Contents Corporate Information Financial Highlights Corporate Profile Management Discussion and Analysis Other informatio

Transcription

1 2016 INTERIM REPORT (Incorporated under the laws of the Cayman Islands with limited liability) Stock Code: 6833

2 Contents Corporate Information Financial Highlights Corporate Profile Management Discussion and Analysis Other information Report on Review of Condensed Consolidated Financial Statements Interim Consolidated Statement of Profit or Loss and Other Comprehensive Income Interim Consolidated Statement of Financial Position Interim Consolidated Statement of Changes in Equity Interim Consolidated Statement of Cash Flows Notes to the Condensed Consolidated Financial Statements 49 Definitions

3 Corporate Information BOARD OF DIRECTORS Executive Directors Mr. Huang Xiangbin (Chairman and Chief Executive Officer*) Ms. Zhang Zhijie Independent Non-executive Directors Mr. Chow Siu Lui Mr. Wang Qing Mr. Liu Wenfang AUDIT COMMITTEE Mr. Chow Siu Lui (Chairman) Mr. Wang Qing Mr. Liu Wenfang REMUNERATION COMMITTEE Mr. Wang Qing (Chairman) Ms. Zhang Zhijie Mr. Liu Wenfang NOMINATION COMMITTEE Mr. Huang Xiangbin (Chairman) Mr. Chow Siu Lui Mr. Liu Wenfang INTERNAL CONTROL AND CORPORATE GOVERNANCE COMMITTEE Mr. Chow Siu Lui (Chairman) Mr. Wang Qing Mr. Liu Wenfang AUTHORISED REPRESENTATIVES Mr. Huang Xiangbin Ms. Wong Sau Ping JOINT COMPANY SECRETARIES Ms. Ko Wing Yu Ms. Wong Sau Ping REGISTERED OFFICE PO Box 309 Ugland House Grand Cayman, KY Cayman Islands * PO Box 309 Ugland House Grand Cayman, KY Cayman Islands * Mr. Huang Xiangbin acts as the co-chief executive officer of the Company following the appointment of Mr. Hao Jinghui as the co-chief executive officer of the Company with effect from 16 August * Sinco Pharmaceuticals Holdings Limited Interim Report 2016

4 Corporate Information (Continued) CORPORATE HEADQUARTER E5-1805, Global Centre No. 1700, North Section of Tianfu Avenue High-Tech Zone, Chengdu Sichuan PRC PRINCIPAL PLACE OF BUSINESS IN HONG KONG Unit 4408A, 44/F, Cosco Tower 183 Queen s Road Central Hong Kong CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE Maples Fund Services (Cayman) Limited P.O. Box 1093, Boundary Hall Cricket Square Grand Cayman, KY Cayman Islands HONG KONG BRANCH SHARE REGISTRAR Computershare Hong Kong Investor Services Limited Shops , 17th Floor, Hopewell Centre 183 Queen s Road East Wan Chai Hong Kong HONG KONG LEGAL ADVISER Shearman & Sterling AUDITOR Ernst & Young Certified Public Accountants STOCK CODE ON THE MAIN BOARD OF THE STOCK EXCHANGE OF HONG KONG LIMITED 6833 COMPANY WEBSITE LISTING DATE 10 March E A Maples Fund Services (Cayman) Limited P.O. Box 1093, Boundary Hall Cricket Square Grand Cayman, KY Cayman Islands

5 Financial Highlights Revenue of the Group decreased by 6.5% to RMB569.4 million for the Reporting Period (six months ended 30 June 2015: RMB608.7 million), primarily due to the decrease in sales of Human Albumin Solution of RMB81.4 million, partially offset by the increase in sales of antibiotics and other products of RMB42.1 million. Gross profit of the Group increased by 0.5% to RMB83.1 million for the Reporting Period (six months ended 30 June 2015: RMB82.7 million), mainly due to the decrease in average purchase price of antibiotics and the increase in sales volume of other products with relatively higher gross profit margin. Net profit of the Group decreased by 37.4% to RMB30.5 million for the Reporting Period (six months ended 30 June 2015: RMB48.7 million). Without the impact of listing expenses, the adjusted net profit of the Group decreased by 6.3% to RMB48.0 million for the Reporting Period (six months ended 30 June 2015: RMB51.2 million). Profit attributable to owners of the Company decreased by 36.3% to RMB31.0 million for the Reporting Period (six months ended 30 June 2015: RMB48.7 million). Basic earnings per share amounted to RMB0.021 for the Reporting Period (six months ended 30 June 2015: RMB0.041). The Directors have resolved to declare an interim dividend of HK$ per share (equivalent to RMB per share) for the Reporting Period (six months ended 30 June 2015: not applicable). 6.5% % % % % Six months ended 30 June RMB RMB 000 (unaudited) (unaudited) Operating results Revenue 569, ,681 Gross profit 83,054 82,705 Profit before tax 40,416 57,842 Profit for the period 30,546 48,699 Profit attributable to owners of the Company 31,062 48,699 Profitability Gross margin (%) (%) 14.6% 13.6% Net profit margin (%) (%) 5.4% 8.0% 4 Sinco Pharmaceuticals Holdings Limited Interim Report 2016

6 Financial Highlights (Continued) 30 June December RMB 000 RMB 000 (unaudited) Financial position Total assets 852, ,010 Total liabilities 379, ,456 Total equity 473, ,554 Equity attributable to owners of the Company 473, ,428 Cash and cash equivalents 364,243 60,206 Six months ended 30 June REVENUE RMB ,000 PROFIT ATTRIBUTABLE TO OWNERS OF THE COMPANY RMB ,699 50,000 TOTAL ASSETS RMB 000 1,000, , , , , , ,373 40,000 30,000 31, , , , , ,000 20, , , ,000 10, ,

7 Corporate Profile The Group is the third largest provider of MPCM services in the PRC pharmaceutical industry. The Group is also China s only MPCM service provider for plasma-based pharmaceuticals. The Group provides integrated MPCM services to small- and medium-sized overseas pharmaceutical manufacturers that do not possess independent marketing and promotion capabilities in China. The Group s services include (a) formulating tailored marketing strategies and plans for each product in the portfolio; (b) executing tailored marketing strategies and plans through experienced in-house team, while utilizing distributors local networks; (c) working with third parties to provide the suppliers with logistic network that helps ensure the timely and cost-effective handling of products from importation to final delivery; (d) participating in the tender processes and assisting the suppliers in selecting and managing distributors with proven track records of sales to hospitals; (e) appointing distributors in different sales regions to sell and promote the Group s products to hospitals and medical institutions; (f) providing the suppliers with up-to-date sales data on their products through the Group s ERP information management system; and (g) coordinating and managing product registration renewal and first-time product registration. (a) (b) (c) (d) (e) (f) ERP (g) The Group s product portfolio includes plasma-based products and products in other fast-growing or sizeable therapeutic areas. We systematically screen and select products from prospective product candidates in the overseas market that we believe have high growth potential in the Chinese pharmaceutical market. As of 30 June 2016, the Group had over 75 in-house marketing and promotion employees, and a national network of 231 distributors across 31 provinces, municipalities and autonomous regions in China. For the Reporting Period, the Group sold its products through its nationwide MPCM service network to a total of over 3,000 hospitals and other medical institutions, covering more than 930 Class III hospitals, 1,340 Class II hospitals and 434 Class I hospitals, in addition to over 700 pharmacies and other medical institutions , , Sinco Pharmaceuticals Holdings Limited Interim Report 2016

8 Management Discussion and Analysis BUSINESS REVIEW Pharmaceutical policies have been extensively promulgated in the first half of 2016, which generated a significant influence towards the pharmaceutical industry in China. The policies of the tightened medical insurance budgets, establishment of diagnostic and treatment hierarchy and precise medical scheme, along with the implementation of pharmaceutical pricing negotiation system, minimum pricing linkage system and Two-invoice system, have made the intensive reforms in pharmaceutical industry become prevailing. In long run, the implementation of these policies will further regulate the research and development, production, logistics of pharmaceuticals in pharmaceutical industry, optimize purchasing and selling order of pharmaceuticals for the pharmaceutical industry in China and provide a better protection to the quality of pharmaceuticals as well as benefits to patients. Nevertheless, in short run, in order to adapt to the new policies, pharmaceutical enterprises in China will undergo a period of business model transition, during which there will be pressure on sales and production of products and cost of sales. Amidst the slowdown of the overall growth in the domestic pharmaceutical industry, the Group s business has been kept stable during the Reporting Period. During the Reporting Period, the Group s revenue has slightly decreased by 6.5% to RMB569.4 million (for the six months ended 30 June 2015: RMB608.7 million), the gross profit increased by 0.5% to RMB83.1 million (for the six months ended 30 June 2015: RMB82.7 million). In order to stabilise our market share and actively respond to the new policies promulgated, we started to adjust our business model and reinforced our internal management. Therefore, our overall expenses including the listing expenses increased and consequently our net profit decreased by 37.4% from RMB48.7 million for the six months ended 30 June 2015 to RMB30.5 million for the Reporting Period. If taking out the impact of the one-off listing expenses, the adjusted net profit has only decreased by 6.3% to RMB48.0 million (for the six months ended 30 June 2015: RMB51.2 million) % % % % During the Reporting Period, the Group continued to maintain a stable partnership with Octapharma, one of the leading global manufacturers of plasma-based pharmaceuticals, to seize the momentum of increasing domestic blood product demands and pricing with flourishing development in the industry, and continued to enhance our capabilities of providing comprehensive MPCM to small-and-medium-sized overseas pharmaceutical manufacturers, comprehensively optimized the existing structure of distributor network, together with improved and refined marketing strategies

9 Management Discussion and Analysis (Continued) 1. Products Development The existing product portfolio of the Group includes premium products produced by small-and-medium-sized overseas pharmaceutical manufacturers. The products cannot only compensate for the existing shortage of blood products in domestic markets but also satisfy the significant demands of medical organizations and patients for pharmaceuticals with better clinical outcomes and high quality. As of 30 June 2016, the product portfolio of the Group covers therapeutic areas on cancers, hepatobiliary diseases, gastrointestinal diseases, brain diseases, burns and immune diseases During the Reporting Period, the Group has adopted reasonable and efficient marketing strategies to actively encounter with the pharmaceutical policies and changes brought by the market scenario. Meanwhile, by re-adjustment of business structure, a series of moves, such as establishment of the product divisions, have been gradually completed. The Group has strengthened our professional construction of the internal marketing team and business control and precision management towards distributors, while further optimizing our product marketing network and exploring the products market potential. Human Albumin Solution Human Albumin Solution is manufactured by Octapharma and used to remedy shock caused by hypovolemia, eradicate edema and poisonous substance, and to cure neonatal hyper-bilirubinemia, which is categorized as Part B product of the National Insurance Catalogue. In 2015, the market size of China s blood products market has reached RMB24.5 billion, which became the second largest blood product market in the world with substantial market demands. Along with the relaxation of restriction on the maximum retail price of blood products promulgated by the State on 1 June 2015, both demands and pricing of blood products have stepped into an upward trend. Accordingly, the Group has raised the selling price of Human Albumin Solution during the Reporting Period. However, because of a slight plunge of supply from our supplier in the first half of this year, revenue from sales of Human Albumin Solution amounted to RMB319.3 million, representing a decrease of 20.3% as compared with the corresponding period of % 8 Sinco Pharmaceuticals Holdings Limited Interim Report 2016

10 Management Discussion and Analysis (Continued) Axetine (Cefuroxime Sodium for injection) Axetine is manufactured by Medochemie and used to remedy bacterial infections, including respiratory infections, urinary tract infections, skin and soft tissue infections. The product was included in the National Catalogue of Essential Pharmaceuticals, Part A product of National Insurance Catalogue, which is classified as the second generation of cephalosporin antibiotic. On 24 July 2015, the National Health and Family Planning Commission published the Guiding Principles for the Clinical Application of Antibiotics (2015 version), which stipulated a classified management approach on clinical application of antibiotics, causing a gradual decrease or suspension of intravenous infusion of antibiotics in clinics from every level of hospitals. Antibiotics market recorded an overall slowdown in growth due to the tightening up of policies. As Axetine has advantages of wide antibacterial range, strong antimicrobial ability and fewer allergic reactions, it has become one of the main domestic pharmaceuticals for anti-allergy. After years of brand building and marketing network expansion, Axetine has gained a high reputation and brand recognition in China. As such, during the Reporting Period, the sales of Axetine has still maintained a stable growth with revenue amounting to RMB148.4 million, representing an increase of 4.9% as compared with the corresponding period of % Medocef (Cefoperazone Sodium for injection) Medocef is manufactured by Medochemie and used to remedy bacterial infections caused by sensitive lactamase, including respiratory infections, urinary tract infections, biliary tract infections, abdominal infections, skin and soft tissue infections, pelvic infections and septicemia, as well as favorable for brain infections caused by influenza and meningococcus. Medocef is classified as the third generation of cephalosporin antibiotic. Since the third generation of cephalosporin antibiotic is characterized as highly effective and fewer side effects, it is well received by clinical patients and its consumption is mainly focused on the 3A-grade hospitals in large cities in China. However, due to the tightening up of policies, during the Reporting Period, revenue from the sales of Medocef amounted to RMB26.2 million (six months ended 30 June 2015: RMB32.0 million), representing a decrease of 17.9% as compared with the corresponding period of %

11 Management Discussion and Analysis (Continued) Taurolite (Tauroursodeoxycholic acid capsule) Taurolite is another core product of the Group, which has recorded a stable growth during the Reporting Period. Taurolite, which is used to dissolve cholelithiasis, is manufactured by Bruschettini. Overseas clinical tests revealed that Taurolite is also favorable for treating cholestasis liver disease and primary biliary cholangitis and prevention of relapsing after surgery for cholelithiasis. Taurolite is the third generation of exclusive generic name oral cholic acid drugs in China s market, which has a higher water binding capacity, higher safety, higher bioavailability, better solubility and highly effective. The product is also one of the substitute soluble stone drugs for ursodeoxycholic acid. Continuous marketing development and brand promotion have been the main areas of work of the Group during the Reporting Period. Through product academic value promotion and branding education, continuous exploration and nurturing of product selling hotspots, and developments of clinical scientific research and doctor education, we aim to improve doctors recognition of the product and strive to expand the product coverage in hospitals, as well as further boost the product developments. During the Reporting Period, revenue from sales of Taurolite amounted to RMB66.1 million (six months ended 30 June 2015: RMB26.5 million), representing an increase of 149.4% as compared with the corresponding period of % Esafosfina (Fructose 1, 6-diphosphate for injection) Esafosfina, manufactured by Foscama, is used to treat hypophosphatemia and chronic diseases, including alcohol intoxication, malnutrition and hypophosphatemic respiratory failure, and as a supplemental therapeutic drug for angina, heart failure, heart attack and interventional cardiovascular, which contributes to the treatment of heart diseases. The product is categorized as Part B product of the National Insurance Catalogue. Fructose diphosphate is categorized as one of the top three categories of cardiovascular drugs, while Esafosfina is the only imported drugs in the domestic market. The Group has regulated the academic information of the product, optimized the promotional focus of the product and distinguished the difference in quality between Esafosfina and domestic products through academic researches. In addition, the Group has enhanced the close partnership with end-users, expanded the coverage to the markets and increased the sales to private hospitals. During the Reporting Period, revenue from sales of Esafosfina amounted to RMB9.3 million, representing an increase of RMB6.1 million as compared with the corresponding period of 2015 (six months ended 30 June 2015: RMB3.2 million). 1, Sinco Pharmaceuticals Holdings Limited Interim Report 2016

12 Management Discussion and Analysis (Continued) TAD (Reduced Glutathione for injection) TAD is manufactured by Foscama, and used to remedy and prevent from intoxications, cell damage and liver damage caused by virus, cytotoxic drugs, alcoholic intoxication and intoxication from other chemical substances. It is included in Part B product of the National Insurance Catalogue. TAD is effective in improving liver s functionality, facilitating bile acid metabolism, protecting the composition of livers and detoxification and reducing hormone activity, which has fewer side effects and commonly used for clinical protection of livers. China Food and Drug Administration is currently conducting the technical evaluation of TAD and issued the Supplemental Information Notice (Yao Shen Bu Zi [2015] No. 1379, 1380) [2015] on 25 November 2015, which stipulated that relevant information shall be supplemented to optimize the content in relation to safety, effectiveness or/and quality control. Pursuant to the Notice, we were required to submit the relevant supplementary information to the Center for Drug Evaluation of China Food and Drug Administration by 9 April As of 30 June 2016, the Group has not yet received further notice regarding the supplemental information from the Center for Drug Evaluation. We expect to receive the renewed imported drug registration of TAD by the end of the third quarter of Since the imported drug registration of the product is under renewal, no sale was made by the Group during the Reporting Period [2015] Development of our marketing network The Group is committed to explore the marketing network continuously and strengthen the management of distributors as one of the key development strategies of the Group. In order to ensure the efficiency and quality of the marketing network, the Group established marketing and promotion strategies and provided management, appointment, training and support and supervision to distributors, as well as launched product learning campaigns through our internal marketing team, and authorized the distributors to undertake the responsibilities of marketing and promotion of the Group s products over the country. This model can effectively expand the coverage of the Group s business. By leveraging on the regional marketing and promotional experiences of distributors, we not only can maintain a flexible operation but efficiently reduce the overall marketing and promotional costs of the Group as well

13 Management Discussion and Analysis (Continued) Along with the promulgation of new industry regulatory policies, Good Supply Practise ( GSP ) unannounced inspection, coordination of pharmaceutical circulation by pharmaceutical supervisory authorities and the implementation of Two Invoice System, these accelerated the acquisition and merger in pharmaceutical industry. In May 2016, China Food and Drug Administration issued the Announcement on Drug Wholesale Self-Inspection ( ). In response to the requirements of the state policy, the Group aggressively undertook self-inspection on false pretenses and illegal operation of existing distributors, actively accepted market supervision, strengthened the supervision on the comprehensive capabilities of the existing distributors, resolutely resisted incompliance, implemented precision management and actively advanced the professionalism of our internal marketing team. GSP In order to expedite the business model transformation, we strengthened the professional marketing capabilities of our internal marketing team via business structure reconstruction by undertaking a series of measures such as establishing the product division and enriched the marketing team through internal coordination and recruitment of external talents. A supervisor is assigned to each product division as division leader. Each division is equipped with professional sales, marketing and commercial, customer servicing and financial talents, who undertake the promotional and sales campaigns of our products. Meanwhile, we strived to launch the product learning and promotional works for the purpose of providing high quality academic assistance for product promotion. We also enhanced our handling capability in terms of government affairs and effectively established the price filing and tendering works. As of 30 June 2016, the Group had over 75 internal marketing staff Implementation of precision management towards distributors implies that the Group has a detailed management on distributors and marketing. Each product division has overhauled the structure of existing distributor network of our product and initiatively phased out distributors that cannot adapt to the development strategy of the Company. In order to ensure the efficiency and quality of our marketing network, the Company proactively optimized its sales channels by exploring more good regional distributors which have close relationships with hospitals and other medical institutional customers and continuously expanded its marketing network towards terminal markets. Meanwhile, the Group has streamlined the management of distributors and sales performance, enhanced the training and support towards distributors and made use of the regional marketing and promotion experience of distributors to ensure that any gaps in the market identified are effectively filled and products potential are fully realized. During the Reporting Period, the Group s mature products, such as Axetine, increased its market coverage by over 162 new hospitals and medical institutions, and our products with huge market potential, such as Taurolite, increased its market coverage by over 74 new hospitals and medical institutions Sinco Pharmaceuticals Holdings Limited Interim Report 2016

14 Management Discussion and Analysis (Continued) As of 30 June 2016, the Group sold its products through 231 distributors from its nationwide network across 31 provinces, municipalities and autonomous regions, covering 930 Class III hospitals, 1,340 Class II hospitals, 434 Class I hospitals and over 700 pharmacies and other medical institutions. 3. The Cold Chain Storage Facility In consideration of future needs of business expansion of the Group and material need of pharmaceutical cold chain facility regarding blood products and biological products in processes of storage and delivery, the Group has accelerated the construction of cold chain facility and research and development base in Shuangliu District, Chengdu, Sichuan Province. Following the Shandong vaccine case in April 2016, the State Council promulgated a newly amended Regulation on the Administration of Circulation and Injection of Vaccines () and China Food and Drug Administration and the National Health and Family Planning Commission have jointly issued a notice in June 2016, which stipulated that the whole delivery process of vaccines shall not be separate with the control of cold chain, regular check, temperature recording and quality warranty of vaccines. The new policy has underlined the determination of regulating the pharmaceutical industry of the State and implied that the medical cold chain industry in China has entered into an era of rapid growth. The Group is currently constructing the first phase of the cold chain facility (15,000 square meters), which can satisfy the storage need of the Company and help better control the quality and safety of the blood products in our product portfolio. As of 30 June 2016, the Group has proceeded with the land transfer procedures with the government of Shuangliu District. We expect to obtain the land use rights certificate by the end of the second half of Research and Development In order to further expand our product portfolio, the Group has engaged Institute of Chinese Medical Sciences to develop Sinco I, a realgarbased chemical medicine intended to treat acute promyelocytic leukaemia. Sinco I is classified as a Class I chemical medicine, a category of new medicine which has never been launched in China or other countries. The approval process of a Class I chemical medicine usually takes a longer time of more than eight years, involving clinical test new drug application and multiple phases of clinical studies before commercial launch. We expect that the pilot phase for the pharmaceutical raw materials of Sinco I will be completed by December During the Reporting Period, the Group achieved progress on the research and development of Sinco I and is currently designing the construction of pilot plant for pilot experiments. As of 30 June 2016, the Group incurred RMB2.3 million as research and development expenses to develop Sinco I , , Sinco I Sinco I Sinco I Sinco I Sinco I

15 Management Discussion and Analysis (Continued) FUTURE AND OUTLOOK While the environment of pharmaceutical market in China is experiencing enormous changes, the pharmaceutical industry also exposes to unprecedented opportunities and challenges. The Group firmly believes that the foundation of the pharmaceutical market in China remains strong, given the ever-increasing development rate and market demand. Along with the revolution and development trend of the pharmaceutical industry, the Group seizes the opportunity for development in order to maintain a sustainable growth and realizes the enhancement of corporate value through making full use of its competitive advantage in marketing, promotion and channel management services for blood products. The Group will continuously strengthen its close relationships with suppliers such as Octapharma so as to reinforce our position as the largest MPCM services provider for imported blood products in China. Meanwhile, we will proactively investigate and seek for products with high growth potential in the domestic pharmaceutical market. In particular, we intend to focus on blood products and therapeutic areas targeting patients who use blood products to achieve economies of scale. Apart from entering into exclusive distribution agreements with suppliers, the Group will seek for opportunities to introduce more premium imported pharmaceutical products by way of strategic investment or equity acquisition in order to enrich our product portfolio. The Group will continuously promote our marketing network towards terminal markets. We plan to expand our products in the domestic pharmaceutical market through various marketing means. In line with policies in the pharmaceutical industry and a closer ties with our distributors, the Group will continue to refine our management of distributors to maximize the benefit of economies of scale of the distributor network. A direct sales team targeting hospitals and other medical institutions will be formed to build up a marketing network with comprehensive coverage and higher density so as to generate more profit for the Group and handle more products. 14 Sinco Pharmaceuticals Holdings Limited Interim Report 2016

16 Management Discussion and Analysis (Continued) FINANCIAL REVIEW Revenue Revenue decreased by 6.5% to RMB569.4 million for the Reporting Period from RMB608.7 million for the corresponding period of 2015, primarily due to a decrease in sales of Human Albumin Solution of RMB81.4 million, partially offset by an increase in sales of antibiotics and other products of RMB42.1 million. Please refer to Business Review for detail analysis of the revenue by products. Cost of sales Cost of sales decreased by 7.5% to RMB486.3 million for the Reporting Period from RMB526.0 million for the corresponding period of 2015, which was largely in line with changes in sales volume. Gross profit and gross profit margin Gross profit increased slightly by 0.5% to RMB83.1 million for the Reporting Period from RMB82.7 million for the corresponding period of Average gross profit margin increased to 14.6% for the Reporting Period from 13.6% for the six months ended 30 June % % % % 14.6% Human Albumin Solution During the Reporting Period, the unit cost of sales increased by 7.1%, mainly due to the depreciation of RMB against USD. In response to the foreign exchange rate fluctuations, the Group raised average selling price by 5.4%. As a result, the gross profit margin on the sales of Human Albumin Solution decreased to 11.9% for the Reporting Period from 13.2% for the corresponding period of % 5.4% % 11.9% Antibiotics Effective from November 2015, the Group lowered purchase prices of Axetine and Medocef, which overweighed the impact of RMB depreciation against USD during the Reporting Period. As a result, the gross profit margin on sales of antibiotics increased to 14.6% for the Reporting Period from 12.0% for the corresponding period of % 14.6% Other products The average gross profit margin of other products remained stable because the Group managed to settle transactions in USD to avoid impact of foreign exchange fluctuations

17 Management Discussion and Analysis (Continued) Other income and gains Other income and gains decreased to RMB0.2 million for the Reporting Period from RMB0.4 million for the corresponding period of 2015, primarily due to a decrease in government grants of RMB0.2 million. Selling and distribution expenses Selling and distribution expenses decreased by 19.2% to RMB2.1 million for the Reporting Period from RMB2.6 million for the corresponding period of 2015, primarily due to a decrease in performance bonus of RMB0.5 million. Administrative expenses Administrative expenses increased by 156.9% to RMB35.2 million for the Reporting Period from RMB13.7 million for the corresponding period of 2015, primarily due to increase in (i) listing expenses of RMB15.0 million; (ii) professional consultation fee of RMB3.1 million; (iii) research and development expenses of RMB1.1 million; (iv) directors remuneration and staff costs of RMB0.6 million; and (v) entertainment fee of RMB0.6 million. Other expenses Other expenses decreased to RMB1.9 million for the Reporting Period from RMB4.9 million for the corresponding period of 2015, primarily due to a decrease in exchange losses of RMB3.7 million, partially offset by an increase in bank charges of RMB0.6 million. Finance costs Finance costs decreased slightly to RMB3.7 million for the Reporting Period from RMB4.0 million for the corresponding period of 2015, primarily because interest on discounted bills receivable decreased by RMB0.5 million, while interest on bank loans increased by RMB0.2 million. Income tax expenses Income tax expenses increased by 8.8% to RMB9.9 million for the Reporting Period from RMB9.1 million for the corresponding period of 2015, with effective income tax rate increased from 15.8% to 24.4%, primarily due to an increase in non-deductible listing expenses of RMB15.0 million. Profit for the Reporting Period As a result of the forgoing, the Group s net profit decreased by 37.4% to RMB30.5 million for the Reporting Period from RMB48.7 million for the corresponding period of Net profit margin decreased to 5.4% for the Reporting Period from 8.0% for the corresponding period of 2015, which was primarily due to an increase in the one-off listing expenses of RMB15.0 million recognised during the Reporting Period % %35.2 (i)15.0(ii) 3.1(iii)1.1 (iv)0.6 (v) % % 24.4% % % 5.4% Sinco Pharmaceuticals Holdings Limited Interim Report 2016

18 Management Discussion and Analysis (Continued) Inventories Inventory balances decreased to RMB22.5 million as of 30 June 2016 from RMB46.6 million as of 31 December 2015, primarily due to an increase in market demand for our products, Human Albumin Solution in particular, and an decrease in inventory turnover days. Bills receivable Bills receivable increased to RMB177.3 million as of 30 June 2016 from RMB77.2 million as of 31 December 2015, primarily due to an increase in the sales of Human Albumin Solution in the second quarter of 2016, and a decrease in bills discounting. To maintain a healthy cash flow and improve our management, we require full prepayment from our customers before goods delivery. Prepayment includes cash deposits and 60-day bank s acceptance bills in relation to sales of Human Albumin Solution. Prepayment, deposits and other receivables Prepayment, deposits and other receivables decreased to RMB23.1 million as of 30 June 2016 from RMB35.8 million as of 31 December 2015, primarily due to (i) a decrease in prepaid value-added tax of RMB9.4 million; and (ii) a decrease in prepaid listing fee and technical service fee of RMB5.4 million, partially offset by an increase in prepaid consultation service fee of RMB2.7 million. Trade payables Trade payables increased to RMB112.8 million as of 30 June 2016 from RMB62.8 million as of 31 December The increase in trade payables was mainly due to the increased undue letters of credit resulted from the increased purchase in the second quarter of Trade payables turnover days increased to 33 days for the Reporting Period from 16 days for the year ended 31 December 2015, primarily due to the increase of balance of trade payables as of 30 June Other payables Other payables decreased to RMB62.5 million as of 30 June 2016 from RMB84.1 million as of 31 December 2015, primarily due to (i) decrease in deposits of RMB14.3 million; and (ii) payment of RMB9.5 million in respect of the acquisition of a 100% equity interest in Linzhi Ziguang Group, partially offset by the (i) increase in consulting and professional fee payable of RMB1.6 million; and (ii) increase in transportation fee payable of RMB0.7 million (i)9.4 (ii) (i)14.3(ii) 9.5(i) 1.6(ii)

19 Management Discussion and Analysis (Continued) Bank borrowings and gearing ratio As of 30 June 2016, the Group s interest-bearing bank loans amounted to RMB160.0 million (31 December 2015: RMB81.9 million), all of which were repayable within one year. The Group s gearing ratio is calculated as net debt divided by the sum of total equity and net debt, with net debt equal to interest-bearing bank loans minus cash equivalents. As of 30 June 2016, the Group s cash and cash equivalents exceeded the total interest-bearing bank loans, so no gearing ratio was presented (31 December 2015: 18.4%). Liquidity and capital resources The Group s primary uses of cash are to fund working capital, payment for the purchase of property, plant and equipment and other recurring expenses and to service indebtedness. During the Reporting Period, the Group funded its cash requirements principally from cash generated from operations and funds raised from global offerings and bank borrowings % The following table is a condensed summary of our consolidated statements of cash flows for the periods indicated and analysis of balances of cash and cash equivalents as of the dates indicated: For the six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Net cash from operating activities 8,666 37,754 Net cash used in investing activities (35,254) (25,745) Net cash from/(used in) financing activities 327,014 (6,266) Net increase in cash and cash equivalents 300,426 5,743 Effect of foreign exchange rate changes 3, Cash and cash equivalents at beginning of the period 60,206 70,216 Cash and cash equivalents at end of the period 364,243 76, Sinco Pharmaceuticals Holdings Limited Interim Report 2016

20 Management Discussion and Analysis (Continued) The Group s cash and bank balances at the end of the Reporting Period can be further analysed as follows: 30 June December RMB 000 RMB 000 (unaudited) Denominated in RMB 138,295 32,683 Denominated in US$ 148,709 27,062 Denominated in HK$ Denominated in Euro 76, ,243 60,206 Foreign currency risk The Group s purchase of products from the overseas suppliers is denominated in US$ and Euro. Most of the Group s assets and liabilities are denominated in RMB, except for certain items of cash and cash equivalents, pledged bank balances, bills receivable, prepayments and trade payables that are denominated in US$, Euro and HK$. The Group does not enter into any hedging transactions to manage the potential fluctuation in foreign currencies. Management monitors the Group s foreign currency exposure and will consider hedging significant foreign currency exposure when the need arises. Capital expenditure The following table sets out the Group s capital expenditure for the periods indicated: For the six months ended 30 June RMB 000 RMB 000 (unaudited) (unaudited) Purchases of property, plant and equipment and intangible assets 25,754 6,745 Acquisition of subsidiaries 9,500 5,000 Acquisition of non-controlling interests of a subsidiary from then shareholders 14,000 35,254 25,

21 Management Discussion and Analysis (Continued) EMPLOYEE AND REMUNERATION POLICY As of 30 June 2016, the Group had a total of 110 employees. For the Reporting Period, the total staff cost of the Group was RMB4.4 million as compared to RMB4.4 million for the six months ended 30 June The Group s employee remuneration policy is determined by factors such as remuneration in respect of the local market, the overall remuneration standard in the industry, the inflation level, corporate operating efficiency and employee performance. The Group conducts performance appraisals once every year for its employees, the results of which are applied in annual salary reviews and promotional assessments. Annual bonuses of the Group s employees are determined based on certain performance criteria and appraisals results. Social insurance contributions are made by the Group for its PRC employees in accordance with the relevant PRC regulations. The Group also provides continuous learning and training programs to its employees to enhance their skills and knowledge, so as to maintain their competitiveness and improve customer service. The Group did not experience any major difficulties in recruitment, nor did it experience any material loss in manpower or suffer from any material labor dispute during the Reporting Period. RISK MANAGEMENT The followings are summary of principal risks and uncertainties identified by the Company which may have material and adverse impact on our performance or operation. There may be other principal risks and uncertainties in addition to those shown below which are not know to the Company or which may not be material now but could turn out to be material in the future. Failure to maintain relationships with existing suppliers The Group currently source all the products in portfolio from limited suppliers, either directly or indirectly through their sales agents. Exchange rate fluctuation The Group s purchase of products from the overseas suppliers is denominated in US$ and Euro, and certain items of bank balances are denominated in US$, Euro and HK$. Decrease in gross profits due to cost increases and competition. Experience prolonged delays or significant disruptions to the supply of the products. 20 Sinco Pharmaceuticals Holdings Limited Interim Report 2016

22 Management Discussion and Analysis (Continued) The Company believes that risk management is essential to the Group s efficient and effective operation. The Company s management assists the Board in evaluating material risk exposure existing in the Group s business, and participates in formulating appropriate risk management and internal control measures, and to ensure its implementation in daily operational management. RELATIONSHIP WITH KEY STAKEHOLDERS Human resources is one of the most important assets of the Group. The Group strives to motivate its employees by providing them with a clear career path as well as comprehensive and professional training courses. The Group conducts an internal satisfaction survey every year and considers carefully employees feedback on operating efficiency and harmony working environment. In addition, the Group also offers competitive remuneration packages to its employees, including basic salary, certain benefits and other performance-based incentives. The Group purchases pharmaceutical products from overseas suppliers, either directly or indirectly through their sales agents, and generates revenue by on-selling them to the distributors. Our suppliers or their sales agents have granted us the rights to market, promote and manage sales channels for their products in China. The Group maintains a stable and long-term relationship with its suppliers by providing them access to the growing Chinese market with steady sales growth. The Group sells pharmaceutical products to distributors, who on-sell the products to hospitals and pharmacies either directly or indirectly through their sub-distributors. The Group maintains stable and long-term relationship with the distributors by providing guidance, training and support to the distributors to carry out more targeted field marketing and promotion activities. ENVIRONMENTAL POLICIES AND PERFORMANCE The Group is primarily engaged in MPCM services for imported pharmaceutical products, a line of business that does not have material impact on the environment. The key environmental impacts from the Group s operation are related to electricity, water and paper consumption. The Group is fully aware of the importance of sustainable environmental development, and has implemented a number of measures to encourage environmental protection and energy conservation. During the Reporting Period, we did not incur any material cost of compliance with applicable environmental laws and regulations. COMPLIANCE WITH LAWS AND REGULATIONS During the Reporting Period, the Group is in compliance with the applicable laws and regulations which have significant impact on the Group in all material respects

23 Other information CORPORATE GOVERNANCE PRACTICES The Group is committed to maintaining high standards of corporate governance to safeguard the interests of the shareholders and to enhance corporate value and accountability. The Company has adopted the Corporate Governance Code and the Corporate Governance Report (the CG Code ) contained in Appendix 14 to the Listing Rules as its own code of corporate governance. From 10 March 2016 (the Listing Date ) to 30 June 2016, the Company has complied with all the code provisions of the CG Code and adopted most of the best practices set out therein, except for the following provision Under code provision A.2.1 of the CG Code, the roles of chairman and chief executive officer should be separate and performed by different individuals. Under the organization structure of the Company, Mr. Huang Xiangbin was the Chairman of the Board and the chief executive officer. With Mr. Huang s extensive experience in the pharmaceutical industry, the Board considered that vesting the roles of chairman and chief executive officer in the same person is beneficial to the business prospects and management of the Group. The check and balance of power and authority is ensured by the operation of the senior management and the Board, which comprises experienced and high calibre individuals. A.2.1 Following the appointment of Mr. Hao Jinghui as the co-chief executive officer of the Company with effect from 16 August Mr. Huang Xiangbin acts as the co-chief executive officer of the Company. Mr. Huang and Mr. Hao are responsible together for the Group s overall business development, operation and management. MODEL CODE FOR SECURITIES TRANSACTIONS The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuer (the Model Code ) as set out in Appendix 10 to the Listing Rules as its own code of conduct regarding securities transactions of the Directors. Having made specific enquiry with the Directors, all Directors confirmed that they have complied with the required standard as set out in the Model Code throughout the period from the Listing Date to 30 June INTERIM DIVIDEND The Directors have resolved to declare an interim dividend of HK$ per share (equivalent to RMB per share) for the Reporting Period (six months ended 30 June 2015: not applicable), payable on or around 18 October 2016 to shareholders whose names appear on the register of members of the Company on Thursday, 15 September The interim dividend will be paid out from the Company s share premium account. As at 30 June 2016, the Company s share premium account was approximately HK$308,238,000. After the payment of the interim dividend, assuming there are no other changes to the share premium account, the Company s share premium account is expected to be reduced to approximately HK$302,908, ,238, ,908, Sinco Pharmaceuticals Holdings Limited Interim Report 2016

24 Other information (Continued) CLOSURE OF REGISTER OF MEMBERS In order to determine the entitlement of Shareholders to receive the interim dividend, the register of members of the Company will be closed from Tuesday, 13 September 2016 to Thursday, 15 September 2016, both days inclusive, during which period no transfer of shares of the Company will be registered. All transfer documents, accompanied by the relevant share certificates, shall be lodged with the Company s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops , 17th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong no later than 4:30 p.m. on Monday, 12 September 2016 for registration. AUDIT COMMITTEE The Board has established an audit committee (the Audit Committee ) which comprises three independent non-executive Directors, namely Mr. Chow Siu Lui (Chairman), Mr. Wang Qing and Mr. Liu Wenfang. The primary duties of the Audit Committee include the review and supervision of the Group s financial reporting process, internal control and risk management systems, preparing financial statements and internal control procedures. It also acts as an important link between the Board and the external auditor in matters within the scope of the group audit The Audit Committee, together with management and external auditor of the Company, has reviewed the unaudited condensed interim results of the Group for the Reporting Period. CHANGES IN DIRECTORS INFORMATION Save as disclosed herein, the Directors confirm that no information is required to be disclosed pursuant to Rule 13.51B(1) of the Listing Rules. PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES OF THE COMPANY Neither the Company nor its subsidiaries has purchased, sold or redeemed any of the Company s listed securities during the Reporting Period. USE OF NET PROCEEDS FROM LISTING Net proceeds from the listing of the Company (after deducting underwriting fee and relevant expenses) amounted to approximately HK$260.0 million (equivalent to approximately RMB217.2 million). As of 30 June 2016, RMB78.1 million had been utilized in the manner consistent with the allocation set out in the Prospectus B(1)