Financials

Unaudited Results for the Second Quarter and Six Months Ended 31 December 2009

Note: Files are in Adobe (PDF) format.
Please download the free Adobe Acrobat Reader to view these documents.

Profit and Loss

Statement of Comprehensive Income

Review of Performance

Business Review

Highlights of the Results of the Group

Revenue, Cost of Goods Sold and Gross Profits by Categories

Percentage of Revenue by Product Segment

Revenue

Total revenue increased by 18% from HK$144 million in 2QFY09 to HK$170 million in 2QFY10. The increase was attributable to our marketing efforts in building the C&O corporate brand name among PRC doctors and patients, together with stimulated demand for both Exclusive and C&O Branded products by the implementation of Essential Drug List ("EDL") and the newly expanded National Health Insurance Catalog. Sales of Exclusive and C&O Branded products increased by 13% and 30% respectively y-o-y.

Profitability

Gross profit grew by 27% from HK$83 million in 2QFY09 to HK$106 million in 2QFY10. Overall gross profit margin also increased from 58% in 2QFY09 to 62% in 2QFY10 mainly due to the drop in import cost of Exclusive products and gross profit margin remained stable as compared to the previous quarter.

Distribution expenses increased by 25%, which was in line with sales increase. Administrative expenses also increased by 10% as a result of increase in amortization of intangible assets, research and development costs and depreciation of property, plant and equipment. Amortisation of intangible assets for the quarter increased by 64% as compared to 2QFY09 due to additional amortisation arising from the acquisition of intangible assets from Nanjing Xinaokang Pharmaceutical Limited in 2QFY09. Research and development costs for the period rose by 37% because of the acceleration of project development process after the expansion of our R&D centre in Nanjing. Depreciation of property, plant and equipment for the quarter increased by 38% y-o-y because of acquisition of additional fixed assets in FY2009. However, operating profit increased by 41% as compared to corresponding period last year, which was higher than percentage increase in expenses. Profitability improved considerably despite increase in expenses, which demonstrated the Group's efficiency.

Income tax expenses increased as a result of provision for withholding tax of approximately HK$6 million related to the declaration of special interim dividend. If this provision was excluded, the profit for the period would have increased by 42% when compared to the corresponding quarter.

Financial position and cash flows

Non-cash current assets

Trade and bills receivables as at 31 December 2009 remained stable when compared with that as at 30 June 2009. Meanwhile, there was no material change in non-current assets items when compared to 4QFY09.

In preparation for strong sales in the coming quarter, the Group strategically accumulated more stock this quarter, resulting in increase in inventory and trade and bills payables. Other receivables and prepayments dropped by approximately HK$3 million due to decrease in prepayment to sales office for sales activities during the calendar year end. Fixed deposits decreased by HK$11 million as part of the fixed deposits matured. Short term bank loans, secured dropped by HK$12 million due to decrease in bills discounted. Depending on the Group's needs, the Group adjusts its forms of cash holding from time to time.

Increase in deferred tax liabilities was mainly attributable to increase in withholding tax provision as mentioned above.

Total cash (including fixed deposits held at banks and cash and cash equivalents) increased from HK$193 million as at 30 June 2009 to HK$233 million as at 31 December 2009. The increase in cash and cash equivalents was as a result of a cash inflow of HK$100 million from operating activities, a cash outflow of HK$0.1 million from investing activities, and a cash outflow of HK$49 million from financing activities.

As part of the overall planning of the Group to optimize the use of resources, the Group had recently concluded an agreement ("Nanjing Disposal") with a third party as buyer pursuant to which the Group agreed to sell and the buyer agreed to acquire one of our subsidiaries which holds a plot of vacant land in Nanjing and certain R&D projects which the Group had no intention to proceed to product launch at an aggregate consideration of RMB36 million. The land disposed of is vacant land and is not expected to be required by the Group for its business development in the near future.

The Group received the consideration in full on 10 February 2010 and as a result of the Nanjing Disposal, the Group's net cash has been further increased by approximately HK$39 milion.

Commentary

OUTLOOK

Subsequent to the promulgation of "Essential Drug List", the existing National Health Insurance Catalog was recently updated by the PRC government. Two additional C&O Branded products have been included in this updated catalog, namely Amoxicillin Granules and Clarithromycin Dispersible Tablets. This will generate further demand for our C&O Branded products.

In view of sustained growth of C&O Branded products, we will keep on adding new C&O Branded product to our product list. Another two new C&O Branded products, namely Levocarnitine Injection and Cefuroxime Axetil Capsule, are going to be launched in 3QFY10. Both Levocarnitine Injection and Cefuroxime Axetil Capsule are listed in the National Health Insurance Catalog. Levocarnitine Injection is used for the treatment to supplement carnitine deficiency, while Cefuroxime Axetil Capsule is an oral complementary product to our existing C&O Branded product, Cefuroxime Sodium for Injection, a cephalosporin antibiotic. All in all, we shall have 24 C&O Branded products and 2 Exclusive products in the National Health Insurance Catalog.

We are also constantly looking at different ways to optimize the use of our resources to maximize return to our investors. The Nanjing Disposal generated additional cash inflow for the Group and has further strengthened the cash position of the Group; which in turn will enable us to accord a better return to our investors. In this fiscal year and ahead, we will continue our effort to optimize the use of our resources to enhance shareholders' value and to generate higher return to our shareholders.

Our Board has resolved to declare an interim dividend and a special interim dividend.

We are delighted to deliver these strong results this quarter, as well as the past few quarters. While our strategies are showing promising results; we are also constantly looking at optimizing return to our investors. Our efforts in revised business strategy, restructuring and intensive marketing effort has shown promising pay off. We are optimistic on our business performance this fiscal year.

Balance Sheet