Financials

Unaudited results for the third quarter and nine months ended 31 March 2009

Profit and Loss

Click here for the complete Third quarter and nine months ended 31 March 2009 Financial Results

Review of Performance

Business Review

Highlights of the Results of the Group

Revenue, Cost of Goods Sold and Gross Profits by Categories

Percentage of Sales Breakdown

Revenue

Total revenue dropped from HK$158 million in 3QFY08 to HK$142 million in 3QFY09. Sales of Amoxycillin dropped slightly by 2% and sale of Non-exclusive products also declined compared to 3QFY08 as a result of the Group's disposal of interest in Cang Nan Province Hong Tai Pharmaceutical Company Limited ("Hong Tai") in 1QFY09.

Sales of C&O Branded products grew by 17%, and overall sales of Exclusive products improved by 1%. The continuous growth in sales of C&O branded products has contributed to a change in sales mix in 3QFY09, which the percentage of sales contribution from C&O Branded products increased by 7% and 3% as compared to 3QFY08 and 2QFY09 respectively.

Decline in sales of Amoxycillin was mainly attributable to adjustment of our sales policy with downstream distributors. This effect is expected to be temporary. Furthermore, the decline in Amoxycillin is offset by strong growth in sales of another exclusive product Meiact.

Following the expansion of our R&D facilities, our R&D arm expanded CRO ("Contract Business Organization") business and generated additional income to the Group this quarter. It is anticipated that our CRO business will continue to grow. Revenue from CRO business was classified as "Others" in sales breakdown.

Profitability

As a result of the Group's revised strategy on focusing on higher-margin Exclusive and C&O Branded products, a sustained growth in the Group's gross profit and gross profit margin from HK$82 million and 52 % in 3QFY08 to HK$85 million and 60% in 3QFY09 was recorded.

Distribution expenses for 3QFY09 increased by HK$12 million compared to 3QFY08, mainly attributable to increased marketing effort to promote our own brands and newly acquired exclusive products. The increase in distribution expenses was in tandem with sales growth in new exclusive products and C&O Branded products. Administrative expenses in 3QFY09 amounted to HK$18 million, representing a 4% increase compared to 3QFY08.

Profit for the period dropped by 32% y-o-y. One of the reasons was that the Group recorded a gain on disposal of its office building in HK amounted to HK$7 million in 3QFY08. The gain was included in "other revenue" in the income statement. After an adjustment to exclude this one-off gain, the Group's profit for the period declined by 18% y-o-y.

Increment in deprecation of property, plant and equipment and amortization of intangible assets by 37.9% and 77.4% y-o-y respectively were mainly due to the acquisition/transfer of property, plant and equipment from prepayment/construction in progress in second half year of 2008, and the acquisition of intangible assets arising from the newly acquired subsidiary, Nanjing Xinaokang Pharmaceutical Limited, in 2QFY09.

Financial position and cash flows

Non-current assets

Non-current assets amounting to HK$439 million, remained more or less the same as HK$423 million as at 30 June 2008. Upon the completion of acquisition of Nanjing Xinaokang Pharmaceutical Limited, prepayment for acquisition of equity interest of an entity of HK$34 million was transferred into goodwill and intangible assets. A large portion of prepayment for property, plant and equipment and land use right was transferred into fixed assets as property, plant and equipment.

Non-cash current assets

Trade and bills receivables decreased from approximately HK$205 million as at 30 June 2008 to approximately HK$180 million as at 31 March 2009 due to the disposal of Hong Tai with account receivables balance of approximately HK$9 million as at 30 June 2008 and increase in collection of accounts receivables. Other receivables and prepayments increased from HK$13 million as at 30 June 2008 to HK$16 million as at 31 March 2009 was mainly due to the increase in deposits paid for raw materials.

Liabilities

Decrease in trade and bills payables as compared to the balance as at 30 June 2008 was mainly attributable to the disposal of Hong Tai in 1QFY09 with trade and bills payables balance of approximately HK$26 million as at 30 June 2008 and decrease in quantity purchased of exclusive products.

Increase in short-term unsecured bank loans as compared to 30 June 2008 was attributable to the recourse discounted bills outstanding as at 31 March 2009. In accordance with the prevailing international accounting standards, such discounted bills with recourse of HK$45.6 million were recognized as liabilities, and the corresponding amounts were recognized as bills receivables grouped under current assets in the consolidated balance sheet as at 31 March 2009.

Total cash (including pledged deposits, fixed deposits held at bank and cash and cash equivalents) increased from HK$111 million as at 30 June 2008 to HK$176 million as at 31 March 2009. The increase in cash and cash equivalents was as a result of a cash inflow of approximately HK$95 million from operating activities, a cash outflow of approximately HK$79 million from investing activities, and a cash inflow of approximately HK$21 million from financing activities. Material increment in cash inflow from financing activities was mainly due to the short-term unsecured bank loans came from discounted bills with recourse.

Commentary

OUTLOOK

Subsequent to the announcement of the investment of RMB 850 billion in the healthcare sector from 2009 to 2011 by the State Council earlier this year, the PRC government unveiled a blueprint for healthcare reform over the next decade in April 2009, with an aim to lay a solid foundation for equitable and universal access to basic healthcare.

We believe that the healthcare reform will provide both challenges and opportunities to the healthcare and pharmaceutical sector. The Group has been actively preparing itself for capturing business opportunities and managing potential impact brought about by the healthcare reform.

This quarter, we have achieved significant progress on the R&D side. Construction of our new R&D centre in Nanjing was completed and our Nanjing R&D team is moving in in May 2009. We are also expecting more new C&O branded products to be added into our portfolio in late 2009 and early 2010.

HELIXOR® A, the first mistletoe anti-cancer drug in China, was launched in 2QFY09.Coupled with our efforts to raise product awareness among hospitals, we expect to capture higher sales from HELIXOR® A going forward.

Balance Sheet