WeRide Inc. — Annual Report 2002

Oct 22, 2002

FAR EAST PHARMACEUTICAL TECHNOLOGY COMPANY LIMITED （遠東生物制藥科技有限公司）

(Incorporated in the Cayman Islands with limited liability)

ANNOUNCEMENT OF FINAL RESULTS FOR THE YEAR ENDED 30 JUNE 2002

AUDITED ANNUAL RESULTS

The Board of Directors (the “Board”) of Far East Pharmaceutical Technology Company Limited (the “Company”) is pleased to announce the audited consolidated annual results of the Company and its subsidiaries (the “Group”) for the year ended 30 June 2002 (the “Year”) together with the comparative amounts for the corresponding year in 2001 as follows:-

CONSOLIDATED INCOME STATEMENT

YEAR ENDED 30 JUNE 2002

Notes TURNOVER 2 COST OF SALES GROSS PROFIT OTHER REVENUE OTHER EXPENSES Selling and distribution costs Administrative expenses Other operating expenses PROFIT FROM OPERATING ACTIVITIES 2, 3 FINANCE COSTS 4 SHARE OF RESULT OF A JOINTLY CONTROLLED ENTITY PROFIT BEFORE TAXATION AND MINORITY INTERESTS TAXATION 5 PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS	2002 HK$’000 715,717 (443,807) 271,910 3,286 (71,150) (28,438) – 175,608 (520) (131) 174,957 (36,395) 138,562 (3,823) 134,739	2001 HK$’000 409,633 (254,113) 155,520 2,459 (32,456) (15,656) (902) 108,965 (236) – 108,729 (14,321) 94,408 133 94,541

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FINAL DIVIDEND PROPOSED

22,902

6

14,297

EARNINGS PER SHARE 7 – Basic – Diluted	HK33.5 cents HK31.4 cents	HK30.0 cents
		HK29.7 cents

Notes:

1. NEW ADOPTION OF THE STATEMENTS OF STANDARD ACCOUNTING PRACTICE In the current year, the Group adopted for the first time a number of new and revised Statements of Standard Accounting Practice (“SSAP”) issued by the Hong Kong Society of Accountants.

The effects on the adoption of the new and revised SSAPs are summarised as follows:

• i) The adoption of SSAP 9 (revised) “Events after the balance sheet date” results in a change in accounting policy whereby dividends proposed after the balance sheet date are no longer recognised as a liability at the balance sheet date, while the dividend income proposed or declared by the subsidiaries after the balance sheet date are no longer recognised as income by the parent companies. Proposed dividends are now separately disclosed on the face of the balance sheet within capital and reserves section. This change in accounting policy has been applied retrospectively and comparative figures have been restated.

• ii) The adoption of SSAP 26 “Segment reporting” requires comprehensive disclosure of financial information by segments (both business and geographical segments) of the Group. This change in accounting policy has been applied retrospectively and segment disclosures for the year ended 30 June 2001 have been amended so that they are presented on a consistent basis.

• iii) The adoption of SSAP 28 “Provisions, contingent liabilities and contingent assets” has no material impact on the reported financial position or results of the Group except that additional disclosures in relation to the nature, timing and movement of the provisions of the Group as at 30 June 2002 have been made.

• iv) The adoption of SSAP 29 “Intangible Assets” results in no change to the previously adopted accounting policy and no material impact on the reported financial position or results of the Group.

• v) The adoption of SSAP 30 “Business combinations” results in no change to the previously adopted accounting policy where goodwill arising from business combination is amortised to the income statement over its estimated economic life. Goodwill is recognised as non-current asset in the balance sheet and is carried at cost less accumulated amortisation and accumulated impairment losses. The Group will review, at each balance sheet date, the carrying value of goodwill in accordance with SSAP 31 “Impairment of assets” and recognise or reverse an impairment loss, if any.

In addition to the adoption of the above standards, the Group has adopted the consequential changes made to SSAP 10 “Accounting for investments in associates”, SSAP 14 (revised) “Leases”, SSAP 17 “Property, plant and equipment”, SSAP 18 “Revenue” and SSAP 21 “Accounting for interests in joint ventures”. Other than those disclosed in the respective notes to the financial statements, the Group considers that the consequential changes made to the above SSAPs do not have a material impact on the financial statements of the Group.

Unless otherwise stated, the 2001 comparative figures presented herein have incorporated the effect of the adjustments, where applicable, resulting from the adoption of the new accounting standards above.

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2. SEGMENT INFORMATION i) Business segments

The Group is principally engaged in the manufacture and distribution of pharmaceutical products.

An analysis of the Group’s performance by business segments, namely ‘Manufacture and distribution of pharmaceutical products’ and ‘Corporate and others’ is as follows:

Manufacture and distribution of pharmaceutical products 2002 2001 HK$’000 HK$’000 External sales 715,717 409,633 Segment results 181,353 112,857 Interest income 2,703 1,133 Interest expense – (236) Share of result of a jointly controlled entity (131) – Taxation (36,395) (14,321) Minority interests Profit attributable to shareholders a) Turnover Manufacture and distribution of: Anti-viral drugs Antibiotics Vitamins Analgesics Chinese patent medicines Chinese tonic liquor Anti-hypotensive drugs Others b) Profit from operating activities Manufacture and distribution of: Anti-viral drugs Antibiotics Vitamins Analgesics Chinese patent medicines Chinese tonic liquor Anti-hypotensive drugs Others Corporate and others

Corporate and others Consolidated total 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 – – (a) 715,717 409,633 (8,512) (6,351)(b) 172,841 106,506 64 1,326 (b) 2,767 2,459 (520) – (520) (236) – – (131) – – – (36,395) (14,321) (3,823) 133 134,739 94,541 2002 2001 HK$’000 HK$’000 227,412 208,282 87,243 78,979 59,876 42,599 40,741 29,009 113,320 24,590 29,591 26,174 84,769 – 72,765 – 715,717 409,633 2002 2001 HK$’000 HK$’000 75,341 73,436 18,066 18,272 3,163 2,542 3,470 2,946 31,661 7,980 9,246 8,814 20,742 – 22,367 – 184,056 113,990 (8,448) (5,025) 175,608 108,965

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ii) Geographical segment

In determining the Group’s geographical segments, revenues and results are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. No geographical segment information is presented as over 90% of the Group’s revenue and results are derived from customers based in the People’s Republic of China (“PRC”).

3. PROFIT FROM OPERATING ACTIVITIES

The Group’s profit from operating activities is arrived at after charging:

Depreciation Amortisation of intangible assets Amortisation of goodwill Loss on written off of fixed assets 4. FINANCE COSTS Interest payable on: Bank loans wholly repayable within five years Redeemable convertible bonds 5. TAXATION Current year provision: Overseas Tax charge for the year	2002 HK$’000 14,587 2,747 463 237 2002 HK$’000 – 520 520 2002 HK$’000 36,395 36,395	2001 HK$’000 4,836 – 155 –
		2001 HK$’000 236 –
		236
		2001 HK$’000 14,321
		14,321

Hong Kong profits tax has not been provided (2001: Nil) because the Group did not generate any assessable profits arising in Hong Kong during the Year. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

In accordance with the relevant approval documents issued by the PRC tax authorities, Fujian Desheng Pharmaceuticals Company Limited (“Desheng”), a subsidiary of the Company, operating in the PRC, is exempted from the PRC corporate income tax for the first two profitable calendar years of operation starting from 1997 and thereafter is eligible for a 50% relief from the PRC corporate income tax for the following three years. The standard PRC corporate income tax rate applicable to Desheng is 24%.

Fujian Yannian Pharmaceutical Company Limited (“Yannian”), is another subsidiary of the Company operating in the PRC. The PRC corporate income tax rate applicable to Yannian is 24%.

Deferred tax has not been provided because there were no significant timing differences at 30 June 2002 (2001: Nil).

No deferred tax has been provided on the revaluation surplus of the Group’s properties situated in the PRC because the Group presently does not intend to dispose of such properties.

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6. DIVIDENDS

DIVIDENDS
Dividend paid – Final dividend for 2001 at HK4 cents (2000: Nil) per ordinary share Dividend proposed – Final dividend for 2002 at HK4.5 cents (2001: HK4 cents) per ordinary share Total dividends in respect of the year	2002 HK$’000 14,297 22,902 22,902	2001 HK$’000 –
		14,297
		14,297

During the Year, the Group adopted the revised SSAP 9 “Events after the balance sheet date”. To comply with this revised SSAP, a prior year adjustment has been made to reclassify the proposed final dividend for the year ended 30 June 2001 of HK$14,297,000, which was recognised as a current liability at the prior year end, to the proposed final dividends reserve account within the capital and reserves section of the balance sheet. The result of this has been to reduce the Company’s and Group’s current liabilities and increase the reserves previously reported as at 30 June 2001 by HK$14,297,000.

The amount of proposed final dividend is calculated based on 508,932,000 shares (2001: 357,424,000 shares) in issue as at the date of approval of these financial statements.

7. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings: Profit attributable to shareholders and earnings for the purposes of basic earnings per share Effect of dilutive potential shares: Redeemable convertible bonds – interest expenses Profit attributable to shareholders and earnings for the purposes of diluted earnings per share Number of shares: Weighted average number of shares for the purposes of basic earnings per share Effect of dilutive potential shares: Share options Redeemable convertible bonds Weighted average number of shares for the purposes of diluted earnings per share	2002 HK$’000 134,739 520 135,259 2002 402,331,726 16,192,057 12,035,976 430,559,759	2001 HK$’000 94,541 –
		94,541
		2001 315,147,945 3,397,883 –
		318,545,828

The computation of diluted earnings per share for the Year does not assume the conversion of the Company’s outstanding warrants since its exercise would result in an increase in earnings per share for the Year.

PROPOSED FINAL DIVIDEND

The Board recommended the payment of a final dividend of HK4.5 cents per share for the Year (2001: HK4 cents per share), payable to the shareholders of the Company whose names appear on the Register of Members of the Company on Wednesday, 18 December 2002. Subject to the approval of the Company’s shareholders at the Company’s forthcoming Annual General Meeting to be held on Wednesday, 18 December 2002, the said proposed final dividend will be paid to the shareholders of the Company on or about 31 December 2002.

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BUSINESS AND FINANCIAL REVIEW

The Group’s turnover for the Year was HK$715,717,000 (2001: HK$409,633,000). This represented an increase of 74.7% as compared with the corresponding year of 2001. The net profit from ordinary activities attributable to shareholders for the Year amounted to approximately HK$134,739,000 and was increased by 42.5% to that of last year. Basic earnings per share for the Year was approximately HK33.5 cents (2001: HK30.0 cents).

The increase in turnover was mainly attributable to the increase in sales generated from the Chinese patent medicines and Anti-hypotensive drugs.

Anti-viral drugs

Sales of anti-viral drugs during the Year were approximately HK$227,412,000, accounting for 31.8% of the total turnover of the Group and representing approximately 9.2% increase when compared with last year. The increase was due to the increase demand of the Jin Gang Cold which has an excellent therapeutic effect to the treatment of common cold, cough and influenza and due to the banning sales of 16 types of drugs with Phenylpropanolamine (PPA) which are principally used for the treatment of common cold, cough and influenza.

Anti-hypotensive drugs

During the Year, the Group has launched one of the new products “复方降壓膠囊 ”, the sales of which was approximately HK$84,769,000, accounting for 11.8% of the total turnover of the Group. The Group believes that 复方降壓膠囊 will become one of the major products of the Group in the future.

Chinese patent medicines

Turnover of Chinese patent medicines increased from last year’s HK$24,590,000 to approximately HK$113,320,000 for the current year. The sale of Chinese patent medicines achieved encouraging growth due to the effort of effective marketing strategy and market penetration through the Group’s well-established relationship with its wholesalers and distributors.

Selling and distribution costs for the year under review amounted to HK$71,150,000 (2001: HK$32,456,000), accounting for 10.0% of turnover, increased by 119.2% when compared with last year. Such increase was due to the rise in advertising cost for expanding the distribution and sales network of the Group. Administrative expenses, accounting for 4% of the Group’s turnover, increased from last year’s HK$15,656,000 to the current year’s HK$28,438,000. Such increase is due to the hiring of additional management professionals and related expenses, the increase in depreciation charge for the new manufacturing plant and the increase in amortization of goodwill and intangible assets. Based on the Placing and Subscription Agreement executed by the Company on 27 November 2001, the Company placed a total of 20,000,000 shares at a price of HK$1.36 per share. The net proceeds from the placing of 20,000,000 shares of the Company after deducting expenses, amounted to approximately HK$27 million of which HK$23 million will be used for the acquisition of the technological know-how and patents of two products namely, Finasteride (非那雄胺原料藥 ) and Finasteride Tablet (非那雄胺片劑 ) from Fuzhou Jiudu Medical Technology Development Company Limited (福州九都醫葯科技開發有限公司 ). The balance will be used as working capital.

Base on the Placing and Subscription Agreement executed by the Company on 9 May 2002, the Company placed 60,000,000 shares at a price of HK$2.45 per share. The net proceeds of the placing of 60,000,000 shares of the Company after deducting expenses, amounted to approximately HK$141,000,000 and at present such amount is used (i) as to HK$30,000,000 to finance the acquisition of Boomtown Ventures Limited (“BVL”). BVL wholly owned廈門泰倫生物工程有限 公司 (Xiamen Talent Biotech Co. Ltd., “Xiamen Talent Biotech”). The Company and the existing shareholders of BVL had entered into a formal sales and purchase agreement whereby the Company agreed to acquire the entire issued share capital in BVL at a consideration of HK$30,000,000 on 15 July 2002, (ii) as to approximately HK$20,000,000 to finance the related re-engineering works of Xiamen Talent Biotech, (iii) as to approximately HK$20,000,000 to finance the research and development projects of Xiamen Talent Biotech, (iv) as to approximately HK$10,000,000 as marketing expenses of the Group and (v) as to the balance as the general working capital of the Group.

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Xiamen Talent Biotech originated from the Cancer Research Centre of Xiamen University. It turned to develop its research results for market release since 1994. The two technical platforms for Cancer analysing and alarm developed by it, namely, Enzyme Linked Immunosorbent Assay (ELISA) and Polymerase Chain Reaction (PCR) would be the major product projects of the Group.

During the Year, Credit Suisse First Boston (Hong Kong) Limited (“CSFB”) subscribed for Bonds with an aggregate principal amount of US$12,000,000 and proceeds of approximately HK$93,600,000, before issued expenses, were received by the Company. As disclosed in the Company’s announcements dated 14 August 2001, 14 December 2001 and 10 January 2002, the proceeds will be used for capital expenditure in relation to the expansion of production and manufacturing facilities, research and development, expansion of sales and distribution network, acqusition and merging new projects and general working capital purposes.

FUTURE PROSPECTS

The year 2002 is the first year after the accession of China into the World Trade Organization, which marked an excellent development opportunity with both challenges and opportunities for the pharmaceutical industry in the PRC. With the steady growth of its economy, the ongoing reform of its public health system, the PRC will provide a golden opportunity for the domestic pharmaceutical producers. As the PRC Government requires all domestic pharmaceutical producers to obtain GMP certificates before June 2004, which would mean a heavy financial burden to many State-owned enterprises and small scale pharmaceutical factories. However, it will accelerate the integration of the presently scattered PRC pharmaceutical production industry and will create and provide a golden opportunity for enterprises with sound financial and operational upstanding’ horizontal expansion of business. The Group will strive to capitalize on these favourable trends and to acquire and merge with pharmaceutical enterprises and to develop hi-tech Chinese medicines and biotechnology drugs, in order to enhance its competitiveness in both domestic and overseas markets.

In the past, the Group focused its efforts on the construction of a modern plant of 20,000 square metres. Meanwhile, the successful acquisition of Minqing Factory has brought the Group the right to manufacture more than 70 medical pharmaceutical products and the sales channels previously owned by Minqing Factory. The research and development project with its primary interests in genetic engineering has been set up in Shanghai, and will soon start operation. New biotechnology drugs are expected to deliver and introduce to the market shortly afterwards. This year, the Group’s formal anabasis into the biotechnology drugs area was marked by the acquisition of the technological know-how and patents of two products namely, Finasteride (非那雄胺原料藥 ) and Finasteride Tablet (非那雄胺片劑 ) from Fuzhou Jiudu Medical Technology Development Company Limited (福州九都醫葯科技開發有限公司 )and the acquisition of and merger with Xiamen Talent Biotech, a company engages the development and production of Cancer genes diagnosis testers. Sales of three key products, namely, Jin Gang Cold, 复方降壓膠囊 and 勝紅抗炎素膠囊 were satisfactory. The Board believes that the new three products developed by the Group will continue to bring high growth rates of turnover and high gross profit margin to the Group. Therefore, the Group will continue its efforts in developing such business and will, when the opportunity arises, continue to acquire medicine production, sales and biotechnology drugs enterprises in order to further penetrate the huge pharmaceutical market in the PRC.

The Group is fully confident of its future and will put particular emphasis on the absorption of hitech research projects and professionals, with the aim of launching new products each and every year after 2002 and maintaining excellent development prospects for the Group. The Group will make great efforts in establishing its sales network by both reinforcing its market share in the local market and stretching its reach in overseas markets. Meanwhile, the Group will step up its efforts in enhancing its operating efficiency, making good use of the existing modern plants and advanced equipment in increasing the production volume and efficiency, reducing costs and improving returns. In addition, the Group will expand its production capacity and increase its capital investment to take advantage of the PRC’s policy on developing the pharmaceutical industry in recent years. Besides, the Group will also strengthen its efforts in acquiring other pharmaceutical companies with quality assets and an impressive category of registered medical products, so as to expand its operation and enhance its cost effectiveness. It is the Group’s ultimate goal to develop into one of the first-rate leading companies in the PRC in the shortest span of time.

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Looking ahead, the Group is fully confident of the prospects for its operation in the PRC pharmaceutical market. It will continue to push forward with the Group’s high-quality medical products in the existing sales network, and will step up its efforts in exploring new drugs via biotechnology. In order to increase the Group’s profitability and the shareholders’ wealth, the Group will continue to focus on developing hi-tech Chinese medicines and biotechnology drugs with its utmost effort in the coming year.

CHARGES ON GROUP ASSETS

At 30 June 2002, none of the Group’s assets was pledged as security for liability.

USE OF PROCEEDS FROM THE ISSUANCE OF SHARES

On 23 August 2000, the Company issued a total of 80,000,000 new shares at an issue price of HK$1.00 each pursuant to the New Issue and Placing (as defined in the Company’s prospectus dated 11 August 2000). The net proceeds therefrom after deducting expenses, amounted to approximately HK$67 million. As at 30 June 2002, a substantial part of the net proceeds had been utilized in line with the terms stipulated in the Company’s prospectus, as follows:

• HK$13 million for the establishment of the new production plant in the PRC;

• HK$17 million for the purchase and installation of related production equipment and facilities in the new production plant in the PRC;

• HK$1.5 million for research and development of new pharmaceutical formulae and improvement of the Group’s existing production technology, production rate and product quality; and

• HK$13 million for expanding the distribution and sales network of the Group.

To the extent that the above net proceeds are not applied, they are currently placed at bank as short term deposits.

LIQUIDITY AND FINANCIAL RESOURCES

During the Year, the Group’s primary sources of funding were provided by operating activities, cash proceeds from the New Issue and Placing (as defined in the Company’s prospectus dated 11 August 2000) and cash proceeds from the aforementioned placing of 20,000,000 and 60,000,000 shares of the Company and the issuance of US$120,000,000 convertible bonds to CSFB. As at 30 June 2002, the Group had cash and bank balances of a total amount of HK$465,483,000 (2001: HK$117,559,000). At 30 June 2002, the Group had total assets of HK$835,618,000 (2001: HK$346,613,000), current liabilities of HK$134,729,000 (2001: HK$56,185,000) and shareholders’ equity of HK$695,857,000 (2001: HK$289,229,000). The Group has consistently maintained a strong working capital during the Year, with net current assets of HK$556,101,000 at 30 June 2002 (2001: HK$166,870,000) and with a current ratio of 1.25 times at 30 June 2002 (2001: 1.33 times).

As at 30 June 2002, the Group had no outstanding borrowings (2001: Nil).

As the operations of the Group are mainly denominated in Renminbi and Hong Kong Dollars. In view of the constant exchange rate between the two currencies, the Group considers that its foreign exchange risk is minimal.

On 14 August 2001, 14 December 2001 and 10 January 2002, the Company agreed to issue in total US$12,000,000 convertible bonds to CSFB and the proceeds therefrom, before expenses, amounted to approximately HK$93,600,000. The details of the said issuance of convertible bonds have been set out in the Company’s press announcements published on 15 August 2001, 17 December 2001 and 11 January 2002 respectively.

The Board believes that the Group had sufficient liquidity to satisfy its commitments and working capital requirements.

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CONTINGENT LIABILITIES AND CAPITAL COMMITMENT

As at 30 June 2002, the Group did not have contingent liabilities (2001:Nil).

As at 30 June 2002, the Group had no capital commitments (2001: HK$12,339,000).

EMPLOYEES AND REMUNERATION POLICY

At 30 June 2002, the Group had approximately 1,200 employees in Hong Kong and the PRC.

The remuneration policy and package of the Group’s employees are reviewed and approved by the Board. Besides provident funds and double pay, discretionary bonuses based on individual performance will be paid to employees as recognition of and reward for value creation.

Under the Company’s existing share option scheme, options to subscribe for shares of the Company can be granted to full-time employees (including executive directors) of the Company and its subsidiaries. For the period up to the date of this announcement, 65,710,000 share options have been granted, of which 52,000,000 share options remained unexercised as at the date of this announcement.

CLOSURE OF REGISTER OF MEMBERS

The Register of Members of the Company will be closed from Friday, 13 December 2002 to Wednesday, 18 December 2002 (both days inclusive), during which period no transfer of shares will be registered. In order to qualify for the entitlement to the proposed final dividend for the Year and for attending the Annual General Meeting of the Company to be held on Wednesday, 18 December 2002, all share transfers accompanied by the relevant share certificates and the appropriate transfer forms must be lodged with the Company’s Share Registrar in Hong Kong, Tengis Limited, at 4/F Hutchison House, 10 Harcourt Road, Central, Hong Kong for registration not later than 4:00 p.m. on Thursday, 12 December 2002.

PUBLICATION OF ANNUAL RESULTS ON THE STOCK EXCHANGE’S WEBSITE

The 2002 Annual Report of the Company containing all the information of the annual results of the Group for the Year required by paragraphs 45(1) to 45(3) inclusive of Appendix 16 to the Listing Rules will be published on the website of the Stock Exchange in due course.

On behalf of the Board Cai Chong Zhen Chairman

Hong Kong, 21 October 2002

Please also refer to the published version of this announcement in The Standard.

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