tongjitang for the year ended 31 December 2015, which implied a price-to-earnings ratio of approximately 17.1 times; (ii) the Target Profits of not less than RMB43 million (equivalent to approximately HK$49.9 million) for each of the two years ending 31 December 2016 and 2017, which implied a price-to-earnings ratio of approximately 11.86 times; (iii) both of the aforesaid implied price-to-earnings ratios being lower than the average of the price-to-earnings ratios of comparable companies of approximately 19.22 times on the date of the Acquisition Agreement; (iv) the profit after tax of approximately RMB22.7 million (equivalent to approximately HK$26.3 million) recorded by Shanghai Tongjitang for the six months ended 30 June 2016, which represents more than half of the Target Profits (as defined below); and (v) the synergies to be realised as a result of the Acquisition.

For the purpose of assessing the fairness and reasonableness of the Consideration, we have, on the best effort basis, identified 6 companies listed on the Stock Exchange (the “ Comparable Companies ”) (i) principally engaged in manufacture and/or sales of TCM products in the PRC; and (ii) recognised profit in the last financial year, which we considered to be a full and exhaustive list of samples. We note that Shanghai Tongjitang and the Comparable Companies are not the same in terms of scale of business and market capitalization. However, as the Comparable Companies are principally engaged in manufacture and/or sale of TCM products business in the PRC, we considered the Comparable Companies are reasonable reference. In our analysis,

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LETTER FROM GUOTAI JUNAN

although Shanghai Tongjitang is an unlisted company, we have not taken into account any impact of liquidity discount for the Acquisition on the basis that (i) the PER of Shanghai Tongjitang is within the range and is lower than the average of PERs of the Comparable Companies; (ii) they are all principally engaged in manufacture and/or sales of TCM products in the PRC which is the same as Shanghai Tongjitang; (iii) acquisition of private company is not readily available and it is consistent with the market practice to compare with listed companies and (iv) there would not be a reasonable basis to such liquidity discount, if any.

We have reviewed and compared the price-to-earnings ratios (“ PER ”) and price-to-book ratios (“ PB ”) of the Comparable Companies with the implied PER and PB of Shanghai Tongjitang. The PERs are calculated based on their respective share price on the last trading day on which Shares were traded on the Stock Exchange prior to the signing of the Acquisition Agreement (the “ Last Trading Day ”) divided by their respective earnings per share as set out in their latest annual reports before the Last Trading Day. The PBs are calculated based on their respective share price on the Last Trading Day divided by their respective net asset values per share as set out in their latest annual reports before the Last Trading Day.

	Company		Market
	(Stock code)	Principal activities	Capitalisation	PER	PB
			HK$
			(billion)
1	Guangzhou Baiyunshan	Research and development,	4.4	17.0	2.6
	Pharmaceutical Holdings	manufacture and sales of
	Co. Ltd. (874)(i)	Chinese patent medicine,
		wholesale, retail, import and
		export of western and Chinese
		pharmaceutical products and
		medical apparatus; research and
		development of natural
		medicine and biological
		medicine
2	Tong Ren Tang	Manufacture and sales of	9.3	30.2	4.1
	Technologies Co. Ltd.	Chinese patent medicine in the
	(1666)(i)	forms of granules, pills, tablets
		and soft capsules
3	China Shineway	Research and development,	6.6	8.7	1.1
	Pharmaceutical Group	manufacture and trading of
	Limited (2877)	Chinese pharmaceutical
		products
4	Zhongzhi Pharmaceutical	Manufacture and sale of	1.4	13.3	2.2
	Holdings Limited (3737)	pharmaceutical products in the
		PRC
5	Beijing Tong Ren Tang	Manufacturing, retail and	9.6	27.0	5.3
	Chinese Medicine	wholesale of Chinese medicine
	Company Limited (8138)	products and healthcare
		products and provision of
		Chinese medical consultation
		and treatments

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LETTER FROM GUOTAI JUNAN

	Company			Market
	(Stock code)	Principal activities	Capitalisation		PER	PB
				HK$
				(billion)
6	The Company (570)	Production and sales of Chinese		17.3	19.9	1.4
		medicine and pharmaceutical
		products
		Average			19.3	2.8
		Maximum			30.2	5.3
		Minimum			8.7	1.1
		Shanghai Tongjitang_(ii)_			17.1	2.9

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

Notes:

• (i) The market capitalisation of these PRC incorporated Comparable Companies included H shares only and excluded A share.

• (ii) In calculating the respective ratios for the purpose of comparison, (a) the maximum amount of the consideration before any downward adjustment, being RMB510 million; (b) the historical profit after tax for the year ended 31 December 2015 and the net assets as at 30 June 2016 of Shanghai Tongjitang are used.

PER

We consider that PER is a commonly adopted market multiple analysis for valuation of companies principally engaged in manufacture and/or sale of pharmaceutical products business. As set out in the Letter, the consideration for the Acquisition has an implied PER amounted to 11.86 times, based on the Target Profits of Shanghai Tongjitang for the year ending 31 December 2016. Pursuant to the Acquisition Agreement, the Vendors have guaranteed that the audited net profit after tax (excluding non-recurring gains and losses) of Shanghai Tongjitang for each of the two years ending 31 December 2016 and 2017 shall be not less than RMB43 million. In the event that the audited net profit after tax (excluding non-recurring gains and losses) for any of the two years ending 31 December 2016 and 2017 is less than the Target Profits, the consideration for the Acquisition will be reduced by RMB10 million and adjusted to RMB500 million in total, and the Balance Payment of RMB10 million will not be payable by Feng Liao Xing to the Vendors.

Given that the adjustment to consideration is only up to RMB10 million in case the Target Profits is not met, we consider that it is less relevant to place emphasis on the Target Profits of 2016 and 2017 in evaluating the consideration. Rather, we consider that it is more relevant to evaluate the consideration based on the historical net profit for the year ended 31 December 2015.

The Shanghai Tongjitang’s unaudited net profit for the year ended 31 December 2015 was approximately RMB29.8 million. As such, the implied PER by the consideration (i.e. RMB510 million) is about 17.1 times.

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LETTER FROM GUOTAI JUNAN

As disclosed in the Letter, Shanghai Tonjitang was set up by Mr. Wang and Mr. Hu Yong since 2002 and the investment costs, which is the paid-in capital contributed by the Vendors to Shanghai Tongjitang was only RMB10 million (equivalent to approximately HK$11.6 million) as at the set up date and gradually increased to RMB80 million (equivalent to approximately HK$92.8 million). However, with the long operating history of over 14 years and the expertise brought by Mr. Wang and Mr. Hu Yong, Shanghai Tongjitang has been developed into a recognised reputable TCM decoction pieces company in Shanghai and recorded substantial growth in its revenue and profits throughout the years.

Based on the table above, even though the adjustment to the consideration is only RMB10 million and the consideration represents a premium over the investment cost of the Vendors, we still consider the consideration and the compensation mechanism are fair and reasonable and in the interests of the Company and its shareholders as a whole considered that (i) the historical profitability of Shanghai Tongjitang and it also recorded a profit after tax of approximately RMB22.7 million (equivalent to approximately HK$26.3 million) for the six months ended 30 June 2016 (representing more than half of the Target Profits); (ii) the historical PER amounted to approximately 17.1 is lower than the average of the PERs of the Comparable Companies, which indicate that the valuation (by reference to earnings) implied by the consideration is in line with the Comparable Companies; (iii) the terms of Acquisition Agreement, including both the consideration, non-competition undertakings and compensation mechanism, are outcome from commercial negotiation and (iv) the synergetic effects brought by the Acquisition.

PB

As mentioned above, we consider PER analysis is an appropriate approach to assess the fairness and reasonableness of the consideration for the Acquisition. On the other hand, it is expected that a substantial amount of goodwill will be recognised as a result of the Acquisition. Such amount represents the excess of the aggregate of the fair value of the consideration over the net fair value of Shanghai Tongjitang’s identifiable assets and liabilities measured at the date of the completion. As such, we further compared the PB of Shanghai Tongjitang to those of the Comparable Companies. The implied PB by the Consideration is about 2.9 times. Based on the above table, we note that the Shanghai Tongjitang’s highest implied PB of 2.9 times is within the range of the PBs of the Comparable Companies and is lower than the average of the PBs of the Comparable Companies, which indicate that the valuation (by reference to book value) implied by the consideration is in line with the Comparable Companies and therefore we consider it fair and reasonable.

Non-competition undertakings from Mr. Wang and Mr. Hu Yong

Pursuant to the Acquisition Agreement, each of Mr. Wang and Mr. Hu Yong has undertaken to the Company after the completion of the Acquisition that he will not directly or indirectly engaged in any businesses or activities (including but not limited to joint-venture, co-operation, joint operation, entrusted management, equity investment) in the PRC or outside PRC which compete with Shanghai Tongjitang, or

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LETTER FROM GUOTAI JUNAN

attempt to hold interest in any entities which compete with Shanghai Tongjitang for an indefinite period of time, save for Mr. Hu Yong’s employment under Shanghai Tongjitang and Mr. Wang’s interest in the Company.

Mr. Wang and Mr. Hu Yong has also further undertaken to procure each of the core management members of Shanghai Tongjitang (i.e. Mr. Hu Yong (the general manager), Mr. Hu Bin (the deputy general manager of the procurement department), Ms. Chen Jianru (the deputy general manager of the production and administration department) and Mr. Zhang Zhongquan (the deputy general manager of the sales department)) to enter into a deed of non-competition undertaking, pursuant to which he/she undertakes that during the employment period and until two years after resignation from his/her position in Shanghai Tongjitang, he/she will not directly or indirectly engaged in any businesses or activities in the PRC or outside the PRC which compete with Shanghai Tongjitang, or attempt to hold interest in any entities which compete with Shanghai Tongjitang.

Having considered that there is no definite ending term for Mr. Wang and Mr. Hu Yong’s undertakings, and that the undertaking for the other core management members lasts for two years, we are of view that the terms of undertaking under the Acquisition Agreement are beneficiary to the Group as it ensures a stable management of Shanghai Tongjitang after the Acquisition.

5. Financial Effect of the Acquisition

The following illustrates the effect on earnings, net asset value, gearing and working capital of the Group as a result of the Acquisition.

Effects on earning

The Group had an audited net profit attributable to the equity Shareholders Group of approximately RMB621.7 million for the year ended 31 December 2015. As set out in the Letter, Shanghai Tangjitang recorded a net profit of approximately RMB29.8 million and RMB24.3 million for the year ended 31 December 2014 and 2015 respectively. Based on its satisfactory profitable track record, the consideration adjustment and the potential synergetic effect, we consider that the Group’s earnings will be increased by consolidating Shanghai Tangjitang’s results upon completion of the Acquisition.

Effects on net asset value

The consideration for the Acquisition would be settled by cash. It is expected that there would be no material effect on the net asset value of the Group. On the other hand, Shanghai Tongjitang recorded net assets of RMB178.3 million as at 30 June 2016. The consideration for the Acquisition is RMB510 million (subject to downward adjustment of the consideration). As a result of the completion, a goodwill representing the difference between fair value of the consideration and the net asset value of Shanghai Tangjitang upon completion is expected to be recorded by the Group. Given

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LETTER FROM GUOTAI JUNAN

that the Group had unaudited net assets value attributable to owners of the Company of RMB11,447.6 million as at 30 June 2016, it is expected that there would not be material impact on the Group’s net assets except for the recognition of goodwill.

Effects on gearing and working capital

Based on the Group’s unaudited bank balances and cash of RMB1,934.7 million and net current assets of RMB1,835.8 million as at 30 June 2016, it is expected that the Group would have sufficient capital to settle the consideration of RMB510 million (subject to downward adjustment of the consideration). Since Shanghai Tangjitang recorded net current assets of RMB178.3 million and as advised by the management of the Group, it does not have material bank borrowing as at 30 June 2016, it is expected that the Acquisition will not have material impact on the gearing of Group.

RECOMMENDATION ON THE ACQUISITION

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

• the reasons for and benefits of the Acquisition as stated in the paragraphs headed “Reasons for and benefits of the Acquisition” are in the interests of the Company and the Shareholders as a whole;

• the terms of the Acquisition Agreement, including but not limited to the basis of the consideration and the non-competition undertaking are fair and reasonable, on normal commercial terms and in the interests of both the Company and the Shareholders as a whole; and

• the possible financial effects of the Acquisition on the Group,

we consider that, although the Acquisition is not in the ordinary and usual course of business of the Group, the terms of the Acquisition Agreement is on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to approve the Acquisition Agreement as detailed in the notice of EGM as set out at the end of the Circular.

Yours faithfully, For and on behalf of Guotai Junan Capital Limited Letty Wu Executive Director

Ms. Letty Wu is a licensed person registered with the Securities and Futures Commission and as a responsible officer of Guotai Junan Capital Limited to carry out Type 6 (advising on corporate finance) regulated activities under the SFO and has over 10 years of experience in corporate finance industry.

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

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

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

			Approximate
			percentage of the
Name of	Capacity/Nature of		issued share capital of
Directors	Interest	Number of Shares	the Company
			(Note 3)
Mr. Wang	Interest in controlled	376,735,042	8.50%
	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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APPENDIX

GENERAL INFORMATION

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

(ii) Interests of substantial Shareholders

			Approximate	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)
(“Sinopharm”)
China National	Interest of controlled	1,614,313,642	36.43%
Pharmaceutical	corporations	(long position)
Group		(Note 1)
Corporation
(“CNPGC”)
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)

– 28 –

GENERAL INFORMATION

APPENDIX

Notes:

1. 1,614,313,642 Shares are held by Sinopharm, 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.

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

4. 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.

5. 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.

(iii) Competing interests

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

(iv) Other interests

Save for Shanghai Tongjitang in which Mr. Wang has a 50% interest, 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. Save for the Acquisition Agreement, there was no contract or arrangement subsisting at the Latest Practicable Date in which a Director is materially interested which is significant in relation to the business of the Group.

3. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered, or was proposing to enter, into any service contract with any member of the Group which is not expiring or may not be terminable by the Group within one year without payment of compensation (other than statutory compensation).

– 29 –

GENERAL INFORMATION

APPENDIX

4. EXPERT AND CONSENT

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

Guotai Junan

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

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

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

5. MATERIAL ADVERSE CHANGE

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

6. 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 Acquisition Agreement;

• (b) the letter of recommendation from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 14 of this circular;

• (c) the letter of advice from Guotai Junan to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 15 to 26 of this circular; and

• (d) the letter of consent from Guotai Junan referred to in the section headed “Expert and Consent” of this appendix.

– 30 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

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 IS HEREBY GIVEN that the extraordinary general meeting (the “ Meeting ”) of China Traditional Chinese Medicine Holdings Co. Limited (the “ Company ”) will be held at 1:30 p.m. on Friday, 11 November 2016 at Conference Room, 2nd Floor, No.1 Keyuan Heng 4 Road, Gaoli Hi-Tech Park, Ronggui, Shunde District, Foshan City, Guangdong Province, China for the purpose of considering and, if thought fit, passing the following resolution as ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

• (a) the conditional sale and purchase agreement dated 27 September 2016 (the “ Acquisition Agreement ”) entered into among 國藥集團馮了性（佛山）藥材飲片有限 公司 (Sinopharm Group Feng Liao Xing (Foshan) Medicinal Material & Slices Co., Ltd.) (“ Feng Liao Xing ”), Mr. Hu Yong and Mr. Wang Xiaochun (collectively, the “ Vendors ”) and 上海同濟堂藥業有限公司 (Shanghai Tongjitang Pharmaceutical Co., Ltd.) (“ Shanghai Tongjitang ”) (a copy of which has been produced to the meeting marked “A” and signed by the chairman of the meeting for the purpose of identification), pursuant to which Feng Liao Xing conditionally agreed to acquire, and the Vendors conditionally agreed to sell, the entire registered capital of Shanghai Tongjitang, for a consideration of RMB510 million (subject to downward adjustment) on the terms and conditions of the Acquisition Agreement, and the transactions contemplated thereunder be and are hereby approved, ratified and confirmed; and

• (b) the directors of the Company acting together or by committee, or any director acting individually, be and is/are hereby authorised to do all such further acts and things and execute such further documents and take all such steps on behalf of the Company as he or they may, in his/their absolute discretion, consider necessary, desirable or expedient to implement and/or give effect to the Acquisition Agreement and the transactions contemplated thereunder.”

By order of the Board

China Traditional Chinese Medicine Holdings Co. Limited Wu Xian Chairman

25 October 2016

* For identification purpose only

– EGM-1 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Notes:

1. Any member of the Company entitled to attend and vote at the Meeting shall be entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at the Meeting. A proxy need not be a member of the Company.

2. A form of proxy for the Meeting is enclosed. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority, shall be deposited at the Company’s registered office at Room 1601, Emperor Group Centre, 288 Henessy Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the Meeting.

3. If more than one of the joint holders are present at the Meeting personally or by proxy, that one of the said persons whose name stands first on the register of members in respect of the relevant share(s) will alone be entitled to vote in respect of the relevant joint holding.

4. Completion and delivery of the form of proxy will not preclude any member of the Company from attending and voting in person at the Meeting. In the event that any member of the Company attends the Meeting, the form of proxy will be deemed to be revoked.

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

– EGM-2 –