27 Jun 2008 07:00
Taihua plc("Taihua", the "Company" or, together with its subsidiary, the "Group")
Preliminary Results for the Twelve Months Ended 31 December 2007
Chairman's Statement
I am delighted to present the results for the year ended 31 December 2007, the first full year since the Company's admission to AIM in December 2006.
It is particularly pleasing that during the 12-month period under review to 31 December 2007, we maintained our earlier strong sales growth and high gross margins, so that I am able to announce an extremely impressive set of results. Turnover rose to Renminbi (RMB) 71.79 million (£4.71 million) from the previous year's RMB 52.62 million (£3.45 million), an increase of 36%. Meanwhile, pre-tax profits increased to RMB 39.8 million (£2.61 million) from the previous year's RMB 30.15 million (£1.98 million). Gross margins increased slightly to 69.6% but higher selling expenses impacted at the operating profit level. Reflecting our enhancement of shareholder value, the shares traded consistently above their IPO price over the period, and, despite a higher tax charge than the previous year, our earnings per share rose 20% to RMB 0.42. Our cash position remains equally strong.
Following consideration of the Company's proposed capital expenditure programme, the board has decided to declare a maiden dividend of 0.25p per share subject to Chinese Government Exchange Control approval.
In line with our planning, we began the application process to obtain a certificate of suitability from the European Directorate for the Quality of Medicines. Your board is confident, that once secured, the certificate should open the way for sales of paclitaxel into the European market, as demand for generic paclitaxel-based drugs remains strong. We expect to make further announcements on our progress with the application in due course.
We are now also expecting to review the application process for the US market once the EU approval programme is complete. The Board took a deliberate decision against applying in the US and the EU simultaneously, believing that each of these applications would require our undivided attention.
Underpinning this strong growth, sales of both of our key anti-cancer active pharmaceutical ingredients (APIs), homoharringtonine and paclitaxel, remained strong through the year. They continue to sell well to manufacturers in China, Russia and South America. Pre-market evaluation sales in South Korea continued to grow during the year.
As a result, we are considering new investment to expand our APIs production facilities at our Luonan facility. An additional production line would be a major step towards maintaining if not increasing our profit margins on these products.
Our progress in the Traditional Chinese Medicine ("TCM") market also remained solid during the year despite rising raw material prices and government price controls. We are continuing with the registration for more new products for the Chinese market, which include Biantong Tian for the release of constipation and Huoliyuan Tian for sleeping disorders. We remain optimistic that our TCM sales will continue apace as we introduce these products. Demand for non-prescription medicines, including TCMs, continues to grow on the back of China's strengthening economy and health awareness, and we have increased our sales force to drive forward our business.
In summary, 2007 was another year of substantial progress for your Company, and the Board is looking forward through the current year with every confidence of further strong advances.
Richard TannerChairman26 June 2008
Exchange rate: £1= RMB 15.244
CHIEF EXECUTIVE'S REPORT
Financial Results
I am delighted to report that during the 12 months to 31st December 2007 Taihua and its subsidiary operations achieved another set of outstanding financial results. Gross profits rose 37.5% to nearly RMB 50 million on sales up 36% to RMB 71.79 million. Our increased profits resulted in part from improvements in the extraction process which in turn generated cost savings in the manufacturing process, along with a sustainable source of raw material. Encouragingly, we continued to maintain our margins at a high level of over 69%. Earnings per share rose 20% to RMB 0.42, while our cash positioned strengthened to RMB 64.45 million.
Market Overview
Sales of Paclitaxel and homoharringtonine, our two anti cancer active pharmaceutical ingredients (API's) continued to rise steadily during the year. Demand for these ingredients grew in our established international markets of Russia and South America and in China itself. Our distributor in South Korea is in pre-market evaluation.
Our production of Paclitaxel rose from 14kg during 2006 to 20 kg during 2007. Homoharringtonine production rose from 9 kg in 2006 to 12 kg during 2007. Encouragingly, the unit prices of Paclitaxel were maintained despite unfavourable exchange rate movements during the second half of the period under review. Sales to Russia averaged RMB 1,140 per gram while sales into South America were slightly higher , averaging RMB 1,146 per gram. In our domestic Chinese market, we achieved an average sales price of RMB 1,139 per gram.
During the year, overall sales of Homoharringtonine rose by an impressive 37% to RMB 33.9 million while the increase in Paclitaxel sales was even greater, up 39.5% to RMB 23 million. Underpinning the strong growth in revenue, particularly that in TCMs (see below), was a doubling of our sales force, and we continued to keep our management operating procedures under close review as part of our strategic approach to maintaining tight controls over costs as we continue to expand our market. This is evidenced by the maintenance of our margin at close to 70%.
In addition, as the foundation for EU and US marketing approval, we implemented stronger production and quality controls during the year. We also began to look towards the planned upgrading and extension of our Luonan production facilities so that we shall be in position to produce injectable forms of Paclitaxel and Homoharringtonine once we have the necessary manufacturing permits.
Traditional Chinese Medicines
Sales of TCMs in China rose to RMB 14.8 million during 2007,up 29.6% on the previous year. We have now received product licences on two of the four new TCMs we have had in pre-market development, Biantong Pian and Huoliyuan Pian, respectively used for the relief of constipation and sleeping disorders, respectively. Selection of these two products as a priority was based on analysis of commercial potential.
Nursery and Plantations
Against the backdrop of continuing growth in the need for cancer treatments, the prospective demand for both Paclitaxel and Homoharringtonine remain commercially very attractive. We believe supply of the raw material for paclitaxel, which is extracted from yew trees, continues to be outstripped by global demand, which has helped sustain pricing. This puts Taihua, with access to its own yew tree nurseries, in a strong position to maintain cost-efficient raw material supplies for Paclitaxel manufacture. Although we continued to purchase some of our raw material from outside suppliers, as anticipated we are expecting the first trees from our 10,000 square meter yew tree nursery in the Qinling Moutains in Shaanxi Province to be become a primary source of supply of this high-purity compound in 2010. We have maintained our policy of seeding new cuttings; during the year, we planted a total of 50,000 new cuttings, representing a 25% increase over 2006 .Currently we have growth capacity well in excess of that required to meet current and anticipated demand for our paclitaxel. At the same time, to meet anticipated growth, we are analysing the return on investment of purchasing more land to expand our nursery. As before, we continued to buy the branches and leaves from Cephalotaxus sinensis, the Chinese Yew tree used to produce homoharringtonine from local farmers through Luonan Taichang, a local supply company.
Luonan manufacturing facility
We continued to reduce manufacturing costs for Paclitaxel and Homoharringtonine at our Luonan facilities during the year, largely through the constant review of our production systems and design technologies to improve efficiency. We were also successful in reducing annual maintenance fees by investing in new equipment. Capital investment is also occurring to underpin the GMP-requirement of the anticipated EU marketing authorisation. Currently, our facilities are able to comfortably produce 50 kg each of Paclitaxel and Homoharringtonine, per annum. - leaving us very strongly positioned to handle underlying increases in demand and to move into larger commercial markets as the necessary permits are obtained.
Licence Applications
We have now submitted (January 2008) our application to the European Directorate for the Quality of Medicines for a certificate of suitability for Paclitaxel, through our regulatory agents, Beijing Canny, supported by Advocates Ltd. This is now undergoing review and feedback is expected before year end.We have also continued to document our standard operating procedures as part of our drive to obtain good manufacturing practice GMP recognition from the European Medicines Agency.
Summary
In summary, I am very pleased to be able to report excellent progress on all fronts. During 2007, we achieved strong financial growth and made advances in manufacturing operations. whilst maintaining tight controls over our costs. We believe this leaves us strongly positioned for further significant advances during 2008, and I remain highly confident that the coming year will carry us forward on the same successful path to further growth.
Yunwu LiuChief Executive Officer
26 June 2007
For further information contact:
David Youngman, W H Ireland Ltd: +44 (0) 161 832 2174Allan Piper, First City Financial Public Relations: +44 (0) 20 7242 2666Jiang Lei: First City Financial Public Relations: +86 138 0800 7147
TAIHUA PLC
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER, 2007
| | | 2007 | | 2006 | |
| | | RMB’000 | | RMB’000 | |
| | | | | | |
| Revenue | | 71,793 | | 52,624 | |
| | | | | | |
| Cost of sales | | (21,855 | ) | (16,307 | ) |
| | | | | | |
| Gross profit | | 49,938 | | 36,317 | |
| | | | | | |
| Other revenue | | 407 | | 294 | |
| | | | | | |
| Selling expenses | | (5,009 | ) | (3,013 | ) |
| | | | | | |
| General and administrative expenses | | (5,544 | ) | (3,364 | ) |
| | | | | | |
| Operating profit | | 39,792 | | 30,234 | |
| | | | | | |
| Finance costs | | - | | (88 | ) |
| | | | | | |
| Profit before income tax | | 39,792 | | 30,146 | |
| | | | | | |
| Income tax expense | | (5,908 | ) | (4,112 | ) |
| | | | | | |
| Profit for the year | | 33,884 | | 26,034 | |
| | | | | | |
| Attributable to : | | | | | |
| | | | | | |
| Equity holders of the company | | 33,884 | | 26,034 | |
| | | | | | |
| Earnings per share : | | | | | |
| | | | | | |
| Basic (RMB per share) | | 0.42 | | 0.35 | |
| | | | | | |
| Diluted (RMB per share) | | 0.41 | | 0.35 | |
TAIHUA PLC
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER, 2007
| | | 2007 | | 2006 | |
| | | RMB’000 | | RMB’000 | |
| ASSETS | | | | | |
| | | | | | |
| NON-CURRENT ASSETS | | | | | |
| Property, plant and equipment | | 3,511 | | 4,164 | |
| Land use rights | | 1,601 | | 1,639 | |
| Biological assets | | 830 | | 830 | |
| | | | | | |
| | | 5,942 | | 6,633 | |
| CURRENT ASSETS | | | | | |
| Inventories | | 8,104 | | 6,150 | |
| Trade receivables | | 20,903 | | 5,891 | |
| Other receivables | | 689 | | 73 | |
| Deposits and prepayments | | 18,549 | | 17,342 | |
| Amounts due from related companies | | 29 | | - | |
| Land use rights | | 39 | | 39 | |
| Cash and cash equivalents | | 64,446 | | 54,364 | |
| | | | | | |
| | | 112,759 | | 83,859 | |
| | | | | | |
| TOTAL ASSETS | | 118,701 | | 90,492 | |
| | | | | | |
| LIABILITIES | | | | | |
| | | | | | |
| CURRENT LIABILITIES | | | | | |
| Trade payables | | 302 | | 376 | |
| Receipts in advance | | 156 | | 233 | |
| Accrued expenses and other payables | | 4,216 | | 10,668 | |
| Amounts due to directors | | 86 | | 399 | |
| Income tax payable | | 1,388 | | 1,046 | |
| | | | | | |
| | | 6,148 | | 12,722 | |
| | | | | | |
| NET CURRENT ASSETS | | 106,611 | | 71,137 | |
| | | | | | |
| TOTAL LIABILITIES | | 6,148 | | 12,722 | |
| | | | | | |
| NET ASSETS | | 112,553 | | 77,770 | |
| | | | | | |
| EQUITY | | | | | |
| | | | | | |
| CAPITAL AND RESERVES ATTRIBUTABLE TO | | | | | |
| EQUITY HOLDERS OF THE COMPANY | | | | | |
| Share capital | | 12,347 | | 12,280 | |
| Other reserves | | 18,746 | | 12,858 | |
| Retained profits | | 81,460 | | 52,632 | |
| | | | | | |
| TOTAL EQUITY | | 112,553 | | 77,770 | |
The financial statements were approved and authorised for issue by the board of directors on 26 June 2008.
TAIHUA PLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER, 2007
| | | | | | | | | | | | | | Foreign | | | | | | | | | | |
| | | | Merger | | | | Reverse | | General | | Enterprise | | currency | | | | Share | | | | | | |
| | Share | | relief | | Share | | acquisition | | reserve | | expansion | | translation | | Warrants | | options | | Retained | | | | |
| | capital | | reserve | | premium | | reserve | | fund | | fund | | reserve | | reserve | | reserve | | profits | | Total | | |
| | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | RMB’000 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| At 1 January, 2006 | 3,180 | | - | | - | | - | | 3,336 | | 1,668 | | - | | - | | - | | 30,483 | | 38,667 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Issue of shares by subsidiary | 7,615 | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 7,615 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Reverse acquisition adjustment | 278 | | 64,364 | | - | | (63,408 | ) | - | | - | | (1,103 | ) | - | | - | | - | | 131 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Issue of ordinary shares by way of share placement | 1,207 | | - | | 10,860 | | - | | - | | - | | - | | - | | - | | - | | 12,067 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Issue costs | - | | - | | (6,762 | ) | - | | - | | - | | - | | - | | - | | | | (6,762 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Grant of share options | - | | - | | - | | - | | - | | - | | - | | - | | 18 | | - | | 18 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Grant of warrants | - | | - | | (935 | ) | - | | - | | - | | 7 | | 928 | | - | | - | | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Profit for the year | - | | - | | - | | - | | - | | - | | - | | - | | - | | 26,034 | | 26,034 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Transferred to statutory reserves | - | | - | | - | | - | | 2,590 | | 1,295 | | - | | - | | - | | (3,885 | ) | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| At 31 December, 2006 and 1 January, 2007 | 12,280 | | 64,364 | | 3,163 | | (63,408 | ) | 5,926 | | 2,963 | | (1,096 | ) | 928 | | 18 | | 52,632 | | 77,770 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Issue of ordinary shares by exercise of warrants | 67 | | - | | 772 | | - | | - | | - | | - | | (166 | ) | - | | - | | 673 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign currency translation | - | | - | | - | | - | | - | | - | | (130 | ) | - | | - | | - | | (130 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Share-based payments | - | | - | | - | | - | | - | | - | | - | | - | | 356 | | - | | 356 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Profit for the year | - | | - | | - | | - | | - | | - | | - | | - | | - | | 33,884 | | 33,884 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Transferred to statutory reserves | - | | - | | - | | - | | 3,371 | | 1,685 | | - | | - | | - | | (5,056 | ) | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| At 31 December, 2007 | 12,347 | | 64,364 | | 3,935 | | (63,408 | ) | 9,297 | | 4,648 | | (1,226 | ) | 762 | | 374 | | 81,460 | | 112,553 | | |
TAIHUA PLC
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER, 2007
| | 2007 | | 2006 | |
| | RMB’000 | | RMB’000 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
| Operating profit | 39,792 | | 30,234 | |
| Adjustments for :- | | | | |
| Provision for bad debts | 824 | | 143 | |
| Amortisation on land use rights | 38 | | 39 | |
| Depreciation | 744 | | 820 | |
| Share-based payments | 356 | | 18 | |
| Interest income | (407 | ) | (175 | ) |
| | | | | |
| Operating cash flows before working capital changes | 41,347 | | 31,079 | |
| Increase in inventories | (1,954 | ) | (1,807 | ) |
| Increase in accounts receivable | (15,802 | ) | (3,222 | ) |
| (Increase)/decrease in other receivables | (650 | ) | 108 | |
| (Increase)/decrease in deposits and prepayments | (1,207 | ) | 2,605 | |
| Decrease in amounts due from directors | - | | 5 | |
| Increase in amounts due from related companies | (29 | ) | - | |
| Decrease in accounts payable | (74 | ) | (6 | ) |
| (Decrease)/increase in receipts in advance | (77 | ) | 117 | |
| (Decrease)/increase in accrued expenses and other payables | (6,452 | ) | 1,688 | |
| (Decrease)/increase in amounts due to directors | (313 | ) | 373 | |
| | | | | |
| Cash generated from operations | 14,789 | | 30,940 | |
| Interest received | 407 | | 175 | |
| Profits tax paid | (5,566 | ) | (4,598 | ) |
| | | | | |
| NET CASH GENERATED FROM OPERATING ACTIVITIES | 9,630 | | 26,517 | |
| | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
| Purchase of fixed assets | (91 | ) | (42 | ) |
| | | | | |
| NET CASH USED IN INVESTING ACTIVITIES | (91 | ) | (42 | ) |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
| Issue of shares | 673 | | 12,067 | |
| Issue of shares by subsidiary prior to acquisition | - | | 7,615 | |
| Repayment of short-term borrowings | - | | (1,300 | ) |
| Interest paid | - | | (88 | ) |
| | | | | |
| NET CASH GENERATED FROM FINANCING ACTIVITIES | 673 | | 18,294 | |
| | | | | |
| | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 10,212 | | 44,769 | |
| | | | | |
| CASH AND CASH EQUIVALENTS AS AT 1 JANUARY | 54,364 | | 9,595 | |
| | | | | |
| Effect of foreign exchange change | (130 | ) | - | |
| | | | | |
| CASH AND CASH EQUIVALENTS AS AT 31 DECEMBER | 64,446 | | 54,364 | |
| | | | | |
| ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS | | | | |
| Cash and bank balances | 64,446 | | 54,364 | |
TAIHUA PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER, 2007
1. GENERAL INFORMATION
The financial information in this preliminary announcement has been prepared in accordance with the accounting policies set out in the financial statements of Taihua plc for the financial year ended 31 December 2007. The financial information in this document does not constitute the company's statutory financial statements for the financial year but is derived from those financial statements. Statutory financial statements for the period will be delivered to Companies House following the company's Annual General Meeting. The auditors have reported on these financial statements; their reports were unqualified and did not contain statements under sections 237 (2) or (3) of the Companies Act 1985.
Taihua Plc (the "Company") was incorporated and registered in England and Wales on 29 August, 2006 under the Companies Act 1985 as a public company limited by shares with the name "China Natural Plc" with registered number 5918155. On 8 September, 2006, the Company changed its name to "Taihua Plc". The address of the registered office is 3 Hardman Square, Manchester, Lancashire M3 3EB, and the principal place of business is Room 201-210 Zhongjiao Tongli Mansion, No.9 Kejiyi Road, High-tech Development Zone, Xian, Shaanxi Province, 710075, the People's Republic of China (the "PRC").
The Company is an investment holding company and its subsidiaries are principally engaged in the manufacturing and sales of pharmaceutical products. The consolidated financial statements are presented in Renminbi ("RMB"), the currency of the primary economic environment in which the Group operates.
2. Basis of preparatio
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of Taihua Plc and its subsidiary undertakings (the "Group") and the individual financial statements of Taihua Plc (the "Company") have been prepared in accordance with those International Financial Reporting Standards and Interpretations in force ("IFRS"), as adopted by the European Union, and those parts of the Companies Act 1985 applicable to companies preparing financial statements under IFRS.
The preparation of these financial statements in conformity with IFRS also requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement and complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 4 "Critical accounting estimates and judgements"
(b) Basis of consolidation
The consolidated financial statements include the financial statements of Taihua Plc and all of its subsidiary undertakings as at 31 December, 2007 using the acquisition method of accounting. The results of subsidiary undertakings acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
The acquisition of China Natural Pharmaceutical Limited ("CNP") by Taihua Plc on 26 September, 2006 has been accounted for as a reverse acquisition in accordance with IFRS 3 'Business Combination'.
As a consequence of applying reverse acquisition accounting, the results for the year ended 31 December, 2006 comprise the full year results of CNP and its subsidiary undertakings for the year ended 31 December, 2006 plus those of the company from 26 September, 2006, the date of the reverse acquisition, to 31 December, 2006.
(c) Initial application of International Financial Reporting Standards
In the current year, the Group initially applied the following International Financial Reporting Standards :-
IAS 1 Presentation of Financial Statements
IFRS 7 Financial Instruments : Disclosure
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IAS 1 - Presentation of Financial Statements
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group's objectives, policies and processes for managing capital. These new disclosures are shown in note 27 to the financial statements.
IFRS 7 - Financial Instruments : Disclosure
This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group's financial instruments as well as the nature and the extent of risks arising from those instruments. The new disclosures are included throughout the financial statements. While there has been no effect on the financial positions or results, comparative information has been provided where needed.
IFRIC 8 - Scope of IFRS 2
This interpretation requires IFRS 2 to be applied to any arrangements in which the entity cannot identify specifically some or all of the goods received, in particular where equity instruments are issued for consideration which appears to be less than fair value. As equity instruments are only issued to employees in accordance with the employee share scheme, the interpretation had no impact on the financial position or performance of the Group.
IFRIC 9 - Reassessment of Embedded Derivatives
IFRIC 9 states that the date to assess the existence of an embedded derivative is the date that an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. As the Group has no embedded derivative requiring separation from the host contract, the interpretation had no impact on the financial position or performance of the Group.
(c) Initial application of International Financial Reporting Standards (cont'd)
IFRIC 10 - Interim Financial Reporting and Impairment
The Group adopted IFRIC Interpretation 10 as of 1 January, 2007, which requires that an entity must not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. As the Group had no impairment losses previously reversed, the interpretation had no impact on the financial position or performance of the Group.
(d) International Financial Reporting Standards in issue but not yet effective
The following standards and interpretations were issued and available for early application but have not yet been applied by the Group in these financial statements. The Group intends to apply these standards and interpretations when they become effective :-
IFRIC 11 IFRS 2 - Group and Treasury Share Transactions1
IFRIC 12 Service Concession Arrangements2
IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction2
IFRIC 13 Customer Loyalty Programmes3
IFRS 8 Operating Segments4
IAS 1 (Revised) Presentation of Financial Statements (revised 2007)4
IAS 23 (Amendment) Borrowing Costs4
1 Effective for annual periods beginning on or after 1 March, 2007
2 Effective for annual periods beginning on or after 1 January, 2008
3 Effective for annual periods beginning on or after 1 July, 2008
4 Effect for annual periods beginning on or after 1 January, 2009
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(a) Subsidiary companies
A subsidiary is an entity controlled by the Company. Control exists when Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Details of the subsidiaries of the Company at 31 December, 2007 are as follows :-
|
|
|
|
| Percentage of equity holding held by the Company |
| Proportion of voting |
|
| ||
| Name of | Place of | Registered |
| Directly |
| Indirectly |
| power held |
| Principal |
| subsidiary | establishment | capital |
| % |
| % |
| % |
| activity |
|
|
|
|
|
|
|
|
|
|
|
|
| China Natural Pharmaceutical Limited ("CNP") | BVI | US$1,000 |
| 100 |
|
|
| 100 |
| Intermediate holding company |
|
|
|
|
|
|
|
|
|
|
|
|
| Taihua Natural Plant Pharmaceutical Company Limited ("TNP") | PRC | HK$10,500,000 |
|
|
| 100 |
| 100 |
| Production and sales of pharmaceutical drugs |
(b) Revenue recognition
Revenue from sales of goods is recognised when the significant risks and rewards of ownership of goods have been transferred to the buyer.
Interest income is recognised on a time apportion basis.
(c) Segment reporting
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.
(d) Property, plant and equipment
Property, plant and equipment, other than construction in progress, is stated at cost less accumulated depreciation and impairment losses.
Depreciation of property, plant and equipment is calculated on the straight-line basis to write off the cost of each asset to its estimated residual value over its estimated useful life. The estimated useful lives of property, plant and equipment are as follows :-
Buildings 20 - 40 years
Motor vehicles 5 years
Furniture, fixtures and equipment 5 - 10 years
Plant and machinery 5 - 8 years
Construction in progress represents stores and storage facilities under construction, or renovation works in progress and is stated at cost less any impairment loss, and is not depreciated. Cost comprises development and construction expenditure incurred and other direct costs attributable to the development less any accumulated impairment losses. On completion, the relevant assets are transferred to property, plant and equipment at cost less accumulated impairment losses.
(e) Land use rights
Land use rights represent operating lease payments paid to the PRC government authorities for rights of 40 to 60 years.
Land use rights are stated at cost less accumulated amortisation and impairment losses. Land use rights are amortised using the straight-line basis over the unexpired period of the rights.
(f) Impairment of assets
Where an indication of impairment exists, or when annual impairment testing for an asset is required, recoverable amount is estimated. The recoverable amount is calculated as the higher of the asset's or cash-generating unit's value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises.
(g) Biological assets
Biological assets are measured on initial recognition and at subsequent reporting dates at fair value less estimated point-of-sale costs, unless fair value cannot be reliably measured. In the case of the Group's biological assets, no meaningful or reliable determination or estimation of fair value is possible. Consequently, the biological assets are measured at cost, less any impairment losses.
(h) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in the case of work in progress and finished goods, cost comprises direct materials, direct labour, and an appropriate proportion of overheads.
Net realisable value is based on estimated selling price less all further costs expected to be incurred to completion and disposal.
(i) Trade and other receivables
Trade receivables, which generally have credit terms ranging from 30 to 90 days, are recognised and carried at original invoice amounts less allowances for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.
Prepayments, deposits and other receivables, amounts due from the directors and related parties are recognised and carried at cost less allowance for any uncollectible amounts.
(j) Trade and other payables
Liabilities for trade and other payables which are normally settled on credit terms ranging from 30 to 60 days are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Group.
(k) Provisions
A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditure expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.
(l) Loans and borrowings
All loans and borrowings, which are interest-bearing, are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with borrowing, and are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.
Gains and losses are recognised in net profit or loss when liabilities are derecognised or impaired, as well as through the amortisation process.
(m) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets (that is, assets that necessarily take a substantial period of time to get ready for their intended use), are capitalised as part of the cost of those assets. Capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use.
Other borrowing costs are recognised as expenses in the period in which they are incurred.
(n) Operating leases
Leases where substantially all the rewards and risks of ownership of asset remain with the lessor are accounted for as operating leases. Rentals applicable to such operating leases are charged or credited to the income statement on the straight-line basis over the lease terms.
(o) Research and development costs
Research and development costs are expensed as incurred.
An intangible asset would be recognised for certain development expenditure if applicable conditions were met, but to date all such expenditure has been expensed as incurred.
(p) Retirement benefits
Obligatory retirement benefits in the form of contribution under a defined contribution retirement schedule administered by local government agencies are charged to the income statement as incurred.
(q) Foreign currency translation
The functional currency of the subsidiary undertakings is Renminbi ("RMB"), and the audited financial statements of the subsidiary undertakings have been drawn up in RMB. As sales and purchases are denominated primarily in RMB and receipts from operations are usually retained in RMB, the directors are of the opinion that RMB reflects the economic substance of the underlying events and circumstances relevant to the Group. Monetary assets and liabilities maintained in currencies other than RMB are translated into RMB at the approximate rates of exchange ruling at the balance sheet date. Transactions in currencies other than RMB are translated at rates ruling on the transaction dates.
The financial statements of the company and its Hong Kong subsidiary are translated into the company's presentation currency using the year-end rates of exchange for the balance sheet items and the average rates of exchange for the year for the income statement items.
The presentation currency of the Group is RMB and therefore the financial statements have been translated from GBP and HKD to RMB at the following exchange rates:
Year-end rates Average rates
31 December, 2007 £1 = RMB14.6085 £1 = RMB15.24409 HKD1 = RMB0.9375 HKD1 = RMB0.97639
(r) Income tax
Income tax comprises current and deferred tax. Current income tax is calculated based on the results for the year, adjusted for items which are not assessable or are disallowed.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry-forward of unused tax assets and unused tax losses can be utilised.
(s) Share-based payments
The cost of granting share options and other share-based remuneration to employees and directors is recognised through the income statement on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. These share-based payments are measured at fair value at the date of grant by use of the option pricing model known as the Black - Scholes formula using assumptions deemed to be consistent with the price which the incentive might have been worth if it were traded in the open market.
For equity-settled transactions with non-employees, the costs are recognised through the income statement (or where they relate to issue costs, taken against the share premium account if appropriate) with measurement normally based on the fair value of goods or services received.
(t) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value.
(u) Related parties
For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
In the process of applying Group's accounting policies, management make various estimates and judgements (other than those involving estimates) based on past experience, expectations of the future and other information. The key source of estimation uncertainty and the critical judgement that can significantly affect the amounts recognised in the financial statements are :-
Depreciation of property, plant and equipment
Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account of their estimated residual values. The determination of the useful lives and residual values involve management's estimation. The Group assesses annually the residual values and the useful lives of the property, plant and equipment and if the expectation differs from the original estimate, such a difference may impact the depreciation in the year the estimate is changed and the future period.
Allowance for bad and doubtful debts
The Group performs ongoing credit evaluations of its customers and adjust credit limits based on payment history and the customers' current credit-worthiness, as determined by the review of their current credit information. The Group continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified. Credit losses have historically been within the Group's expectations and the Group will continue to monitor the collections from customers and maintain an appropriate level of estimated credit losses.
Allowance for inventories
The management of the Group reviews an aging analysis at each balance sheet date, and makes allowance for obsolete and slow-moving inventory items identified that are no longer suitable for use in production. The management estimates the net realisable value for such finished goods based primarily on the latest invoice prices and current market conditions. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and makes allowances for obsolete items.
Income tax expense
The Group is subject to income tax in the PRC. There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made.
5. EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.
| | | 2007 | | 2006 | |
| | | | | | |
| | Profit attributable to equity holders of the Company (RMB’000) | 33,884 | | 26,034 | |
| | | | | | |
| | Weighted average number of ordinary shares in issue (thousands) | 81,296 | | 73,776 | |
| | | | | | |
| | Earnings per share (RMB per share) | 0.42 | | 0.35 | |
Diluted earnings per share
The Company has two categories of dilutive potential shares - share options and warrants. A calculation is done to determine the number of shares that could have been acquired at fair value based on the monetary value of the subscription rights attached to outstanding share options and warrants. It is compared with the number of shares that would have been issued assuming the exercise of the share options and warrants.
| | | 2007 | | 2006 | |
| | | | | | |
| | Profit attributable to equity holders of the Company (RMB’000) | 33,884 | | 26,034 | |
| | | | | | |
| | Weighted average number of ordinary shares in issue (thousands) | 81,296 | | 73,776 | |
| | Adjustment for share options and warrants (thousands) | 1,396 | | 70 | |
| | | | | | |
| | Weighted average number of ordinary shares for | | | | |
| | diluted earnings (thousands) | 82,692 | | 73,846 | |
| | | | | | |
| | Diluted earnings per share (RMB per share) | 0.41 | | 0.35 | |
6. Annual Report
Copies of the Annual Report and Accounts for the year ended 31 December 2007 will be posted to shareholders by 30 June 2008 and will be available, free of charge, at any time from the date of posting, from the Company's website - www.taihuapharm.com.cn/english.
7, Annual General Meeting
The Company's Annual General Meeting will be held at Halliwells LLP, 3 Hardman
Square, Spinningfields, Manchester, M3 3EB on 30 July 2008 at 9:00 am (UK time).