Mission Statement Natural Beauty is dedicated to cultivate our staff, customers, students and franchisees to appreciate our education, products and se

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2 Mission Statement Natural Beauty is dedicated to cultivate our staff, customers, students and franchisees to appreciate our education, products and services, which are made by the love and kindness of our founder, Dr. Tsai Yen-Pin, who made modern ladies beautiful, confident and wealthy.

3 Contents 2 Corporate Information 7 Financial Highlights 10 Management Discussion and Analysis 22 Report on Corporate Governance 38 Management Profile 45 Directors Report 60 Independent Auditor s Report 62 Consolidated Statement of Comprehensive Income 63 Consolidated Statement of Financial Position 65 Consolidated Statement of Changes in Equity 67 Consolidated Statement of Cash Flows 69 Notes to the Consolidated Financial Statements 140 Financial Summary 1

4 Corporate Information BOARD OF DIRECTORS Executive Directors Dr. TSAI Yen-Yu (alias Dr. TSAI Yen-Pin) (Chairperson) Mr. LEE Ming-Ta (alias Mr. LEE Ming-Tah) (Vice Chairman) Dr. SU Chien-Cheng Non-Executive Directors Mr. Patrick Thomas SIEWERT (Vice Chairman) Ms. NG Shieu Yeing Christina Ms. FENG Janine Junyuan Mr. POON Yee Man Alwin Dr. SU Sh-Hsyu Independent Non-Executive Directors Mr. Francis GOUTENMACHER Ms. Su-Mei THOMPSON Mr. CHEN Ruey-Long Mr. YANG Tze-Kaing AUTHORISED REPRESENTATIVES Mr. CHAN Yan Kwan, Andy Dr. SU Chien-Cheng COMPANY SECRETARY Mr. CHAN Yan Kwan, Andy Francis GOUTENMACHER 2 Natural Beauty Bio-Technology Limited Annual Report 2012

5 Corporate Information MEMBERS OF THE AUDIT COMMITTEE Mr. CHEN Ruey-Long (Chairman) Ms. NG Shieu Yeing Christina Mr. Francis GOUTENMACHER Ms. Su-Mei THOMPSON Mr. YANG Tze-Kaing Dr. SU Sh-Hsyu MEMBERS OF THE REMUNERATION COMMITTEE Ms. Su-Mei THOMPSON (Chairperson) Mr. Patrick Thomas SIEWERT Mr. Francis GOUTENMACHER Mr. CHEN Ruey-Long Mr. YANG Tze-Kaing Dr. SU Chien-Cheng MEMBERS OF THE EXECUTIVE COMMITTEE Mr. Patrick Thomas SIEWERT (Chairman) Dr. TSAI Yen-Yu (alias Dr. TSAI Yen-Pin) Dr. SU Sh-Hsyu Mr. Francis GOUTENMACHER Mr. YANG Tze-Kaing Mr. POON Yee Man Alwin MEMBERS OF THE NOMINATION COMMITTEE Mr. YANG Tze-Kiang (Chairman) Dr. TSAI Yen-Yu (alias Dr. TSAI Yen-Pin) Mr. Patrick Thomas SIEWERT Mr. Francis GOUTENMACHER Ms. Su-Mei THOMPSON Mr. CHEN Ruey-Long Francis GOUTENMACHER Francis GOUTENMACHER Francis GOUTENMACHER Francis GOUTENMACHER 3

6 Corporate Information REGISTERED OFFICE P.O. Box 309 Ugland House Grand Cayman KY Cayman Islands HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS IN HONG KONG Unit 3512, 35/F The Center 99 Queen s Road Central Central Hong Kong AUDITOR Deloitte Touche Tohmatsu Certified Public Accountants 35/F One Pacific Place 88 Queensway Hong Kong LEGAL ADVISERS King & Wood Mallesons 9/F Hutchison House 10 Harcourt Road Central Hong Kong P.O. Box 309 Ugland House Grand Cayman KY Cayman Islands Natural Beauty Bio-Technology Limited Annual Report 2012

7 Corporate Information PRINCIPAL BANKERS The Hongkong and Shanghai Banking Corporation Limited 1 Queen s Road Central Hong Kong Land Bank of Taiwan No. 76, Section 2, Tun Hua South Road Taipei Taiwan Mega International Commercial No. 62, Section 2, Tun Hua South Road Taipei Taiwan Bank of Communications Shanghai Branch, Zhabei Sub-branch 211 Hengtong Road Shanghai The PRC China Minsheng Banking Corporation Limited Shanghai branch, Hongkou Sub-branch 1/F Gulf Building 53 Huangpu Road Shanghai The PRC WEBSITE

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9 Financial Highlights Selected Financial Data FY2008 FY2009 FY2010 FY2011 FY2012 (except per share data) Revenue 592, , , , ,438 Cost of sales 86, , , , ,592 Gross profit 506, , , , ,846 Operating profit 308, ,753 75, , ,251 Profit for the year 238, ,923 30, , ,108 Dividends 167, , , ,179 45,648 EPS basic $ $ $ $ $ DPS $ $ $ $ $ Return on Equity (ROE) 27.1% 16.8% 3.7% 14.7% 15.9% Return on Assets (ROA) 23.2% 14.2% 3.2% 12.1% 13.5% TURNOVER BY ACTIVITIES BREAKDOWN (%) (%) TURNOVER BY GEOGRAPHICAL BREAKDOWN (%) (%) 0.8% 1.3% 20.2% 7

10 Financial ial Highlights ghts 8 Natural Beauty Bio-Technology Limited Annual Report 2012

11 Management Discussion and Analysis 9

12 Management Discussion and Analysis FINANCIAL REVIEW Changes Turnover by geographical region % % % PRC 379, % 473, % (93,652) -19.8% Taiwan 97, % 110, % (12,987) -11.8% Others 6, % 7, % (1,218) -16.1% Total 483, % 591, % (107,857) -18.2% Turnover of the Group in 2012 decreased by 18.2% to HK$483.4 million compared with HK$591.3 million in The decline was mainly due to a HK$105.1 million decline in product sales, largely influenced by the economic downturn, weak consumer market in the PRC and Taiwan, and intensified competition in the spa industry. Turnover in the PRC market decreased by 19.8% from HK$473.2 million in 2011 to HK$379.6 million in 2012, whereas turnover in the Taiwan market declined from HK$110.5 million in 2011 to HK$97.5 million in Sales in other regions, including Hong Kong, Malaysia and Macau, decreased 16.1% from HK$7.6 million in 2011 to HK$6.3 million in Contributions of these regions to the Group s turnover remained insignificant, which accounted for 1.3% only. The Group s overall gross profit margin declined mildly from 79.3% in 2011 to 78.6% in 2012 due to cost inflation. 591,300, % 483,400, ,100, ,200, % 379,600, ,500,000 97,500, %7,600,000 6,300, % 79.3% 78.6% 10 Natural Beauty Bio-Technology Limited Annual Report 2012

13 Management Discussion and Analysis FINANCIAL REVIEW (Continued) Changes Turnover by activities % Products PRC 378, ,310 (93,165) -19.8% Taiwan 95, ,021 (10,914) -10.3% Others 6,340 7,384 (1,044) -14.1% Total 479, ,715 (105,123) -18.0% Services PRC 1,437 1,924 (487) -25.3% Taiwan 2,409 4,482 (2,073) -46.3% Others 174 (174) % Total 3,846 6,580 (2,734) -41.6% 11

14 Management Discussion and Analysis FINANCIAL REVIEW (Continued) Changes Turnover by activities % % % Products 479, % 584, % (105,123) -18.0% Services 3, % 6, % (2,734) -41.6% Total 483, % 591, % (107,857) -18.2% Products The Group is principally engaged in manufacturing and sales of a range of products, including skin care, beauty, aroma-therapeutic products, health supplements and make-up products under the Natural Beauty brand. Product sales are the Group s key revenue source and primarily come from franchised spas, self-owned spas and concessionary counters at department stores. Product sales in 2012 amounted to HK$479.6 million, or 99.2% of the Group s total revenue, representing a decrease of HK$105.1 million when compared with sales of HK$584.7 million or 98.9% of the Group s total revenue in The decrease in product sales was mainly attributable to the decline of HK$93.2 million in sales in the PRC market. 479,600, %) 584,700, % 105,100,000 93,200, Natural Beauty Bio-Technology Limited Annual Report 2012

15 Management Discussion and Analysis FINANCIAL REVIEW (Continued) Products (Continued) Changes Service income % % % Training income % % % SPA service income 2, % 5, % (2,330) -46.5% Others % 1, % (492) -34.3% Total 3, % 6, % (2,734) -41.6% Services Service income is derived from the self-owned spas services, training and other services. The Group provides skin treatment, beauty and spa services through its self-owned spas. The Group s strategy is to establish self-owned spas as model outlets in strategic locations to stimulate overall sales of products to franchisees. Service income is solely derived from the Group s self-owned spas. The Group does not share any service income generated from spas run by franchisees under its current franchise arrangements. The service income the franchisees derive from the spas covers their operating expenses such as rentals, salaries and utilities. In 2012, service income decreased by 41.6% to HK$3.8 million compared with HK$6.6 million in The decrease was mainly due to the closure of one self-owned spa and renovation for another self-owned spa in China during Other income Other income increased by 14.5%, or HK$2.6 million, to HK$20.6 million from HK$18.0 million in Other income was mainly comprised of rental income from other properties, interest income and financial refunds, amounting to HK$2.9 million, HK$7.0 million and HK$6.9 million respectively in ,600, % 3,800,000 18,000, %2,600,000 20,600,000 2,900,0007,000,000 6,900,000 13

16 Management Discussion and Analysis FINANCIAL REVIEW (Continued) Distribution and administrative expenses Distribution and selling expenses as a percentage of the Group s turnover increased to 39.2% in 2012 compared with 33.3% in Total expenses decreased by HK$7.5 million from HK$197.1 million in 2011 to HK$189.6 million in During 2012, the Group used TV commercials, magazines, outdoor advertising and the Internet (websites and blogs) to drive sell-through of its inventory. Advertising and promotion expenses decreased by HK$8.4 million from HK$56.5 million in 2011 to HK$48.1 million in Other key expenses included salaries, travel and entertainment expenses, depreciation charges as well as rentals of offices and sales counters, which amounted to HK$60.3 million, HK$10.8 million, HK$12.6 million and HK$35.1 million respectively in Total administrative expenses decreased by HK$63.6 million to HK$45.1 million in The decrease in administrative costs in 2012 was mainly because of a reversal of non-cash stock option expenses charged in previous year amounted to HK$29.2 million. Other administrative expenses comprised non-cash stock option expenses charged in 2012 of HK$1.2 million, staff costs and retirement benefits of HK$27.3 million, legal and professional fees of HK$4.6 million, travelling expenses of HK$2.9 million, depreciation charges of HK$11.9 million and office and utilities expenses of HK$5.9 million. Other expenses Other expenses increased from HK$7.8 million in 2011 to HK$10.6 million in 2012, representing an increase of HK$2.8 million. Other expenses mainly include foreign exchange loss of HK$3.1 million and loss on disposal of property, plant and equipment amounted to HK$4.0 million during the year. Profit before taxation Taking into account the decrease in gross profit, lower distribution and selling expenses, administrative expenses, and increased other income and other expenses, profit before tax decreased by 10.6% from HK$173.6 million in 2011 to HK$155.3 million in Taxation Taxation expenses decreased 38.2% from HK$58.5 million in 2011 to HK$36.1 million in The effective tax rates of the Group in 2011 and 2012 were 33.7% and 23.3% respectively. The low effective tax rate in 2012 was due to the reversal of stock option expenses charged in the previous year amounting to HK$29.2 million. If the stock option expenses and reversal were excluded in each of 2011 and 2012, the effective tax rate of both years would stood at around 29%. 33.3% 39.2% 7,500, ,100, ,600,000 56,500,000 8,400,00048,100,000 60,300,000 10,800,00012,600,000 35,100,000 63,600,000 45,100,000 29,200,000 1,200,000 27,300,0004,600,000 2,900,000 11,900,000 5,900,000 7,800,000 10,600,000 2,800,000 3,100,000 4,000, ,600, %155,300,000 58,500, %36,100, % 23.3% 29,200,000 29% 14 Natural Beauty Bio-Technology Limited Annual Report 2012

17 Management Discussion and Analysis FINANCIAL REVIEW (Continued) Profit for the year Profit for the year increased by 3.4% from HK$115.2 million in 2011 to HK$119.1 million in Profit for the year would have dropped by 37.3% if all non-cash stock option expenses and reversal were excluded in both years, from HK$145.3 million in 2011 to HK$91.1 million in Liquidity and financial resources Cash generated from operating activities in 2012 was approximately HK$59.5 million (HK$170.4 million in 2011). The decline was mainly due to the decline in sales and changes in working capital (increase in inventory while decrease in other payables). As at 31 December 2012, the Group had bank balances and cash of approximately HK$432.4 million (HK$558.3 million as at 31 December 2011) with no external bank borrowing. In terms of gearing, as at 31 December 2011 and 31 December 2012, the Group s gearing ratios were zero (defined as net debt divided by shareholders equity) as the Group was in a net cash position on both year-end dates. Current ratios of the Group (defined as current assets divided by current liabilities) as at 31 December 2011 and 31 December 2012 were 4.2 times and 4.4 times respectively. As at 31 December 2012, the Group had no material contingent liabilities, other than those disclosed in its financial statements and notes thereto. With the cash and bank balances in hand, the Group s liquidity position remains strong and it has sufficient financial resources to finance its commitments and to meet its working capital requirements. Charges on assets At 31 December 2011, the Group had pledged bank deposits amounting to HK$443,000 which are required pursuant to a tenancy agreement for one of its wholly-owned subsidiaries in relation to a selfowned store in Macau. With the termination of tenancy agreement, the charge was released in Treasury policies and exposure to fluctuations in exchange rates Most of the Group s revenues are denominated in Renminbi and New Taiwan Dollars as its operations are mainly located in the PRC and Taiw a n. As at 31 December 2012, approximately 70.9% (81.5% as at 31 December 2011) of the Group s bank balances and cash was denominated in Renminbi, while approximately 21.3% (14.9% as at 31 December 2011) in New Taiwan Dollars. The remaining 7.8% (3.6% as at 31 December 2011) was denominated in US Dollars, Hong Kong Dollars and Ringgit Malaysia. The Group continues to adopt a conservative approach in the management of foreign exchange risks. It reviews its foreign exchange risks periodically and uses derivatives to hedge against such risks whenever necessary. 115,200, %119,100, % 145,300,000 91,100,000 59,500,000170,400, ,400, ,300, , % 81.5% 21.3% 14.9%7.8% 3.6% 15

18 Management Discussion and Analysis BUSINESS REVIEW Changes Turnover by geographic region % PRC Products 378, ,310 (93,165) -19.8% Services 1,437 1,924 (487) -25.3% PRC Total 379, ,234 (93,652) -19.8% Taiwan Products 95, ,021 (10,914) -10.3% Services 2,409 4,482 (2,073) -46.3% Taiwan Total 97, ,503 (12,987) -11.8% Others Products 6,340 7,384 (1,044) -14.1% Services 174 (174) % Others Total 6,340 7,558 (1,218) -16.1% The PRC Market Turnover in the market decreased by 19.8% in 2012 to HK$379.6 million compared with HK$473.2 million in The decline was mainly due to the deteriorating retail and economic environments. Gross margin on product sales decreased from 83.0% in 2011 to 80.7% in 2012, as a result of (1) an inventory write-off, which amounted to HK$6.7 million, due to repackaging of products and the formula upgrades; (2) the lower sales mix of NB-1 and Yam products which have higher margins and (3) costs inflated significantly during The Taiwan Market Turnover for the Taiwan market also declined by 11.8% from HK$110.5 million in 2011 to HK$97.5 million in 2012 amid a slowdown in retail sales and economic growth. Gross margin on product sales decreased from 83.1% in 2011 to 80.9% in 2012 due to the lower sales mix of NB-1 and Yam products which have higher margins and inflated costs during the year. 473,200, % 379,600, % 80.7%(1) 6,700,000(2) NB-1 Yam (3) 11.8% 110,500,000 97,500, % 80.9%NB-1 Yam 16 Natural Beauty Bio-Technology Limited Annual Report 2012

19 Management Discussion and Analysis BUSINESS REVIEW (Continued) Distribution channels Store Number by Ownership Franchisee owned Spa Self owned Spa Total Spa Entrusted Counter Self owned Counter Total Counter Grand Total As at 31 December 2012 Taiwan PRC 1, , ,173 Others Total 1, , ,498 Franchisee owned Entrusted Self owned Total Store Number by Ownership As at 31 December 2012 Taiwan PRC 1, ,173 Others Total 1, ,498 17

20 Management Discussion and Analysis BUSINESS REVIEW (Continued) Distribution channels (Continued) 2012 Average store * * 2011 Average store * * 2012 Average sales per store 2011 Average sales per store Changes HK$ HK$ HK$ Average sales per store % PRC 1, , , ,000 (95,000) -22.8% Taiwan , ,000 (10,000) -3.0% Group total ** ** 1, , , ,000 (75,000) -18.9% * Average store number is calculated by (opening period total + closing period total)/2 * 2 ** Group total does not include Hong Kong and Malaysia turnover and store count. ** The Group derives its income principally from its network of distribution channels, including spas and concessionary counters at department stores. As at 31 December 2012, there were 1,454 spas and 44 concessionary counters. Of these, 1,450 were franchised spas, 4 spas and 25 concessionary counters were directly operated by the Group. 19 concessionary counters were entrusted to reputable operators. Franchised spas are owned by the franchisees who are responsible for the capital investment in these spas. They are obliged to use only Natural Beauty or NB products in their spas. A wide array of services, including hydrotherapy, facial treatment, body care and skin care analysis, are provided in all the spas, while skin care analysis is widely available at the concessionary counters at department stores. Group-wide, a total of 136 new stores were opened and 176 stores were closed during Average sales per store in 2012 decreased from HK$396,000 in 2011 to HK$321,000 in Average sales per store in the PRC in 2012 decreased by 22.8% to HK$321,000. In Taiwan, average sales per store decreased by 3% to HK$321,000 in , , NB ,000321, % 321,000 3% 321, Natural Beauty Bio-Technology Limited Annual Report 2012

21 Management Discussion and Analysis BUSINESS REVIEW (Continued) Research and Development The Group puts significant emphasis on research and development, which enables it to maintain its competitive edge, to continuously improve the quality of its existing products and develop new products. The Group has been collaborating with overseas skincare companies on technological advancement. The biotechnology materials the Group uses for its NB products are imported from Europe, Japan and Australia. The Group s research and development team comprises a number of overseas consultants with experience and expertise in cosmetics, medicine, pharmacy and bio-chemistry. NB s products are constantly enhanced and modified by the application of new ingredients developed by the team. The Group draws on its collaboration of experts with different expertise and experiences, together with Dr. Tsai s 40-plus-year industry experience and knowledge to continue to create high-quality beauty and skin care products. NB principally uses natural ingredients to manufacture products and adopts special formulae to cater to the specific needs of women with delicate skin. NB products accommodate the natural metabolism of skin with long-lasting effects. NB has collaborated with a leading researcher in the field of human genome and stem cell technology for the development of an anti-aging NB-1 product family and other products for spot removal, whitening, allergy-resistance and slimming. The stem cell technology is patented in the United States to protect the uniqueness of the NB-1 products. New Products The Group s flagship NB-1 product family includes the anti-aging NB-1 series, NB-1 Whitening series, NB-1 anti-allergy and NB-1 pore refining series. During 2012, over 422,000 sets/bottles (520,000 sets/bottles in 2011) of NB-1 family products were sold with turnover amounting to HK$171.8 million (HK$231.8 million in 2011) and accounting for more than one - third of the Group s total product sales recorded in During 2012, the Group continued to enrich this product portfolio and launched 13 new skin care products, 8 new products for the aromatherapeutic line, 2 new collagen drinks within its food supplements business and 12 new NB-1 products in the PRC. The collagen drinks have generated sales of HK$12.3 million since their launch in October NB-1 NB-1 NB-1 NB-1NB-1NB-1 NB-1 422, ,000NB-1 171,800, ,800, NB-1 12,300,000 19

22 Management Discussion and Analysis BUSINESS REVIEW (Continued) Human Resources As at 31 December 2012, the Group employed a total of 786 employees, of whom 663 were based in the PRC, 116 in Taiwan and 7 in other countries and regions. Total remuneration (excluding directors emoluments) during 2012 was approximately HK$89.2 million (HK$145.2 million in 2011), including retirement benefit related costs of HK$18.6 million (HK$17.2 million in 2011), reversal of stock option expenses of HK$29.2 million charged in previous year and stock option expenses of HK$1.2 million (HK$30.1 million in 2011). Competitive remuneration packages are maintained to attract, retain and motivate capable staff members and are reviewed on a regular basis. The Group maintains good relations with its employees and is committed to their training and development. Professional training courses are offered to beauticians employed by the Group and to franchisees on a regular basis ,200,000145,200,000 18,600,000 17,200,000 29,200,000 1,200,000 30,100,000 In addition, the Group granted share options to certain key employees on 4 April 2011 to subscribe for a maximum of 90,895,381 shares which would vest in a ratio of 40%, 20%, 20% and 20% over a fouryear period subject to the grantees achieving certain performance targets. During 2012, the Group reversed HK$29.2 million of the 1-year unvested share option expenses in 2011 and lapsed options for the employees who resigned. Share option expenses for the remaining grantees charged in 2012 amounted to HK$1.2 million (HK$30.1 million in 2011). 90,895,381 40% 20% 20% 20% 29,200,000 1,200,000 ( 30,100,000 ) 20 Natural Beauty Bio-Technology Limited Annual Report 2012

23 Management Discussion and Analysis BUSINESS REVIEW (Continued) Capital Expenditures The Group s major capital expenditure during 2012 related to its selfowned spas and refurbishment work for its offices, IT infrastructure and machinery in its factories. Fixed assets increased by HK$48.9 million in 2012 (HK$50.7 million in 2011), mainly representing the expansion of its new factory in the PRC amounting to approximately HK$9.2 million, furniture, signage and IRIS system provided to New Concept Stores amounting to HK$17.6 million, upgrades to its PRC and Taiwan IT system amounting to approximately HK$10.4 million and the renovation of self-owned spas, counters and branches amounting to approximately HK$10.6 million. In December 2010, the Group moved its old Fengxian (Shanghai) skin care plant to a new industrial development zone within Fengxian. The new plant received GMP certification in January 2012, greatly facilitating the Group s plans to upgrade the quality of its skin care products as well as improving productivity with new production floor layout and consolidation in production capacity. OUTLOOK After the 18th National People s Congress of the Chinese Communist Party, the government s plan for urbanization and household income growth should continue to fuel the long-term growth of China s domestic consumption which will be positive for the consumer market. However, results in short term are expected to remain volatile. As such, we will continue to pursue a prudent growth strategy and implement the following strategies so as to proactively strengthen our position as a leading skin care brand and spa operator in the Greater China Region. 48,900,000 50,700,000 9,200,000 17,600,000 10,400,000 10,600,000 GMP We will focus on increasing the productivity of our existing franchisees as our major growth driver in the near term through the addition of new outlets based on our NCS store strategy to increase our scale. We will enhance our operational efficiency by streamlining our organisational structure, implementing a more integrated go-tomarket process and improving our cost-controls measures. We will focus our marketing and promotional efforts on enabling more sell-through by our franchisees. 21

24 Report on Corporate Governance Natural Beauty Bio-Technology Limited firmly believes that strong corporate governance is the foundation to delivering the corporate objective of maximizing return to its stakeholders over the long term. The core of the governance structure is an effective and qualified Board of Directors (the Board ) which is committed to maintaining a high standard of corporate governance, sound internal control and effective risk management to enhance transparency, accountability, integrity and honesty, in order to earn the confidence from our shareholders and other stakeholders. The Board had adopted Corporate Governance Guidelines (the CG Guidelines ) (available on website: which gives guidance on how corporate governance principles are applied to the Company. Save as explained herein, the Company applied the principles and complied with all the code provisions set out in Appendix 14 Corporate Governance Code and Corporate Governance Report (the Code ) of the Rules Governing the Listing of Securities (the Listing Rules ) on The Stock Exchange of Hong Kong Limited (the Stock Exchange ). The following summarises the Company s corporate governance practices and explains deviations, if any, from the Code. In addition to complying with applicable statutory requirements, we aim to continually review and enhance our corporate governance practices in light of local and international best practices. 22 Natural Beauty Bio-Technology Limited Annual Report 2012

25 Report on Corporate Governance STATEMENT OF COMPLIANCE A. Directors A1. The Board Details of composition of each of the Board Committees, and the Directors attendance records in 2012 are as follows: A. A1. Remuneration Audit Executive Nomination Committee Committee Committee Committee Board Training Meeting Meeting Meeting Meeting Meeting Courses Executive Directors Dr. TSAI Yen-Yu (Note 1) 1 2/3 n/a Mr. LEE Ming-Ta n/a n/a Dr. SU Chien-Cheng (Note 2) n/a n/a 2 Dr. SU Sh-Hsyu (Note 3) n/a n/a 3 1/4 1/2 6/6 Note b b n/a n/a 6/6 Note b b n/a n/a 6/6 Note a a 4/4 n/a 6/6 Note a a Non-Executive Directors Mr. Patrick Thomas SIEWERT 3/3 n/a Mr. Gregory Michael ZELUCK (Note 4) Gregory Michael n/a n/a ZELUCK 4 Ms. FENG Janine Junyuan n/a n/a Ms. NG Shieu Yeing Christina n/a Mr. POON Yee Man Alwin (Note 5) 5 n/a n/a 5/5 n/a n/a 4/4 2/2 6/6 Notes a, b a, b 1/1 n/a 3/3 n/a n/a n/a 2/3 n/a 0/6 Note b b 6/6 Note a a 3/3 Note a a Independent Non-Executive Directors Mr. Francis GOUTENMACHER Francis GOUTENMACHER 3/3 5/5 4/4 2/2 5/6 Note a, b a, b Ms. Su-Mei THOMPSON 2/3 5/5 n/a 1/2 5/6 Note b b Mr. CHEN Ruey-Long 3/3 5/5 n/a 2/2 6/6 Note a a Mr. YANG Tze-Kaing 3/3 5/5 3/4 2/2 6/6 Note a a Attendance by proxy was not counted as attendance by the Director himself/herself in the above summary. 23

26 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A1. The Board (Continued) Notes: A. A1. (1) Dr. TSAI Yen-Yu ceased to be a member of the Remuneration Committee on 7 February (1) (2) Dr. SU Chien-Cheng was appointed as a member of the Remuneration Committee on 7 February (2) (3) Dr. SU Sh-Hsyu was redesignated as a Non-Executive Director and appointed as a member of the Audit Committee on 7 February (3) (4) Mr. Gregory Michael ZELUCK resigned as a Non-Executive Director and a member of Executive Committee on 17 May (4) Gregory Michael ZELUCK (5) Mr. POON Yee Man Alwin was appointed as a Non-Executive Director and a member of Executive Committee on 17 May (5) (a) Attended training course conducted by Deloitte Touche Tohmatsu that was organized by the Company. (a) (b) Attended other continuous professional development training course(s) not organized by the Group. (b) Directors are consulted to include any matter in the agenda for regular Board meetings. The Company generally gives notice and draft agenda of regular Board meetings at least 14 days in advance. The Company aims at giving reasonable notice generally for all other Board meetings. All Directors have access to the Company Secretary who is responsible for ensuring that Board procedures are complied with and advising the Board on corporate governance and compliance matters Natural Beauty Bio-Technology Limited Annual Report 2012

27 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A1. The Board (Continued) The Company Secretary is responsible for taking minutes of Board meetings and Board committees (each a Board Committee ) meetings, which will be sent to Directors within a reasonable time (generally within 14 days) after each meeting and will be made available for inspection by Directors and Board Committee members. The CG Guidelines allow Directors to take independent professional advice at the Company s expense. Instead of by way of circulation, full Board meetings will be held for any material transaction with connected persons. independent non-executive Directors who, and whose associates, have no material interest in the transaction should be present at such meeting. The Company s articles of association (the Articles ) provide for voting and quorum requirements conforming with the Code requirements. We have also arranged appropriate insurance cover on Directors and officers liabilities in respect of legal actions against them arising from corporate activities. A. A1. 25

28 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A2. Chairperson, Vice Chairmen and Chief Executive Officer Dr. TSAI Yen-Yu serves as the Chairperson, while Mr. Patrick Thomas SIEWERT and Mr. LEE Ming-Ta are the vice-chairmen. Mr. TSENG Hsin-Sheng John served as the Chief Executive Officer during the year and resigned in October Ms. CHANG Karen Yi Fen has been serving as the Chief Executive Officer since 2 January The roles of the Chairperson and Chief Executive Officer are separate. The Chairperson focuses on Group strategic and Board issues while the Chief Executive Officer has the overall responsibility for operations and development. The Chairperson has a clear responsibility to provide the whole Board with all information relevant to the discharge of the Board s responsibilities. The Chairperson should hold meetings with Non-Executive Directors (including Independent Non-Executive Directors) without the Executive Directors present. However, the Chairperson is also an Executive Director of the Company. All Independent Non-Executive Directors are members of Audit Committee, Remuneration Committee, Nomination Committee and two Independent Non-Executive Directors are also members of the Executive Committee. It was considered there were ample opportunities for the Chairperson to communicate with Non-Executive Directors (including Independent Non- Executive Directors). A. A2. The Company aims to continually improve on the quality and timeliness of the dissemination of information to Directors. (See Section A6 Supply of and access to information for further details) A6 26 Natural Beauty Bio-Technology Limited Annual Report 2012

29 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A3. Board composition Composition of the Board, by category of Directors, including names of the Executive Directors, Non-Executive Directors and Independent Non-Executive Directors are disclosed in all corporate communications. There are four Independent Non-Executive Directors out of twelve Directors, representing one-third of the Board. Independence of Independent Non-Executive Directors We have received from each of our Independent Non-Executive Directors an annual confirmation of his/her independence pursuant to rule 3.13 of the Listing Rules. We consider each of the Independent Non-Executive Directors is independent. A4. Appointments, re-election and removal Directors with service contracts, including Executive and Non-Executive Directors, usually serve three-year terms, and are subject to re-election. Mr. Gregory Michael ZELUCK, Mr. Patrick Thomas SIEWERT, Ms. NG Shieu Yeing Christina, Ms. FENG Janine Junyuan and Mr. POON Yee Man Alwin did not enter into service contracts with the Company as they are employees of Carlyle Asia Investment Advisors Limited, an entity established in Hong Kong. Carlyle Asia Investment Advisors Limited has offices in Hong Kong, Mumbai, Seoul, Beijing, Shanghai, Singapore and Sydney. Carlyle Asia Investment Advisors Limited acts as the Asian investment advisor to various Asian focused investment funds managed by The Carlyle Group. In accordance with Article 100 of the Articles, any new Director appointed shall hold office only until the first general meeting of the Company after his/her appointment and shall then be eligible for re-election. Mr. POON Yee Man Alwin will retire and, being eligible, will offer himself for re-election at the forthcoming annual general meeting ( AGM ). A. A A4. Gregory Michael ZELUCK Carlyle Asia Investment Advisors Limited Carlyle Asia Investment Advisors Limited Carlyle Asia Investment Advisors Limited Carlyle

30 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A4. Appointments, re-election and removal (Continued) In addition, in accordance with Article 117 of the Articles, onethird of the Directors for the time being, or if their number is not three or a multiple of three, then a number not less than one-third, shall retire from office by rotation at each AGM. Mr. CHEN Ruey-Long, Mr. YANG Tze-Kaing, Mr. LEE Ming-Ta and Dr. SU Chien-Cheng will retire by rotation and all of them, being eligible, will offer themselves for re-election at the forthcoming AGM. To further enhance accountability, any appointment of an Independent Non-Executive Director who has served on the Board for more than nine years will be subject to a separate resolution to be approved by shareholders. We will state in the notice of the AGM the reason why we consider the Independent Non-Executive Director is still independent and our recommendation to shareholders to vote in favour of the re-election of such Independent Non-Executive Director. A5. Nomination Committee Nomination Committee now comprises four Independent Non- Executive Directors, one Executive Director and one Non-Executive Director, namely Mr. YANG Tze-Kaing (Chairman of the Committee), Mr. Francis GOUTENMACHER, Ms. Su-Mei THOMPSON, Mr. CHEN Ruey-Long, Dr. TSAI Yen- Yu and Mr. Patrick Thomas SIEWERT respectively. The Nomination Committee is responsible for, including but not limited to, determining the policy for the nomination of Directors, reviewing the structure, size and composition of the Board and make recommendation to the Board on selection of candidates for directorships. Full terms of reference (Nomination Committee Charter) are available on the Company s website: and the Stock Exchange s website. The Company provided sufficient resources for the Nomination Committee to perform its duties. Where necessary, the Nomination Committee could seek independent professional advice at the Company s expense, to perform its duties. The Nomination Committee had reviewed and recommended the appointment of Mr. POON Yee Man Alwin as a Non- Executive Director and Ms. CHANG Karen Yi Fen as the Chief Executive Officer during the year. A. A A5. Francis GOUTENMACHER ( 28 Natural Beauty Bio-Technology Limited Annual Report 2012

31 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A6. Responsibilities of Directors On appointment, new Directors will be given comprehensive orientation training by the Company s legal counsel, to explain the responsibilities and duties, and other regulatory requirements. The Company Secretary is responsible for keeping all Directors updated on Listing Rules and other statutory requirements. All Independent Non-Executive Directors are members of the Audit Committee, Remuneration Committee and Nomination Committee. Individual Independent Non-Executive Directors are also members of the Executive Committee. The attendance record of individual Directors for all Board and Board Committee meetings in 2012 are set out in the beginning of this report. The Company has adopted a code of conduct regarding Directors securities transactions on terms no less exacting than the required standard set out in the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules. Having made specific enquiry with all Directors, all Directors complied with the required standards of the Model Code throughout the year. The Company organized two Directors trainings, one in Hong Kong and one in Taiwan, on the update of Listing Rules and Regulations during the year. There were compliance manuals provided to each of the Directors and members of senior management, which set out (a) the principal continuing obligations of the Company and the Directors as a result of the listing of the securities of the Company on the Main Board of the Stock Exchange; and (b) the systems and procedures that the Company, its Directors and senior management should follow in order to ensure compliance with such obligations. A. A6. (a) (b) 29

32 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) A. Directors (Continued) A7. Supply of and access to information Board papers were normally sent to all Directors at least three days before the date of the Board/Board Committee meeting. Senior management members are from time to time brought into formal and informal contact with the Board at Board meetings and other events. Board papers and minutes are made available for inspection by Directors and Board Committee members. B. Remuneration of Directors and Senior Management and Board Evaluation Remuneration Committee now comprises four Independent Non- Executive Directors, one Executive Director and one Non-Executive Director, namely Ms. Su-Mei THOMPSON (Chairperson of the Committee), Mr. Francis GOUTENMACHER, Mr. CHEN Ruey-Long, Mr. YANG Tze-Kaing, Dr. SU Chien-Cheng and Mr. Patrick Thomas SIEWERT respectively. Remuneration Committee determines the policy for the remuneration of Executive Directors, assessing performance of Executive Directors and approving the terms of Executive Directors service contracts, and made recommendations to the Board on the remuneration packages of individual Executive Directors and senior management. Full terms of reference (Remuneration Committee Charter) are available on the Company s website: and the Stock Exchange s website. B1. The level and make-up of remuneration and disclosure With reference to the Remuneration Committee Charter, each committee member (except for his/her own contract) had carefully reviewed and considered the terms of the service contracts of Ms. Su-Mei THOMPSON, Mr. Francis GOUTENMACHER, Mr. CHEN Ruey-Long, Mr. YANG Tze- Kaing which had expired on 31 January 2013, contribution of each of the Directors to the Group, the Directors experience in the beauty and spa business and the market rate paid by comparable companies. The Company has renewed the said service contracts commencing on 1 February 2013 on the same terms for another three years. Independent professional advice will be sought to supplement internal resources where appropriate. A. A7. B. Francis GOUTENMACHER ( B1. Francis GOUTENMACHER 30 Natural Beauty Bio-Technology Limited Annual Report 2012

33 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) C. Accountability and Audit C1. Financial reporting Management provided explanation and information to the Board to enable the Board to make an informed assessment of the financial and other information put before the Board for approval. Directors are provided with reports on the management s strategic plans, updates on lines of business, financial objectives, plans and actions. The Directors are responsible for keeping proper accounting records and preparing accounts for each financial period, which give a true and fair view of the state of affairs of the Group and of the results and cash flow for that period. In preparing the accounts for the year ended 31 December 2012, the Directors have: approved the adoption of all applicable Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants; selected and applied consistently appropriate accounting policies; made judgements and estimates that are prudent and reasonable; prepared the accounts on a going concern basis. A statement by the auditors about their reporting responsibilities is included in the Report of the Auditors set out on pages 60 to 61. Management provided all members of the Board with monthly updates giving a balanced and understandable assessment of the Company s performance, position and prospects in sufficient detail to enable the Board as a whole and each Director to discharge their duties. The Directors acknowledge their responsibility for preparing the accounts, and the financial statements have been prepared on a going concern basis. The Board will present a balanced, clear and understandable assessment to annual and interim reports, other announcements in relation to inside information and other financial disclosures required under the Listing Rules, and report to regulators as well as to information required to be disclosed pursuant to statutory requirements. C. C

34 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) C. Accountability and Audit (Continued) C2. Internal controls The Board has overall responsibility for the system of internal controls and for reviewing its effectiveness. Management regularly reviews the effectiveness of the risk management system and system of internal controls and compliance with best practices. The Chief Executive Officer and Chief Financial Officer also report to the Audit Committee on key findings regarding internal controls. The Audit Committee, in turn, communicates any material issues to the full Board. The Board s review will also consider the adequacy of resources, qualifications and experience of staff of the Company s accounting and financial reporting function, and their training programmes and budget. During the year, the Board has conducted reviews of the internal control system and considered the internal control system of the Group has been implemented effectively. C3. Audit Committee The Audit Committee now comprises four Independent Non- Executive Directors and two Non-Executive Directors, namely Mr. CHEN Ruey-Long (Chairman of the Committee), Mr. Francis GOUTENMACHER, Ms. Su-Mei THOMPSON, Mr. YANG Tze- Kaing, Ms. NG Shieu Yeing Christina and Dr. SU Sh-Hsyu respectively. The terms of reference explaining the Audit Committee s role and authority, revised with reference to the Code to include duties regarding corporate governance functions and as a minimum the specific duties as stipulated in the Listing Rules were adopted by the Board and are available on both our website: and the website of the Stock Exchange. Draft minutes prepared by the Company Secretary are sent to members of the Audit Committee within 14 days of each meeting. None of the Audit Committee members is a former partner of the external auditors. Full terms of reference (Audit Committee Charter) are available on the Company s website: and the Stock Exchange s website. C. C2. C3. Francis GOUTENMACHER ( ( 32 Natural Beauty Bio-Technology Limited Annual Report 2012

35 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) C. Accountability and Audit (Continued) C3. Audit Committee (Continued) The Audit Committee is authorized by the Board to investigate any activity within its terms of reference; to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Audit Committee; to obtain outside legal or other independent professional advice; and to secure the attendance of outsiders with relevant experience and expertise to their meetings if necessary. Sufficient resources are provided to the Audit Committee to discharge its duty. The Audit Committee reviewed the interim and annual results, and held Audit Committee meeting with external auditors to discuss any audit issues, before recommending to the Board for approval of publication of results. There is an agreed procedure for Audit Committee members to take independent professional advice at the Company s expense. There were no material uncertainties relating to events or conditions that may cast significant doubt upon the Company s ability to continue as a going concern. The Audit Committee did not have any different view from the Board regarding the selection and re-appointment of external auditors. The Audit Committee recommended to the Board (which in turn endorsed the view) that, subject to shareholders approval at the forthcoming AGM, Deloitte Touche Tohmatsu be reappointed as the external auditors for There was a whistle-blowing policy which form part of the employee s handbook. Auditor s remuneration During the year under review, the remuneration paid to the Group s auditors, in respect of audit services amounted to HK$3,340,000 and non-audit services amounted to HK$25,000 which were reviewed and approved by the Audit Committee. C. C3. 3,340,00025,000 33

36 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) D. Delegation by the Board D1. Management functions There is a defined schedule of matters reserved for full Board decision, including: D. D1. Long-term objectives and strategies; Extension of Group activities into new business areas; Preliminary announcements of interim and final results; Material banking facilities; Material acquisitions and disposals; Material connected transactions; and Annual internal controls assessment. D2. Board Committees The Board has established four Board Committees (Audit Committee, Remuneration Committee, Executive Committee and Nomination Committee) with specific terms of reference available at the Company s website: Board Committees present their respective reports to the Board after each meeting, which address their work and findings. In addition to the Audit Committee, Remuneration Committee and Nomination Committee described above, details of the Executive Committee are set out below. D Natural Beauty Bio-Technology Limited Annual Report 2012

37 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) D. Delegation by the Board (Continued) D2. Board Committees (Continued) Executive Committee Executive Committee now comprises three Non-Executive Directors, one Executive Director and two Independent Non- Executive Directors, namely Mr. Patrick Thomas SIEWERT (Chairman of the Committee), Mr. POON Yee Man Alwin, Dr. SU Sh-Hsyu, Dr. TSAI Yen-Yu, Mr. Francis GOUTENMACHER and Mr. YANG Tze-Kaing respectively. Executive Committee is primarily responsible for formulating business policies, making decisions on key business issues and policies, facilitating the approval of certain corporate actions and exercising the powers and authority delegated by the Board in respect of matters arising between regularly scheduled Board meetings, and to review financial, marketing, retail, operation and other business performance, as well as to review and approval annual budget and key performance indicators (KPIs) and track performance. E. Communication with Shareholders E1. Effective communication Separate resolutions are proposed at the meeting on each substantially separate issue, including the election of individual Directors. Chairperson of the Board and Chairmen of the Board Committees or their respective delegates are requested to attend the forthcoming AGM. There was one AGM held since the issue of the last annual report. Dr. TSAI Yen-Yu, the Chairperson of the Company, was unfit to travel under medical advice (due to tooth implant) and was unable to attend the Company s AGM held on 11 May 2012 ( 2012 AGM ). The Board had arranged for Mr. Patrick Thomas SIEWERT, the Vice-Chairman of the Company and the Chairman of the Executive Committee of the Group, who is well versed in all business activities and operations of the Group, to attend and chair the 2012 AGM on behalf of Dr. TSAI Yen-Yu and to respond to shareholders questions. D. D2. Francis GOUTENMACHER E. E1. 35

38 Report on Corporate Governance STATEMENT OF COMPLIANCE (Continued) E. Communication with Shareholders (Continued) E1. Effective communication (Continued) Mr. Francis GOUTENMACHER, Ms. Su-Mei THOMPSON and Mr. CHEN Ruey-Long, who are Independent Non- Executive Directors and they are chairmen or members of Audit Committee, Nomination Committee and Remuneration Committee, also attended the 2012 AGM. The Company arranged for the notice to shareholders for the 2012 AGM at least 20 clear business days before the meeting. The procedure for shareholders to convene an extraordinary general meeting can be found in Article 73 of the Memorandum and Articles of Association of the Company, which is available for download from the Company s website ( and the Stock Exchange s website. Documents relating to the Procedures for Nomination of Directors by Shareholders and the Shareholder Communication Policy are available for download from the Company s website ( E. E1. Francis GOUTENMACHER ( ( There is a dedicated section of Shareholder Services in the Company s website: to provide comprehensive information related to shareholders. Shareholders can contact the Company by at ir@nblife.com. ( (ir@nblife.com) 36 Natural Beauty Bio-Technology Limited Annual Report 2012